KBR Inc (KBR) 2016 Q3 法說會逐字稿

Welcome to the KBR's conference call. This call is being recorded.

(Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Miss Lynn Nazareth. Please, go ahead, ma'am.

Thank you, Savanna. Good morning. Thank you for joining us today to discuss KBR's third-quarter 2016 results. Joining us on today's call will be: KBR's President and Chief Executive Officer, Stuart Bradie; and KBR's Executive Vice President and Chief Financial Officer, Brian Ferraioli. 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 of KBR.com. Following their prepared remarks, we will take your questions. Today's call is also being webcast. A replay will be available on KBR's website for seven days at KBR.com. The press release announcing KBR's third-quarter results and our third-quarter Form 10-Q are both 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 risks 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 in KBR's third-quarter earnings press release, Form 10-Q for the period ended September 30, 2016, and current reports from Form 8-K. You can find all of these documents on our website. I will now turn the call over to Stuart. Stuart?

Thank you, Lynn. Good morning. So, moving to slide 3, Safety. KBR is a people business. It's essential that part of our core value is look at after ourselves and those around us and our goal is to achieve zero harm. To that end, I'm pleased to report that we've achieved a 45% decrease in our total recordable incident rate year on year. We've got an increase of 19% on the days in which we achieved zero harm. That number is over 70% of all days that we work at the moment across the world. So good performance there.

So, moving on to slide 4, highlights and some key wins. The underlying business continues to reflect strong progress against our strategic goals. When you look at the revenue line and you take out the effect of industrial services and deconsolidating that last year, the revenue is holding up year on year. In fact, we've had revenue growth from last quarter to this quarter. I also think that we're now starting to see the pivot of the business, as we reported last quarter coming through with an increase in backlog. I will talk a little bit more about that as we go through the presentation.

In the quarter, we did complete the acquisitions of Wyle and Honeywell's services business, HTSI. The full quarter of financials of Wyle are in these results, but only a couple of weeks of HTSI. We'll talk a little bit more about how we are traveling against the integration objectives there later. We continue to see expansion of our US legacy government contract business with an increase in task orders supporting the US military overseas. Pleasingly, the margin performance in the T&C segment against what we reported earlier in terms of the changing project mix coming through in the quarter.

Disappointingly, as we previously announced, we had a forecast increase in costs on two projects: the power project in part of non-strategic, which is now close to 90%, just under 90% complete and scheduled for completion in the second quarter next year; and the ammonia project in North America, which is complete. We've finish the performance test and the customer has taken over the facility and has assumed care of the asset, as we speak. Pemex, as expected, Pemex did appeal and asked for a rehearing on that ruling. We await that ruling.

In terms of strategic wins: Army 2020, that has been signed. The Secretary of State has announced it to Parliament this morning UK time, so that is actually -- we've secured that contract. That's about $736 million to KBR as a joint venture and it's over $1.4 billion. So half of that to KBR. That will come through in the fourth quarter into backlog. So, we've talked about that for some quarters. That is now a reality.

We also won KBOSSS, Kuwait Base Operations contract. It's not yet in backlog, that is a five-year contract. It will be circa $800 million plus over those five years. It's in protest, which seems to be the norm these days rather than the exception. But we hopefully we can take that in after the protest period in the fourth quarter.

We've also been awarded one of five seats in the US Naval Facilities Engineering Command contract, which is like a master services agreement and you get task orders under that. So, we're looking forward to supporting that contract.

And in our core competency area in LNG, we are securing a number of -- the market is moving in the LNG area and we are securing a number of FEED studies. The second phase of Woodfibre, we've announced in the quarter. We've also secured FEED services for a confidential mid-scale LNG project again in North America, and in Asia and Singapore and in Indonesia, we've picked up work for new terminals.

We continue to make progress in Australia in the civil infrastructure project arena. That business continues to perform very well. So, how did that reflect in the numbers and in the quarter? I will hand over to Brian.

