KBR Inc (KBR) 2017 Q3 法說會逐字稿

Good day, and welcome to KBR's Third Quarter 2017 Earnings Conference Call. This call is being recorded. (Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Nelson Rowe. Please go ahead, sir.

Good morning, and thank you for joining us today to discuss KBR's Third Quarter 2017 Financial Results. Joining us on today's call will be Stuart Bradie, President and Chief Executive Officer of KBR; and Mark Sopp, Executive Vice President and Chief Financial Officer.

Stuart and Mark will discuss KBR's financial and operational results, market outlook and earnings expectations for the remainder of 2017. Please refer to the 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 and a replay will be available on KBR's website for 7 days at kbr.com. The press release announcing KBR's third quarter results and third quarter Form 10-Q will also be available on the website.

Before we turn the call over to Stuart, I would like to remind the audience 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 statement. These risks are discussed in KBR's third quarter's earnings press release, third quarter Form 10-Q for the period ending September 30, 2017, and current reports on Form 8-K. You can find all these documents on our website at kbr.com.

Now I will turn the call over to Stuart.

Thank you, Nelson. Good morning, and thank you, You All for joining us. You can tell I've become a little bit more Texan given how the Astros are performing at the moment. I will begin on Slide 3 with an update on our safety performance.

I am pleased to report that both our total recordable incident rate and days on which we achieved Zero Harm across KBR's global operations, our projects and our sites are at an industry-leading level, but that is not enough, as our commitment and vision is to achieve Zero Harm every day. KBR is a people company, and core to our culture is looking after oneself and those around us. Quite simply, good safety is also good business, which takes us on to Slide 4, third quarter highlights.

Executing on strategy, together with both strategic and commercial discipline and a focus on priority areas, solid project execution, cash and winning the right work has delivered a fairly clean quarter. Strong and predictable earnings and better cash performance, portfolio mix reducing risk profile, strong bookings led by our government services business, KBRwyle, our higher-margin business, Technology & Consulting, together with strategic wins for E&C, including growth in our small project OpEx-facing businesses was pleasing. Directionally important, we are again raising guidance for the 2017 full year, and more on that later.

A few of the wins for KBR in the quarter are highlighted. For KBRwyle, Diego Garcia and Bahrain base operations contracts, both these protests were resolved in our favor in the period, 8- plus 5-year contracts, respectfully. We secured the 8-year Djibouti base operations contract, our final major recompete for 2017. Our Niche Security Solution's business secured a maintenance contract from FAA and our space vertical secured a seat on NASA's REMIS contract. Internationally, KBRwyle in the U.K. is performing well and continues to grow. In addition, we announced the strategic acquisition of Sigma Bravo in Australia. Sigma Bravo takes KBRwyle into the highly differentiated classified arena for the Australian Ministry of Defense, and this is actually on the anniversary of the Wyle and HTSI acquisitions.

In technology, following our strategy, we were rewarded the revamp of an ammonia facility in Russia, originally built by KBR. In E&C, in conjunction with our consulting business, Granherne, we pulled through ongoing pre-FEED work for BP's development in Mauritania and Senegal. E&C was also awarded an EPCM contract by JVGAS in Algeria. This is a 4-year contract for work on JVGAS' major gas developments, with work expected to grow through 2018.

I will now hand over to Mark, who will take you through the results in more detail, our cash position and the expectation of what we will see in Q4, including guidance.

Great. Thanks, Stuart. I'll start on Slide 5 of the earnings presentation. As Stuart led with, we've continued to perform on or above our plan for 2017 and well above last year's performance, which included some large project charges.

Q3 this year was clean and highlighted with continued sequential growth in Government Services, growth and impressive margins in Technology & Consulting and project performance in E&C, which drove favorable net adjustments and good attended margins. These factors contributed to a healthy adjusted EPS of $0.35 for the quarter and forming the basis for upping our 2017 EPS guidance again. More on this in a little bit.

General and administrative expenses continued to be at normative levels, as the prior year included some transaction expenses associated with the Wyle and HTSI acquisitions. Our effective tax rate in Q3 was 24% as expected, compared to an income tax benefit in Q3 of 2016 due to the project losses we had last year. As I said, adjusted EPS was $0.35, GAAP basis was $0.32 for Q3.

