KBR Inc (KBR) 2015 Q1 法說會逐字稿

Good day and welcome to the KBR's first quarter 2015 earnings conference call. This call is being recorded.

(Operator Instructions)

And now, I would like to turn the conference to Mr. Zac Nagle, Vice President of Investor Relations and Communications. Please go ahead, sir.

Good morning and thank you for joining us for KBR's first quarter 2015 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 KBR's first 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 call, Stuart and Brian will cover KBR's results in more detail and discuss our market outlook by major segment. 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'd like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their 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 first quarter earnings press release, KBR's earnings presentation, KBR's Form 10-K for the period ended December 31, 2014, and KBR's current reports on Form 8-K. You can find all these documents at KBR.com.

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

Thanks, Zac. Good morning, all. I guess the journey continues and so I moved to slide 3.

I would just touch on the KBR Zero Harm initiative. I think that what you see in the slide are lagging indicators. But to get there we have a number of leading indicators which are really driven by executive leadership and visibility of leadership on job sites and at offices across the world, really driving the message around courage to care and the message around safety as a 24/7 initiative. And as you can see, these results have really improved KBR's safety performance. And as we move through the first quarter, we're now really at the level where we need be and that is moving into the top quartile of performers.

We want to get to Zero Harm, we're not resting on our laurels at all. But it's a significant improvement. It's personally very pleasing looking after yourself and those around you is a core value at KBR and one that I'm totally behind. So this is -- this is very much good business and great job by KBR's people to get this performance.

So moving on to slide 4, so really the Q1 summary. Significantly improved earnings performance versus 2014. I think the strategy is on track for the segment margins and the target savings by the end of 2016 that we published before and committed to achieving before. We've got more than $100 million of cost identified in action to date that will be taken out of the business and realized through 2015.

The mega LNGs continue to perform well and will remain major significant contributors to earnings in 2015 and with the way the projects are looking into 2016. That really, in terms of resolution of pending change orders and some of those LNG protects, I think 2016 could be comparable to 2015 in terms of our LNG earnings. Which is a shift from where we were before and it's really just part of understanding the, I guess, the longevity of these projects and the complexity, simplifying the complexity in terms of what it means to KBR.

We continue to win in strategically important areas. The Yara/BASF, we announced the full EPC in that. We also announced the JV with a national oil company of Azerbaijan, SOCAR. We have started year-around reimbursable construction -- bared some fruit in the quarter. And I guess our positioning in LNG, with the Dragon LNG EPCM boil-off re-liquefaction project in the UK was a pleasing win in the period.

Oil prices remain depressed, no doubt about it, and it is tough. But I think KBR's focus on low-cost natural gas related projects and international government services positions us well. And also we've got the opportunity we'll discuss a little bit further on in the presentation, around UK Ministry of Defense contracts that place us well for new awards through the year.

Our expectation, as we declared earlier, is that backlog will be flat. And we're starting behind that statement. We think that the opportunities in front of us will allow that to happen with a fair wind. But as expected, our balance sheet is very strong. It remains robust. We have got zero debt. But as expected, cash was negatively impacted in the quarter due to certain non-project-related payments. And I'll say that again, nonproject-related payments, and Brian will discuss that later in the presentation.

So that's really the summary of the quarter. Now I would like to hand over to Brian to put a bit more meat around the bones in terms of the financials. Brian?

Thank you, Stuart, and good morning, everyone.

Turning to slide 5, start with the bookings at the top right-hand corner of the slide, $899 during the quarter which has backlog of about $10.3 billion. I'd like to remind everyone that we only put projects in backlog going out five years. We do have a number of contracts that extend well beyond the five-year time horizon and Stuart will touch upon those a little bit later.

Revenues declined during the quarter compared to the prior year, primarily due to the completion of some North American construction projects that we had as well as the Canadian modular assembly projects. And also from reduced activities on the LNG projects. If you recall, we had an LNG and a gas-to-liquids projects that were basically winding up but still had activity in 2014.

Gross profit and equity in earnings reflect improved underlying business performance and we've done a good job, as Stuart has mentioned previously, at reducing our overhead cost. So we had a good profit quarter. You see the G&A is also down significantly from a year ago, $21 million and the net income obviously reflects the solid performance. EBITDA for the quarter, $76 million.

Moving on to slide 6, looking at the individual segments. The technology and consulting group had a mix of to more technology-related services and less proprietary equipment so that tends to reduce the revenues, but it increases the margin associated with that segment. The E&C, the largest segment, reflects the completion of the construction and modular assembly projects I previously touched upon. And the government services is down a bit, and that reflects less support for the UK military in Afghanistan. As the UK has pulled back out of Afghanistan obviously the services we provide decline as well.