Thank you, Stuart. Good morning. Turning to slide 5. As Stuart mentioned, the revenues are down from last year. But that's due to the deconsolidation of our industrial services business, as well as the sale of our infrastructure business. So the $132 million of revenues from the third quarter last year obviously are not reported in the revenue line for us this year, although the industrial services business, [50]% we still own and it will come through the equity in earnings line. The gross profit and equity in earnings included the $126 million of charges that we had previously announced, primarily related to the power business in our non-strategic business, $86 million of that amount.

That project is 85% complete and is expected to be completed and handed over to the customer in the second quarter of 2017. The ammonia project, previously mentioned by Stuart, is $40 million, which has already been handed over to the customer. So the revenues and gross profit, excluding the project charges, were primarily driven by having a full quarter of the Wyle financial results in there and only two weeks of the HTSI. We think the revenues were basically flat on a run-rate basis compared to the prior year.

We expect this increase as we roll forward, getting a full quarter of HTSI, the Army 2020, which will start, and the MFTS project, which we booked earlier in the first quarter, which has not recognized any revenues yet, which we will pick up its revenue recognition in 2017. So, we remain quite optimistic about revenue growth in 2017.

The G&A continues to reflect a cost reduction. There was $8 million in transaction and integration costs related to the two acquisitions, as well as $4 million coming into G&A from those two businesses, which obviously were not in the September 2015 results. We had a net loss for the quarter as expected of $63 million or $0.44 per share.

Turning over to the slide 6. We have an unusual effective tax rate. Given that we do not tax effect the US losses in that $126 million that I talked about earlier, we don't tax effect that for financial reporting purposes. So it makes the effective tax rate usually high in 2016. As we continue to pay foreign taxes, but the pre-tax consolidated income number declined.

So basically, the denominator has gone down while the numerator remains the same. It results in, as we said, a high effective tax rate. Year to date, it is 43%. That is net of $6 million of discrete credits. If we do not have any discretes in the fourth quarter, we will have a 52% effective tax rate. So quite high for one more quarter. But that will go back to its normal range in 2017 being somewhere around 25%.

Turning over to slide 7, technology and consulting. The year-to-date revenues are up but for the quarter they are down a bit. But the good news is that the gross profit and equity in earnings line is flat. That reflects the changing of the mix. You'll recall, most of this year, we've had an increase in proprietary equipment, which tends to increase the revenue line but at a lower margin than the engineering services and license fees.

This quarter that mix started to swing back the other way, which we have now more of the license fees and engineering services. So we had a gross profit of 25% versus 22% from a year ago. On a run-rate basis, we continue to expect the long-term gross margin percentage to be in the low 20%s for this business. But it may fluctuate from quarter to quarter. Continuing what we?ve said in the past, given the challenges for the upstream oil business, the majority of activity in technology and consulting today is on the technology side, principally, related to refining, Syngas and other downstream markets.

Turning the page to slide 8, engineering and construction. Their revenues were down about $233 million from a year-ago quarter. But, again, $122 million of that relates to the deconsolidation of the industrial services business in the third quarter of 2015 and also reflects the rundown of one of the LNG projects that is basically completed in Australia. Gross profit was only $1 million. That is primarily as a result of the charges we spoke about earlier on the ammonia project, that has been already handed over to the customer.

We continue to seek recoveries from vendors but we have not included any assumed recoveries in the financial results to date. We continue to evaluate those each quarter. The equity in earnings line was $11 million for the quarter, which is $15 million down from the year-ago quarter. That's due to slower activity on an LNG project in Australia, as well as reduced CapEx spend or OpEx spend in Mexico by Pemex.

Turning to slide 9, government services. Revenues were more than double what they were a year ago up to $401 million. This reflects the continued expansion of the heritage KBR business as well as the inclusion of Wyle for a full quarter and the HTSI business for only two weeks. Gross profit increased by $24 million. That's due to the higher volume of, as we mentioned, the heritage business as well as the two acquisitions. The equity in earnings was relatively flat with the prior year. That's primarily driven by the joint venture we have in the UK supporting the UK military.