And finally, operating cash flow of $28 million was improved year-over-year and is on track with the plan we set out for the year. As we have explained, operating cash flow this year is being adversely impacted by net working capital outflows, associated with a higher proportion of projects nearing completion. In other words, we're now burning off advances that we received at project inception in prior years. We expect to see more of this in Q4 but it should mostly be resolved this fiscal year.

On to Page 6, digging into the segments. Government Services continued to grow year-over-year and sequentially due primarily to the HTSI acquisition, which happened at the end of Q3 last year, but also winning all significant recompetes so far this year and capturing a few new wins, plus experiencing growth on existing contracts. We've seen particular strength in our logistics and mission support area, where we have become the provider of choice for overseas base operations support for the US military, winning everything significant we have bid this year. These wins will provide revenue visibility and foundation for growth in the years ahead.

Gross profit and equity in earnings margin was just above 9% in Q3, aided by growth in equity in earnings from the ramp-up of the new United Kingdom Military Flight Training School contract under our Affinity joint venture.

Technology & Consulting also grew year-over-year and sequentially with a particularly strong quarter in Licensing, Catalyst and Consulting sales, which drove margins to about 25%.

For E&C, we've had strong execution on the projects nearing completion, which contributed to margins of 9% for the quarter. We had a number of small E&C services wins, as recently announced and remain optimistic that larger projects will eventually come from the pipeline of opportunities we have developed. Timing remains difficult to predict.

As we enter into the final stages of closing out our last remaining power project in our Non-Strategic Business segment, we were able to reduce some costs associated with the closeout of this project and thus recorded some profit in Q3 as well.

Over to Slide 7. With respect to cash and debt, no major changes here in Q3. Our cash position was modestly improved with a favorable net cash flows we experienced and the gross debt position remains the same for now.

On to Slide 8. With respect to guidance, with Q4 to go, we are upping adjusted EPS guidance to a range of $1.35 to $1.50, and upping EBITDA guidance to a range of $320 million to $350 million. We are keeping operating cash flow at $120 million to $200 million.

On to Slide 9, here's a little bit more color on what to expect in Q4. As a backdrop, the market conditions continue to be favorable for Government Services, Technology & Consulting and early-stage project studies in Life-cycle Services and E&C. And while timing remains hard to predict for our large E&C projects, the increased early-stage consulting projects we are seeing in T&C is a favorable leading indicator for large EPC projects to come.

For Government Services, we expect revenues to downtick sequentially, primarily from a lower number of productive days due to holidays in Q4. This is a normative trend for Government Services businesses. We also completed a short task order under LogCAP IV in Q3, so that'll have a modest negative impact to Q4 sequentially as well.

For Technology & Consulting, more of the same: sequential and year-over-year growth. And for E&C, we see continued sequential revenue declines due to ongoing project ramp-downs. And given where we are in the year, we do not expect any new wins in the fourth quarter to impact this fiscal year's revenue result.

For cash flow, while we benefited from some timing items in Q3, we expect Q4 net operating outflows in the $50 million to $100 million range, as we wind down the projects in the E&C segment as we've guided all year.

The team looks forward to finishing the year at this higher level of performance and setting the stage for momentum in 2018. We'll release Q4 in late February, and we'll issue 2018 guidance at that time. Now back to Stuart.

Thank you, Mark. On to Slide 10, for the end summary. Overall, at the group level, a clean quarter and simply executing on our strategy. At the segment level, KBRwyle, working with our global government customers, is performing really well. It's realizing synergies and growing backlog. In Technology & Consulting, our prospects -- pipeline leases to expect further growth in Q4 and beyond with continued strong margins.

As Mark alluded to, our Consulting business saw increased activity in Q3, which is a good leading indicator to future E&C project opportunities. In E&C itself, good project execution together with an increasing number of smaller and OpEx-facing projects is delivering more predictable results. Our prospect pipeline remains attractive in the downstream market in the U.S. and in the Middle East, as we move into 2018. We're also currently engaged in a number of strategic opportunities in the offshore arena that we believe will move forward in late Q4 and early 2018.

Overall, we have a high level of backlog and our earnings momentum, with greater consistency and predictability, that allowed us to again raise guidance.

I will now hand back to the operator who will open the call up for questions. Thank you.

(Operator Instructions) We will go first to Tahira Afzal with KeyBanc Capital Markets.