Moving on to the gross profit in equity earnings, technology and consulting reflects, as I mentioned, that shift in [marger] work. So it tends to bump up the margins but as we progress throughout the year, we would expect more proprietary equipment to come back into the mix and therefore the margins will tend to be back down toward the targets that we had originally talked about in December. Margins in the low 20s in terms of percentiles.

E&C reflects improved performance and a lower cost overheads. In 2014 we had $41 million related to those losses on the Canadian modular assembly projects as well as $8 million on the North American construction projects. They did not re-occur. But we also had a favorable settlement in 2014 of $33 million also which did not re-occur.

Government services, as I talked about, as related to the volume of activity in Afghanistan, we had $5 million in the US related to legacy legal fees on the US government contracts as we try to close out the LogCAP III and RIO contracts. In the nonstrategic businesses, we're relatively quiet, the way we like them to be. And you see the EBITDA reflects reduction of the overhead and the earnings that we previously talked about.

Moving on to slide 7, cash. Cash was down for the quarter, $758 million balance. And you see the breakdown between domestic and international cash. Primarily the uses of cash were, as Stuart mentioned earlier, non-project related. We try to outline here the largest components.

We had a $12 million payment to our former parent, as part of the settlement that we had reached with them last year. That would appear in the operating cash flow on the cash flow statement. We had more closeouts of US government audits relating to, primarily, the LogCAP III and LogCAP IV contracts. That required us actually to send a check of $23 million back to the US government. I'd like to point out that the US government owes us more than we owe them and we would expect, as we move forward, for the cash flow related to these closeouts to be positive with cash flow flowing to us.

We also bought out a partner in the Middle East, in Saudi Arabia, and that was $48 million, $8 million of which appears in the operating cash flow, and $40 million will show up in the financing activities on the cash flow statement. We bought back $16 million worth of stock. We paid $12 million in dividends.

And finally, we had a significant impact related to the foreign exchange. During the quarter the US dollar strengthened, and $28 million of the $64 million that is shown here just reflects the translation of foreign currencies, Pounds sterling, Australian dollars and Canadian dollars just being translated back to the US dollar at a higher US dollar rate. So it means those foreign currencies translate into lower US dollars for financial reporting purposes.

The balance, $36 million, is reflected in operating cash flows. That was a settlement of hedges. We had a number of hedges in place, as we always do, and when the dollar strengthened, obviously those hedges required us to settle and it cost us $36 million in cash offset by the gains that we had by the dollar strengthening and reducing the overhead -- the overall liabilities that we had in foreign currencies. So with that, I'll turn the conversation back over to Stuart, and move on to slide 8.

Thank you, Brian.

I guess the market outlook for technology and consulting really driven by gas and really led by ammonia refining, olefins and across the chemicals market. You know, we just received a significant order for license basic engineering and pre-FEED for work for a series of ammonia revamps that will come through in the Q2 bookings. We've also just been awarded a technical services agreement that leads to, I guess, sole source EPC pricing for another grass roots ammonia plant in the Midwest US which is valued around about a $2 billion opportunity for E&C in the US.

Our opportunities in China, particularly around VCC, or Veba Combi-Cracker, technology, which converts heavy hydrocarbons into lighter fuels like diesels, is really gaining momentum. And the start up of the first commercial facility in China has gone pretty well and as a consequence we received a number of new inquiries around that technology. The market is tight for a consulting business, but we continue to see selected opportunities in upstream, on onshore and offshore, and more in midstream and downstream. And we continue to look for new opportunities to expand our technology portfolio, as we've discussed earlier.

So moving on to slide 9 for E&C, our largest segment. A number of key wins that we've announced in Q1, that really support our strategic focus, the Yara/BASF EPC award. The BG Alliance-- that's kicked off in earnest now and where it leads to over the next year with the announcement of Shell's acquisition of BG, we need to work closely with Shell and with BG to see how that develops. Saudi Aramco, that work is in the process of kicking off in the long-term agreement with them to support their offshore oil and gas assets. And we discussed before this major reimbursable construction services award.

We also continue with a healthy base of backlog in E&C, the two mega-LNG projects. Those will contribute, as I said before, healthfully in 2015 and with resolution of pending change orders the earnings will be comparable in 2016 as they are in 2015. Key prospects, they support backlog growth in 2016, but I would say that we do need to win them. And we're currently executing four ammonia/urea projects in North America using our technology and what I would call a differentiated offering, I guess, with technology and self-perform construction with our delivery capability.

So moving on to slide 10. We've got -- we're going to increase our focus on the Middle East and, you know we recently announced the strengthening of the management team in that area and obviously the acquisition of our Saudi partner, or one of our Saudi partners, allows us very much to get clarity of focus in how we're going to approach the market in Saudi Arabia that we feel regardless of oil price will continue to spend and develop and I think that's -- that's absolutely vital going forward. So we're putting a lot of effort in that marketplace.

