KBR Inc (KBR) 2014 Q2 法說會逐字稿

Good day and welcome to KBR's Second-Quarter 2014 Earnings call.

This call is being recorded.

(Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations and Communications. Please go ahead.

Good morning and thank you for joining us for KBR's second-quarter 2014 Earnings conference call. Today's call is also being webcast and a replay will be available on KBR's website for seven days at KBR.com. The press release announcing second-quarter results is also available on KBR's website.

Joining me today are Stuart Bradie, President and Chief Executive Officer and Brian Ferraioli, Executive Vice President and Chief Financial Officer. During today's calls Stuart and Brian will cover the quarters results in more detail and discuss our market outlook by major segments. Please refer to the accompanying presentation that is posted on our website at KBR.com. After our prepared remarks we'll open the floor for questions.

Before turning the call over to Stuart, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and the potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements.

These risks are discussed in KBR's second-quarter earnings press release, KBR's earning presentation, KBR's form at 10-KA for the period ended December 31, 2013 and KBR's current reports on Form 8-K. You can find all of these documents at KBR.com.

Now I'll turn the call over to Stuart. Stuart?

Thank you, Zac and good morning and thank you for joining us today.

If you could move to slide 3, which is the overview of the Q2 2014 results. I thought we'd start by highlighting the fifth bullet point down there, my onboarding activities. I'm very conscious that I've not been very much engaged with the shareholder community and the analysts since we last talked, probably a month ago now.

The reason for that is I've been actually traveling the world and trying to really get the pulse of KBR. Really understand how our customers view us, meet our people and spend a bit of time with our partners and really see the business at the core face.

In that month I've spent time obviously in the US but I've also been to the businesses in the UK. I've been to Singapore, Jakarta and I'm currently in the UK, now having just spent the last two weeks going around Australia and the job sites there. And also I've been to our businesses in Sweden.

Quite a busy time, but I think really important as we move through the strategic review process to get a firm understanding of what KBR is and what we're doing and the quality of the people we have which is been a real uplifting eye opening part of the last month or so. I thought I'd touch on that and say I think I'll be coming out to see you probably in the latter part of August and start that dialogue in a far more engaged away from then on.

Going to the top of the slide, the EPS loss for the quarter was $0.06 which was a good improvement from last quarter, and Brian will touch on that a little bit later. But clearly this is well below where we need to be. The operational performance of gas mon and hydrocarbons remains very strong and the bookings for hydrocarbons was also increased significantly in the quarter.

IGP continues to lag a little, albeit it's moved into the black this quarter but I guess the pleasing piece there was the backlog increase.

Services continues to underperform predominately again in our Canadian business with losses in the quarter of $41 million. Which is, obviously, well below where we want that business to be, and Brian will give you a bit more detail around that as we go through the presentation. Another strong quarter for cash, it's becoming a stronger and stronger focus for KBR and I think you can see that in the size of the cash balance. And we continue to repurchase shares and, obviously, pay the quarterly dividend of -- we'll touch again on our account allocation later on in the presentation.

I'll talk more about the market, but I think there's been a bit of rhetoric in the press about where we sit in the North American with the shale gas revolution and the growth of opportunity in that space. We'll touch a little bit in the presentation now that I've got a better handle of how we're doing in North America. It's a far stronger performance than we've probably given ourselves credit for. Looking forward there's a very strong pipeline of work heading towards -- from the market heading giving us these opportunities.

That's really the introduction. I'll now hand over to Brian who will give you a little bit more meat around the bone and what's happening in Canada and then he'll read you through the key financial results and metrics.

Brian.

Thank you, Stuart and good morning.

Turning to slide 4, as Stuart mentioned, the quarter's results were again dominated by Canadian projects, particularly the pipe fabrication and module assembly contracts. As context, we have seven of these contracts that we've talked about in the past. Four of which are largely completed.

These contracts represented significant sales growth, but the modules that we are manufacturing and assembling are far larger and more complex than we had historically have completed. The cost increased and productivity decreased and that's what's driving the financial results.

As Stuart mentioned earlier, we had losses during the quarter of $41 million. These are primarily on the three remaining projects, and the three remaining projects are a little bit different than the first four. The three projects that remain are tied to unit rates based on weight of the modules. And therefore, any increased welding or other assembly work that is required when we receive the drawings from our clients increases our costs, but it doesn't allow us to increase the revenues because the weight in many cases did not change.

That's what's driving the $41million estimate to complete the additional three modules that you see here. We mentioned in the past that one of the clients has a master service type agreement where they have the right but not the obligation to place additional work with us up in our Canadian fabrication unit. No new orders were received from that client throughout this year.

