KBR Inc (KBR) 2017 Q1 法說會逐字稿

Good day, everyone, 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 Nelson Rowe. Please go ahead.

Good morning, and thank you for joining us today to discuss KBR's First Quarter 2017 Financial 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, Mark Sopp. Stuart and Mark will discuss KBR's financial and operational results, discuss the market outlook and the earnings expectations for 2017. Please refer to the accompanying presentation that is posted on our website in the Investors section of kbr.com. Following their prepared remarks, we'll take your questions.

Today's call will also be Webcast and a replay will be available on KBR's website for 7 days at kbr.com. The press release announcing KBR's first quarter results and KBR's first quarter Form 10-Q will also be available on the website.

Before I turn the call over to Stuart, I would like to remind the audience today that today's discussions 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 first quarter Form 10-Q and current reports on Form 8-K. You can find all these documents on our website.

Now I'll turn the call over to Stuart.

Thank you, Nelson, and good morning, and thank you for joining us today. On Slide 3, I will begin as is our practice with safety. We have put considerable effort into the overall integration of our recent acquisitions, and this is going really well. Pleasingly, our new colleagues have embraced the Zero Harm culture, and this is reflected in the continued performance improvement as we integrate these businesses.

Continuous improvement takes commitment and belief from every one of our 34,000 people in the KBR family. We believe it's not only our responsibility to look after our people and those we work with, but it's simply good business.

Now on to Slide 4: Q1 highlights. This quarter has been a reasonably clean quarter. Earnings in line with consensus despite ForEx headwinds and delayed profit due to a change in estimate on a large LNG project, the combined headwind was $0.08 to $0.09.

Through 2016, we saw revenue stabilize, and this has now moved to growth in the first quarter of 2017 with the year-on-year increase of 11%.

Excluding the nonstrategic businesses, the revenue growth would have been 18%. So very pleasing. Our project delivery performance was strong, and we continued to derisk the enterprise removing uncertainty.

We have substantial completion of the final EPC power project in the U.S. We achieved the PEMEX settlement, including the cessation of all legal proceedings.

It's worth noting that although this is a Q2 event, the monies are with KBR, the VAT has been settled in cooperation with PEMEX and the tax computation is moving to finalization with payment later this month.

The net to KBR is a cash injection of over $300 million. We also settled a number of legal matters in the quarter, 2 to highlight as shown on the slides.

In the business pursuit and capture area, we have certainly seen increased activity. Our pipeline in all business segments increased, especially in E&C, and our Consulting business is getting busier which supports this.

Speaking of market conditions, let me spend a few moments providing an overview of our markets. In our government markets, we continued to see the expansion of our LogCAP IV contract with a growing presence in the Middle East and particularly Iraq, and Eastern Europe in response to conflicts. We expect to continue to ramp up on our contracts in the U.K. with Army 2020 and MFTS through 2017.

Everything else in the U.S. government market is moving along, albeit slowly as the new administration gets its feet under the table. That said, in the quarter, we were awarded both the Gizmo Recompete contract and the U.S. Air Force's Civil Engineering MATOC contract. This segment has a robust pipeline that we will discuss further at our Investor Day on May 12, in New York.

Moving on to Hydrocarbons. We see that global Industrial Services markets continue to provide opportunities as customers look for greater operational efficiency and cost competitiveness. We continue to participate in a number of front-end designs for ammonia, refining, ethylene and small and selectively large-scale LNG opportunities. This supports our view that E&C backlog will grow through 2017, albeit in the latter half.

A growing part of our business is focused on OpEx spending and other areas of differentiated reimbursable services. We are pleased with our increased level of engagement with our major oil and gas and industrial customers. We have leveraged our scale and global reach in recent months to secure long-term service agreements with Chevron, BP and International Paper to name a few, thus helping us to achieve long-term stable earning streams with associated strong free cash flow.

Our technology markets are active in the Middle East, Russia, Asia and China. And it's worth noting that the backlog in Technology, our highest margin performer, grew nicely in Q1.

On strategic pursuits, we secured significant operations and maintenance contracts, both in Government Services and in E&C. The first shown is a 5-year recompete win to support NASA's satellite program. This stems from our Honeywell acquisition and it was the largest contract in their portfolio.

The second is again a 5-year deal, providing Brownfield Services supporting Chevron Indonesia's existing assets, but importantly, takes the Brown & Root maintenance focus brand into Asia.

Additionally, we secured the recompete for our long-term maintenance contract in Russia for International Paper.

Moving on to Slide 5. I will touch on backlog before handing to Mark. A few key points to highlight on this slide. A secured earnings backlog for 2017 sits at 75%. The backlog mix underpinning the future earnings has been derisked significantly with the mix overwhelmingly weighted toward recurring services contracts.