We talked about already the EPC pricing for the $2 billion grassroots ammonia/urea complex in the Midwest. Low cost development in the Middle East and Caspian are driving onshore upstream opportunities, and I think the JV with SOCAR, where we've got a strong footprint in country that plays to national content and the local scene, positions us well for offshore brownfield projects. We've been supporting BP in Azerbaijan for decades now and we're very well known there and have actually helped BP develop all their assets in country to date.

Offshore developments, pretty selective, but they continue in the Gulf of Mexico and Africa. And we're seeing, again, sort of some key opportunities in the North Sea in the UK and offshore Norway. As I said, we've got an early work award against the BG Global Alliance, which is going well, and several major LNG developments are also in process. The Shell global LNG agreement, we've got a number of assignments within that. Tangguh Train 3 FEED JV work continues with EPC pricing being submitted at the end of this year. We think that project will proceed in early 2016.

And Magnolia, we talked about this before. It's a medium sized new technology and we're in a sole source position there, sort of working to get a pricing together by Q3 and I guess the bit of news there is that we're working towards finalizing the EPC terms and conditions later this month and that's very close to finalization. And I guess the other piece that Magnolia have announced recently is they signed their first offtake agreement for one of the trains which, you know, is really a key milestone in allowing these projects to go ahead.

We've also picked up pre-FEED for a major LNG project with a confidential client and we've just been awarded the front end design for an exciting opportunity for FLNG in the Black Sea. We still in process with Pacific Northwest and Tangguh. But the Technip/KBR JV was not short listed for Lake Charles and the reason for that is the joint venture was unwilling to take unlimited fixed priced construction risk in the Gulf Coast for a project of this magnitude. That was a highly considered decision by the joint venture.

So moving to slide 11, the Outlook for government services, I think we've got government services really heading in the right direction now. We've cleaned up what was the old IGP and we really understand our customer and where that business is heading. So we're seeing significant opportunities as a result. The UK Army re-basing, the client has confirmed its intention to work with the KBR JV and contract with that entity for the facilities construction which is expected to be awarded in Q3.

The strong operational performance and incremental scope opportunities for long-term maintenance for the UK Minister of Defense. We've got the ongoing work there. We've got an agreement that will run for another 21 years. And if we actually, we're looking very closely now -- the PFI arrangements are a little bit different than your typical commercial arrangements and any contract cancellations and things like that come with some obligations on the part of the UK government because these are finance deals. And if we took that into backlog, and we're looking carefully at whether we think that's appropriate or not, but just to give you and the market an idea of what that means, it would be, you know, the backlog would increase by about $4 billion. Which is really significant and I think is a true reflection of what the business has in hand.

We were confirmed the preferred bidder for the UK Ministry of Defense fixed wing training contract, we've talked about that earlier. That's progressed and, you know, but there's a lot of work going on now really to sort of put the financing in place, et cetera, to make that all happen. And, again, it's another long-term annuity contract opportunity and again the expectation is Q3 closure.

So a number of international government services opportunities, you know with the UK police and other local governments and also with Australia. And the US overseas base operational support opportunities continue and we were recently awarded the Arabian Peninsula contract in Q2. We've seen some growth in the services in Iraq as we support the US military and what's happening with ISIS and we expect that to grow a little bit further and with opportunities to grow even further going forward depending on what happens there.

So really, turning to page 12 and to summarize, I think in Q1 we saw a strong and improved operational performance and financial outcomes. The restructuring continues on track. And it continues on track to achieve the targets that we set out. We continue to have good success in winning strategically important projects in the areas where we're pointing the business, albeit we're not running away from the fact this is a difficult market. Backlog statements, we stand behind flat in 2015 with opportunities to grow in 2016.

And I guess that one piece, again, just to reiterate, is the LNG projects remain significant contributors in 2015 and will be in 2016 and resolution of these pending change orders could result in LNG 2016 being comparable to 2015. So we're reaffirming our annual EPS guidance of $1.07 to $1.22, excluding legacy fees. And as Brian said before, the fees in Q1 were $5 million, approximately $0.03.

So that really concludes our prepared remarks and I would now like to turn the call back over to the Operator for questions. Thank you.

(Operator Instructions)

Our first question will come from John Rogers of D.A. Davidson.

Hi, good morning.

Good morning, John.

Couple of things, first of all just on the G&A reduction that we saw in the quarter. Is that a good run rate now or will we continue to see that decline through this year and into 2016? (multiple speakers)

I'll take that. As we said before, we would expect more cost to be action throughout the year, so we would expect those numbers to, as a minimum, be the same but hopefully throughout the balance of the year decline. So we're not done with the cost reductions yet.

Okay. I guess then that would suggest that the gross profits or the segment profitability-- segment contributions, then, would come down a little bit from the run rate we've seen recently or at least be through the rest of the year?

Well, what we're -- we're keeping the guidance the same, we have a long way to go. As Stuart said, it's a pretty tough market. So we'll see. It's early on, but we're not going to give any additional guidance in terms of what the margins will be on a quarterly basis for the balance of the year.

