KBR Inc (KBR) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

For opening remarks and introductions, I'd like to turn the call over to Lynn Nazareth, Vice President of Investor Relations. Please go ahead.

Thank you, David. Good morning and thank you for joining us for KBR's second-quarter earnings conference call. This morning, you hear from Stuart Bradie, President and Chief Executive Officer; and Brian Ferraioli, Executive Vice President and Chief Financial Officer. Stuart and Brian will discuss KBR's financial and operational results, provide an update on progress against our strategic objectives and discuss our market outlook.

Please refer to the accompanying presentation that is posted on our website in the investors section at kbr.com. After our prepared remarks, we will open the floor for questions. Today's call is also being webcast and a replay will be available on KBR's website for seven days at www.kbr.com. The press release announcing KBR's second-quarter results and our second-quarter form 10-Q are available on KBR's website as well.

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

These risks are discussed at KBR's second-quarter earnings press release, KBR's form 10-Q for the period ended June 30, 2016, and KBR's current reports on the form 8-K. You can find all of these documents on our website. Now I will turn the call over to Stuart. Stuart?

Thank you, Lynn, and good morning.

Starting at slide 3, looking after ourselves and the people around us, as I've said before, is a core value at KBR. Our fundamental belief is that zero harm is achievable and I'm pleased to report that we continue our progress towards that goal. You can now see where we're performing very much at the top quartile performance and we'll continue to endeavor to improve upon that. So great performance from the team in the safety area.

Moving on to slide 4. Just in summary, a solid earnings quarter for KBR still at the levels to the same period in 2005 if you exclude the 2005 one-time gain associated with the sale of the building group, so earnings holding up which is pleasing. We then had four or five risks and opportunities identified at the beginning of the year that have come to pass that essentially net each other off and I'll talk about each in turn. But what it means overall is that the underlying operating earnings is thus at the $0.32 area.

Firstly, we signed an agreement the US government on reimbursement for legal costs and I guess future potential legal costs and potential awards to platers if they appeal the recent judgment. I think that's associated with sodium dichromate.

I think as importantly as this is directionally, we've sort of stated for some time that we believe that we will win these cases on the merits and that we have certain indemnities in place regardless and I think directly that has born out to be true in this particular case and we will recoup our legal fees associated with defending those cases which have been going on for a number of years. Very, very good derisking of the business in this area.

In E&C, we had some puts and takes. We closed out an LNG project in Africa to the good. We then had some equipment failures associated with it in the commissioning phase of an ammonia facility in the US to the dime. We also had increases in costs related to closing up one of the power projects in the nonstrategic area. And as I said before, together with some of the transaction costs and together with some of the restructuring charges when you looked at them altogether kind of net each other out.

We also continued to win key contracts and contract extensions in the government sector. We've been very successful in Australia and a number of sort of in the E&C infrastructure area in the Australian marketplace and we've put together some more wins in technology and a strong performance from technology and the revenue line this quarter, which is very pleasing.

So I guess progress on initiatives across common services continues to be a growing market, somewhat offsetting the headwinds in hydrocarbons with we've talked about that previously and it continues to be the case.

Which leads us into the sort of book leased it before we closed on the Wyle acquisition on July 1. Though we don't focus initially on that business, there are new overlaps, as we previously sort of presented. So the focus is very much on the revenue synergy area. And pleasingly, we're starting to see quite a lot of personnel moving across from the E&C side of the business into government services, so some good synergy there. On the cost saving side, again, moving against our target well. We've identified the $200 million we've set out to achieve and we continue to look for more savings in that area.

We will continue to look for additional acquisition opportunities in the three focus ares we've previously announced and we're being very disciplined around what we are looking at strategically. And those are in the adding to the technology portfolio that higher-end government services and expanding our maintenance industrial services based globally under the US for that matter.

We do continue to make progress on resolving other parts of the legal disputes with the US government and the audit pieces is behind us now, which is terrific -- sodium dichromate, as I previously stated. And it's no real update. We still await a ruling. That is a question that we often get asked post these calls, so we thought we'd deal with it right up front.

So now, I'm going to hand over to Brian who will put a little more meat on the bone around the various segments. Brian.

Thank you, Stuart, and good morning.

Turning to slide 5, you see the awards during the quarter of $331 million and you see the backlog of about $11 billion. The backlog reflects the work off of two of the large LNG projects in Australia, but it also includes a reduction of about $500 million for the quarter related to the devaluation of the UK British pound against the US dollar. This relates primarily to our government services business in the UK which has a 20 plus year contract with the Ministry of Defense.

That contract is all denominated in pounds sterling, both the revenues and the costs. So the devaluation of the pound had no real economic impact for that business, but it does translate into lower US dollars equivalent in terms of the financial reporting. So $500 million reduction for the quarter and $600 million year-to-date just due to the currency fluctuation.