Our reported backlog is $10.6 billion. Adding the option years on secured government contracts, this moves closer to $13 billion and further supports a future earnings profile that is less volatile, more predictable and comes with associated strong cash flow conversion.

Now I'll hand over to Mark. Mark?

Thanks, Stuart. I'll start on Slide 6 of the earnings presentation. As Stuart mentioned, in Q1 2017, we made good progress on producing more stable results, which were generally in line with our expectations. A consolidated revenue growth of 11% was fueled by acquired and organic growth in our Government business, more than offset declines in our other 2 segments. Achieving overall growth in a challenging hydrocarbons market is a significant milestone in the strategic transformation of KBR.

I'll also say we believe that Q1 year-over-year decline in the T&C segment is largely a timing and mix issue. Our forecast calls for organic growth for the full year as supported by recent wins.

Gross profit came in at 7.4% of revenues, improved over 6.8% last year with Government Services and T&C being at normative levels, whereas E&C drove the overall improvement with strong project execution.

One area where we fell short of target was equity and earnings, but this was largely a timing issue. Due to cost growth on reimbursable costs for a large LNG joint venture project in Australia, called Ichthys, and that's spelled out in our release, we had a percentage of completion adjustment which pushed out profit out of Q1 and into future quarters. This offset otherwise normal equity in earnings results from all other sources. We expect recovery of Ichthys over 2017 and 2018.

Other elements in the P&L were normative, although the effective tax rate improved to 25% due to favorable [apportionate] mix.

GAAP earnings per share from continuing operations came in at $0.26 per share and was $0.28 before legacy legal costs of $2.4 million.

As for Q1 operating cash flow, net uses were $115 million and were consistent with our expectations, driven by about $150 million of net unfavorable working capital changes offset by cash earnings.

The working capital uses were driven on the liability side with reductions in accounts payable and billings in excess due to funding costs on late-stage EPC contracts, where we are working down advances received in the earlier stages of those programs, plus reductions in reserves for the funding of lost contracts that we recorded in 2016.

On the asset side, cash collections were good in Q1, accounts receivable coming down almost $40 million and DSOs finishing at 79 days. Over time, I believe we can bring this metric down even further.

As mentioned in the press release, the PEMEX settlement was received in April and will be recorded in Q2. A final gain of this settlement is still being fine-tuned as we finalize the tax payment in the related foreign exchange effects in May.

As Stuart said, the good news, the cash was received in early April and $150 million was already used to reduce debt on our line of credit. There will be a tax payment of roughly $100 million and the rest of the PEMEX settlement will generally be used for ongoing working capital purposes in 2017. A little bit more on this later on.

On to Slide 7, the schedule provides a little more color on the segment results, but I think I've already summarized the major movements there. You will note in the nonstrategic business area that, that's continuing to wind down, and this should phase out entirely in the second half of this year.

On to Slide 8, some background to set the stage for the rest of the fiscal year. Consistent with our remarks back in February, Government Services and T&C are expected to post healthy top line growth this year, most of which is already secured in backlog. This should offset expected work off of large capital projects in E&C and also in the nonstrategic business area.

OpEx facing Industrial Services in E&C should also provide ballast until we start to see more new starts in hydrocarbon projects later on this year.

Excluding the PEMEX gain in Q2, gross profit plus equity in earnings as forecast to run about 10% of revenues in the out quarters and G&A is forecast to run in the low 3% range of revenues.

As (inaudible) cash flows, we still expect ongoing working capital requirements in 2017 to fund late-stage EPC contracts and lost contracts. This liquidation in 2017 should set the stage for operating cash flows to have higher correlation to cash earnings in 2018 and beyond.

Taking the total cash flow picture into account, we recently reduced the debt on our line of credit by $150 million as I said earlier, and our debt now stands at $500 million and our net debt position is approaching 0. This is certainly a strong balance sheet position which provides KBR strategic and tactical flexibility. This, coupled with stronger expected conversion of earnings to cash flow in 2018 and beyond, should avail more capital deployment options as envisioned in our overall strategy.

Onto Slide 9 which summarizes our current quantitative outlook for 2017. We reiterate the EPS guidance provided last quarter. However, with the PEMEX settlement completed and as suggested on the last call, we now expect EPS, excluding legacy legal fees, to be in the upper half of the $1.10 to $1.40 range. We expect the legacy legal fees and amortization costs are unchanged from our last call. We now expect the effective tax rate to be in the 25% to 27% range, an improvement from the 27% we said on the last call. And in addition, resolution of the PEMEX settlement gives us greater clarity on 2017 operating cash flows. We expect operating cash flows to fall in the $100 million to $200 million range for the year, reflecting cash earnings of about $200 million, the net PEMEX settlement proceeds exceeding $300 million and the remainder being working capital outflows to fund the later stage EPC and lost contracts I mentioned earlier.