Significant wins this year: the MFTS that we talked about, the fixed-wing training contract that we booked in the first quarter of 2016; and the Army 2020, which we announced this morning; as well as the continued expansion of existing contracts here for the US government; as well as the two acquisition. As I mentioned earlier, we believe that these projects position us very well for strong growth, both in the revenue line as well as in the gross profit and equity in earnings lines. As previously reported, the impact of the devaluation of the pound sterling has not had much of an impact to us other than in the reported backlog for our UK government services business.

Which, turning to the next slide, not only has the revenue decline flattened out, the backlog situation has also improved. So you see the third-quarter 2016 bar, we're up to $11.4 billion in backlog. That's after considering $936 million of reduction due to the reduction of the pound sterling to the US dollar exchange rate. But what is significant here is that's up almost $400 million from the second quarter. We've, as I said before, arrested the decline in the backlog.

But more importantly for our internal perspective, we look at the bar to the far right, the pro-forma column, which includes contracts where we have won but have a number of option years. So the option years are not in backlog, but they represent work on projects we are already executing. If we estimate what we expect to execute over the life of those contracts, we would add another $2 billion to our book backlog and get up to about $13.5 billion in total backlog. So, you see the government services in green is significantly expanding and becoming the largest component of our backlog by far.

Over the page to slide 11, again, looking at the backlog. We believe that we have diversified and significantly reduced the risk of what we have in backlog. On this chart, we have included the booked amounts in the white numbers. The percentages in red and parenthesis reflect if we would assume those option years are exercised and that work gets booked.

So, if you look at the first chart at the upper left, backlog by business segment, between 65% to 70% of the work would be government services. If you look at it by region, the significant component is in Europe, Middle East and Africa, which is predominately the UK. That will go up by even more once we book the Army 2020 project that we just announced. If you look at it by contract type, cost reimbursable and the project finance initiative-type contracts that we have in the UK, dominate the backlog between 82% to 84% of total backlog, where lump-sum contracts being only 18% of existing backlog.

So again, the majority of these government services are long-term reimbursable service annuity-type contracts that we think are significantly lower risk than some of the other projects that we took charges on in this quarter. If you consider the Army 2020 of $736 million, the KBOSSS contract, which we won which we have not booked, which will be again measured in the hundreds of millions we believe the backlog will continue to grow and will continue to be dominated by the government services for the near term.

Moving on to cash, we've started to redeploy some of our cash. Cash balance was down to $569 million at the end of September, $369 million of which was overseas and $52 million of which is in joint ventures. That's down from about $800 million at the end of June. We have used the cash to help fund some of the transactions as well as, we have $650 million drawn under our revolver, again, to fund the transaction, leaving us with a net debt position of about $81 million.

Turning to slide 13. We have been saying for some time that we intend to deploy a capital allocation that's very balanced, partly investing in our business and partly returning capital to shareholders. We think we have performed to that regard. The two acquisitions during the quarter also add to the technology acquisition we did in the first quarter. So, this year has been more heavily weighted to the acquisition side and investing in new earnings power for the Company.

We continue to pay a dividend. We have the highest-yielding dividend among our peers here in the US. We've returned over $319 million to shareholders via dividends since the spin. We have a buyback program. Again, we?ve returned $795 million to our shareholders since the spin. We have the ability to buyback another $208 million of shares. So again, I think we have done a pretty good job of having a balanced capital allocation strategy. With that, I'll turn it back over to Stuart. He'll talk about 2017.

Thank you, Brian. So 2017. As you're seeing from the doughnut charts, as we call them, there's a higher proportion of earnings driven by differentiated professional services and technology going into 2017. We'll get the full-year impact coming through of the Kuwait BOSSS contract, Army 2020, which we announced morning, and the revenue starting to come through on MFTS. So a growing part of our business and growing overall for KBR. We will also get the full-year impact of Wyle and HTSI.