Revenues are down from the prior year but it reflects $187 million reduction due to the deconsultation of our industrial services business which is $119 million of it and $68 million which relates to nonstrategic businesses which we have sold over the past year. It also reflects reduced activity on the nonstrategic power plant as we had two power plants going last year and only one this year as we are exiting that business. And it also reflects the reduced activity on those LNG in Australia.

There's a $20 million decline in gross profit or in equity in earnings and that reflects the reduced volume, but there a number of large discrete items this quarter that Stuart touched on initially. $39 million in costs related to complete the E&C project, the ammonia project, which had the equipment failure and $21 million increase in costs on the power project in our nonstrategic segment.

But they were offset by normal growth in the government services business as well as a $33 million gain on the settlement with the US government relating to the reimbursement of the legal fees on the sodium dichromate cases, as well as a $36 million gain as we closed out another LNG project in Africa. So when you net all of those together, it's about a $9 million to the good and that is largely offset by the restructuring charges of $12 million for the quarter and a gain on disposition of assets. If you net all of those together, they basically zero out.

On the G&A line, you see we continue with a cost reduction but also included in there is $1.4 million relating to the Wyle deal, which as we've mentioned previously, closed on July 1. 2015 also included a $28 million gain from the sale of the building group which obviously did not repeat. So net of all of this is $0.32 per share, down from a year ago, but if you eliminated the gain on the sale of the building group from a year ago, the EPS actually would be up year over year.

Turning on to slide 6 in the segments. Technology and consulting, the revenues were $98 million for the quarter, which is an increase of $18 million from a year ago and that's due to increased sales of proprietary equipment, which is up to almost 60% of the total revenue. If you recall last year, we had a higher percentage of the revenues were related to the license sales associated with the technology and as those projects move through the cycle, we're into the proprietary equipment supply phase of it.

This started around year end, beginning of the first quarter, and we expected it to continue for several more quarters. The gross profits decreased as a result or because of the proprietary equipment has a lower margin than the license fee typically do and we believe that this is a timing issue.

As gross margin in 2015 was approximately 24% driven by those license fees and now we're back down into the teens because of the proprietary equipment and we continue to believe on a long-term run rate basis that the margins for this business should be somewhere in the low 20%s in terms of percentage.

Not surprisingly, the market for the upstream consulting services which is the smallest component of this segment remains challenged. This business continues to focus on the technology side and downstream projects and that's where the vast majority of both the revenues and the earnings are coming from this year.

Moving on to engineering and construction on slide 7. Revenues were $621 million, which was down from a year ago, with $119 million of the decline related to the deconsolidation of our industrial services business. If you can recall, we sold 50% of it to a partner and we've deconsolidated it as well as the declines related to reduced activity on those LNG projects in Australia. There was also increased revenues from domestic projects here in the US and $36 million relating to the settlement and closed-out activities of the LNG we've previously discussed.

Gross profit for the quarter was $35 million, which is a reduction of about $17 million from a year ago, and again, that reflects the lower volume of work in general and the LNG projects as well as the deconsolidation of the industrial services business and then you have the increase in the estimated cost on the ammonia plant offset by the settlement on the LNG project. And finally, you have the overhead reductions continuing to help on the earnings line.

Equity and earnings were down $17 million from a year ago, but if you recall, we had a $15 million positive adjustment to this line a year ago, which obviously did not repeat. That was a catch-up of some earnings from prior years that was taken into account a year ago.

Moving on to government services, as Stuart mentioned, they continue to perform very well. Their revenues for the quarter were $229 million, which is an increase of about $71 million from a year ago. That's largely due to work in supporting the US government internationally during the first half as well as the settlement for the sodium dichromate that we previously discussed.

Gross profit increased significantly to $41 million, and again, a large part of that is the $31 million pick up related to the sodium settlement, as well as the higher volume and on the US government support work. Equity and earnings was $10 million for the quarter, that was down slightly from a year ago, and as you recall, a year ago we were still doing some of the construction related to that long-term annuity-type contract in the UK. That construction has ended and that reflects the decline.

The activity right now continues to be to run the facilities for 23 years to go. This is the first phase of the project and, as Stuart mentioned earlier, the Army 2020 prospect is really the second phase of this project, which we continue to track and expect to be awarded before the end of the year.

And then obviously, none of these numbers include any revenue or earnings from Wyle, since the transaction closed on July 1. And then we've previously talked about the impact of the foreign exchange on the translation of the earnings of this business, but really, not much impact on an economic basis.