And finally, we of course plan to continue our regular dividend as a high priority for the company. In conjunction with our strategic transformation goals, we see 2018 and beyond as years with significant additional deployment potential, and we'll discuss that in greater detail in our Investor Day on May 12.

That concludes my remarks. Back over to Stuart.

Thank you, Mark. So on to Slide 10. In conclusion, a strong start to 2017, with solid financial and project delivery performance, including the acquisitions where integration progresses on plan with no value erosion, continued realization of strategy with key wins across segments.

Our outlook across our markets is positive. We see organic growth continuing into 2018 and beyond with opportunities for step-out growth. More details on this at Investor Day.

Backlog profile combined with reducing uncertainty and risk supports more predictable returns. We have a lean structure, but importantly, it has been designed to be scalable.

We are predicting a strong free cash flow, which gives us deployment options into 2018 and beyond. And again, more on this at Investor Day.

So this takes it nicely to the final slide in today's presentation. Please join us on the 12th of May in New York. Thank you very much, and I will now hand back to the operator, who will open it up for questions.

(Operator Instructions) And we'll go to Brent Thielman, D.A. Davidson.

Just trying to think about the E&C segment through the remainder of this year and with respect to some of the assumptions in guidance. You've burned off quite a bit of backlog and even as that stabilizes hopefully here in the second half, it seems like you have some more pressure there coming this year. So how do we kind of think about sustaining that mid- to high single-digit margins in that business with revenues coming in this year?

I think the margin performance is continuing and has improved a little, in fact. I mean, we've been quite clear that we're seeing a greater level of activity down the pipeline, Consulting business is getting busier which is -- supports that statement. And we think that we will start to see backlog growth and what we're bidding at the moment coming through at the latter part of '17. So I think we're still saying what we said last quarter, and we're not seeing that change in the market. In fact, the opportunity in pipeline is growing. So the outlook is actually more positive this quarter than it was last quarter.

That's great to hear. And then -- and maybe just one on Government Services. Can you just comment on the Wyle, Honeywell businesses, maybe on their own. Are they growing as you expected? Faster, slower? Any thoughts there?

Yes, I mean, a lot of the focus has been on making sure there's no value erosion. We have secured, as we said, that the major mainstay of the Honeywell business in their portfolio, which was the Gizmo contract, that's the one major recompete we had this year. We won it. So those businesses are performing to expectation. We're seeing opportunities for, I guess, we've got some synergy wins in the tank already and we're seeing more coming down the pipeline. But the procurement process within Government does move slowly. So I think we've said all along that the realization of those synergies will be over the next few years and we continue to believe that, that's what we'll see. So I think overall, the integration is going very, very well. The attrition is very low. The sentiment in the business is very positive. And I think we feel, particularly from the Honeywell side, they now belong to a people business rather than a product business and they are viewing highly positively.

We'll go next to Rob Norfleet, Alembic Global.

This is Nick Chen for Rob Norfleet. Just digging into Brent's question a little more in the E&C segment. I was hoping you could give us some color on the specific end markets you guys are pursuing for your opportunities there and what the actual size of the work you're pursuing in those end markets might look like? Whether it's more small- to medium-sized projects or billion-plus. And also, what the mix of those projects is in terms of fixed price versus cost reimbursable?

Okay. So that's a long question or maybe a short question with a long answer. So those various components across our E&C business. We've got our maintenance business Brown & Root which is continuing to grow and we've had strategic success this quarter which underpins that growth. So that's one point. And I think we've said before, that's upwards in '17 of a -- an $800 million business KBR share for us, and we see that continuing to have a substantial upside. In terms of -- then we have a pure Services business, which in the main is provision of high-end engineering-type services, typically reimbursable like the Industrial Services maintenance business. And again, that's predominately what we do in Australia and Saudi Arabia and of a lot of what we do in the U.K. and across Asia and the Middle East, and obviously, a bit in the U.S. as well and in Mexico. So that's a very sort of recurring revenue reimbursable part. And then you have the -- what we call our EPC business. And where we get to with that is that we're seeing, I mean, we're a very gas spacing business. It's -- we've been saying that for a number of quarters, we're not really at the mercy of the oil price, per se. The low gas prices, particularly in the U.S. are affording a lot of opportunity in the monetization of that gas across the value streams that might be in the ethylene sector or downstream from ethylene, whether that's polyethylene and olefins. It's also ammonia, the ammonia prices have come up we are seeing. Activity in that sector, again, quite attractive. And I think, generally just in the downstream side. We do see some opportunities upstream through our long-term relationships with our sort of IOC customers, but they are selective. In terms of scale, we are seeing projects mostly in the, what I'd call, it's probably the high 100s to the below $2 billion-type size, is really sort of the size which we're very comfortable in that, we're very comfortable across the range, but in terms of the risk profile, very manageable risk profile. But I would reiterate again, our strategy is technology-led EPC. We want to be hired and considered on the risks we take. We're being very disciplined around that commercial area. So I think that, that's a key message to the market and one I think demonstrated in the past. And we just got out from under of contracts that have been difficult and were signed at a time when, I guess, we had -- we signed up to deals that were perhaps not as good as they should have been, but we just got out from under them, so we want to be very careful about what we sign up to going forward and make sure that we can manage the risk.