In hydrocarbons, we are very much focused in the industrial services, the debottlenecking and revamping of existing LNG projects. Ammonia and downstream in petrochem, ethylene, and increasingly in small-scale LNG positions in North America, given the work we're doing in the front-end design of those today. There's a greater proportion of our differentiated reimbursable services. This is leading to margin expansion. It also de-risks our business considerably. So the majority of the backlog is in that differentiated reimbursable area.

We are expanding capabilities and executing on growth plans in the US and the Middle East for our maintenance and turnaround services. Very much focused and getting involved in more of the OpEx spend. This is a growing part of our business. We will talk about that in the coming quarters a bit more. Again, it's more focused on reimbursable services and long-term annuity-type contracts.

We will continue to evaluate M&A opportunities, seeking additional earnings power with long-term and stable earning streams and strong free cash flow. One of the great things about the, I guess, the reimbursable differentiated professional services, particularly in the government services sector, is the strong correlation between earnings and free cash flow, which is a prime focus for us. Of course, we will continue to be tough on cost control and focus on efficiency.

Moving on to slide 15. I said I would give you a bit of update on how we're going on integration. So, key bullets here, we did close HTSI, the second of the acquisitions on September 16. Since then, we have aligned the leadership behind Roger Wiederkehr, who was the former CEO of Wyle. So we had a very strong management team come across from both acquisitions. Wyle is taking on that responsibility. Roger is taking that responsibility.

We have aligned the business development and operations management teams quickly. We've -- there's a single brand facing the US government agencies and the US Military called KBRwyle. So that's been launched and was received very, very positively. There's a strong focus on realizing revenue synergies. Shortly after we closed, we were awarded a contract that showed the power of the team with KBRwyle winning a circa $50-million contract to support the US Navy. But that included HTSI cyber security expertise as a subcontractor and brought in KBR, our legacy business on past performance, beefing up the safety management programs and the proven project management capability.

And we improved the combination together; we won that contract bidding against the other entity. So a really good start in terms of realizing the revenue synergies we reported earlier. We have just gone through our planning phase and really started to combine and gel our thinking around the growth focus for 2017 and beyond. This will be $2.5 billion worth of contracts annually, greater than that with what we?ve booked recently. So the scale and the capability is a significant player in the government sectors and the growing markets around the world. So good progress on integration (inaudible), we think.

In terms of guidance, our previously-announced guidance remains as is. This also reflects the higher ETR that Brian talked about earlier.

Okay. Moving on to the next slide. So, in conclusion, we continue to have strong discipline around our strategy. It is very focused. It's leading to growth in backlog. It's de-risking the business by really sort of focusing in the high-end differentiated professional services and technologies, the strong and growing long-term annuity-type contracts, particularly in government services but also in the OpEx-driven E&C side of the business.

It allows us to take large projects when the appropriate risk return makes sense. So we're not being driven to book revenue that doesn't make sense.

It is a key part of what we want to do going forward. So, significantly lower risk profile, leaner cost structure due to strategic initiatives but we'll continue with that. It's an ongoing process; you never take your foot off the gas in that area. So a large percentage of more predictable earnings, associated margin enhancement and, as importantly, a very strong free cash flow profile. A balanced capital allocation strategy, strong balance sheet, particularly as we transition into the stronger free cash flow arena in 2017 and we get the legacy projects behind us. With that, I will hand over to the operator. Thank you.

(Operator Instructions)

Chad Dillard, Deutsche Bank.

I just wanted to walk through the moving pieces of revenues actually entering 2017. So, just doing some back-of-the-envelope math, by taking that 41% of backlog to be burned in the next 12 months and subtracting consensus revenues, about $1.2 billion for 4Q.

