KBR Inc (KBR) 2018 Q2 法說會逐字稿

Good day, and welcome to the KBR Incorporated Second Quarter 2018 Earnings Conference. This call is being recorded. (Operator Instructions).

For opening remarks and introductions, I would like to turn the call over to Alison Vasquez. Please go ahead.

Good morning, and welcome to KBR's Second Quarter 2018 Earnings Call. Joining us today are Stuart Bradie, President and Chief Executive Officer; 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 2018. After these remarks, we will open the call for questions. Please refer to our earnings presentation posted on our website in the Investors section of kbr.com. Today's call is also being webcast and a replay will be available on KBR's website for 7 days. The press release announcing our second quarter 2018 results and our second 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 that today's discussion may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and 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 second quarter 2018 earnings press release, our second quarter Form 10-Q and our current reports on form 8-K. You can find all of these documents on our website at kbr.com.

I will now turn the call over to Stuart.

Thank you, Alison, and good morning, and thank you for joining us. As you may have noticed, there was a different voice doing the introduction this morning. I would like to officially welcome Alison Vasquez to the role of Vice President, Investor Relations and FP&A. Nelson Rowe has decided take a role outside the company. He's done a terrific job for KBR over many years, and we wish him all the best.

Now if you can turn to Slide 4, safety. Good safety is simply good business and it's often a key indicator to execution performance. Execution excellence and strong HSSE performance is delivered by all of KBR's 34,000 people, all day, every day. It requires unwavering commitment, professionalism and leadership. Our execution over the last 6 quarters has been consistent and predictable with no surprises, going hand-in-hand with our safety performance.

As an example, we have recently celebrated over 25 million man-hours without a lost time injury in Djibouti, where we run the base for the Department of Defense. This represents 5 years of continuous 24/7 operations. This is quite an accomplishment and just one of the many outstanding safety performances achieved in our culture of Zero Harm. And I wish to thank all our people on this front.

Now on to Slide 5, financial snapshot. It's a really, really good time to be part of KBR. Our end markets in all segments are strong. Our execution is consistent and delivering targeted margins. Our safety performance continues to trend favorably, and we are seeing industry-leading double-digit organic growth in Government Services and a strong book-to-bill for both the Hydrocarbons Services and Technology segments.

We successfully completed the strategic acquisition of SGT, solidifying KBR's position as a leader in space exploration and opening up significant new opportunities across the commercial, civil and military sectors. For the quarter, revenues were up 16% from the same period last year, driven by 11% organic growth in our Government Services business, plus accretive revenue from our acquisitions of SGT and consolidation of Aspire.

We're pleased with our overall book-to-bill in the quarter of 1.2, with Hydrocarbons Services delivering a book-to-bill ratio of 2.6, Technology delivering a book-to-bill of 2.2 and the Americas Government Services business delivering 0.9, which is respectable given major pending awards, and more on this later.

Margins continued to be strong, performing at or above our target range across all 3 segments, generating operating cash flows of $94 million for the quarter. Combined with continued diligence on cost efficiency and discretionary spending, we're pleased to announce solid earnings in line with our expectations for the quarter. In conjunction with our strong performance in the first half of the year, we are raising our full year guidance, and Mark will walk through those details shortly.

On to Slide 6, segment highlights and outlook. Our Government Services business continues to deliver strong results across the globe, generating 11% organic growth for the second consecutive quarter, and it produced 68% of our consolidated revenue and 55% of our gross profit plus equity in earnings in the quarter. Department of Defense activity remains high. NASA's budget continues to grow. And activity on the Aspire and MFTS programs in the U.K. are ramping up.

During the quarter, we were awarded $133 million task order by the U.S. Army to provide technical and high-end engineering services to the PATRIOT missile system and earned a seat on the $900 million IDIQ contract to provide solutions under the Department of Defense's Joint Test and Evaluation Program.

We have a healthy pipeline of prospects, with over $9 billion of bids currently in [source] selection, including LogCAP V, and we expect decisions on some of these programs later this year. Although the overall government funding environment is strong, the level of our bookings near term will, of course, largely depend on the timing and outcome of the large bids awaiting decisions.

In our Technology business, we continue to experience strong demand for Gas Monetization technologies across petrochemical, ammonia and refining markets. Our bottom-of-the-barrel refining technologies are in strong demand, and we sold our second polycarbonate license this quarter, again in China, where we see growing demand for polycarbonate products.