We'll go next to Jamie Cook, Crédit Suisse.

I guess first question, just a little more color on Ichthys. I mean, in terms of -- you talked about cost growth so that's differing profits. I think you said it's $0.08 to $0.09 in the quarter. So I guess how much of that do you recoup in '17 versus 2018? And what are the offsets to maintain your guidance? Is that just PEMEX or is there something else that's doing better? And then my last question, obviously, there's been a lot of press with talking about issues between you guys and the customers. So if you could just provide an update there. And if that's what's impacting the earnings deferral?

Yes. So the earnings deferral is associated with change of scope, which, as you know, just delays the profit element of that coming through. We think the majority of that will come through in '17. So that's probably the first statement. The second, as we said, $0.08 to $0.09, but some of that was ForEx headwinds, so it wasn't all related to Ichthys, that's probably the other point of clarity. But in terms of the project overall, we haven't changed our position in terms of what we recorded in our financials. We feel really good about how our recovery opportunity opposite the powerstation piece of that, and the project continues to progress. So I think overall, there's been a lot of noise. A lot seems to be played out in the Australian press and not just in Ichthys, but in many projects. But I mean, what I'm saying today is the current KBR view and...

Okay. So you'll recoup all that, so it does imply other businesses are doing better or besides (inaudible) you get PEMEX.

Yes. I mean, PEMEX is a Q2 event. I think I'm very pleased with the quarter performance, Jamie. We've met consensus with actually very strong underlying performance. All the segments are doing well.

Okay. And then I guess one question for Mark and that I'll hop back in queue. You gave the operating cash flow guidance of $100 million to $200 million and you talked about the puts and takes. But one of them was working capital versus the cash being used to fund projects. So can you give us some color on how much of the cash is being used to fund projects in 2017? I'm assuming you're going to give longer-term targets at the Analyst Day in a couple of weeks.

Yes, and we will, Jamie. In terms of funding projects, I think you mean that working capital use to complete our obligations on existing projects. And there are 2 parts to that equation. There's just the natural phenomenon of negotiating advances in the early stages and then having that reverse in the later stages. And we're in the later stages of many projects. And so that's one element. I would say that's about 2/3 of the working capital utilization that I referred to and the remaining 1/3 is tied to funding the lost projects that we announced in 2016, of which there were 3. And so that's kind of how it all mixes together. The total working capital used on those 2 categories embodied in our guidance is $300 million to $400 million in 2017. So that's a big number but we'll work through that. We're well capitalized to do so in 2017. And I see the conversion ratio, as I said in my remarks earlier, in 2018 and beyond being much stronger.

We'll go next to Anna Kaminskaya, Bank of America.

So I just wanted to -- and maybe follow-up on the problem project that you announced in 2016. Where are you in the completion and what's the visibility on -- just kind of how much conviction or visibility do you have on cash used for that project?

Okay. So I'll go on the performance to date. So the ammonia facility's finished and handed over the final U.S. EPC project and power is substantially complete, so handed over to duty and care of the customer. And then we've got one final domestic EPC project lump sum, which when we took charge was in Q4. And that is progressing. I see a little bit better than we have planned in terms of progressing. So the numbers are holding very well there. And our understanding of the market now and the productivity, et cetera, is playing to that very well. I would also remind you all that across all 3 of those projects, we have claims, both to vendors who didn't perform or we felt didn't perform and to the customer on certain change that we have not reflected in our financials. So there are -- there is only potential upside, not downside associated with those jobs.

And relative to the cash flow there, very scheduled and granular for the 2 completed projects, so we're just working that down in '17. And then of the final one that's still in flight, of course, we have a good visibility of our cost structure there provided we finish the job as expected and we're very confident that our cash flow forecast embodies everything, included to finish that. And as Stuart mentioned, if we're successful in some of the claim areas, we have not baked that into any of our cash flow guidance, so that would be an upside.