It suggests that you will be able to -- you have about $3.5 billion of revenues and backlog for 2017 or about 75% of consensus revenues for 2017, which actually seems pretty decent, given the current environment. My question is, are you in a position to grow revenues and earnings in 2017 versus 2016, excluding the project charges that you just took?

Well, yes, that's the plan. I agree with you, 75% in backlog going into the beginning of a year is a pretty healthy position to be. Clearly, we would expect to grow the earnings and not have any issues on the major projects that we had this quarter.

Absolutely, the government services contract that were booking that are not yet in backlog will also add significantly to the revenue line. Remember, the MFTS that we booked that has not had any revenue recognition yet, the Army 2020, that we start with a construction phase. Obviously that is shorter, that is spread out over at three- or four-year time horizon.

Then you have the running the facilities, which will extend over 25 years; that will add to it as well. As well as having a full year of Wyle and HTSI. So, we are quite optimistic about 2017.

Great. Just, actually, just sticking with 2017 but more so on the LNG side. I know that you guys have talked about LNG earnings being flat year-over-year in 2016 but, given that Gorgon is running off and you still have a little bit of Ichthys, how are you thinking about LNG's contribution as we enter 2017?

I think, Chad, we've said it previously, we still believe it will be significant -- significantly similar -- we continue to work through the projects in Australia. You mentioned Gorgon there. That's been essentially for us, complete, for quite a few quarters now. Our statements around LNG exclude the revenue from Gorgon and have done for quite some time.

Tahira Afzal, KeyBanc.

I just wanted to clarify Chad's earlier question. I think he was asking in terms of earnings, I think what Chad was asking was, was it the midpoint of your original guidance of, let's say, $1.32, do you think you can grow earnings? Is the clarification around that, Brian, that you can?

Compared to -- I'm not clear what you are measuring against?

Your original guidance of $1.25 to $1.40.

We haven't given any guidance for 2017.

Yes, I know. But I was not sure based on your earlier comment, whether you were referring to your 2016 guidance as a reference point to 2017, when addressing Chad's question, or the revised guidance?

We don't want to be too specific yet; we will give guidance with our next quarterly results. But clearly, that is our goal is to grow the bottom line. Now we think we have earnings power to be able to do that.

Okay. Maybe not to belabor the point, but would that be growth versus the original guidance? Or because there is a huge difference between that and your current (technical difficulty).

I am sorry, you cut out there.

I guess, I am still not sure whether, when you are talking about growing earnings it's versus the $0.30 to $0.50 or the $1.25 to $1.40. Of course, there is a considerable difference, so I just wanted to get a clarification on that.

Again, we don't want to give guidance for 2017 yet, but we're focused on growing the bottom line without the charges.

Tahira, we have tried to give you far more color and flavor around the backlog, so that you can actually ascertain at this juncture before we're in a position to give guidance, it gives you a good feel as to where we're growing backlog. What the scale of that backlog is and what it's made of in terms of the risk profile and the margin performance. So, I think that's the area where you need to focus in on in this next little while.

Got it. Okay, Stuart. Actually, that's pretty helpful. Second question, obviously the government services shift seems to be working out very well for you guys so far.

Just pivoting back to the E&C business, Stuart, you have been booking some more E&C projects over the last two years in what you would probably describe as a fairly tough environment. How do we get comfortable that what you have on your E&C backlog is fairly -- in terms of risk -- has a better profile than the ammonia project you just closed out on?

Again, in the backlog slides, we give some clear color as to the level of lump sum versus what we call reimbursable PFI-type contracts. Certainly, we've got some of that backlog in there related to the power project of course, which we are dealing with. I think we've de-risked the business considerably.

I think there is a very good understanding of some of the legacy projects that were in the portfolio when I joined. We are driving them to conclusion.

My sense of the business going forward, again, is that there is a five-year proportion coming through in reimbursable services. I think we've de-risked the business considerably.

Jamie Cook, Credit Suisse.