Turning over to slide 5 looking at the consolidated financial results for the second quarter versus the prior year. In general, it was a relatively good bookings quarter, particularly for hydrocarbons, and also for IGP who booked the Marshalltown gas power plant.

And more encouraging we are optimistic about the bookings for the latter half of this year for hydrocarbons. Which again, is being driven by work resulting from the shale gas revolution here in the United States. We expect bookings to continue to be strong for hydrocarbons in the balance of the year.

Gas monetization continued to perform well, particularly on its two large LNG projects in Australia. Backlog continues to decline from that business as we mentioned in the past because of those two large projects burning off and not expected to book the next mega EPC project until 2015. The gas monetization burn off is what's really driving the decline in backlog but that's going pretty much as expected.

Hydrocarbons continues to perform well and is actually better than they performed in the first quarter. It continues to reflect the shift of more of the EPC type work, which is higher revenue with lower margins. But they also are having some increased proposal costs associated with those opportunities I've talked about earlier.

Services continues to be dominated by Canada, as we mentioned before. IGP's results volume of business continues to decline in the US as the work in support of the US government continues to decline. Their results were impacted by a $14 million impact for increased cost and lower margins on a power project. But that was offset by a $15 million gain which appears in the equity earnings line on reduced costs and insurance recovery on one of their international projects.

Turning over to slide 6 to talk a little bit more in detail about the individual segments. As I mentioned, revenues were down primarily because of gas monetization. Two projects that were very significant in volume in 2013 for them. A gas to liquids and an LNG project are largely completed, but services were also down from a revenue perspective year-over-year. And that's due to the North American construction projects that they had at that time which are now largely complete.

The increase in hydrocarbons reflects the EPC contracts primarily tied to ammonia and urea and ethylene projects that we've talked about in the past. They continue to perform well.

From the earnings perspective, the gas monetization earnings were lower than the similar quarter in 2013 because 2013 had higher fees on a particular project, sort of a one-off that did not reoccur in 2014. They also had about $6 million in proposal cost increase year-over-year. That's again related to the large EPC projects that we are in process of bidding and we're expecting awards to begin in 2015. Hydrocarbons, as I mentioned, continues to perform well, but they also had about $2 million in increased proposal costs year-over-year, for new ammonia prospects that we are currently pursuing.

IGP reflects the reduced work volumes that I talked about before, and it also has $6 million in closeout costs associated with the US government legacy type work that we were doing primarily in Iraq. We've added the initial disclosure in the appendix so you can see more visibility into the US government work that is really winding down.

Services, as I mentioned earlier, is dominated by Canada and on the other EBITDA line it reflects an $18 million improvement of our labor costs utilization rate. This reflects increased chargeability to contracts and also cost reductions that we've have talked about that have been ongoing for some time.

The other EBITDA line also includes a gain on a sale of some excess property that we had and also a foreign exchange gain of $10 million.

Moving onto slide 7, looking at the second quarter versus the first quarter of 2014, this is a new slide for us, and given that the change in the management occurring this year, we thought this would be a good way to look at how things are progressing.

Starting from the revenue line, there was an increase in the revenues from the first quarter and again this is largely due to hydrocarbons, EPC contracts that we mentioned earlier.

From an earnings perspective the gas monetization continues to perform well and up to our expectations. But they also had a closeout gain in the first quarter, which was not repeated in the second quarter. So obviously, that one-time event is the primary reason for the drop in earnings for them from the first quarter. Hydrocarbons, as I mentioned, is performing well and IGP has returned to a profitable level, as mentioned by Stuart, and also increased its backlog, which is nice to see.

In services besides Canada, the other headline is the triple end joint venture that we have in Mexico which services the offshore oil rigs. The vessels are back on a three-year type assignment, so we expect to continue to see an improvement in those earnings going forward.

Moving onto slide 8, cash and capital allocation, as Stuart mentioned earlier, we still have a pretty robust cash balance, $969 million at the end of the quarter and you see the split between the domestic and US cash.

In terms of return of cash to shareholders you see $52 million was returned during the quarter. $120 million so far this year and $937 million since the spin back in 2007. That $937 million represents about 50% of the earnings since then.

As Stuart mentioned, we continue to focus on cash management. I think we have some areas to improve what we think is already a pretty good process. And you see we had generated $37 million of operating cash flow during the second quarter even with some of the challenges we had in Canada.

Capital allocation remains a priority and clearly that will be a significant focus of the strategic plan that we are in the middle of. And finally, you see the share count based upon the shares, 3.5 million shares repurchased so far year-to-date. CapEx was $18 million, which included $9 million from ERP and our ERP CapEx guidance for the year remains unchanged, that $25 million to $35 million for the year.

With that, I'll turn the call back over to Stuart who will talk about the markets. Stuart?

Things, Brian.