Our technology strategy to combine our innovative technologies with basic engineering and design services, equipment, catalysts and other professional services makes KBR the partner of choice to fully support our clients in achieving their vision. This combination also provides increased revenue opportunities at very, very attractive margins. With excellent sequential bookings over the last 3 quarters, our ending backlog in Q2 is quite healthy at over $500 million, with a book-to-bill in this quarter of 2.2.

In Hydrocarbons Services, we're seeing increased activity and optimism in LNG as we head towards the 2022 supply shortfall, driven largely by demand above expectation in China. The ethylene and associated density markets are also very active, as is the specialty chemicals market in the U.S. and the Middle East.

Our Industrial Services business continues to grow, growing at double digits year-on-year, both domestically and internationally, and this is expected to continue as multiple new facilities come online and our customers look for operating efficiencies.

We're excited to announce 2 recent wins signed in July that will get us off to a good start for bookings in Q3. Nigeria LNG awarded our Bonny 7 joint venture a reimbursable LNG FEED and EPC pricing contract for further expansion of the Bonny Island LNG plant, where we delivered the first 6 trains from 1995 to 2007. And a leading producer of methanol awarded us a reimbursable FEED contract leading to EPC for a methanol plant in the Gulf Coast.

During Q2, we also announced multiple reimbursable awards from key clients. That included pre-FEED, FEED, EPCM, construction management and program management services, all of which are predictable, stable backlog in KBR and position us for the next phase of these projects.

To highlight this, the methanol plant I talked about above at the Arkema specialty chemicals facility, a refinery expansion for a Tier 1 customer we talked about last time in Texas and the Trinidad refinery project, all are expected to be reimbursable EPC projects with the exclusion of Arkema, which is a lump-sum conversion, but all are in line with our risk profile and all are expected to deliver solid revenue and stability, enabling a return to growth in the Hydrocarbons Services business into 2019 and beyond.

Across each of our segments, we're seeing continued strengthening in the markets we serve. Increasing budgets in defense and space, growing commitments on hydrocarbons and LNG investment and continuing strength in the petrochem and ammonium markets. Our recent wins across the portfolio demonstrate the quality of our capabilities to deliver complex, differentiated solutions as our clients ramp up investment and spending.

Combined with strong, consistent fundamentals and execution across our diverse portfolio of programs, we're poised to continue the momentum of securing new work through 2018 and beyond.

Now on to Slide 7. Ichthys update. In short, the second train is complete and ready for start-up is scheduled for August. This progress essentially completes the scope associated with the main facilities and leaves only the power station to complete. We continue to progress the power station. Gas turbine generators 2 and 3 successfully exported power in early July and are on track for handover to the client in August. GTG 1, the final GTG, is progressing as planned and is expected to export power in late August with a turnover later this fall.

Just to remind everyone, the temporary power generator is already in place, plus the gas turbines, will provide enough power to run both trains at full capacity. Steam turbines will be completed sequentially through to early 2019.

Our estimated cash requirements to complete the project remain as previously disclosed. Due to problems in the offshore part of the project outside of our scope, the client has advised a delay in gas delivery until September 2018.

Now I'll hand over to Mark, who will give us more granularity on the segment results. Mark?

Thank you, Stuart, and good morning. I will start on Slide 9, covering the consolidated results. Upfront, I would like to clarify in what's in the numbers given our recent M&A activity. Q2 2018 includes a full quarter's worth of the accounting for the Aspire Defense joint venture, having taken full operational control of the program back in January 15 of this year. We own 100% of the subcontracting entities that perform all of the operational roles on the program. In addition, we continue to own 45% of the prime contracting entity under the Aspire program.

As disclosed last quarter, we will report revenues and gross profits from our operational role and equity in earnings related to our 45% equity participation in the prime contracting entity.

To add more perspective on Aspire, the financial impact of the program collectively is quite significant and positive for our outlook. The underlying Aspire PFI contract goes out another 22 years and cannot be terminated for convenience by the customer unless a make-whole payment is made. So this clearly adds security to our profit streams under the program.

The performance on the program has been strong, and we do not see the risk profile changing significantly in the future. So taken together, our 2 levels of participation on the program provide long-term, recurring and predictable profit and cash flow streams, which collectively represent approximately 1/3 of the total Government Services' EBITDA and 20% of KBR's total EBITDA calculated on a 2018 basis. The program also has both inflation-based escalation provisions, plus opportunities for scope expansion with our end customer of the U.K. Ministry of Defense.

As for SGT, the acquisition closed on April 24, therefore Q2 has about 2/3 of a quarter's activity. At a high level, Aspire and SGT are performing as expected out of the gate.

And finally, our debt refinancing transaction closed also in late April, and reflects again about 2/3 of the impact of that change in our interest expense levels. A little bit more on this in a moment.