Okay, fair enough. And if I could, one more.

In terms of the buyback, was modest in the quarter. Any update on thoughts there?

No. You know we don't comment about what we're going to do or not do in terms of share buybacks. Obviously, with the year end close process, there was a limited amount of time in the quarter that we could be doing buybacks. But we really don't comment because I don't think it does anything to improve our shareholder value by telegraphing what we may or may not do in the capital markets.

Fair enough. Thank you.

We'll go next to Robert Norfleet of Olympic Global.

Hi, this is actually Nick Chen for Rob this morning. Congratulations on a nice quarter.

Just in terms of the cash that you guys have on balance, it's looking like $0.75 billion. How do you guys see yourself allocating that?

Well, as we said in the past, Nick, we try to have a balanced capital allocation policy. We're trying to grow the business and M&A would be a component of that. We like technology as an area of focus.

But we also are committed to returning capital to shareholders. And as you see on slide 7, you know, we had $28 million in cash returned to shareholders via the repurchases and dividends. And since the spin back to January 2007, we've paid back almost a billion dollars.

Great.

I think we've taken a balanced approach to it.

Okay. Fair enough.

And just looking at your guys' actual portfolio of businesses right now, you had mentioned during the investor day looking into divestitures or exiting some of those businesses. Are there any updates there?

Yes. We continue to have discussions with both our building group subsidiary as well as our US infrastructure business as we previously had talked about. And hopefully we'll be able to close something this year.

All right, thanks so much, guys. I'll jump back into the queue.

It's probably worth saying there, so that you know that the divestiture of those businesses is really to tidy up the Company and to get the management focused on the key areas of the future. They're not going to be massive dollars coming in the door. I'm trying to be very straightforward there.

Great. Thanks a lot, guys, that's helpful.

And I'd also add, Nick, that these are nice little businesses and they're not a problem business that we need to divest. It's much more of a focus on the strategy we laid out in December.

Got it.

We'll go next to Andrew Kaplowitz of Barclays.

Hey, guys, nice improvement this quarter.

Thanks, Andy.

Brian, you stood by backlog growth in 2015 which was your previous guidance. So maybe you can talk a little bit more about where will the backlog -- I should say flat backlog for the year.

Where will the flattest backlog come from? Do you still need the UK MoD work this year to get there? Are you counting on bigger ammonia work or anything in LNG this year?

I think all of them (laughter) is probably the way to put it. We've come out and actually said we expect the UK MoD contracts to close this year in Q3 and we still stand by that. We think that's the right timing. And obviously that would factor into what we're doing in terms of backlog this year obviously.

And then we're -- I guess our pipeline of opportunities in North America there, we've talked about some LNG projects, we've talked about some ammonia projects and some chemical projects in addition to what we're looking at in the UK and in the hydrocarbons sector.

So I think it's a combination. It doesn't sort of -- it doesn't hinge on one particular award or another, it's across a portfolio. So there's a -- as a consequence of that, that's why we're happy to stand by the statement at the moment because it's a spread.

Got it. And then Stuart, can I ask you about your ammonia portfolio in particular.

You mentioned you're working on four ammonia projects in North America and two projects in the pre-FEED stage. Can you talk about the duration of these projects and your ability to maintain or grow your ammonia related business and what does seem like a more difficult overall environment for those types of projects?

Yes, that's a good question. And I think pleasingly, you know, we've got some that are -- tail end, about three-quarters of the way construction and we have got some that are just beginning. I guess the engineering have got -- over two years to go and we've got some that are in the middle. The other nice thing is that two of them are lump sum EPC and two of them are reimbursable EPC so there's a good mix in terms of how we manage our risk there as well.

And I think the drivers around ammonia, interestingly enough. I think -- if you look at the starts around importation of ammonia in the US, I think the facilities that are planned to be built at the moment will actually just satisfy the demand domestically. And if you think about ammonia and its use in fruit production and fertilizers going forward, the opportunity to utilize cheap gas to become an export product from the US hasn't even been thought about.

And so -- I'm sure it's been thought about but it's, we're not at that terms of capacity yet. I think the opportunities and the drivers behind that part of the business are somewhat different to your oil and gas markets which is why we think it's an exciting area for us to be hugely differentiated with that technology.

Okay. Thanks, Stuart.

We'll go next to Jamie Cook of Credit Suisse.

Hi, good morning and nice quarter.

I guess my first question, I thought it was interesting the comments you made about the LNG projects and that the income in 2015 could be comparable to 2016 assuming that you get a favorable change order. So one, how would you handicap the probability of you getting that change order and what is that dependent on? I guess two, how much does income ramp down, you know what I mean, if you don't get that change order?

And then I guess just my -- my second question -- actually, why don't you ask that first and then I'll go to my second question.