A couple questions, one, Stuart, you talked about in your prepared comments being able to improve margins in 2017. Again, just to be clear, what are your assumptions on the margins? Is that just -- are we adjusting for the project charges that we had this quarter? What does it assume in terms of closeouts for the LNG projects. I guess, I'm just trying to think about, are you saying margins should improve on normalized basis or just because of adjustments that we had?

No. No, there is no smoke and mirrors in that statement, Jamie. If you think of the returns that we get through the government services sector compared to the E&C sector in terms of margins, you can see there that there?s enhanced margins coming through from those differentiated services contracts.

Okay. Then I guess two more questions. One, Brian, with the two acquisitions, how should we think about, on a normalized basis, free cash flow versus net income moving forward as your business profile changes?

Then, I guess the second -- or my third question is, Stuart, back to the E&C business, I appreciate you?re trying to refocus to government but are there any opportunities to win work on the E&C side, or should we expect to -- your win rate to be lower just because the competitive environment remains challenged? Thanks.

Okay. I'll take the free cash flow question first, Jamie. As we've previously discussed, the two new acquisitions in government services in general, have a high correlation of free cash flow to earnings. So we would expect the conversion factor to be somewhere in the 75% to 85% of earnings.

There's not a lot of CapEx typically associated with those businesses unless we're doing one of the PFIs in the UK, which tend to be off balance sheet and not consolidated. So again a pretty high correlation. As you know, the Wyle business was acquired from private equity.

I think that's a pretty good evidence about the ability of these businesses to generate cash flow; that's what's attractive to the private equity holders. So we would think somewhere in the 75% to 85% conversion going forward.

On the E&C side though, we have to get through the legacy projects. So, we'll burn some cash on the ammonia plant, as that has now just finished in the fourth quarter. We still have the power project which will run through Q2 of next year.

The E&C side of the question, we continue to -- you're quite right, Jamie, it's very much a focus for us. I think the OpEx side of the business in E&C continues to perform well. We've put on over 2,000 people in that area in the US in the past 12 months.

Again, we're going to talk a bit more about that in the following weeks and quarters as we complete the build-out of the industrial services. We're seeing a lot of activity in that arena in the Middle East and in Europe. So, that's a growth story for us in the hydrocarbon sector.

I think pleasingly, we're seeing a number of inquiries coming through in the LNG side, particularly the mid-scale side of the house in the US and a little bit in Canada. So I think all in all, yes, we continue to focus in E&C. I think the key point of it is that we're not going to be rushed into doing anything stupid and signing a contract that we can't execute and booking revenue for revenue's sake. As Brian said, we're focused on the bottom line. We have pivoted the Company to have a greater proportion of differentiated services, whether that's in hydrocarbons, or in government, or in technology. It allows us the ability to be highly considerate when we take on EPC risk. We will do it but we want to be highly considerate when we do, do it.

Okay. Thanks. I'll get back in queue.

John Rogers, D.A. Davidson.

I just wanted to follow-up on the LNG awards. There is a number of them in the early stages; can you characterize when those projects might get to FID? Is this 2019, 2020? I know it is always hard to forecast.

Yes, it is hard to forecast, John. If you look, they are all at various levels of maturity. We haven't talked about Magnolia on this call.

That continues to be part of our future, assuming we can get the off-date agreements and their recent announcements would drive towards the end of 2017, where they hope to conclude deals. Whether that is realized or not, that remains to be seen. I think the timing is late 2017 and into 2018.

Okay. Thank you. Then, just as far as additional acquisition opportunities out there, how do you think about the balance of the portfolio right now? You've -- obviously, de-risked the backlog, but how do you think about that in terms of positioning yourself for, I guess hopefully a recovery at some point in the hydrocarbon?

Acquisitively -- there's two bits to it. I think that you've got to retain your key talent through these difficult market times. I think we're being able to do that by winning pre-FEEDS and FEEDS and keeping that key talent. The construction side of our business continues to be quite busy in stand-alone construction work.