Now let me get into the outtakes of Q2 performance-wise at a consolidated level. Revenue was up measurably about $175 million, highlighted, as Stuart said, by the 11% organic growth on our Government Services business. We also had new revenue contributions from Aspire and SGT with offset as expected in Hydrocarbons Services as we complete several projects. Margins were on track with our stated targets in all 3 segments, underscored by consistent execution across the team.

Equity in earnings was down in Government due to the change in ownership in Aspire and relocation of much of the program's economics to gross profit, as I discussed a moment ago.

Nonoperating items were as expected. Interest is up considerably to $17 million. That's a result of the higher debt and the higher rates we are paying related to the refinancing transaction that took place in April, done to fund the recent acquisitions and also our proportionate share of our Ichthys funding requirements. We expect interest expense to range from $18 million to $20 million per quarter for the rest of 2018.

Taxes for the quarter were at 22%, with resulting GAAP EPS of $0.30 and adjusted EPS of $0.34. All of the adjustments we've made to GAAP were as prescribed in our original guidance we issued back in February.

Operating cash flow is strong at $94 million, or more than double net income. This was as expected, as we had high collections in the quarter, which had spilled over from Q1.

Let me move to Slide 10. Here is some more detail on our Government Services business. As mentioned, revenue spiked from the 11% organic growth performance, plus the additions of Aspire and SGT. The double-digit organic growth for the last 2 quarters sequentially was driven by 3 main factors: first, we got ongoing growth in our overseas logistics and mission support programs with higher military exercise activities that we support, plus increased outsourcing of sustainment activities by the military and also ramp-up of the new wins.

Secondly, we've had increased tasking for various missile defense and other military priorities in our engineering business area under select IDIQ contracts.

And third, retention of our base business across GS has been strong. We've won all significant recompetes so far this year.

Gross profit plus equity in earnings margin was about 9% of revenues for the quarter. That's a fairly normal level that you can expect with our current mix of business.

I'll move on to Slide 11, our Technology business. As Stuart mentioned, this business continues positive momentum with top line and profit growth year-over-year, plus another quarter of book-to-bill above 2x. Better backlog, coupled with continued quarter-to-quarter profit growth, underscores the momentum this business is producing. Overseas orders continue to be the major drivers for new business over the past few months.

As Stuart discussed, we're seeing strong demand for solutions in Gas Monetization, with combinations of technology licenses, basic engineering packages, proprietary equipment, catalyst supply agreements, which are sold together or end-to-end solutions, which we find are increasingly attractive to our clients.

Slide 12, Hydrocarbons. Much of the focus this quarter was to capitalize on the improving market conditions to win new work and importantly at an acceptable risk profile. Bookings in Q2 topped $800 million with a book-to-bill of 2.6. This included the renewal of a reimbursable service contract valued at over $500 million with greater scope that will provide growth above current levels and will provide stable and predictable profit and cash flows over the next 5 years.

When combined with the FEED to EPC opportunities mentioned earlier by Stuart, we believe our Hydrocarbons Services wins highlight our ability to capture attractive new business in a lower-risk, reimbursable format, as our market conditions are improving. This provides confidence we can restore growth to this segment in 2019 and beyond.

Moving on to the balance sheet and liquidity matters on Slide 13. As I said earlier, cash flow performance improved to $94 million by a combination of cash earnings and reduced day sales outstanding. DSOs came down nicely in each of our 3 segments, with total DSO improving from about 94 days in Q1 to 74 days in Q2. We generally expect to stay in the low 70 zone for the rest of this year, but there are opportunities for improvement as we apply greater focus in this area.

Debt increased by about $600 million, directly tied to the funding of Aspire and SGT and also for funding on the Ichthys program, which amounted to $160 million through Q2. The gross debt leverage ratio of 3.4 was consistent with our expectations coming out of the refinancing transaction earlier in Q2.

Slide 14. As Stuart covered upfront, our pace through Q2, plus recent bookings improves our adjusted EPS outlook for the year, and we're raising EPS guidance to $1.40 to $1.50. Drivers for this increase are attributable to higher performance in each of our 3 segments, which we think reflects well on the strategic transformation to build a lower-risk, balanced professional services and technology portfolio across the Government and Hydrocarbons verticals.

With that, I'll turn it back to Stuart to wrap it up.

Thank you, Mark. So on to the summary slide. For the sixth quarter in a row, we produced consistent and predictable results. Revenue growth, both organic and acquisitive combined with strong margin and cash flow performance are strong indicators that KBR is on the right track. Bookings were strong, and the market outlook across all 3 segments is buoyant.