Okay, I think Jamie, we don't really talk about individual projects, as you know, in terms of their earnings. But what I would say is, I made the statement that it will be a substantial contributor in, that our LNG performance will be substantial contributor in 2015 obviously and in 2016. And that's -- that's without actually doing anything very differently, it's just the way these projects have evolved.

And we think the change orders that we're looking at, it's not a change order, it's a number of sort of outcomes because of things changing on the project themselves and we think they're valid. We've taken a very close look at them. We've done the forecast, the complete analysis and we know those statements, we stand behind. We wouldn't be putting this into presentations if we didn't think that what we were asking for was reasonable and contractually right.

So you wouldn't expect a substantial decline if you didn't get favorable resolution on the change order, that's the way to think about it.

I think-- like all these things, you know, yes. I think -- the way these projects evolve, it's difficult to make a firm statement around the level of decline. But we still think it's going to be a substantial part of our earnings for next year.

Okay. And then just a follow-up question on the cost cutting actions.

We saw the $21 million come out of G&A, which I think was just ERP. And you know, Brian, you sort of mentioned-- so you really don't have any head count reduction coming out of that. So how do we think about that in the latter part of year?

And then you also, in the 10-Q, you did mention that there were cost savings that hit the different segment lines. What inning of the ballgame are you with regards to the cost savings in the segment line? And then again, any color on how we think about this -- how it should progress throughout the year?

Okay, Jamie. First of all, the G&A savings are not just ERP.

Was that the majority of it?

No, it was maybe half of it.

Okay.

ERP is a component of it, but we also-- as you recall, when we stopped the ERP program, we must maintain and continue to operate the existing ERP system. So there's some offsets to the savings of not spending on the ERP because we need to maintain and continue to operate the existing ERP.

So the majority are cost reductions. And I don't think it's -- I know it's not an accurate statement about being no cost -- head count reductions, there had been head count reductions. As a matter of fact, that's where the majority of savings have come from.

Right, I was trying to give you a compliment that your corporate G&A should come down throughout the year. You're on the wrong side of this, but anyway.

No, I understand and I said that earlier. It should come down. But I just wanted to point out that it's not just the ERP savings. It is a very comprehensive approach to cost.

But then on the segment line?

I think you're right, Jamie. You know the cost of the head count reduction, you don't capture it all in Q1. You will see more of that coming through the G&A line as Brian said. So thank you for the compliment. That's good, we'll take that.

And in terms of coming through the segment line, yes, we're still -- we continue to drive efficiencies there. We've set out the target margins and we expect to achieve those through the time frame that we've committed to. And the cost reductions through there will be driving that move to achieving those margins.

All-righty. Thanks, I'll get back in queue.

Thank you.

We'll go next to Tahira Afzal of KeyBanc Capital Markets.

Hi, folks. Congrats on being back on track.

Thanks, Tahira.

I think a lot of my free cash flow questions have been taken care of but-- so I'll go to the LNG side. I just wanted to find out, if I look at Magnolia LNG and the sponsors, it seems like one of your key assets over there is being on the technology side given the technology they're using.

For left, love to get some thoughts -- I know those guys also are proposing a project, Banner at LNG in Canada. Does that sound like an opportunity on the mid size projects for yourselves as well? Are some of the small to mid-size LNG projects we're seeing emerging in the US potentially more interesting for yourselves from a risk perspective?

We think that the mid-size LNG opportunities are attractive. I think the capital requirements make them a little bit more attractive if we can get the technology to work, it becomes -- we feel quite compelling from a return perspective. I think that the opportunity beyond this is clear because the capital intensity is lower.

If you think about how you can actually replicate or modularize these -- you can start off with one two million ton train and then add another and add another. So there's ways to do that and there's ways to get more and more efficient at doing it as well through time. We think that this is a good opportunity, we think it could be very attractive to KBR's future.

Got it, okay. And just in terms of some modeling nuances. I know typically E&C companies, when they're building large projects, I believe them in on a probability basis.

When I look at your flat backlog commentary, does that assume Magnolia and at whole in terms of how you see it, does it not exclude it? Would love to get a little more color around that.

All right. I thought maybe I had a go at that earlier. What I said earlier is it's a portfolio of opportunities and doesn't hinge on one particular opportunity.

So hypothetically speaking, if you do end up booking Magnolia this year could we-- apart from your UK opportunities, let's assume we get those, too. Is there a scenario of backlog potentially being up this year Stuart?

I would rather stand behind the statement that the backlog is flat and you guys can think that through. There's a lot of moving parts out there. We're working hard on all of them. But as ever you can't win everything and not everything will go and so I think we'd rather stand behind our statement.

Got it, okay, and congratulations once more. Great job on the cost reduction side.

Thank you.

Our next question comes from Steven Fisher of UBS.

Hi, thanks. This is actually Cleve Rickard on for Steve this morning. Nice quarter, guys.