I guess, first question, and I know you guys are going to be giving out detailed guidance for 2018 later on, but as you did introduce some headline numbers in a sense to think about back on your Investor Day, would love to get a sense how your biases align. It seems like Government Services, for instance, is turning out to be closer to the upper end of what you've laid out for 2018. So any thoughts on how things are quality divested in -- versus those headline numbers would be helpful.

Yes, I mean, good question, and not unexpected to hear a lots of -- should be lots of questions about 2018 there. Let me start first on E&C and quite a lot of debate around that. I mean, if you remember in our Investor Day, our forecast was to keep revenues flat going into 2018, but I gave an EPS bump for us, because we were working off loss-making projects this year, and that was really the way we were thinking about the market, sort of picking up in sort of FEEDs and things like that as it sort of worked its way through the execution sort of spend profile through '18. And given our prospect pipeline, we still feel good about that forecast, so that's probably the first thing to get out there. Terms of Technology, that continues to grow quarter-on-quarter and particularly, in -- around the margins and the gross profit line, which is really, really exciting for us, because there's a lot of recurring revenue in Catalyst and things like that. So we expect that to continue to grow and I think, I said last quarter, the prospects we have in that business are as good as we've seen for many, many years, and that trend is continuing. But in terms of GS, you're right. We won over $1 billion of work in the quarter. I mean, that's quite seasonal. In fact, I think the government budgets are such that you tend to do well in the third quarter, but I think directionally, you're correct. We're aiming at the -- we've got the opportunity to achieve the higher end of that growth spurt.

Very helpful. Good. And I guess as a follow-up, you talked a bit about offshore. And even today, there was not (inaudible) on how you guys might be bidding on some work in West Africa. That's on the FPSO side. And as you look over the last 4, 5 months, I know people focus a lot on LNG for you and maybe a bit on petrochem, but it seems like the offshore RFPs have notably picked up, maybe more than LNG, et cetera. Would love to get your thoughts on that, and whether you feel incrementally more confident about that market into next year?

I think overall, that market is still challenged, the offshore arena. But I think we've been very considered in where we've pointed our bid dollars and our effort, and that's been quite successful. We talked some time ago about Johan Sverdrup, and we positioned well for that, and won that work, and that's now moving into the next phases, so there are opportunities there. Our work with companies like BP and Azerbaijan and West Africa are well known, and that continues to go very well. And we're looking in places like Trinidad for opportunities, where really, the $50, $60 oil scenario is still attractive for those developments. But I think as long as we continue to be sensible and considerate, I think it comes with great opportunity and I think that's what we're seeing. I mean, really, on LNG itself, quite a bit of press this quarter, which I'm sure you've all picked up on with Exxon and others all coming to press, really, talking about, I guess, the demand in China, really going well above expectation, because of I guess, coal -- trying to replace coal and environmental pressures, et cetera, the security of supply issue in Europe, still a big question mark, really around, sort of, Russian gas going into Europe and looking for alternatives, and I guess, North America's a natural alternative for that. And really, I think, it all culminates -- what does that all mean? It all means that, I guess, people are zoning in on that, sort of, 2023 supply-demand cross, and if you want that back, I guess, our expectation is that you start to see some movement in LNG through '18 and FIDs into early '19.

And we'll go next to Jamie Cook with Crédit Suisse.

Two questions, I guess. First, last quarter, Stuart or Mark, the unapproved change orders got quite a bit of attention. I mean, it looks like they went up again this quarter fairly materially, so if you could provide color how much of that was (inaudible)? Or how we think about that trending over the next couple of quarters or potential resolution? And how concerned you are about that? And I guess, my second question, your -- it's more to you on a strategic level. Given the interest that we're hearing on CBI's technology business, how do you think about your Technology business strategically over the longer term? And depending on whatever multiple CBI gets, would that make you rethink that business whether or not it should be core to you, or you could trade greater shareholder value if someone else wanted it?

Jamie, it's Mark. Yes, most of the uptick in the unapproved change order disclosed in the footnote is related to it as we say in that footnote, and that continues to be activity where under the cost reimbursable part of the job, we or/and our subcontractors have requested for and have received funding for additional work relative to the project, and we have submitted change orders relative to those. The clients have, through negotiations, has almost entirely funded those change orders, but they remain in the unapproved status, because they have reserved their rights as is customary to later discuss those before they are finalized in an approved order sense. And so it's really, quite honestly, more of the same that we've seen in recent quarters, and we'll expect that to tamper down as the project concludes in 2018, but we might see more increase in that in the next couple of quarters until we reach mid-2018 timeframe, where we expect completion to occur.