So again, we're retaining the key talent there. Acquisitively, we've been very transparent that we're focused in on three areas, the government service side, I think we've addressed in the US. But we are focused in hydrocarbons, both in technology and in the industrial services maintenance reliability-type performance area.

That's where we'll be looking to build-out capability. That's where we'll be looking to grow the business acquisitively because it's enduring.

Thank you. I appreciate it.

Steven Fisher, UBS.

Continuing on the discussion about pipeline of new awards, can you give us a sense of visibility and timing on the next big contract? I guess, mainly in government, once you get through Army 2020 and KBOSSS.

Then, I guess if you want to talk about E&C as well. You mentioned the LNG, but is there any other bigger prospect outside of LNG?

So, on the government side, there are a number of substantial opportunities, Steve, both coming through heritage HTSI and Wyle and legacy KBR and in the UK and actually in Australia. The pipeline of opportunities, we haven't been specific on naming them, but there are a lot of opportunities that are significant and coming through that pipeline, which we feel quite good about.

In terms of the E&C side, yes, we talked about the LNG side just briefly there and we're starting to see activity there. Of course, there are opportunities in the Middle East and in the US, particularly in the downstream side that we are tendering now. So again, we haven't been specific on particular projects, but the opportunity to land those is in front of us.

Those are in 2017 on the government side?

Yes.

Okay. Then in terms of Wyle and HTSI, now that you?ve had them closed for a little while, you gave some examples of some strategic wins or synergy wins. Can you give us an update on the quantification of the synergies and the timing? I think you had been looking for about $0.30 to $0.40 of accretion in 2018. How has that changed now that you're more into the details of it and seeing what can actually happen?

Steve, I'll take that. I don't think anything has changed significantly. We had said we would have about $325 million of revenue synergies by 2020. To Stuart's point, we've already got $49 million in the first quarter.

But we still think that the revenue synergies will extend out over a period of time that we initially announced. The government procurement cycle is rather slow and long. So we think we're doing well, but no surprises, I think things are going pretty much according to plan.

I think the team is working well together. There are a number of synergies that really we haven't talked about. But small things, in re-competes and on new awards where just the experience that one of the groups had adds to the ability of the bidding entity.

It could be that Wyle was bidding on something but they were a little light on experience in one particular area, which now either KBR or HTSI has that has that experience. So it further enhances the ability for Wyle to either win new work or to win on re-competes.

So, there's a lot of smaller synergies behind the scenes that are really starting to take effect now. Many of these opportunities have been bid or are coming up to be bid shortly.

No change to the $0.30 or $0.40 then?

No major surprises yet.

Okay, thank you.

(Operator Instructions)

Andrew Kaplowitz, Citigroup.

It's Alan Fleming on for Andy this morning. Stuart or Brian, I just want to follow-up on margin. You recently talked about cost out positively impacting margin in 2017. I think you've basically finished your $200 million program.

So what kind of cost tailwind could you see in 2017 and how should we think about that impact on margin, maybe particularly in E&C? Are you saying that you think cost-out can offset pricing headwinds, or do you think you could see more cost-out drop to the bottom line next year?

So, firstly my statement on margins was really I guess the change in mix from reimbursable services, whether it's in hydrocarbons or any government services as we go forward and that is reflected in the backlog.

Certainly -- if you think about the number people that KBR now employs, it's circa 32,000 and the increasing number, sort of high-end white-collar workforce within that 32,000, so it gets greater returns from a differentiated professional services basis. That was really where we're going from the margin discussion earlier.

In terms of cost out, as I said in my prepared remarks, this is an ongoing effort for us and we have achieved $200 million, but we want to take more out as we go and drive efficiently where it makes sense and we'll continue to do that.

The E&C sector in terms of tailwinds, it is highly competitive. We said all along, that cost out does allow us to hold up margins, not increase margins in the E&C, particularly, that's -- I think we would still say that today.