Turning to slide 9, looking at government services with the addition of the Wyle. As you recall, it was a strategic acquisition. It provides high value, low risk and it's primarily US-based, which fits very nicely with our traditional government services business, which was predominantly outside of the US. And it provides these long-term annuity type revenue streams with very little overlap to KBR's historic business.

And now we think we have a full-service government services organization executing about $2 billion worth of contracts each year. And it's also a growing market. Also importantly to us, it adds immediate earnings power and it also acts as a different funding sources from our traditional business. The Wyle government funding typically comes from the research and development aspects of the government budget, where our traditional government work for the US comes from the overseas contingency fund.

So it diversifies the funding sources and also we believe it reduces our overall risks as the vast majority of the Wyle contracts are reimbursable. We like the cultural fit. The management team has adapted well to the KBR organization and we believe that Wyle's high-end technical capabilities domestically match very, very well with KBR's well-established international capabilities and logistic support and, as Stuart mentioned, the acquisition is really a play on revenue synergies.

We believe we should be able to achieve at least $250 million in revenue synergies by 2020. As I said before, it will be immediately accretive. In 2016, $0.05 to $0.08 and that includes the deal and transition costs and then you see for 2017, we expect that to be more like $0.15 to $0.22 per share which also includes some transition cost.

The charts to the left give you some context in terms of the impact that Wyle will have on revenues. The top circle shows a pro forma estimate of revenues excluding Wyle and you see the government service is about 20%. If you include a full 2016 revenues for Wyle, you see that the equivalent would've been about 34% of expected revenues this year.

Moving on to slide 10 in cash. At the end of the quarter, we had $804 million in cash. We used $200 million of it on July 1 to complete the Wyle transaction. And we used $400 million from our revolving credit facility. We're in process of putting in place permanent financing and we expect to have that close by the end of the year.

Turning to slide 11, we get questions from time to time on our capital allocation so we thought it would be good to take a look and explain, again, our thinking on our capital allocation and the way I think about, there's really two columns. The column to the left relates to investments in the business where the column to the right really reflects the shareholders and within the business, obviously, we support the ongoing businesses, although we don't have to investment much capital.

We're a service company other than working capital. That's really the focus on capital allocation for the existing businesses is managing working capital. We try to maintain our revolver and strong balance sheet which will give us good bonding capacity when the markets return on the hydrocarbon side, but we also have divested or exiting underperforming business.

We sold the building group, the infrastructure group, closed the US mining business in 2015. We were suboptimal in those businesses and we also sold off 50% of our industrial services to try to grow that business with a partner. As we mentioned previously, we're exiting the power business here in the US.

To Stuart's point earlier, acquisitions continue to be a strategic focus for us with the three-pronged approach: technology, the government services, and the industrial services on a global basis. We particularly like the first two. They are higher multiples than the oil field services type businesses these days.

And we did one acquisition in the first quarter on the technology side and now Wyle is the latest on the high-end government services and we continue to look at other opportunities in those two sections as well as international industrial services and maintenance opportunities. These are billing and geographic holes for us but they provide long-term and reliable earnings and we plan to continue to use a combination of cash and debt for acquisitions.

We try not to forget our shareholders. We pay a dividend: $0.08 per share per quarter. And we have one of the highest paying dividends among the US peers, approximately 2.2% yield. We've returned a little over $300 million since the spin via dividends, and we also have a buyback program in place and you could see that we have returned almost $800 million since the spin. And we continue to look at that as more of an opportunistic basis.

So with that, I'll turn it back over to Stuart and he'll talk a little more about 2017.

Good. Thank you, Brian.

So let's just try and be a little bit upfront about probably the key question that's on people's lips today and that's really around the issue of backlog, the backlog question, particularly as it relates to 2017 [annex]. I guess looking back at the wheel, the circle that Brian mentioned, the pro forma revenue presented shows that we are moving close to sort of half the business, sitting between technology and consulting and government services.

And that's on a pro forma basis. We haven't got the -- when you start to think about the growth in those sectors and you start to look at bringing in the Wyle backlog, which again, we will only show the funded elements of the Wyle backlog and as we presented last time around, there's some substantial multiples of that number in unfunded committed backlog. But again, we will give more color on that next quarter.

And then you layer in the Army 2020 opportunity that Brian talked about earlier that will come to fruition later this year. And that should give pretty good visibility in recurring revenue streams, annuity-type contracts, going into 2017. Really I guess the outlook, thinking about that, is there's higher proportion of earnings driven by government services and technology in 2017.

And that really gives a good balance for us between hydrocarbons and government services and we are starting to see quite a bit of synergy particularly with personnel movement between E&C and government services, which is good. 2020 we have talked about.