Okay. I mean, is there a maximum level? I mean, I'm just surprised, it's -- the total amount relative to your company is big. I mean, at what level could we see this on approved change order get to over the next couple of quarters through mid-2018? Just so we know what your expectation is.

I mean, I think, Jamie, it's difficult to put a number on that, but what I would say is, I mean, the mechanism of the way this works is that the costs associated with this are actually in the main, not our cost but sub-contractor costs. It's all part of the reimbursable work ongoing in Australia to finish the trains. And as we negotiate the closeout with the clients' oversight and approval in terms of numbers, we take these into the unapproved change order because at the end of the day, they're still sort of finalizing their overall accounts and reserving their rights around it. So I think the important thing is -- 2 things, one is in the reimbursable, only going to the -- essentially the subcontractors and the second is this being fully funded by the customer.

Okay. And -- sorry.

Yes, and as Mark said, it's more of the same. And the -- that this job as you know is a -- is sort of driving to conclusion. I think first train, publicly [excess] of, say, at the end of the year. Second train, the middle of next year. So it will start to resolve itself as we go forward.

Okay. And then the Technology business?

Yes, good question. I guess, the -- at the end of the day, this is being spurred on by CB&I, having to sell their business. And I think the main driver there is having to sell their business because of their current situation and as unfortunate as that is. And they don't want to sell as I understand it, they see the -- a huge value in technology, so leading into opportunities in the E&C sector. I think we've said that all along. It's a key part of what we do and plus we got Technology & Consulting in there and our consulting, sort of brand Granherne is doing very well, as Mark alluded to in his remarks. And that really is sort of allowing us to go through work and sort of stuff we're doing for BP and, et cetera. So I do think it's a key strategic, sort of column in the house, if you like, that CB&I are being forced to sell, and we'll make them less differentiated going forward.

We'll take our next question from Brent Thielman with D. A. Davidson.

Stuart, you talked before about good activity developing in the T&C business. And I was curious, I mean, are you seeing healthy opportunities developing in geographies and markets that the E&C business would want to leverage and participate? I mean, I know you don't want to be in China.

Yes. I mean, it's a good question, and I think the way to look at it is the technology, for us is a global business, which means we could take it to markets where we wouldn't do lump sum EPC or construction and but also, there are opportunities in markets where we would. And in terms of consulting itself, we're more than happy to do, sort of pre-FEEDs in our consulting group and fill them into front-end designs and detailed designs and project management assignments. So I think-- there's no black-and-white answer to that question. I think that what it does is that both businesses are good businesses in their own right, but it allows you to be selective on the risk profile you want to take. But are there opportunities in places where we would like to leverage our E&C capability from T&C? The answer is yes. But are we compelled to do so? The answer is no.

Okay. And I guess, are there any thoughts or comments on M&A and areas you're looking at or interested in, still focused in T&C and government?

Yes. I think that we're pretty consistent in ECA as, I mean, we did Sigma Bravo in the quarter, high-end, up the food chain, differentiated in Government Services and we'll continue to look for opportunities in that arena. We are continually looking in the technology piece. We did the polycarbonate deal earlier this year and have a couple of opportunities in that arena that if they -- if we are successful, we'll more than justify our positioning in that market. And certainly, the other place we've talked about before is the Maintenance business globally. Our Brown & Root JV continues to do well, contributing positive results due to equity in earnings line, as we go forward, and that's growing. And our positioning overseas in maintenance is getting momentum as well. So I think those are the 3 core areas and they fit with really what we said all along is that we want longer-term, predictable, cash -- good cash-conversion-type businesses, and all 3 of them fit that profile.

And we'll go next to Brian Ruttenbur with Drexel Hamilton.

One or 2 housekeeping, and then tough questions. So first housekeeping. D&A going forward, I think you're down to $11 million. I believe, previous quarter was $14 million of D&A. Is the $11 million the good number going forward, or am I missing something?

It's a clean number going forward. I'd target $40 million to $45 million on annual basis.

And that's the backlog runoff of the acquisitions, the one here.

I'm sorry, can you repeat something about backlog?

Brian, this is Nelson. That's the backlog that's run off for the -- the backlog for the acquisitions, the purchase accounting, so that ran off. So the $11 million that you have now should be a fit number, going forward.