Moving to slide 9, gas monetization, no real change from last quarter. The work continues on the two mega LNG projects that we have kicked off. We announced the Shell global arrangement and the markets kicked off with that. There continues to be a strong pipeline of pre-front and FEED and EPC opportunities that you can see listed there.

You've got some major FEED work. Just finishing off Pacific Northwest and moving into the EPC bid phase of that. And we're expecting, once the political situation in Indonesia settles down with the appointment of a new president, now looking like that's happened, and that transition will happen through September into October, and that award is expected to come out the other end from that process.

In terms of the three big EPC contracts we're bidding, Pacific Northwest stays on the estimated timeline. Lake Charles also stays on the estimated timeline, and LNG might slip little bit in Indonesia because of what's happened politically, but still holding pretty much to the dates that you see there. These are the three keys prospects in LNG that our team feels that we stand the best chance of winning, and we're pursuing on with some vigor.

Moving on now to slide 10, Brian talked a little bit about the Q2 bookings. It was led by the mass [kiljean] offshore FEED which in itself is very strategic as it takes us firmly back into the UK and offsea, which is an array of work coming up there around in the region sector, as well.

We secured significant additional scope in our existing downstream projects in Saudi Arabia and through good performance. We've kicked off Q3 with some solid bookings, as well, some of which you will be aware of, the Al-Nasr work for ADNOC in Abu Dhabi in conjunction with Hyundai, HHI, which has been executed out of our Singapore and Jakarta offices. So that is a pretty healthy backlog for those businesses. And also we've secured significant Gulf Coast chemicals project.

Coming back to what I alluded to earlier, we're executing three EPC, ammonia urea EPC projects in North America, and I think the thing to note there is they're using KBR technology. We've got a very strong position in ammonia technology and its a key differentiator together [in that area] and then pull through and position ourselves for these EPC projects. And we're currently bidding two additional projects with expected award dates in the second half of the year.

Chemicals, again, highly buoyant market for us in North America and we expect major EPC awards in the second half of 2014, and I've been working on a number of front end studies and proposals for ethylene and derivative projects also. The refinery market in North America is also quite buoyant for us and we're doing a number of FEEDS with EPC with rollover opportunities.

Coming back to technology, it's a bit of a business that's grown nicely over the past several quarters and continues to really be a global plane for KBR and allowing us to get in very early, as I said before. So continued strong market there for us.

FNLG, activity there is growing. We're feeling pretty confident at the moment about a bit of good news coming through in the next month or so, in the FEED phase, and then rolling into an EPC opportunity. We're engaged in many ultra-deep water Gulf of Mexico pre-FEEDs using KBR production semi-submersible technology with opportunities to continue to feed in.

For those that don't know, our position in the semi-submersible market is arguably a market leader, and this is an area that we've probably not talked about enough, and its an area where we have a technology-led differentiated position. Quite exciting, as there is more and more activity in the offshore, deepwater sector and workovers and drilling continues to be an increasing market. As I have said before, we've got additional offshore project pursuits in the UK and the Norwegian sectors of the North Sea.

Moving onto slide 11, IGP. Strong operational performance continues in the UK for the Ministry of Defense, for construction and long-term facility of maintenance contracts and we're recently awarded a longer term contract by the Australian Defense Force for their helicopter landing dock ships. I guess the way to think about these is they're more in line with annuity-type contracts. They're longer-term recurring revenues and fairly predictable going forward. So, an attractive piece of our business.

We continue to work on the EPC power projects in North America and recently booked Marshalltown, as Brian mentioned earlier. There's multiple international government services opportunities. I think it's a good market for us in the UK as Army returns from Europe. There's training opportunities. We continue to support expedition support for the UK government and the MoD.

And (inaudible) we've taken some of our skill base and started to apply into a different area of the market and [that's with] the UK police and local government authorities, which we feel is a good market for our skill sets. The Ministry of Defense force continues to throw up significant opportunities over the next little while with the announcement of quite significant capital spend in that area. We're supporting a number of US overseas-based operations and I think opportunities in that space continue to appear.

Moving onto slide 12, the outlook for services, continued opportunities in North America in our industrial services business and the way to think about industrial services for us is where the asset service is longer-term arrangements in the US construction arena as the economy continues to improve. And especially for us, as a differentiator to our own EPC pursuits and ongoing projects.

The Mexican offshore industrial services business, again longer-term contracts and we put those vessels on three-year deals going forward. We've got industrial services work ongoing in Saudi Arabia, and I think we're well placed as that market continues to drive outsourcing and expand. Canada long-term is an attractive market. I'm sure you'll appreciate our current focus right now is on stabilizing what we're doing in the modular fabrication area.