And how tangible are those claims? I'm not sure if you've been able to quantify.

Yes, I'm sorry, we can't really talk about that given the sensitivity around (inaudible). As we resolve them, we'll tell you.

And then when you discussed your E&C backlog outlook for the second half, sounds like you have a relatively wide range of projects in the pipeline, you have to assume the Magnolia LNG will go forward before the backlog will start growing? Or is it just independent of Magnolia LNG has always been this big sizable projects that you happen to think? And secondly, if those projects come in at too low margins and you find that it's very tough for you to compete on the project, is there strategic optionality for the E&C business, like how do you think about it, how long do you have to see the progress on the E&C business before you make maybe different strategic decision versus holding out for the business? How do you think about it internally?

We're very excited about the E&C business and where we sit at the moment. We feel we've got a capability in cost base where it needs to be, and that's why when I talked a little bit about growth in my closing remarks, we feel we're very much poised for step-out growth. And for us, that really comes through a differentiated offering at the E&C space, particularly using our solid gas spacing technology. So we're under no illusion, we are committed to the E&C business, we're under no illusion we're into the big project delivery business but we'll only do it when it makes sense, but we feel our differentiation allows us to play when it makes sense.

And it is fair to say that there are opportunities outside of Magnolia LNG to grow the project in the second half?

Yes, I mean, you're right, historically LNG has been a big part of KBR. I've been at pains to explain to the market that it's -- we're very much across the industry sector now. We're across the full life cycle of what we do in oil and gas, hydrocarbons. That includes -- downstream includes chemicals, includes fertilizers, and of course, includes LNG. And in the LNG space, Magnolia LNG is one opportunity, I think we've said before, and we've disclosed that we're involved in a number of these sort of mid-scale opportunities. And will they all go ahead, who knows? But will some go ahead? Most likely. So we feel pretty good about that. But we feel that we're very, very much got across -- we've got optionality across the hydrocarbons space. So it's -- I'm trying very hard to get the message across that KBR is far more than LNG. And in fact, we're doing that and we're proving that, and we're actually involved in a whole host of downstream projects today.

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

Congrats on getting the execution back on track. I guess first question, as you look at that eventual deployment of cash, and it's good to feel free cash flow will hopefully be inflecting soon sustainably. Why would it not go towards share buybacks? I mean, based on the message so that where you think there's a big disconnect between where the stock is trading and where you think your -- the fundamentals lie.

This is Mark. We'll talk about this, of course, much more at the Investor Day. Our deployment priorities will start with making sure we're funding organic growth and maintaining an attractive dividend. After that, we'll talk about M&A and buybacks and we'll be strategic relative to both those options and both those options will be very much on the table at all times depending on the opportunities in front of us. So we expect to maintain an authorization and have the buyback options available to us, and we'll use it as conditions warrant.

But I think it's fair to say that we will be in a far -- we have far more optionality around capital deployment as we move through the end of '17 and our free cash flow conversion starts to realize. And certainly, as Mark said, we've got the authorization in place today, there's no -- we're going to maintain that so we can act quickly and buyback is most certainly an option that we're looking at going forward.

Got it, okay. And I guess as a follow-up, a little more on the E&C side. I do see that you've started turning up more on bidding lists now both on the upstream and LNG side. Stuart, I believe you might be on the list for some of Chevron's upstream developments in Gulf of Mexico and we've seen you pop up with Shell LNG which is a pretty large LNG project up in Kitimat. How are you -- it seems like you're sort of showing up on these lists, should we assume that's just because the market is picking up? I assume it's not because you guys are getting slightly aggressive.

I mean, I think you -- I have a history with Chevron and with Shell. It's well documented. I mean, the key customers, our relationships are very good and we are going after projects including Canada LNG and Kitimat. That process is ongoing now which is a sizable LNG project. I mean, that's a several billion dollars. And so again, we're in partnership there and we feel pretty good about where that is today, but it is a competitive process with 3 others. So -- but there are a number of things there, Tahira, we've been very considered about what we're going after. Our bidding dollars, we think about it very carefully. And if we don't feel that we've got an opportunity to a, be successful, but more importantly, b, be successful then make money, then we're not going to do it.

(Operator Instructions) We'll go to Chad Dillard, Deutsche Bank.

Just a couple of questions on your operating cash flow guidance. How should we think about the cadence through the rest of the year? And then also, how much in cash advances from new bookings in the second half is baked into that $100 million to $200 million guide?