Okay. Great. Next question is on the Sigma Bravo acquisition. Can you talk about what that adds in terms of revenue? Was it significant? Or was it just a small add-on?

It's a bolt-on. And I mean, it's -- we've gotten the disclosures, the value around that was about $10 million, in acquisition prices. I think what's far more important is where it takes us strategically. It's in the classified arena for the Australian Ministry of Defense. We -- it, sort of, it's in the IT arena as well and so that takes us into a completely different area of the Ministry of Defense in Australia and -- which allowed us to take what we've got there and synergize going forward. So it's more about the strategic direction than scale.

Okay. And then some of the harder questions. In terms of Government Services, you're getting a lot of traction, a lot of bookings. Can you talk about the profitability of that -- those bookings? Are they going to be above average, average, below average? Just trying to understand the mix of business on that specific line item, kind of, gross margins or whatever you want to talk about, either gross or operating for Government Services, moving forward within the ministry...

Yes. That's a good question. I think it depends on, in each individual sort of booking, and I think the dynamic you have and things like long-term base operations sort of annual fixed price-type deals is that, you can actually work efficiencies through time as you get better and better at executing. So through time, the margins, you should do better. I think in the more reimbursable nature, it's average just because you -- that's the market you're bidding into. Does that -- I mean, that -- so overall, I think we're -- the margin profile is, is within our guidance, and we're feeling pretty good about that guidance.

Okay. So we should have stable, kind of, Government Services margins overall moving forward or better? Is that the right read on that?

Well, we'll provide our guidance for '18 in a few months. But generally speaking, the portfolio is moving along, as we had targeted and the Logistics business tends to be lower than average. The science and space and parts of the engineering can be slightly above, and it all averages out to the targets we've said before considering the International business, which is above both of those categories and doing very well and growing nicely. And so again, the portfolio is taking shape as we set forth, and we feel good with the numbers we provided back at the Investor Day for the longer term.

And we'll go next to Rob Norfleet with Alembic Global Advisors.

Just quickly, in terms of the Government business, are there any significant rebids from you coming up in 2018? And kind of walk us through some specific large programs that maybe you're bidding on in 2018, just as it relates to the different end markets that you serve?

I mean, the major rebid that we're looking at is around LogCAP IV, which moves to LogCAP V, unsurprisingly. But the configuration of that change is significantly, the way that the Army is looking at -- it's sort of structuring that as to put it into regions rather than individual contracts. So for example, there will be a contractor for the Middle East. There'll be a contractor for Africa, et cetera. So I think the opportunity that, that affords us is quite significant. And particularly, as it relates to places like the Middle East I guess and -- and I guess Central Europe where we feel that we're performing well and therefore, having a good opportunity to prevail as that goes forward. And that would really expand that business and it would lock it in for quite a number of years so we're feeling very excited about that. That's probably the largest recompete we have in '18.

Clearly the largest. We have a pre-positioned stock bid or recompete, coming through, that's scheduled for '18 as well. And so that's another one in -- amongst our top contracts. It's not as big as LogCAP IV to V, though, as Stuart mentioned, that's by far the largest.

And could really have a significant upside for us. And in terms of, as Mark said, in terms of other bids that we have in front of us, we've got some significant bids with NASA going on. We tend not to call out the specific bids themselves just because of the competitive environment. But I think significant bids for NASA, significant opportunity to preposition stock, continual opportunities in the Logistics side. Our Niche Security Systems business is doing very well and growing and we talked a little bit about our contract with FAA this quarter, and we're feeling pretty good about that. We have the Board down in Charleston where that's headquartered earlier this quarter looking at that business, and that one came away very positive. So I think we're seeing opportunities across all 3 verticals, but also opportunities internationally as well. The U.K. business continues to do well in that I guess, they're fairly set -- the facilities integrator is a kind of unique differentiated position that we're getting a lot of interest around. So I think all that -- we're feeling quite buoyant about the opportunities in front of us in Government Services and I think that the coming together of Wyle, HTSI and KBR, we've done a lot of effort to get the internals sorted out, and I think the opportunity to look more externally going into '18 will provide even greater opportunity. So we're feeling quite good about that business.