And the focus in hydrocarbons, we really talk there about industrial services, and I guess, brownfield opportunities, expansion opportunities, debottlenecking opportunities. So we are seeing continued activity in the ethylene area and we are still seeing what I would call, not one-offs but multiple isolated projects that will proceed under the current environment even under the capital constraints of our customers. There's a number of those that we're looking at today that I think will come to fruition before the end of the year or early in 2017.

Some lower E&C contract margins, that's the reality. We know that there is squeeze on in that particular sector. I'm sure you're hearing that from the peer group. But for us, that's largely sort of offset by cost reductions and we're doing well in that particular area.

We continue to expand capabilities and we're executing our growth plans in the Middle East and to some extent in the Americas. We're underrepresented in the Middle East, particularly outside of Saudi Arabia, and we feel there's headroom for organic growth in those despite taking market share in those markets where our brand is very strong. And as Brian alluded to, we plan to acquire additional earnings power with long-term and stable earnings via focused M&A and we talked about those three strategic areas before.

So just coming back to the guidance, our previous guidance holds. No change to that, excluding Wyle. And the reason for that is that we've got Wyle coming in. It's accretive but we do have to account for integration costs and acquisition costs associated with that deal as we move it into KBR holistically.

That's really moving on to slide 14 in terms of concluding, [this is] conclusions. [Highly] focused business strategy, I believe differentiated offerings covering the entire life cycle through specialized consultant proprietary technology and strong global engineering expertise and brand. Still very gas focused at E&C and a growing long-term annuity-type contract revenue base in the government services business.

Pleasingly, we continued to make major progress on resolving the legal disputes with the US government and the sodium dichromate settlement revolves historic and future legal costs associate with that case. But I think, directly, very, very important in terms of derisking KBR. Moving ever further to a lean and leaner cost structure and we'll continue with our balanced capital allocation strategy that we've been consistent about, I think, over the last couple of years.

So that is it. Thank you.

(Operator Instructions)

John Rogers, D.A. Davidson.

Hello. Good morning.

Good morning, John.

Stuart, I appreciate the comments on 2017, particularly, but could you talk a little bit more about the, specifically, the E&C project opportunities? Not so much that they would have an impact necessarily on earnings even in 2017. But what are the booking opportunities out there for KBR? I mean, in the past, you've talked around the global, what's out there. Obviously, the market is in disarray. What's your sense of what's out there (multiple speakers)?

I think the way to answer that question, John, is to look at the, I guess, the market in its totality. If you look, say, the LNG market is a good example. The LNG at the moment people are struggling with off-takes, there is a lot of distortion in that market.

But what is clear and what is consistent from the analysis I've read and the market outlooks I've read, is that there will be a, the supply/demand curves cross again in 2021 to 2022 and if you think of the gestation period to sort of designed and build LNG projects, the four to five years in tenure at the minimum. When you start to walk that backwards, you could see that market will need to start to pick up in 2017 to actually meet the demand cycles into the future.

So I guess that's as good an indication in that market as probably anyone can give it at this juncture. I think there will be selected opportunities in LNG before then. You'll see the nudging forward and as we've talked before, we're across probably five or six of those today. And the reason we're not being specific on either of those is it's not absolutely certain of which ones will go and which ones will not go.

Sure.

And so I don't really want to set ourselves up by saying something that we really can't stand behind. In terms of, I guess, the offshore oil and gas market, there's, again, there's supply/demand curves which show that reservoirs deplete over time and the level investment going into offshore campaigns in the drilling and the exploration side of the business has got to such a low level, there's starting to be supply/demand issues happening in certain areas of the world.

And certainly for the oil companies who are valued on their, basically what they've got, and sort of oil and gas backlog for want of a better description, in their reserve base. And so you'll start to see certain projects move that are the most competitive for them in their portfolio.

And all that's happened is that, over the last little while, they've taken stock and they've prioritized what those are to reassess the market in terms of going out for retender because the market's reset itself on sort of vendor pricing, et cetera, and the aggressiveness of the competition.

So you'll start to see selected opportunities in the Gulf, you'll start to see selected opportunities in the UK and -- in particular. And so when you think of that, it's really the ones that probably the most, give the greatest return on investment because of the cost of development or cost of barrel if you like it, at just the lowest levels in their project portfolio.

Okay. Just one follow-up. The Army 2020 opportunity, did you say what the booking value or prospects of that is?

No. We've not disclosed that because it'd still of a highly confidential nature given who the customer is.

Sure.

But, it's a sizable award.

Okay. Thank you.

And there's two elements, of course. There's the construction element itself and then, of course, I guess, the long-term annuity additional sort of facilities management piece of it that would be additive to what we do today.

Okay. Thank you.

Tahira Afzal, KeyBanc.

Hello, folks.

Hello.