Okay. That's helpful. My follow-up is on technology, and maybe you can talk a little bit more about what you're seeing there in the earlier-cycle business? Backlog was down, modestly versus 2Q, but several of your competitors have talked about seeing an uptick in orders there on the engineering or the catalyst side.

Are you seeing similar type of pick up there? When could we maybe expect to see backlog turn to sequential growth again?

Remember, in the technology and consulting arena, we have got the consulting part of our business, which is predominantly oil and gas spacing, which has probably backlog challenge rather than upside, so. the technology piece is actually holding up well. It is a global business for us so it's -- particularly in places like China and India and the former Soviet Union we're doing particularly well at the moment.

So I think you've got to take out or understand that there is a consulting backlog piece within there that is challenged at this particular juncture.

Okay. Then, maybe just one more. Brian, do you have any more ammonia projects in backlog that you are currently working on?

Yes. We have three.

We have got three or four -- we've got three major projects that we are working on. A number of sizable but not quite at that scale-type projects were working on also. We've got a number of technology projects we're working on in ammonia, particularly in the revamp arena.

Okay. All right, thank you, guys. Good luck.

It?s worth actually just commenting there that a number of those projects are actually reimbursable as well.

Rob Norfleet, Alembic Global.

Close enough; good morning, guys. (laughter) Most of my questions have been answered, but just a couple of follow-throughs. When you look at the existing or legacy backlog within E&C, are there any projects in there in which you see the potential for some scope changes or additional add-ons for work?

Yes, of course. That's always part of the project environment. We've talked often about various change orders, particularly as it relates to some LNG projects that we are still working through.

There are additional scope changes in some of the ammonia projects that we're executing. Yes, we do see that opportunity. As you continue to perform well, you get opportunities for more work.

Okay. I know you guys are trying to avoid a little bit getting specific about potential projects, but when you look at some of the E&C prospects that are out there, which we would think, you guys would be interested in. You had BP's Mad Dog project, obviously some additional ammonia and ethylene projects. Can you just talk to us a little bit about what you're seeing today in terms of customer CapEx?

I know it's still a very cautious environment, but are you starting to see some of these projects that have been held up for the last 12 to 18 months starting to move towards that FID stage for 2017?

Yes, I think the oil companies will move cautiously, but we are starting to see a little bit more activity in the marketplace for sure, particularly at the early stages, the consulting-type areas as they start to recycle things and have a look at whether there's some smart solutions that can be brought to bear, some innovation, which I think we're well placed to provide. As I said earlier, we're starting to see a bit more activity in the LNG sector also.

All right. Then last question for me. Can you -- obviously with Pemex -- I know this is the question you get every call, but now that they have appealed, Brian, can you walk us just through what the likely timeframe is until we get some resolution to the matter?

Okay. They've asked for a rehearing for the Second Circuit Court, which there is no specific time requirement for the court to rule. Basically, what they're asking for, the court to come back and reverse its decision that itself had unanimously reached. We would expect something, hopefully before year end.

If that were to occur, that would allow Pemex, if they so chose, to seek an appeal to the US Supreme Court. If the Second Circuit Court does rule by the end of the year, that would allow possibly the request to be made to the Supreme Court to be done in the spring in time to be heard in the fall of 2017. Again, our outside counsel does not believe there's a high probability of the Supreme Court taking up such a case; it's more of a commercial case and also, do not believe that there is a high probability of the Second Circuit Court reversing itself given the unanimous opinion. That rarely happens where a court reverses itself. Although, there can be no assurances obviously.

So, that's the timeline. We still are thinking for own planning purposes that within the next 12 months, we would hopefully have this resolved.

All right. Thanks a lot.

(Operator Instructions)

Savanna, I think we can go ahead and end the call. Thank you all very much for your participation this morning. Have a good day.

Thank you.

This does conclude today's program. Thank you for your participation. You may disconnect at any time. Have a great day.