Turning onto slide 13, in summary, 2014 remains a transition year for KBR and as of right now (inaudible)we've kicked off the strategic review process and that's moving along. Gas mon and hydrocarbons continue to perform very well. IGP has improved and with increased backlog and services is impacted by Canada.

I think the key take away is that our position in North America is probably stronger than we've told people before, and I think there and globally there's large opportunities to do the work that we're seeing coming to tender. A very strong focus and (inaudible) an ongoing and increased focus on cash management and capital allocation efficiency, and I think you see that coming through strongly in the cash balances.

That's really all for the prepared presentation. We're going to hand it over to the operator for questions now. But please note Brian and I are actually in different cities at the moment so it would be really helpful for us if when you ask your question if you could direct it to one of us. Thank you.

Now turning to the operator.

Thank you.

(Operator Instructions)

And we'll take our first question from Andrew Kaplowitz of Barclays Capital.

Good morning.

Stuart, I'm looking in hydrocarbons, the process you talked about. Backlog was down a little in Q2, but revenue was up nicely, as you talked about. Can you talk a little bit more about the visibility in hydrocarbons to the extent that with all the prospects you mentioned have you gained confidence that you can grow backlog in this segment going forward?

Yes. Yes, is the short answer. I mean it's multi-headed. I think the offshore side of the business we continue to work hard to take early positions and work that through and I think we're seeing significant upside coming through the business there.

It's interesting talking to our people and to analysts. A lot of the rhetoric is usually around LNG and obviously the historical load cap business. But the hydrocarbons business, we feel, has a very bright future. We've got a technology position, we're differentiated and we've got a very strong front pre-FEED offering in the semi-submersible arena.

But also in one of our businesses called Granherne, which has got global recognition in that space, which allows us to get early entry into that market place. And it allows us to get in with high end technical specialist capability, and then if we do well in that arena we've got more opportunity to pull through into the EPC area. I think it's highly prospective for us.

That's helpful, Stuart.

This question might be for both of you. Can you talk about the losses a little bit more in Canada? You had the same level of charges in Q2 in that particular area as you did in Q1. And your projects are -- you're getting to the projects, and supposedly you can make more conservative estimates as you go. So why should we have any conviction that you're now conservative enough with how you look at that work going forward? Why wouldn't charges in the segment last well into 2015?

Okay, let me start with that, Andy. This is Brian.

The difference is that the scope of work is defined by drawings we received from our clients. On the remaining contracts the majority of the drawings have now been received from the clients and therefore we're able to do the takeoffs to understand exactly what the scope of work is.

When the quantity of work increases based upon drawings, that's what's driving the results for this quarter. It was really impossible for anyone to be able to predict what the scope of work will be when you don't have the drawings that are issued for construction in-house.

As we get to the backend of these projects the drawings are in, and now we have defined the scope, and therefore we're much better suited to be able to estimate what those costs are to complete. We still have to execute, and that would be on us, but with the fine scope it gives us more confidence in the estimates that we currently have.

Brian, just to clarify, are the drawings all in now or are you still waiting for the last project or two?

The drawings are in, it takes a while to go through all of the scope and do the material takeoffs, which are in various stages on those last three projects. But there's always the possibility that the client could change some drawings, and clearly that's something beyond our control.

But we're much more confident that we're closer to the end then to the beginning. Touch wood with the fine scope. The estimates we hope are a whole lot more accurate now than they were in prior quarters.

Brian, let me ask you one more follow-up. You had a new $14 million change in estimated cost to complete on the North American power project. We understand that there's noise in the business pretty much always. But how do we sort of dial down the noise from the legacy projects, or are we just going to have to get used to these things? Maybe you can talk about what you think of noise outside of the Canadian project going forward?

The short answer is no, we shouldn't get used to it. We should not be having negative adjustments to two projects. To the extent we had some positive adjustments going the other way offsetting, shows me that our estimates are getting centered where you should have some going opposite ways.

I think the comment that we made earlier about gas mon and hydrocarbons performing well is a driver as we look to the execution of the business. And IGP has been suffering from decreased workloads. So you have these offsets that aren't really the message for IGP.

IGP, to me, it's more the volume of business. The government business in the US had declined as well as the minerals and infrastructure business. As volume of business ramps up, I'm much more optimistic that their earnings could get back up to a significant contributor to the organization.

And then services, obviously, is being dominated by Canada. We'll get that behind us and we'll move on. Canada has been historically a nice little profitable business for us, and we remain confident we can get back to those levels. But it's going to take some time to work through the remaining three projects.

We will take our next question from Tehira Afzal of Keybanc Capital Markets

Good morning, this is [Zenon] on behalf of Tehira.

My first question is regarding the gas monetization margins. How should we look at the steady state margins going forward? Would it be around 17% to 18%?