Good morning. So, Stuart, thank you for talking a bit about 2017, but I think you did a nifty job of not really talking about, call it, clarifying to some degree, the big question out there. We do have maybe a gap as one of your LNG projects somewhat complete into next year. From what we've been reading, there's some of that project activity has been a little pushed out into 2017.

So you know all the moving parts you mentioned, and given what's happening with this particular LNG project, is Wyle going to be enough to really offset the moving parts assuming you will execute well? Or is there fall-off you talked about in the last quarter? It closes the gap a bit, but not fully.

So I think let me address the LNG piece first. I think when I first joined KBR, everyone was worried we were going to fall off an earnings cliff in LNG because Gorgon was coming to a conclusion, everyone's aware of that. And really, what has happened through the pieces that our LNG earnings have held up very well over the last couple of years.

And we're now at the stage where one those projects in Australia, as you rightly pointed out, is essentially complete for us. But the other one will continue well through 2017. So the sort of levels of fall-off that you're thinking about are not going to happen.

And it's difficult for us to -- right now, we're going into our -- we'll start our planning cycle in the next month or so for next year, but when you start to put that in context, I think that the sort of cliff and the sort of concerns around that are understandable; but that's not what's going to happen in practice.

Got it. That's very helpful, Stuart. And, Stuart, the ammonia project startup issue. You've obviously had some legacy gains that helped save the day for the guidance for this year. But to the reentering these projects are more representative of the execution terms, et cetera, going forward in this macro environment. Should we be concerned that we could see such hiccups again or you've been through your portfolio and your execution teams and you feel very comfortable?

I think the latter. Certainly the terms and conditions associated with this particular ammonia project were signed up to well before the troubles in the hydrocarbon sector. I think to give you maybe a little bit more comfort, we've sat down a year ago and looked at what our performance and our guidance should be in 2016 and we knew the risks associated with the projects because we've been through those projects in some detail.

And we knew the potential sort of risks, but also the opportunities associated because of the other projects, et cetera. And we ran up where we would run a balance across that such that [the kind of] guidance that we can stand behind. So you are always going to get puts and takes and it's incumbent on us to make sure that whatever gains we give is the best outcome in every possible scenario because that's just unrealistic.

Got it. Thank you, folks.

(Operator Instructions)

Jamie Cook, Credit Suisse.

Hello. Good morning. A clarification, I guess two clarifications, and then my real question. Brian, when you talk about with Wyle, obviously, it's a nice contribution and store to your portfolio, the $2 billion in revenues on a combined basis, is it a low-teens margins the right way to think about it still? As we look just combining the two?

Probably, yes, is the question. We've got to go through the planning cycle to map that out, but --

It shouldn't be too far off because it's 9%, 12%, I mean high-single-digit to low-teens. There's no reason to think it's not somewhere in that range.

Correct. Correct. And the only hesitation is really when, depending upon where entities or business or future projects get accounted for, whether they're in the revenue line or they come through in the equity and earnings line. As you know, we have quite a mix there.

Okay.

So the answer should not change dramatically.

And then I think, the most interesting thing -- when you're in your slide 12, when you talk about outlook for 2017 and you say there should be a greater balance between hydrocarbons and government service -- when you're talking hydrocarbons, you're just talking E&C, not technology consulting as well? Or are they both?

Of course, as you increase the earnings in government services there will be a bounce across the board. I guess the point we were trying to make in the wheel slide, Jamie, was one that actually said our technology business continues to grow. We see continued pipeline opportunities, pipeline of opportunities there. It's a good business margin wise.

But the way the backlog works for that is it's smaller, more repetitive, type awards. So you don't see the big bump in backlog, but that it's a recurring business. Not truly the thinking there in the way that we've shown it. So the pro forma shows you at 43% across those two.

But I guess the point that's interesting that I'm trying to make, and I think it's a positive for KBR, as we think to [2017]. If you have a $2 billion business, that let's say it's a 9% margin, that's $180 million in profit and you're implying that hydrocarbons should theoretically be that big? Is that the wrong way to look at it based on what you're saying the balance between -- you know what I mean?

The balance between the two should be more equal. You know what I mean? I'm just trying to figure out what you're trying to say because that would imply, when I think about your profit for 2017, back to the point that Tahira was sort of asking. It doesn't imply -- I mean, it implies you could at least sort of be flat assuming we're including government services. I'm just trying to think about if I'm way off base.

No, you're (multiple speakers). Go on, Brian.

I was going to say, Jamie, I think what we're trying to say here is we're trying to move to more of a balance between the two rather than guide you to a specific number. And I would also point out on the E&C, that number will move around, obviously, in terms of percentage if we were to book any of these mega-type projects, like another LNG or an ethaline cracker or something like that. The intent is really to say it should be much more balanced and not skewed to the E&C like it has been more recently.