Great. And just quickly on E&C. Obviously, with -- there's not a lot of fixed price that you see, work currently in the portfolio. If you look at the bid pipeline in terms of the projects that you feel pretty comfortable will get a FID next year, what's kind of the breakout, roughly, of fixed-price EPC work versus cost reimbursable because obviously, we've kind of gotten away from fixed-price EPC. And again, how should that potentially transfer the margin, meaning obviously, the fixed-price work is higher margin. Should we possibly see a little bit of boost in margin as some of that work does get booked, if it is more fixed-price work in 2018?

I mean, I'm not sure if the fixed-price is greater margin, particularly at the end of the job. But what -- I mean, what I would say is that we're doing better than the services arena at the moment, and that tends to have a little bit less risk. But the associated margins are actually typically a little bit better just because the volume's less. In terms of the (inaudible) EPC, the fixed-price ratio versus the rest of what we do, I mean, we were quite specific about that. I think historically, we don't set a target ratio of the opportunities in front of us. They're really about, can we manage the risk associated with that project? Are we disciplined in the way we're approaching the commercial aspects of that opportunity? And are we feeling good about execution. And if the answer is yes, then we go after that opportunity as long as it wasn't 5 bids in a buy. We really want to be in a more differentiated space. And if you follow that logic a little bit rather than the track if you are in a differentiated space, then typically your margins are better. If you're more commercially considered, then there's less volatility.

We'll go next to Chad Dillard with Deutsche Bank.

So the employed 4Q earnings guidance suggests $0.15 to $0.20, and that range seems pretty wide for being the last quarter, so I was just curious to get year-over-year on what are some of the big swing factors that get you to either end of the range? And is the low end of that range too conservative?

Go ahead.

Well our overall policy, as I think we've tried to articulate through the course of this year, is to be conservative in our forecasting and to either run a responsible business, and our current guidance outlook reflects that same view. In the fourth quarter, there are couple of things that we expect to come into the picture. First, you'll always account for some degree of unknown when we're setting guidance. So I'll attribute some of it to that. We did -- do have government seasonality that I mentioned earlier, and so there's some associated profit and EPS that comes with that, but that is seasonal in nature. That is not indicative of the trend of the business. And we are expecting a modest facilities charge in the fourth quarter just to lower our cost structure going forward, and that'll be a few cents of EPS, but that'll better position the business going forward. But outside of those things, we're expecting ongoing normality in our profit rates at our targets that we've mentioned before and again, some general seasonality of that and conservatives of that we've baked in. So we're just trying to continue the mode of providing solid performance. We've upped our guidance twice this year, and we think that's very positive.

I think, the only other comment I'd add to that is this is only the second time in my tenure that we've increased guidance. It just happens to be 2 quarters in a row, but that's okay as far as I am concerned. And as Mark said, we don't want to get ahead of our skis unless we want to be making sure that what we put forward is achievable and if we do better than that then all for the good.

That's helpful. And then what drove the step-down in the equity in earnings per (inaudible)? And do you expect that to pick back up? Or are we on the downward slope of the construction curve here?

I mean, I think we've said before, we've had dilution in equity in earnings because of the adjustments. I think we've been quite clear about that and put the numbers in the disclosures and to the market. Obviously, as we move towards the conclusion of the project, any dilution historical or forward is cost increase will be recovered. I mean that's the [mass]. So I don't think you're seeing a downward cycle. It's just a timing issue for us.

And we might not see much of a change year-over-year when '18 is done relative to '17, because we have deferred, if you will, through dilution. Quite a bit what we otherwise had planned this year. But at the same time, we see other joint ventures improving. Stuart mentioned Brown & Root earlier, so we think that's shaping for better things in '18. So some things, I think, will go up. I think our contracts in the U.K. will continue to grow, particularly with the ramp-up of Military Flight Training School. And so as some things will come down through their project life, I think this being one of them and -- in the later part of '18, and others are coming up. And so we'll lay that all out in our guidance in terms of the overall view, come late February.

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

I'm surprised you got a voice left after the last few games. My questions regard 2 things. First, in your prepared remarks, you did talk about, you had a great third quarter of bookings from KBRwyle. What would you attribute this success towards? I know it's been some time that you've owned the asset and integrated, but what are you -- this is probably a lot better than people would've anticipated, maybe the analysts and the competitors themselves. What's been driving some of the successes that you're having in those wins? And my second question would be, I anticipate we're going to see a lot greater or faster international defense spending growth relative to the U.S. Is that something that you're seeing as well and you need to be positioned to generate better growth internationally than what we're seeing domestically?