Our performance in the first half of 2018, coupled, of course, with secured bookings for the second half and favorable market conditions have allowed us to raise guidance. 2019 is already shaping up to be a good year for KBR, assuming, of course, we continue to convert opportunities and execute well as we've been doing over the last 6 quarters.

So that concludes today's presentation. And I will now hand it back to the operator, who will open the call up for questions.

Thank you.

(Operator Instructions) And we will take our first question from Anna Kaminskaya from Bank of America.

Maybe we can start with your backlog outlook. First, touch on Government Services backlog. It was down sequentially. I think a little bit of just a small surprise given that you've been growing consistently. Can you talk about kind of the pipeline, I think you highlighted $9 billion of potential awards? How quickly can you convert it into backlog? And is it just the timing that the backlog was down? If you can just talk about the outlook for the rest of the year, and then I'll have a follow-up question.

It's Mark. I'll start with just one piece that's important relative to the backlog in GS for this quarter. Given the magnitude of business we have overseas, we did have a foreign currency hit in backlog in Q2 was about $500 million. And so when you take that out, we actually had positive bookings before that. So perhaps we could have made that clearer, so that does ebb and flow with currency rates, but the stronger U.S. dollar was the catalyst there. Relative to the pipeline of $9 billion, as you know, we have LogCAP V in there. That's a significant component. We expect a decision sometime in the second half, although it's possible that slips into next year. And we also have a couple of large bids in NASA, both from our recent acquisition and ourselves prior to the acquisition, one of which is NASA SENSE. So we've talked about that one. There are some others. And the timing of those is hard to predict, but we certainly expect some activity in the second half relative to the full $9 billion. Whether it's Q3 or Q4, it's hard to predict.

Okay. And then just the pipeline of your opportunities in Hydrocarbons Services. I think you highlighted some of the larger awards in July already. A, is it possible to quantify the July awards? And secondly, kind of how do you think about your opportunities, particularly on the LNG side? I think this is one area where everybody is excited about. Kind of like, how do you think about your ability to win awards given your risk appetite is probably not as high as maybe some of the other E&C companies?

I think the overall market, Anna, is improving, but let's talk about LNG just specifically for a second. I mean, there's no surprise that the supply demand, I guess, [lines] are now moving towards 2022 with a lot of, I guess, positive momentum in the sector. And quite frankly, our sort of risk tolerance in LNG, I mean, just to make it clear, we don't want to take lump-sum construction risk where it's a high wage rate environment that's heavily unionized with temporary labor. But outside of that, if it's in Africa or it's on the Gulf Coast, which is nonunionized and an area where we've got our blue-collar construction workforce, we are prepared to take lump-sum risk because we fully understand it. We will only do that if we're heavily involved in the front-end design and have a very defined execution plan that is properly priced, et cetera, and we'll be very consistent in that messaging. So I mean the statement around us not having the same appetite as others only really applies to places like Canada or, to a certain extent, at those high-wage rate type countries that are heavily unionized and you've got fly-in, fly-out type workforce and terrible weather. And quite frankly, taking on some risk in that environment is something that we feel is not for us. But elsewhere, I think we've got the same appetite as others. And where we feel it's appropriate, we will go after those opportunities with vigor. And we've got a sliver of them on the books today as we've talked about, things like Nigeria LNG and others on the Gulf Coast that you're well aware of. So we are excited about LNG. We feel that there'll quite a bit of work in that arena for the companies involved, which includes ourselves.

So in terms of the broader oil and gas market, I think we continue to see a lot of activity in North America. We announced COTC last time, crude oil to chemicals, in Saudi Arabia, which obviously there's quite a bit of work happening in the Middle East as well. So as I say, it's a good time to be in that business. I think we don't have any of the legacy issues to deal with outside of Ichthys, which I think is fairly well ring-fenced and, you know, is very close to the end. And so we're really in good shape in terms of being able to look at that market and are winning work in a serious fashion that -- with strong book-to-bill ratios with a risk profile that we're happy to take on. And that should give the market confidence that we can deliver the margins that we've set out to achieve and take away the typical volatility of the E&C performance.

Any way to quantify your Nigeria 7 and methanol awards in July? How much of it adds to the backlog in there?

Yes. I mean, I think the key piece there is really the -- how the position for 2019. We talked a lot about -- we talked about 3 or 4 opportunities that are going through FEED and EPC pricing today that will convert into sort of procurement and construction works as we move into '19. So that's when the uptick, that's when the growth will truly come back into that business. So I think that's the important takeaway today. Although the backlog is growing, although the opportunity set is very much in our wheelhouse, and we're delivering on that, I think the important takeaway is that position us for growth in that sector going into 2019. So I think that's the important takeaway.