Chad, the cadence is, as we have discussed relative to revenue trends, we are working down the projects in their later stage. And as a result, at least on the E&C side, revenues will come down from the first half to the second half. At the same time, margins, I think, will improve. But relative to the cash question, I think the burn was pretty heavy in Q1. I think it will remain heavy in Q2, and it will start to dissipate in 3 and 4 in conjunction or in correlation with that work off. Relative to your question on advances, while we are optimistic to see new wins in the second half, we have not factored in or are reliant upon advances received in the second half to make our cash flow guidance.

That's helpful. And then what is the CapEx versus OpEx mix in E&C backlog right now? And how should we think about that evolving as we exit 2017? And then secondly, just going to the profitability we've seen this quarter was about $33 million. Can you speak to whether that run rate is sustainable through the balance of the year? And how should we think about that cadence through the rest of the year?

I'll tell you about the backlog first, then Mark can chip in. I think -- we said, I think, during the presentation, we look across the whole business in terms of the risk profile and the contract mix that we have. We're over 87% in cost reimbursable PFI-type contracts. A large chunk of that, as I talked before in the scale of our OpEx [spacing] business in the Hydrocarbons sector, but also, we've got that same in the government sector. So that profile, very much derisked the volatility and I think it gives a good outlook in terms of what the business can do and the consistency of what the business can do.

And relative to profits, this is our most choppiest segment. But I would say that it's modestly down in the second half overall in terms of profit dollars in conjunction with revenue pace. That could shift if new wins come to the surface in the second half.

We'll go next to Michael Dudas, Vertical Research.

So -- but -- so Stuart, on Government Services, when you look at -- it seems like the pipeline is pretty full. Can you maybe share a little bit about what areas are more near term or more opportunistic than some of the others? And as we look to the next quarter to any big projects or any more opportunities of awards that you're going to announce here, say, next quarter or two. And relative to the employees that you have in that division, are you 100% set, are you 80% set? Do you need to attract more type of town or are you still getting through merging the 2 companies? Where do you -- where are you on the human resource calculation to meet the growth targets that you have?

So Mike -- so I think to start with, we're probably a little bit different from some of the mainstay government players in the U.S. in that we've got such a significant component overseas. That, and we've got secured work already in the hopper and in the tank, if you like, that drives organic growth into '17 and into '18 with these PFI contracts, Army 2020 and FTS contract. And there was a number in the pipeline in -- out of the U.K. that we're bidding now that are due for awards quite soon. So I think we're feeling pretty good about that. Tons of resources in the U.K., that's a business we've been in for a multitude of years and we're well resourced and no concerns in that arena to continue with that growth story. In terms of the U.S., the integrations of the businesses, as I said before, is going very well. We've actually restructured them into 3 areas, which is it's kind of common sense, if you like, one is space and we've got the Honeywell NASA business and the Wyle NASA business now together, so we've got the space division, then we've got the engineering piece which really supports all the platforms that we do in the higher technical services. And then we have the logistics piece, which is -- the KBR's legacy business combined with Honeywell. So the prepositioned stock maintenance business. So that's all in place now. The leaders of those businesses are in place, as I said, our attrition has been very, very low. When I look across the breadth of capability that we have, I think the platform for growth is substantial because we've got more capability and more citable past experience than most. And I think we can certainly use that to our advantage going forward. As you know, much, much of what happens in government requires our citable past performance, and we've got a huge amount of it that we can take the business into other areas like ranges and things like that, that we've not been in the past. In terms of short-term growth, the short-term growth that we're seeing is obviously is coming through with the LogCAP contracts, the deployment supporting the U.S. Military, both in the Middle East and in Europe, and that's been growing, I think, for several quarters in a row now and we continue to see the ramp up there. We see that we're one of the best in the business at actually supporting that and have been able to move quickly, and the growth in that arena has been very fruitful. In terms of what's coming down the pipeline in terms of -- we'll say we've got other than Gizmo, which we've just won, which is the satellites' O&M contract from NASA, we have no major recompetes in '17. So the base business is very, very stable. And anything above that it's clearly growth. And the numbers of opportunities coming down that pipeline are substantial. Mostly in the U.S. themselves supporting the major platforms. Probably Mark can talk a little bit more about that.

Well, we'll give you some real pipeline data in our Investor Day, number one, you'll see that it's pretty impressive for the Government Services business in terms of value, and we'll talk about some of the exemplar elements therein carefully, of course, for competitive reasons. But I would also say that we're in the early stage of the collaboration story of putting these businesses together. And based on my discussions with the team, there are some great ideas, there are some early wins on the synergy side. But we're far from really tapping into the full potential on tapping into new customer sets over time. We've been pretty entrenched with NASA in the Navy and the Army in the legacy businesses brought together here under the KBRwyle. But reaching across and going after new areas and also other incumbencies that we now can compete against, I think, is the excitement of putting these things together.