I know. I was just trying to say if government is that big in terms of profits and hydrocarbon and T&C can hold. I mean, again, I think that would be better than what the market's expecting. I guess my last question, Brian, you do talk about greater focus sort of on M&A, and Stuart, because I think people were constructive on the Wyle acquisition and how you're thinking about balancing the portfolio -- can you just sort of talk about your comfort level with leverage as you move to a more O&F type business model and just, sort of, the opportunities out there for 2017? And then I'll get back in queue.

I was going to say, I will start out, Jamie, on the leverage side. Clearly, these businesses are lower risk that we're focused on technology, reimbursable government services, and reimbursable maintenance turnaround, industrial services type businesses. So, they lend themselves to being able to support debt, maybe a little bit better than some of the traditional E&C type activities.

It really depends on the specifics. It really depends on the cash flow. It really depends on the risk profile. And Wyle, for an example, with 97% reimbursable contracts, it was owned by private equity before us. They're accustomed to operating in a levered environment. I would think you are, we do have a bit more appetite for leverage with those types targets than maybe I would on traditional EBC type projects or activities.

Okay. Thank you. I'll get back in queue.

Rob Norfleet, Alembic Global Advisors.

Good morning and congrats on a nice quarter.

Thanks, Rob.

Actually, quick question. I just wanted to kind of, I guess my first question revolves a little around the backlog. Brian, I understand obviously the devaluation clearly hit backlog this quarter, but if we look at where we ended backlog at $11 billion and assume devaluation is not going to occur in the second half of the year.

Based on the opportunity set that you see in front of you in Q3 and Q4, do you think this is kind of the trough for backlog? Or maybe, let me put it this way, do you think that we should end the backlog at a higher level than where it is today?

I'm not sure. We haven't given backlog guidance, so I really can't answer that question specifically. But just point to the Army 2020. That is a pretty substantial booking, although we haven't given a dollar amount, we have said in the past, it's hundreds of millions of dollars.

That clearly would be an important aspect to book that and then anything else on the hydrocarbon side would be great. I'm not going to be too specific on the guidance, but we have some good opportunities in the second half of the year to at least match the revenues going forward.

Okay. And then to kind of get back to the question that people have been asking on LNG, again, I know you guys don't break down the contribution of the LNG related work in the hydrocarbons and in the E&C business, but obviously, a number of us have tried to kind of model out what the contribution is from the various contracts.

I guess my question is, with the one remaining Australian owned LNG contract that will be contributing to operating income in 2017, would the level of contribution in 2017 from that one contract be similar to what we're seeing in 2016 or is there going to be a significant decline?

I guess one of the things that we hear routinely is that people seem to expect the earnings to fall off a cliff. The way any project operates, it doesn't work that way. You think about a kind of a bell-shaped curve. You hit the peak and then you're gradually declining.

So there's no immediate drop-off. As Stuart mentioned earlier, Gorgon is largely complete. They've already shipped some LNG from the first train. That's been trending down for the couple of years. I think this will be a similar model. So there's no dramatic falloff. It's more of a glide rather than a significant step down.

Okay. Great. And lastly, can you give us an update on the BCP partnership. I know you guys have talked about leveraging that into adjacent markets as well as being able to expand the relationship. But can you kind of just give us an update of where you are with that?

I mean, it's focused in the Americas, which includes Canada and certain countries in Latin America. It's a 50/50 joint venture. It has grown its base business and, in terms of building out and more contracts and hiring more people across all it does, particularly in the Gulf Coast and around Louisiana. We've added engineering capability to that through an acquisitive process of a company called Wink Engineering, again, based in Baton Rouge.

And we've also added, I guess, adjacent capability in the scaffolding area so that we're becoming a sort of a one-stop shop to be able to provide sort of that sort of construction, sort of small construction maintenance turnaround services across a growing number of facilities and particularly in around the Gulf coast. And so we see that business growing.

We see the customer base growing which leverages us into those customers' plants outside of the Gulf Coast and across the US. We service all of DuPont's facilities, for example, across all the US and the Americas, for that matter. So we see that as an attractive business. It's a recurring revenue base, typically long-term contracts and we continue to look for opportunities to expand that with BCP.

And I would add to that's likely to help us in 2017 as well as that business continues to ramp up.

Great. Thanks so much guys.

Steven Fisher, UBS.

Thanks. Good morning.

Good morning.

Good morning. In terms of the technology segment, it sounds like the mix headwinds that you have there on the margins will last for a few quarters. What kind of visibility do you have as to what happens after those few quarters? When could that technology shift back to a more profitable mix and do you have any visibility as to what might cause that shift back?

I think, Steven, we've been quite consistent in our guidance around technology in the low 20s. We still stand by that. And it just becomes the phasing in terms of whether it's the proprietary equipment or licensing fees that are coming through. And so, it's a cycle. We still think over time those low 20 margins are consistent. I don't think it's an up or down type question.