We really don't comment on margins. We don't give margin guidance. But as you know there are two projects continuing -- two LNG continuing, one of which is consolidated and one of which is primarily recorded through the equity earnings line.

Those two projects are crossing in that the project that's consolidated, the Gorgon project had reached its peak and will be ramping down, where the Ichthys project as recorded on the equity basis is ramping up. You should see those two lines crossing, as we move forward into 2015. Beyond that we don't give margin guidance.

Okay, got it. The next one is Stuart. If you could tell us the implications, the problem projects in Canada? Would have KBR's positioning on large LND projects in Canada? Are customers concerned there?

I don't think there's any impact at all. I mean they are a very different part of the business operating at a very different level in the business and I don't see any impact in the slightest in terms of what we're doing with our LNG pursuits. And really talking to the customers, it is not even on their radar at the moment. It is not good for KBR, that's for sure, but I don't think it's negatively impacting our opportunity in that position on the LNG pursuits.

Our next question comes from Steven Fisher of UBS.

Hello, good morning.

Stuart, I'm wondering if you can give us any feedback you can share from your impressions from your travels related to the company strength and weaknesses as you see them? The employee mindset and what feedback you're hearing from your customers?

Good question. I think the business in general has for the last little while has lacked leadership. I think everyone is highly positive, in terms of now that we've got in the right direction in that sense. I think the other piece, Steven, that's clear is that the way that we've actually conveyed our strategy has not been felt through the business.

I think going through the strategic review has been not just welcomed by the board and the street to some extent but also from our people. They really want to understand where we are heading as a Company and what businesses are attractive for the future, and the ones we'll invest in and which ones we might want to not be in.

I think that's actually been fed back to me extremely positively, and the fact that we recognize that we are a people Company and we're only as good as the people we employ. And the fact that we can trust and empower our people with the right level of control and deliver in a consistent way and really get behind the message of we deliver. And I think the response to that has been terrific.

I have to say the quality of the people in KBR is enormously impressive. And the number of people that you meet. I've been with the Company for many years and I am committed. And they're building things in interesting places, and really high end technical specialists have been the -- that key skill set undoubtedly exists, as do the underpinning processes and procedures to deliver.

I think really it's actually just setting a forward path. Putting in place an appropriate leadership and structure that allows the business to be unleashed a little bit and to thrive and grow on the capability they have. It's a very exciting space to be in, and I think the people that I've met are up for the future, which is also very pleasing.

That's very helpful.

Stuart, another one for you. You mentioned that you're pursuing those LNG projects with some vigor, can you give us some sense of what that means? Does that mean a specific focus on which personnel you're putting on there, is it a comment on pricing, how should we think about what that means?

I think the way you should view it is that we're very focused on it. We're not getting distracted by going after 10 of these things. We're going after three that we feel have got the best chance to reach FID. Which means they'll go right through into the main development phase and not just be stuck at FEED or whatever.

We feel that we've got a very good chance, so therefore our bid dollars are not being wasted. So it's really getting the attention of our organization to make sure we're putting the best people on it. That we're thinking about the best technical solution, that we're thinking about, commercially, where we need to pitch it. And I think that at the end of the day bringing our partners along with us and making sure those relationships are the best and we have got the right dialogue going on with the customer.

In the past, I think we've been criticized for not securing some of these in the last little while. I don't know what the reason is for that, but I can assure you there is zero complacency going forward.

Thank you very much.

(Operator Instructions)

The next question comes from Jerry Revich from Goldman Sachs.

Good morning.

Stuart, in your prepared remarks you spent some time stressing the Company's opportunity in North American construction projects. I'm wondering if you could flesh that out for us? I appreciate you're in the middle of the strategic review, but to the extent you can comment, where do you see the Company's mix of business going between contract hire versus fabrication?

And just talk about the bid environment, fixed price versus cost plus, and how you're thinking about the Company's focus on what's the right level of risk that we should be thinking about as you look to grow that part of the business, if I understood your comments right.

I'm glad you picked up on that. It starts off as I talk about really on technology, and if you think about where we sell our technology, that's a very low risk entry. As is the associated proprietary equipment that we sell with that technology with pretty good returns in that space. So even the stand alone technology play is very healthy and fairly low risk.

As we move that into FEED and into EPC, what we're seeing is really a good portfolio of opportunities across the ammonia urea space, the gas space and, obviously, the refinery space. And it is sort of a mix of lumps sum in EPC, reinvestible EPC, and traditional services, depending on the client and the maturity of where the engineering is when people want to sign contracts.