We'll go next to Andrew Kaplowitz, Citi.

We're starting to see some stabilization and/or improvement in Middle East markets in some of the other industrial companies we follow. Are you starting to see more projects percolating in that region? And do you think they contribute to the second half backlog ramp up that you expect?

I mean, the answer to both those questions is yes. I think I've said previously, we started the year with more backlog in those -- in the Middle East businesses than we've had in certainly my time at KBR. Our performance is good. Relationships are good and our returns are in line with expectation. So we continue to see opportunities there. We continue -- as I said before, our history in the Middle East is rich, but our legacy sort of business there is really being restricted to Saudi in the past and we've now moved into back into Kuwait, we moved back into Abu Dhabi and back into Qatar and Oman. And so we think there's quite significant headwind for growth just by moving back into those markets and taking market share. But you're right, the sentiment is more positive than it was a year ago. And certainly, we're starting to see opportunities down the pipeline and that will be added if the backlog as we move through '17. No doubt about it.

Okay. And Stuart, I just want to follow up on, I think, it was Jamie's question around Ichthys risk. When I look at the quarter, you did book (inaudible) uptick in unapproved change orders. And obviously, there's been noise around the power plant and what's happening on that job there. Are you -- did you guys take over that job? And is it possible to ring fence for us the cost to complete that power plant job, how do we think about that?

I think the way you need to think about it is that the contract is -- first thing, it was a contract to the joint venture, so to be clear about that. So we have stepped in to finish it. We've already mobilized contractors in there to do that. The consortium which involves UGL, CH2M Hill and GE, they effectively -- walked off the job and we believe breached their contract. We feel we've got clear recovery rights to them. I think we had not announced that -- or it wasn't clear that GE were part of that consortium joined several in the past. But certainly, there's a balance sheet there that is quite robust in terms of our recovery. GE has done the honorable thing. They continue to work on the project around actually supporting their machines and the technical specs that's around that. So in that sense, we've got ourselves in a position whereby GE is standing behind the guarantees, which is the key component of the power station in terms of the rest of the construction we've taken the best-performing contractors on site and they've been mobilized onto the job. And we put people from -- our completing our work in the U.S. In fact, some of our key management and best performance over into Australia to manage the conclusion of that work.

If I remember correctly, Stuart, that power plant was close to done when you started taking over, is that right?

I mean, yes, no, that's right. I think, percentages, Nelson?

80%.

Yes, it was above 80%, 89%, I think. 89%. And so, yes, it's close to being finished. But we do need to finish it and we've set ourselves up to do that. We've put the right resources to do that. We've got the right contractors mobilized to do it and GE continues to stand by their obligations. So we're on the path to sort of, we've got our arms around that now and we're moving it along.

But fair to say that at least in the very short term, that's one of the contributors to the cash stream this year and that side of it.

We think overall that there will be no cash strain on Ichthys in '17.

(inaudible) and one of the drivers, that's not one of the drivers, Andrew, in this. It was the earlier projects discussed in 2016.

Okay, that's helpful. And then just one clarification. Last quarter, I think, Stuart, you suggested that the accretion from the Wyle and HTSI deals in '17, '18 could be a bit better than you originally expected. Is that still the case? You think that they could do around $0.20 in '17 and $0.30, $0.40 in '18? How are they doing versus the original expectations there?

Yes. I mean, I think, yes. I mean, I think we're going to give a bit more color around how the business can do beyond '18 across all of what we do in the Investor Day. I think it's probably -- rather than do a little bit piecemeal here, Andy, we're probably better to do it in entirety at the Investor Day. But we do feel pretty good about our organic growth, as I said that. We think that we've got a firm footing to grow the business organically, and we do have some real step-out growth opportunities and we'll talk more about that on the 12th.

And we'll go next to Steven Fisher, UBS.

This is Cleve Rueckert on for Steve. Just, I guess, a housekeeping question on Ichthys. Can you give us a sense of what equity earnings are going to step back up to on a quarterly run rate basis going forward? I mean, should we be expecting it to get back to that $10 million a quarter level or less than that? And do you have a firm completion date in '18? I was wondering what the run rate is going forward there.

We don't like to talk about individual project profitability, please. But we do expect, as we said in our remarks, to restore profitability in the later quarters from Q1, once the percentage of completion adjustment has been made. And so I think we'll be back on a more normative trail in Q2 and beyond, and that will extend into 2018, which is I won't be too precise on when in 2018, but we're targeting completion in that year. And so we'll carry through somewhere therein.