But you have the visibility? Like you have the list of projects that you know or assignments are going to come in after those next few quarters that will shift it back or could we get to that point and it just lingers on with the same mix?

No, no. I mean, again, it depends on the cycle of the -- so the way that business works in terms of technologies is, you sign up the license fee and the basic engineering, which is the, I guess got higher returns and then as the project comes into execution, you provide the proprietary equipment. Again, it's the timing across the piece in terms of visibility and prospect pipeline. Yes, of course we do and we've got that for quite a ways into the future.

Okay. I think, Stuart, you mentioned you're shifting people from E&C to government services. Just curious on your cost management in this environment how aggressively are you actually taking headcount out as people come off E&C projects that are getting finished?

How are you making the decisions as to whether to keep them on in hopes of projects moving forward versus making more switch decisions to manage costs? And I guess related to that, is there upside to the $200 million of cost savings here?

Going backwards, I think, yes, we continue to look for more opportunity beyond the $200 million. In terms of the people, we're highly considerate about capability drain, but at the same time, I think the costs that we've taken out of the business -- and we're very clear, it's a net cost not a gross cost.

So it actually accounts for people that are not chargeable to projects that we want to hold in the business. So, we've taken out more than $200 million in cost. We're trying very hard to move people across because the key skills we want to retain in KBR. I guess, as against perhaps others of our peer group, we don't have that opportunity to retain staff through other businesses that are growing. It's a good opportunity for KBR.

Do you have any more sense of how much of that $200 million plus will fall from the bottom line?

I don't think we've given any guidance at all as to how much would drop to the bottom line because there's continual margin pressure that comes along with taking the cost out, as you're well aware.

Thank you.

Andrew Kaplowitz, Citi.

Good morning, guys.

Hello, Andy.

Stuart or Brian, you added $0.05 to $0.08 from Wyle this year and you beat our EPS estimate by about $0.06. You didn't change your 2016 EPS guidance. Is it just relatively weak oil and gas markets and you have a pretty wide range as it is, so you want to stay pretty conservation? Isn't it really more likely that you'd do the high end of your range at this point, given you've done almost $0.70 in the first half of the year and now you're adding on Wyle on top of that?

We gave the range and we're going to stick to that without trying to hone in on one end or the other. There's still a fair way to go and $0.05 to $0.08 to me doesn't change significantly the guidance we had given from the beginning of the year with the range that we have. We're still well within that range and we'll see where we come out. I don't want to be too optimistic in terms of the earnings, but we're pretty confident we'll come in within that $1.20 to $1.45.

Okay. That's fair, guys. And then maybe I could ask you more specifically about Wyle now that it's closed. Can you talk a little bit more about the organic growth potential of the Company? I mean, you guys have talked a lot about the $250 million in revenue synergies, but what's the underlying growth of Wyle coming in? And how quickly can you get some of these synergies that you've talked about?

I think we've identified a number sort of quick win synergies where Wyle can be usually additive to our sort of competitive position and ongoing tenders that are firmly in the pipeline and happening today and vice versa.

So I think there's some low hanging fruit there that's quickly additive from a revenue perspective across the piece. We're also, the level of enthusiasm for our government business, in the UK in particular, Australia, which does a lot of similar work to Wyle, where we can actually start to leverage that capability into businesses outside the US is quite an exciting proposition and one that the team are working hard on now because in many government areas outside the US, they operate in a different way.

And we think the model that the US employs with taking sort from cradle to grave approach on some of their platforms makes perfect sense. So it gives us a model that's proven that we can take to other areas across the world.

But Stuart, is it right to think of it in low-single-digit grower, mid-single-digit grower? How should we just inherently think about it when we're thinking about Connelly and going forward?

I think when you model it, you shouldn't look at Wyle and KBRwyle in isolation. I think should look at the global services market in its entirety. I mean, you've seen the growth come through our existing government business and you can see how that's done from last year to this year and it continues to grow quarter on quarter.

When you layer Wyle on top of that and think about the synergy opportunities, you can quickly, I guess, think about that rather than us sort of give specific numbers on it; you guys could work that out. But it's an exciting future for the combination of those business in the markets they're in today.

Okay. You haven't seen any interruption from the Brexit type, the announcement? You haven't seen anything going on with demand, right?

No. Not at all. And, in fact, a lot of the civil service people are still exactly the same and I guess, the defense secretary is still the same, et cetera. So we're not seeing any change from Brexit in that area. I guess the only effect we've had is it sort of, was the backlog question we had earlier, in terms of the value of that backlog as it translates into US dollars and that's it.

Great, guys. Thanks.