Thank you.

Just going back to cash flow a little bit, sorry if I missed it, but CapEx was essentially zero in the quarter. How sustainable do you think that is? And then, more generally, how consistent do you expect cash flow to be going forward?

Well, we're not really a heavy cash flow type business. Our cash flow tends to be more IT related and, as we mentioned earlier, we had stopped the rollout of a new ERP system so CapEx is replacement of laptops and things like that. So it should not be a significant component going forward.

And I'm sorry, the second part of your question?

Just on cash flow consistency and how consistent do you expect it to be in terms of operating cash flow or free cash flow?

Well, we would -- the goal is to try to have earnings cash flow equal or exceed earnings. We did mention though at the beginning of the year that we have some lost projects, particularly businesses that we are exiting on the power side. So they will consume some cash but we're not projecting negative cash flow in total.

Okay. Okay, thanks, I appreciate it.

And then, just touching again on backlog, what's your level of confidence that you can replace Gorgon and Ichthys and some of the bigger downstream projects over the next 12 months to 18 months? And, I guess more generally, how critical is winning large projects to KBR's future as you go through the evolution and the restructuring?

I think, again, it's the portfolio answer. I think, you know, we're -- we're in a reasonably small club in being, you know having market confidence to execute large projects, so that will be a key part of our future.

But also that what we're doing, in my defense what -- these days what you call big, I guess, the work that we're doing in the ammonia sector, these are typically $400 million to $600 million type opportunities. But when you put on urea on the back end it goes up to $2 billion type opportunities and I would call that reasonably big. So again it's a portfolio and I think that in terms of the statement around a flat backlog, we have to be replacing what we're doing now to achieve a flat backlog.

Our next question will come from Vishal Shah of Deutsche Bank.

Hi, this is Chad Dillard on for Vishal. Nice quarter, guys.

Thank you.

So if I look at the government services gross profit and equity margins and back out that $5 million of leave that will cause it to get to about maybe like 9.5% margins. That compares to your target of low teens for the business.

So my question is, how do you think about closing that gap? You know, what needs to be done in terms of -- what projects need to be rolled off? And will you need to rely on future bookings or are there margins already -- margin levels already in the backlog to get to that target? And can you hit that in 2015?

Yes, I mean I think that -- our commitments around achieving the targeted margins are into 2016. That's the first statement.

That being said, the government services business, I said earlier, I think we've now got it on track. It's heading firmly in the right direction. I think we're going to be working hard on the cost side of that business. But at the same time, the opportunity even to hold costs or reduce them and increase volume, particularly in the US and -- sorry particularly in the UK and a little bit in US and Australia, will allow us to drive to those margins.

Okay. And then, can you talk about what you're seeing in your T&C business? I mean do you expect to grow a backlog here in 2015? And has there been any change in the bidding activity, are you see any pushouts or any shift in market mix?

Yes, I think all the E&C businesses are experiencing challenges in this market. Again, we're not -- we've been saying that probably as early as anyone. And our whole philosophy here is what strategically do we need to do to, number one, be very competitive in this marketplace, and secondly, position the Company to take advantages of the opportunities that are coming our way.

So I think we've -- so far I think that started just baring fruits and particularly with our exposure to gas. I think there will be quite a -- I guess the mix will be similar to what you've seen in the past and particularly the recent past in North America. And so in terms of the backlog question, again, it's that portfolio answer where it won't be in one specific area, it will be in a number -- and it will be in a number of markets.

Okay. Thank you.

Our next question comes from Brian Konigsberg of Vertical Research.

Hi, good morning.

Good morning, Brian.

Hitting again just on the cash flow question, so correct me if I'm wrong, I think that you mentioned that you think actually cash flow will be positive this year which I think is actually a change in the commentary from when you spoke last time. Can you just clarify that that is actually the case?

And separately -- I don't know if you could take a ballpark guess. Do you think you could still end the year with about $1 billion of cash where you ended Q4 at?

I don't think we've changed anything, Brian, about what we previously said about cash. We're -- where we're likely to be is to get back to a more normal pace. Some of these one-time items that I outlined earlier go away.

But the earnings, the cash flow from earnings is going to be somewhat consumed by the lost projects that I mentioned earlier on the power side. So I wouldn't be too enthusiastic about positive cash flow. I would think about it as more as a neutral cash flow for the balance of the year.

Neutral for the rest of the year. Okay, got it.

Yes.

And then, can you comment on non-controlling interest? So that stepped down in Q1? I mean, is that the new run rate?

And as you're progressing to 2016, does that take a step lower as Gorgon wraps up? I'm curious to your thoughts on how that progresses.

As we said before, the LNG earnings, we would view it to be comparable in 2016 versus 2015. So there is a component related to the LNG projects, Gorgon as you correctly point out. We'll leave it at that. I'm trying to avoid giving specific guidance on individual line items within the P&L.