I think the takeaway, in terms of the level of risk that KBR will take on is that we'll be very selective when we take on EPC projects going forward, and we will not be chasing revenue for the sake of revenue. We'll want to make sure that we've got a very solid basis for execution, that we've got a good relationship with the customer, and that we really have the people and the wherewithal to execute these projects and really understand -- I mean there are certain areas in the US where it would be pretty challenging to take lumps and risk on things like leverage and things.

If you look at the Gulf Coast, that is very hot at the moment. Wages and per diems are moving up quickly. The mature clients recognize that, so you can get levels of relief through your contractual negotiations in that space. That's probably the best way to think about it. It's a portfolio we're trying to engage early, although there is a very strong insight into what we'll be taking on, and yet we'll only be taking on things that we feel that we can deliver and what we'll be doing it in a very commercially sound way.

The willingness to take on additional fabrication work, can you give us a sense for how you are managing that process? Is that at a standstill until you complete the portfolio review, or how are you running that part of the business?

As a follow-up can you just talk about if you're pursuing opportunities in ethylene and propylene in North America, or are you purely focused on the urea-based projects?

We have got a number of ethylene projects that are coming through now. I'm not going to talk about specific pursuits, but yes we are pursuing that, and we have technology in that space.

In terms of the fabrication piece, at the moment the fabrication is only isolated to Canada, I should stress that point. Historically that business has turned over half of what it currently does and was making a reasonable return with that turnover.

I think we should be looking at taking it back to those levels and making sure that we're executing the complexity of module that business really understands and lower complexity. And if we start to move the dial a little bit and make sure that we manage it in a far better way than we've done recently.

I wouldn't get caught up on the Canadian issue. I think the key piece there is actually not the future orders, but closing out the ones that we've got.

Thank you.

Our next question comes from Jamie Cook from Credit Suisse.

Good morning. A couple questions, Stuart. I would like to hear your thoughts. Obviously, in the space you've seen a lot of M&A happen. More happened since the first quarter, and the rationale behind the M&A in the space, is that scale matters, in particular for winning some of these big projects? Can you talk about your thoughts on that? Do you think KBR is at a competitive disadvantage because they're smaller than some of your peers, and just how you think about M&A?

The second question is, the other push back I get on your stock a lot is while we have this noise related to the fabrication projects or a power project here and there, there is still a big concern out there that there's another shoe to drop on some of your larger projects. So, as you've been there since early June can you talk about your confidence level in the existing backlog that you have?

And then my last question is, you're more positive, it seems like, on bookings potential in the back half of the year based on some of your comments. Do you feel we're at a point where bookings in the back half of the year could accelerate versus Q2 levels, which were better than I would've thought? Thanks.

I think there were at least three questions there, Jamie.

The M&A activity in the marketplace is interesting and I think for us going forward going into the strategic review process as you're well aware. What I would say is we've got a very strong cash balance. We don't have any debt, so we certainly have got headroom to be looking at acquisitions.

My view of them is that they are an accelerative strategy. And we've got to define the strategy, and then if we feel that a particular acquisition at the right price actually helps to get us there quicker, then it's certainly on the table. So that's probably the first statement. We'll always be looking.

In terms of does it really impact -- .

Do you think scale matters in terms of winning some of these larger projects and that's perhaps why KBR didn't win some of the other projects? That's why Shaw acquired TBI. You could make the argument why a common [US requiring] -- you know what I mean? Do you think scale is the major issue, in terms of why you think about it?

I'm sure size matters, but I don't think in this particular case of what we've seen and the bids that -- I mean talking to the guys that we've -- and some of the ones that we haven't won, I don't think our balance sheet and size of the company has had any bearing on it whatsoever.

Typically, we are doing these projects with partners. When you look at even the Gorgons that we're doing at the moment, and as John mentioned the DDC, (inaudible). So, I don't really see that as a limiting factor at all and I think you bring in partners to mitigate some of that risk and the client helps you do that, as well.

Okay, and then the second question was another shoe to drop on the other bigger projects and then bookings in the back half?

I have now been out to the Gorgon site and had a talk to the customer, and done so in Ichthys, and they're both commercially different. But I don't see as dropping the ball on either of those in a significant way.

In terms of the hydrocarbons projects, I think the way the EPC projects are being managed there is quite clear and there's a strong commercial focus and delivery focus on those, and I think the guys understand that the marketplace is such that if you deliver it's the best business development you can do. There's a lot of focus on some.

I'm not thinking we're going to stub our toe there. And we've got the EPC power projects. We've got three of them, and under different levels of development. Marshalltown was just started and SWA is over 80% complete and gets a little bit different again. We've got a clear commercial focus and delivery focus on those.

There is no certainties in this world, Jamie on those ones. I think we've got enough oversight and scrutiny going into them at the moment that certainly through the course of next little while we'll really understand where we're at.

Okay, and then confidence level that bookings perhaps can grow in the back half of the year?