Chad Dillard, Deutsche Bank.

Hello. Good morning.

Morning, Chad.

Just to follow-up on Andy's question, so for the Wyle earnings contribution in 2017 of $0.15 to $0.22, could you talk about what it would take to the higher end of that range? Do you currently have the prospects in pipeline? And maybe you can just talk a little bit about whether you're seeing it more from the domestic side or more from the international side.

I think initially more from the domestic side just because that's its brand and its customer base does there. I think if we give a range, there's a number of things that (inaudible) today [that we are tendering or converting one] contract mechanism to another so really it relates to timing. And I think the opportunity that affords Wyle at the moment is to press on and not get distracted and make sure it delivers these in a timely fashion and that will push the numbers up to the higher end of that range.

Okay. So you won several re-competes on the government side as well during the quarter. Can you just comment on whether you're seeing any change in the contract terms. People kind of focused more so on pricing versus your initial bid. And then secondly, could you just give a little bit more color on the cost decreasing on the ammonia plant? When does the project end? What percentage of it is complete? And is the project still profitable?

Yes. The project is -- I'll answer the second one first, if you don't mind. The ammonia project is at the final close of commissioning and performance testing that the expectation is that will be, that the project we finished early in Q3. So that's very near the end is answer to the question, thankfully. And then I guess, in terms of the other piece of the question, Brian's probably better placed to answer that.

It is not a profitable job now.

Jerry Revich, Goldman Sachs.

Good morning, everyone.

Good morning.

Brian, I know you're looking at a wider, or different M&A possibilities. Just can you touch on, in terms of the opportunities that are at the top of your pipeline, if you will, how we should be thinking about evaluations compared to what we just saw on the Wyle acquisition and in terms of the synergies that you folks are targeting as you're evaluating these opportunities? I would imagine it's different by transaction but can you just talk about from a high-level standpoint, revenue synergies, cost opportunities, just frame that out for us, if you could, based on what's at the top of your focus list here?

Well, we really can't comment more than we have about opportunities on M&A until we actually have a transaction. What we can say is you need to have multiple opportunities and multiple targets for you to get one over the goal line into the end zone. We are looking at opportunities across a number of those target areas, as Stuart said, very focused technology and technology doesn't have to be an acquisition.

It can be a partnership, an alliance agreement in licensing of technology so there are multiple angles to attack technology. On the high-end government services and the turnaround maintenance, et cetera, we have a number of opportunities that we're considering, but as you know, Jerry, until you get one closed, you can't predict what it's going to be.

And then obviously, each one of them has got its own characteristics. We really like much more the revenue, the strategic opportunities rather than doing an acquisition focused primarily on cost reduction.

Okay. Thank you. And then can you comment, so now that you're a month in on Wyle, can you talk about how the systems integration is going and how the overall integration plan is playing out versus when you initially planned out and talk about any variances versus expectations?

I think pretty much to plan. As we said, there's not a lot of overlap and that was on of the big attractions for us in this acquisition. So it makes the integration that much easier. So far, so good. Very much according to plan, no surprises.

And sorry, just the classification on the ERP systems, can you talk about it? Are you transitioning them over to your ERP systems or what your plan is there?

We're still looking at that. That's more of a longer-term project. As a matter of fact, one of the things we are looking about -- does it make sense for us to transition our government services activity to their platform?

So, as we said, they were a standalone company. They've got their own system, so that's not an immediate decision that needs to be taken, but it is something we are looking at going, frankly, the other way, since they have more customized systems for government activity. So that is an opportunity for us maybe to move our historic government activities to their platform.

Anna Kaminskaya, Bank of America Merrill Lynch.

Good morning, guys. I think my first question will be around the free cash flow. Can you update us if you still think you would be more or less free cash flow breakeven for 2016? And what would it take for you to return maybe to more normalized 100% conversion?

Well, Anna, as we said at the end of the first quarter that we would be relatively flat for the balance of the year. So down a bit for the year, because the first quarter was negative and that holds pretty much true as of today. Obviously excluding the acquisition and the use of $200 million for Wyle and it also would exclude if we were able to close on any additional acquisitions between now and year-end.

But more looking to 2017, 2018, what should I be thinking about your free cash flow conversion profile?

It should be better. It should be better. We get these, the power project behind us and the ammonia project will be behind us, so clearly, cash flow should improve.

That concludes today's question-and-answer session. I'll turn the call back over to Stuart for additional comments or closing remarks.

Thank you very much for taking the time to listen in. We appreciate it and I'm sure there will be lots of follow-up calls. As I say, a solid quarter from an earnings perspective and hopefully, we've given you more color into 2017 earnings. So thank you again and I look forward to talking to some of you individually during the course of the next day or weeks ahead. Thank you very much.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.