But I think also it's worth noting that equity earnings is not all Ichthys. It actually -- last year, I think, I said this before is that we were building out our Brown & Root brand and the capability and we made -- did acquisitions in that space to build out that capability. We had obviously [deal] costs and things last year. So not a big contributor last year, but it's been moved into this year, that comes through the equity and earnings line as a growing part of our business. And we've also got -- we've got joint ventures in the U.K. and we've got joint ventures in Mexico that also contribute through that equity and earnings line and those businesses are also growing. So it's wrong to think about equity and earnings line is just a one-trick pony. It's very much -- I think we're seeing a lot of upside in the other areas in equity and earnings and that's why Mark is saying that we'll get back to sort of normative levels, but we see that continuing and not regressing.

Okay, that's helpful to understand. And then, in terms of the $2.2 billion in government options, Stuart, what has to happen to convert those into backlog? Is it really just timing? And are those optional extensions, or is there an opportunity to do something sooner?

Yes, Mark will answer that.

Those -- we're just trying to provide clarity that we and others don't recognize in backlog unexercised options because, of course, the government has the option to not extend. However, when you're an entrenched incumbent, like we are on many of our programs, the history suggests that those options will be exercised and that work will be done. And so for that reason, we would generally expect that we'll carry through the full period of performance, including those option years and those revenues will ultimately be recognized.

We'll go next to Jerry Revich, Goldman Sachs.

Stuart, I'm wondering if you could talk more about the opportunities that you're evaluating in ammonia. Is it similar to the type of revamp work that was awarded in your T&C business this quarter, or more substantial brownfield or greenfield-type activity? And if you can give us any color on region. And also, you mentioned that the contract terms in the last set of greenfield ammonia contracts weren't what you would like. What sort of contract terms should we be thinking about for you folks if you do undertake more greenfield work at some point?

Yes. Maybe I'll answer the last bit first, if I may. I think there was 2 main contributors to where we ended up on these projects. And the first was weather and having no contractual protection around the weather where we had the 100-year event happening 2 years in a row in and around this part of the world and not really thinking that through in terms of how we build that into the schedule or how we had contractual protection within the terms and conditions. So that's the first. The second contributor was really around understanding productivity norms as it sits today. I mean, the labor force in the Gulf Coast today is very different to what it was 15 years ago. We paid a high price to understand that. I think we do understand it now, and certainly, our forecast to complete and the jobs that we have, our productivity is actually doing a little bit better than that forecast which means our execution is actually improving. So I think we've got both of those very much under control, and we really understand how to do this right down at the front line in terms of supervisory ratios and work-based planning and things like that, that really make a difference. So I think it was that piece that really helps us understand how we bid these and actually avoid those pitfalls in the future. So that probably answers the last piece. In terms of ammonia itself, we're seeing, yes, we're continually active in the revamp market. We're seeing a lot of activity there through T&C and where we can, we'll be filling that through and where it makes sense into E&C. We do have grassroots opportunities in a couple of areas. One in the U.S. and one outside the U.S. We see quite a bit of activity in Russia in this arena as well. So it's very much a global business. And I think with the uptick in ammonia pricing and just obviously, the continuation of cheap gas in the U.S. it's a great opportunity. So -- but that was just in the ammonia sector, but we're also seeing that across, I guess, the chemical sector as well and the olefins arena. So I think it's -- again, that opportunity for step-out growth is sitting in front of us in the latter part of '17.

And a question on the Wyle and KBR technology solutions businesses. Based on the pro forma disclosures, it looks like the sales for the 2 businesses were down about 15% year-over-year. And I'm wondering if you could just step us through the drivers. Was it contract timing? And presumably, you folks knew about the contracts at the time so I'm sure it's factored into valuation, but as we just get to know these businesses, can you just help us understand the cadence and the flows of the drivers there?

I mean -- our view at the moment is that those businesses are performing to expectation and in line, particularly in the earnings line, to where we thought they would perform. I'm a little bit confused with the data there. Mark, are you...

Well I can only -- relative to the Honeywell acquisition, that was -- there was a lost body of work before the acquisition that was well known and well placed and so there was a declining trend there that was foreseen and priced in. And we knew that it would take some time to fill that gap, as you're seeing some of that come through relative to that piece, but well known. And there's a recovery story relative to the synergy and the full life cycle offerings we have when you combine KBRwyle together. So that piece, I can say, I'm not following you on the Wyle part. I think that is more stable. But together, both performing in accordance with what we had expected at time of acquisition.

That will conclude today's question-and-answer session. At this time, I'd like to turn the call back over to Mr. Stuart Bradie for any additional or closing remarks.

Thank you. So a pleasing quarter. I think positive outlook and we hope you'll join us for Investor Day on May 12 where we'll give a bit more color about what we think this business can do going forward. So thank you for joining us today.

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