That's the plan. I think the market -- .

I like that plan.

That is the plan.

Great, thanks. I will get back in queue.

Our next question comes from Will Gabrielski from Stephens Capital.

The power project that you are having issues on, can you talk a little bit more about what the actual issues are?

We are starting to look at all these major projects in a very detailed way. We want to make sure that people aren't so -- just so given the most [usually] optimistic view and they're praying for better weather or whatever. I use that as an analogy, nothing specific.

I think what we're seeing is that as we're looking very closely at these projects and this particular one was really the cost to complete, we're too optimistic. When we actually looked at what was left to be done, what schedule needs to be done in, there was an increase in cost to complete. That's the bottom line. (multiple speakers)

-- profitable.

Yes, still profitable.

You mentioned North American refining opportunities; what exactly are you referencing there?

Again, I don't think we're going to talk about specific projects here, but--

No, I just meant by type of projects, revamps, environmental, tier 3, what exactly are you referencing?

Mostly it's revamps, the deal with the changing mix and field types, and things like that.

Perfect. And then [Almy], can you comment on how that's going to trend in the second half of the year with an IGP equity income?

In terms of the equity income, it's performing on a consistent basis in terms of the facilities management of that, which runs alright for the next 30 years or so. But the construction element is coming off as the facilities are coming to conclusion.

I went to visit that site, as well, and I met the customer and they were very happy with what we've done and the quality of the service we are providing is terrific. So I think that's going to be a consistent performer over the next little while. I guess the potential upside in Almy through the Aspire joint venture we need the army are relocating back from Europe and Germany in particular, back into the Saulsbury Plain area, where we built all these facilities. There is a need for additional facilities, and there is a need for the expanded growth in the facilities management piece. We obviously will be looking to have an active role in that.

Quickly, ERP spending this year and any expectation for what that change will be in 2015 versus 2014?

I think Brian is better to talk about ERP.

We think 2015 will be also comparable for this year. We are in process of rolling out in the US now. We've done first phase in the US, and we will continue that in the US in the early part of 2015, and then the balance of the world in 2015. Pretty consistent in 2015 as in 2014 and then a significant trail off thereafter if there's any rollover into the following years.

The next question comes from Vishal Shah of Deutsche Bank.

Thanks for taking my question.

I just wanted to better understand anything changed on a structural basis in the pipe fabrication business? Are you seeing more complex projects, larger projects? Looking at some of the strategic opportunities in that particular business as you conduct this review?

In terms of the actual projects we have, as I've mentioned previously, they have been more complex and larger than what we had done historically. There's a term I've learned, Alberta module, which was a relatively common-type module that had been done by us and others in the past and in the more recent past, these contracts are more complex, more work being done. So there has been a shift there.

I'm not sure whether that's an ongoing market issue, or if it was just specific to the projects that were ongoing at this point in time. As Stuart mentioned earlier, Canada is relatively small, the fabrication component of Canada is a relatively small component of our business. Yes, it will be included in the strategic review, but in context it is one of the smaller components. It just has had a major impact on these seven projects.

That's helpful, thank you.

As you consider the landscape going forward, are you reevaluating your strategy around capital allocation in terms of between buyback and M&A? You said 50% of your cash was returned to shareholders in the form of buyback. Is that going to change going forward? Thank you.

That will be part of the strategic review. So it's premature to comment on capital allocation, but clearly all of those options have been on the table. We had not precluded any of those in the past, and we'll see where the strategic review goes, but I would imagine that they all will remain on the table as we roll forward.

Great, thanks.

The next question comes from Rob Norfleet of Olympic Global Advisors.

Good morning.

My first question on the LNG opportunities. Clearly you mentioned mostly Greenfield opportunities. I wanted to get your thoughts as it relates to some of the existing or legacy products that we're working on. For example, Train 4, Gorgon, Tangu, obviously a project we worked on before. These are projects you have all talked about favorably before and I'm just curious about your thoughts about getting the FEED and EPC on those, as well as any other projects where you see increases in scope?

The current projects are always open to an increase in scope as changes come through. That's probably the first statement, which I'm sure you know well. When you look at Train 4 and Gorgon, I think the focus by Chevron and the partners and certainly, we were chatting about it only last week is really to get the first three trains going.

Some of the infrastructure is already in place for Train 4 and you would have to think the economics around that would make sense given the supporting infrastructure is already in play. I think right now because of the reported cost increases in that particular project, the focus will be very much in the short-term to make sure that we got (inaudible) come going through the plant.