Okay. But the -- I assume the mix between the LNG projects will change even if your contribution or the total amount will be flat, right? So--

Well yes. (multiple speakers)

--could move around.

Yes, it could. But you're right, you're going to have excess which is still ramping up versus Gorgon which is obviously closer to the back end of the project.

Okay, got it. And just last question, maybe could you just comment on this JV partnership that you bought out in the Middle East, what is it focusing on? And what is the opportunity set now that you have full control on that?

I mean, it -- I guess it was a long-term historical partner of KBR's that we, together with that partner, we felt that the opportunity was probably better served for both of us to part ways. We think that Saudi Arabia is a very strategic market us for. We like doing business there. We've got a very healthy relationship with Aramco and with Sabic in country.

And you know its been a large part of our history and we think it continues to be a large part of our future. And you know, it required taking out the partner just really tidies up how we can take that business forward.

Our next question will come from Jerry Revich of Goldman Sachs.

Good morning.

Good morning.

Good morning, Jerry.

Stuart, I wonder if you could just say more about the technology path on Magnolia LNG. You mentioned that it allows for a single train but I think there is also the operator is talking about significantly lower liquification costs as well. Can you just flush out for us your offering there and whether the competitor landscape is more narrow on that specific type of technology? Any sort of color that you're comfortable sharing with us?

I mean I think I've said before. The component parts of the technology have all been proven before, just not in combination I guess. And so the liquefaction pieces is no different.

I think it's the accruing piece that comes into it, this through the ammonia. It's driven by ammonia. And if anyone in the world can really understand that, I would say that KBR is as good as anyone in ammonia technology. So I think we're kind of uniquely positioned to understand the technology and understand what it can and cannot do.

In terms of this sort of it will produce LNG like any other LNG facility, so in terms of its offering to the marketplace there'll be no difference there. I think the attraction is the operating costs and the capital cost are highly competitive. And-- if we get it right, it will be a compelling piece in the marketplace and I think that's been proven out by the recent announcement around signing the off take.

And I think the other piece in this, although I think the commitment that Magnolia, looking at it is, these are two million ton trains round your typical five million ton trains. And Magnolia's first phase is looking at four million tons, so two trains. But, you know, there are opportunities to do more than that. It's -- it's something that's being explored for that site in particular. And then you can actually replicate that model elsewhere in the world.

And where else do you think it could be the closest to being replicated?

Oh, I mean I think I mentioned that LNG Limited, who are the owners of Magnolia, have got a, the beginnings of a project in Canada called Bear Head. So they're already looking at how they can actually replicate this elsewhere and they've sort of moved that project along a little bit. -- They certainly feel there's a market for this beyond Magnolia.

And then how would you characterize the competitive landscape on Pacific Northwest LNG? I guess in the Japanese press there's discussions about your competitors being really aggressive on price and I'm just wondering if you could just comment broadly on how the discussions there are going?

I mean, again, that's at a very, very delicate stage of bidding cycle. It's probably inappropriate to comment. And sorry about that, but that's the truth of it. --

I guess the statement that we would make is that we will only take on projects where we feel we can make a fair return for our shareholders and we'll do it in a way that we feel that we can manage the risk. And if we're forced into situations, like Lake Charles that we announced, that we feel uncomfortable and the technique KBR JV felt that and so they didn't proceed. So I think that's probably the statement to make, but I don't think we can say specifically how we feel about Pacific Northwest at the moment.

Okay. Thank you.

Our next question comes from George O'Leary from Tudor, Pickering, Holt & Company.

Good morning, guys. Good quarter, especially on the cost front.

Thank you.

In that vein, as we model going forward and you have got $100 million of cost saves either in the works or achieved at this point, could you kind of split out for us where the incremental cost saves come from? From here, what kind of levers you're looking at pulling and maybe just qualitative, but if it's more further cuts to SG&A or more of it is just overhead reduction within the segments?

The short answer, George, they're going to be from both. This is a comprehensive view of costs both -- you know, the G&A line but also, frankly, in the businesses. So it's going to be split between the two.

Order of magnitude, probably more in the businesses because they're larger than the corporate staff and the corporate activities. Somewhere in the neighborhood of typically 58% to 42% is kind of the split.

Okay, that is very helpful color. And then, maybe just one more follow-up on that because most of my other questions have been answered.

The SG&A reductions quarter-on-quarter were very impressive. Would you say you're kind of ahead of schedule or in line with your plan? To us, I think to most people on the street, seemed a little bit accelerated. But just be curious to get your thoughts.

We've commented that we're on track. These things go in fits and starts. It's still early days in the year, so we're confident that we'll achieve the 200 goal that we set out and we'll give you updates as we roll through the year.

Great. Thanks very much, guys.

All right, thank you.

We'll go next to Martin Malloy of Johnson Rice.