I mean, the first question's -- it's just focus. It's -- we've said all along, the first thing that we would do around integration was get the sales folks together, really look at how we can leverage the historical past performance and really, get our peak win rates up and positioned for success. And I think the team's done well there and although perhaps the market and some analysts didn't think we could achieve the synergies we set forth, we certainly were committed to achieving those targets and the team has done a fantastic job. And absolutely, really, really focused in what they're doing and spending the bid dollars in the appropriate way. That's it. Mark, any more on that?

The only thing I see is our legacy KBR government business has not had a lot of new capability into the mix for a long time and introduced Wyle and HTSI over the past 12 months and there's a tremendous amount of new capability and energy that are -- our heritage legacy folks have really tapped into to help the Mission Support and Logistics business, provide differentiators there, and we've had a tremendous win rate and run in that business, similarly. Our traditional business can help those folks as well, and so they're teaming well together plus they're making sure they're staying focused on what they do every day in serving their customers. The customers are clearly pleased with what we're delivering and the recompete win rate is extraordinarily high. And so a combination of focus but also excitement with all the new capability that we have to bring to the market.

And the international?

So internationally, we feel the same. We think the bigger market relative to us, the U.K., is a place for possibly robust growth, and that's been the case for the last 1, 2 years here. We've really benefited from the TSIs, but it's much more than that. There's a very interesting pipeline. A group was put together there to hit not only defense but all forms of government in that region, and so we're optimistic there. And in terms of relative growth rates, I would say Australia might be even more interesting but smarter in the absolute. And that underscores the importance of adding capability like Sigma Bravo. Now our growth rates there are very, very healthy double-digits and we see the tremendous, not reset, but aggregate increases in investment in the Australian defense budgets very significantly over the next 10 years. It's very explicit and we intend to capitalize on that.

We'll go next to Steven Fisher with UBS.

Just want to come back to the unapproved change orders, because you sounded more certain this quarter compared to last quarter, sort of, when you'd raised the possibility that this could ultimately end up going to court. So has something changed to give you more clarity on where that responsibility falls, or how should we think about the risk of cost responsibility on the project?

I mean, I think it's, as I said before, the nature of these change orders are very much through the subcontractors, the reimbursable part of the scope of work that we're doing. And the customer -- the way the mechanism works is that you've got to agree the number with the customers, as you go forward, and they fund that portion of it. But under our system, we certainly never take anything in until it's all fully signed up. And if they reserve the rights in any way, we're very, very conservative in what we put into the revenue, and I think that's appropriate. As everybody's large projects, Steve, we'll end up in a negotiation that concludes the commercial outcome, and it's all driving towards that as the project moves to the end.

Okay. And Stuart, can you just give us a little bit more color on your E&C prospects from a size perspective? Because I know going back to the Investor Day, you were talking about an expectation of small- to medium-sized projects, having a good pipeline there. I think it was around $500 million to $1.5 billion was your kind of sweet spot. Today, you're talking about the potential for large projects. How are you thinking about what the prospect looks like from a size perspective?

Yes, I think that the outlook is still the same as we sort of presented at Investor Day that really the portfolio that excites us and then the opportunity to go forward, of course, that -- I guess, in that sweet spot range that you mentioned, I mean, it's easier for people to make decisions around that in terms of FIDs than the sort of $12-billion-type opportunities. Everyone knows that we're bidding kind of to LNG. That's a significant opportunity, but the FID question around that will come well into '18. I think that to go back to what I said before, the market that we're seeing, we're seeing quite a bit of focused activity in offshore where we're planning our bid dollars and there's some good opportunities there. And there -- the project opportunities there are really around the numbers recorded. And the downstream petrochem sector in the U.S. again, similarly, the portfolio we have there is in that sort of -- in those ranges. And certainly, in the Middle East, the sort of early work will, again, be in those sorts of project ranges. So I think we stand by our, sort of, statements on Investor Day. I think that where the team have focused their effort, I think the projects that are in front of us will go ahead. And I think we'll find out whether we've been successful or not successful as we move into '18 -- early '18. So as I said before, we're still feeling pretty good about what we presented Investor Day around E&C in terms of that revenue-flat profile.

And we'll go next to Alan Fleming with Citi.