What I would say is that once the facility is up and running, and there's a lot of hesitancy in the marketplace as well. At the moment there's a lot of noise around Angolan LNG. As you're probably aware, they have had some issues. So they want to start there to make sure it is running well, et cetera. Thereafter, I'm sure that Train 4 will be under consideration and I'm sure that KBR and GGC will be well-placed to go after it, just given that we've just finished the first three trains.

In terms of Tangu. The subtrain in Indonesia is very much in play at the moment, and we're going after that quite aggressively and as you rightly pointed out, we built the first two trains, so we feel that we've got a good shot at that particular project in BP, are very driven to get it sanctioned and through the process in Indonesia.

Okay, great.

The second question can you discuss a little bit the competitive environment you're seeing in North America? You all clearly seem very upbeat about several projects in chemical and oil and gas moving to EPC in the second half of the year, which is great. But a number of your competitors have really stated that they're continuing to seize sluggish activity, products are getting pushed out and it's a very price competitive environment. Can you discuss what you're seeing in the North American markets?

I don't really talk about competitive statements, but certainly what we're seeing at the moment and certainly a backlog would prove that out if the opportunities in front of us. I think perhaps the differentiator for us is that we get in with our technology, as well. We actually don't see such huge cost pressure in that area at the moment. We find it competitive as ever, but no more competitive than three or four months ago.

Okay great.

My last question is for Brian. Brian, I know the strategic review is ongoing so you'll have a conclusion to that at some point. But where does buyback at this juncture sit on your plate? Why you're doing the review are you still going to be active in buyback? Clearly given to where the stock is trading? I just want to get your perspective on that.

As we've commented in the past, we don't really talk about timing of buyback. There are a lot of people out there who trade in stocks as their living, and I don't think it serves our shareholders well for us to give any indications about when we may or may not be in the marketplace. I would have to defer. But clearly we still have a lot of authorization available under the existing facilities, but it will be part of the strategic review is about the best I can say.

Okay, and lastly, any update on Pemex?

No, it continues to move along the legal process. We always are thinking of ways that we might be able to reach out and come to a commercial conclusion there rather than a legal one. And as we mentioned in the last quarter, there's a renewed emphasis in general here on resolving disputes commercially rather than legally. But no, nothing new of any significance to report on the Pemex EPC dispute.

The next question comes from Robert Connors of Stifel Nicolaus.

Good morning or good afternoon. How are you?

Hi, Rob.

Thank you for being on the call.

I don't know if this one -- this question is for both of you. But I get it lot from your shareholders is, there's always been this cloud that's been overhanging KBR that despite a great reputation in international LNG, there really remains an unquantifiable liability on the legacy Iraq and Afghanistan work. Do you continue to see that your shareholders are best served by keeping these two segments together, or is that being explored in the strategic review?

I think you know the answer to that question. That's very much part of the strategic review process, and we'll come back and talk to you about that later.

Okay. Can you just remind us of where you're at on percent of complete on Ichthys LNG, as well as the breakdown of fixed price versus cost plus exposure? Previously, we used to get a breakdown on that.

I was just there going to say they just crossed the 50% complete mark and there's a big celebration for that. In terms of the breakdown, I don't actually have the figures in front of me so we might have to do that off-line as we've done it before.

All right, thanks for taking my question.

The next question comes from Michael Dudas of Sterne Agee.

Think you. Two questions for Brian.

First, Brian, the labor productivity improvement we've seen, can that maintain in the second half or do you need to see more visible in the new bookings to help absorb some of the underutilization?

Clearly, you always need new bookings because projects are rolling down, and you need new ones to roll on to replace them. But, no, we're feeling a lot more optimistic about the utilization of labor than we were a year ago. You see it's made a pretty significant improvement from a year ago as we said. Yes, you always do need some new bookings, but again we remain much less concerned about labor cost utilization that we did a year ago.

Understood.

Secondly on cash generation second half of the year. Is it going to be a change in the mix from international to US, so given your plan? Any meaningful change in the mix?

No, I can't think of any meaningful change in mix. No.

Fair enough, and for Stuart, thoughts on the Russian business, given some of the concerns over there?

Say that again? I didn't quite hear it very well.

About your relationships with gas problems in some of the Russian opportunities?

Our exposure in Russia is fairly minimal. It's very politically volatile, as you know at the moment so I don't see it as a material risk to the Business at the moment. And we've got some small PNC work ongoing. It is good for relationship building but no it won't commercially (inaudible) risk.

That concludes today's question and answer session. At this time I would like to turn it back over to Stuart Bradie, President and Chief Executive Officer of KBR for final comments or closing remarks.

I think a good level of questioning. Thank you very much for your interest and your questions towards KBR. Certainly, now I've been in the job six or seven weeks now and thoroughly enjoying it and I look forward to getting out and meeting with you as we get into the back end of August. Thank you very much.

That does conclude today's conference. We thank you for your participation.