Good morning. Just a question on the $2 billion ammonia-- urea project opportunity in the Midwest. Have you -- is that essentially a pre-FEED is what you've been awarded and what's the timing of a potential PC award there?

It's a little the bit more than a pre-FEED because it obviously has to result in firm EPC pricing so you have to get the definition in it that you need. So we're going to market not to actually build up pricing.

The customer themselves have got, they feel, solid backing to move this ahead. So really, it really depends on whether we can actually get the pricing and the confidence around execution, which we're working very hard towards now.

So the timing is looking closer to year-end, intent to being able to do all that work in a way that satisfies, of course at KBR on the risks that we'll be taking on. And secondly to get the order aligned take everything is in place. So that's -- yes, that's probably all we can say on that at the moment. But it's an exciting opportunity, we're in a sort of sole-source position and that work is starting in earnest.

Okay, and then, as far as the government services, some of the opportunities there, is there any help that you can give us in terms of the potential impact to KBR size of the army -- UK Army re-basing, UK Fixed Wing Training contracts?

No. (laughter) Only because we don't really like to comment on those individual things.

And again, we're in the process of negotiating those opportunities and it's inappropriate to talk about scale or size or whatever. It's just not the right time to do it.

Thank you.

All right, thank you, Marty.

We'll go next to Robert Connors of Stifel.

Good morning, guys, congratulations on the quarter.

Thanks, Rob.

I was just wondering if you can provide some detail on the timing of, what you guys pointed out recently the in the Ks and Qs of the $370 million in foreign cash that's out there? And a couple things, I guess, like timing as well as if there would be any potential taxes on that amount, what would they be as well as what you guys intend to use that amount for?

Well, Rob, we -- we're trying to communicate that we have the opportunity to repatriate cash, not necessarily the intention to repatriate cash. We're only going to bring it back when we need to do so, if we need to do so.

In terms of the tax implications, right now the current situation would be it would not have any significant tax implications to us, given that we have a significant foreign tax credits as well as some tax losses. So the cash tax impact would be relatively small and the P&L impact would be also negligible. So, it's just more, the goal that we've probably stated is have the opportunity to move the cash around more freely internationally without having leakage both on the P&L as well as on the cash taxes.

Okay, and then -- can you give us a -- I mean, looks like execution on some of those problem projects was pretty good in the quarter. But, you know, are you guys completely out of the woods there? Because what we tend to find here in just E&C land is a lot of critical and settlement issues tend to still pop up, usually around year end.

I mean, part of the -- I guess the object of the way we restructure the Company is to get an absolute focus on execution. And -- very much aware that we've had some lumpy results, usually going the wrong way in the past. And every effort is being made to ensure that we get ahead of that curve going forward.

In terms of I guess the historical projects, we've taken a long hard look at those as part of the restructuring effort and the statements around the year-end. And I think the teams have done a good job in actually addressing those situations at a very detailed project level.

Great. Thanks again and nice quarter.

Thank you.

We'll go next to Adam Thalhimer of BB&T Capital Markets.

Good morning, guys. Nice quarter.

Thank you.

The two businesses you're selling, the buildings group and the US infrastructure business, what should we be thinking about in terms of value and timing?

(laughter) I think -- I don't think we can comment on the volume number. We made a statement earlier. Again, those people are actually in the process of actually looking to acquire those businesses. So again, it would be a bit unappropriate to say a number.

We have said that it's not -- its tens of millions of dollars, not hundreds of millions of dollars. We have made that statement before and that's probably the right sort of thinking around this.

And the timing will be through the course of the year there is no -- one is more advanced than the other. But, you know, in the world of acquisitions, you know you've got to kiss a lot of frogs and sometimes fall for it at the last moment. So it's difficult to -- I'd love to give you a definitive answer on that but it would -- I wouldn't be able to stand behind it. And we're not going to do that.

Okay. And the three power plants, what was the negative impact in Q1? As you look at -- as those start to finish up, should we be thinking about one of those being more of a negative drag than the others in terms of the one of those that finishes up this year versus 2016 versus 2017?

We don't want to comment about profitability on any individual project. So we can't be more specific than that. You see the results in the P&L, the nonstrategic businesses, basically had really no significant impact from the P&L perspective.

Okay, and lastly, the pipe trap award, or the pipe trap contract in Canada, runs through 2017. What's the chance that you would have another award pop up under that agreement?

There's always a risk for it. I think it's pretty low. The client is mature, they understand, and the market is not -- the Canadian market is probably one of the worst -- one of the first to be affected by low oil price. So if you think about it, in that context, that gives you a good idea.

And that is all the time that we have for questions today. I'd like to turn it back to Stuart Bradie for additional or closing remarks.

I guess the closing remark is thank you for listening in. We do appreciate your attendance and your questions. Obviously if there are any follow-ups, we'll be glad to field those.

But thank you again. Thanks.

That does conclude today's conference. Thank you all for your participation.