Stuart, I want to follow up on a comment you made in your prepared remarks that, I think, you said you were seeing growth in small- to mid-sized OpEx facing businesses within E&C. I thought that was interesting and maybe you can just kind of expand on that a little bit. Have the trends in the shorter-cycle businesses improved through the year? And if so, do you think that's tied to more recent stability in oil prices? And kind of what markets are you seeing growth there?

Good question. I think that the answer to that is different in each geography. And in the Australia market, we've grown our business and got it profitable over the last couple of years. It's doing very, very well. And it's across a number of sectors, in infrastructure, in oil and gas. And we recently announced that the project mine -- the first project mines that went in the Mining business, which is starting to get, kind of, a bit more attention at the moment. In terms of places like Saudi Arabia, there're a lot services work going on there, supporting our own corps locally, both in the offshore side but also in supporting work going on, on the onshore side. But predominantly, just Services, engineering-type work. In the U.K., we've diversified our client base and have geographical reach from our U.K. business, and that's performing a really, really well with work from Russia to Algeria to the Middle East to, obviously, parts of Dagang and et cetera as well as the U.K. North Sea and the Norwegian North Sea sector. So for the onstream, downstream and the nature of that work is, again, predominantly in the Services side. We talked earlier about our Maintenance business. We -- Brown & Root. We've brought a joint venture in the U.S., and that's grown significantly and we've got full spread of capability. And we're able to leverage that capability globally, and we've got opportunities in the Middle East to build on our existing business in Saudi. We're also in Poland and Russia, and we're in Indonesia. So really, -- and that's really OpEx facing, where they have to spend the money because we've got to keep the assets going. And like our sort of -- our niche there is being able to combine the white-collar and the blue-collar. And you get lots of companies that could do one or the other. I think we've got a proposition where you can get the smarts, but you can get the execution in an efficient way at the same time, and we're taking that model globally and it's doing very well.

I appreciate that. And as a follow-up, I do want to come back to Ichthys because I've seen your Q that the consortium on the fixed-price scope of the Ichthys power plant filed a request for arbitration. And it looks like, I guess, the next step is for the JV to file a response, I guess, here in the next few weeks. So Stuart, can you kind of talk about your confidence here in being able to successfully prevail in an arbitration on the fixed-price portion of the project? And can you give us an update on where the power plant stands today in terms of percent complete?

Yes. So again, good question. The part -- I went down to Ichthys myself in the quarter to look at the project and meet the team and just understand where it was heading. I think the first thing on the power plan is that we've agreed that those temporary power solutions that will not slow down the execution of getting this facility started up. So that's the first thing to say. The second is that in terms of where we are on the power plant and in terms of progress, and the team is still heading -- there's been a number of rework issues that we associate with that which we're working through in terms of the percent complete. It's still sort of in the numbers recorded historically. In terms of our ability to recover, we -- I mean, everyone on this call knows how U.S. GAAP works and the sort of lack of, I guess, support from third parties and law firms and legal opinions and things one needs to stake a position, and that's where we stand today with the support of our orders, et cetera. So we feel -- I mean, if this consortium walked off the job, one of the 3 partners clearly didn't want to walk off the job because they're still on it, and that's GE doing what they need to do around the equipment and the technical authority that sits behind that. In terms of the other 2 partners, we feel they completely breached their contract and walked off the job because they saw the costs escalating to a point that were unsustainable for them. And one of those companies has been sold in the process as we all know. So clearly, they were struggling. And so we feel pretty good about our opportunity to recover, and certainly, the legal opinions would support that.

And with that, we feel good that their case against us will not prevail, and we will succeed there in that arbitration against us. We think the rights point in our favor that as Stuart mentioned, they were -- repudiated the contract and the costs we incurred to complete their work will be recovered from them over time.

And now we'll conclude our question-and-answer session. I'd like to turn the call over to Stuart Bradie for any additional or closing remarks.

Thank you. Thank you for taking the time. As I've said before, it's a clean quarter, but as expected, most of the questions related to 2018, and hopefully, we've given some color. I think the business is in good shape. We've got some fantastic people doing some great work. And I think we've -- as we move forward into guidance time at the end of -- at the end, probably in February, we'll obviously give absolute clarity around what we expect in the business. But I think the main takeaway from today is that the overall '18 is -- within E&C is meeting expectation and T&C is growing and the Government Services is performing very well. So we're feeling pretty good about that and pretty good about the fact that we've won quite a bit of work in the quarter. So thank you very much for taking the time. Obviously, we'll be available for that calls later on today. Thank you.

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