And we will take our next question from Jamie Cook from Crédit Suisse.

I guess, 2 questions. Stuart, you guys have mentioned 2019 several times and obviously your backlog is shaping up to show some pretty good growth. So as you sit here today, I'm just wondering how you're thinking about your longer-term financial targets and the potential for you to actually achieve your -- the breakout potential that you outlined at the Analyst Day. In which segment, Hydrocarbon Services or Government are you feeling more optimistic about? And then my second question, just I appreciate the update on Ichthys, but any update in terms of potentially settling and where we stand relative to the $600 million in subcontractor potential recoveries?

Okay. So it's an interesting question, Jamie, on the breakout potential because right now, we feel the breakout potential is achievable in both segments. If -- with the growth that's happening in our Government Services business, we achieved 11% organic growth for the second quarter, and we've got substantial bids out there, the $9 billion pipeline and an award in something like LogCAP V that went in our favor, we would achieved that breakout case. So that's very much within reach if things go our way and we continue to perform. And then again on the Hydrocarbons side, the breakout case is really related to really sort of winning probably a fair share in the downstream sector, which we're doing and then one of the LNGs going ahead in the time frame that we're working on and I think that that's all achievable. And so that's why I started off by saying that's the way you should think about it. Yes, I mean, it's a very exciting time to be part of KBR. And at the same time, our Technology business has got...

And in 2019...

Yes. It ramps up in '19. Yes.

Okay. So we should start thinking about the breakout potential in 2019 to be clear, assuming these awards hit...

Yes, that's right. Yes. And as Mark said, LogCAP V, for example, is scheduled to be awarded in the second half of this year, but it could slip, it could be [protested] and it could slip till first quarter, early second quarter next year. And the LNGs themselves as they move into FID and they move along again could be late this year, could be early next year. But that's the sort of -- that's how we're thinking, that's how we're gearing up for that piece of the market.

Okay, great. And then sorry, just on Ichthys and the subcontractor recoveries. Any...

Yes, I mean we -- yes, no, we continue to progress discussions with the customer, but I think at this point, their primary focus is obviously to get the facilities finished, which we've all but done, and -- but they're having some issues offshore. So I think the key discussions there will be a little bit later this year when they -- even they move forward with, I guess, first production once they get gas from resolving their offshore issues into September. And then I think when they start generating revenues, the discussions around settlement obviously become a bit more positive as the facilities are running and there is cash coming in for the customer. So that's kind of where we're -- our thinking it is going at the moment. The facilities, the work has progressed very, very well. The safety performance has been very, very -- well, it's been absolutely outstanding for Australia. So, yes, we remain pretty upbeat that we will get there over the course of the next 6 months or so.

And we move on to our next question from Tahira Afzal from KeyBanc.

So Stuart, first question. I know you have 3 large -- fairly large-sized LNG projects that go to FID and contract to you, let's say, within the next 6 to 7 months, ideally $8 billion and that does not include Magnolia. So can you or Mark sort of quantify what kind of advanced payments you could potentially get from that, if that does occur and -- because I assume it will be more than $600 million just doing the math? And what that would mean for some of the cash flow outlook that you provided for the second half of the year going forward?

Yes, I think you're right. You're looking between $600 million to $750 million of advanced payments under those -- under that scenario if that is to happen. And in terms of our cash flow forecast, we haven't forecasted any of those.

Correct.

Okay. So Stuart, would it be fair to say that could help retire the debt you've taken on a little earlier perhaps and also add to your breakout scenario for next year by really lowering the interest expense?

Yes, I think that is -- of course, it's all connected to timing, but you're absolutely correct. If those LNGs progress this year and we got the advanced payments, that would change our sort of -- our profile significantly on the balance sheet.

Got it. And Stuart, how -- to the extent you can comment, I mean, obviously, the step-up function in LNG demand in terms of contracting community has been very notable and very rapid, what has that meant incrementally for [the terms] that you're bidding on going forward?

I mean, I don't think the terms themselves are really changing so much. It's just whether you want to -- like we talked before about Canada, whether you want to take that particular risk or not. And if some companies want to do that, they will, and the client will take advantage of that. But I think what it does do is it gives multiple opportunities, and I think by default, the pricing changes a little bit in the benefit of the contractor. And as people's shops get filled up, if their resource base gets busy, choices lessen, and as a consequence of that, you do better. Sometimes, it's not good to be first. Sometimes, it's not good to win the first one. And so I think -- I don't think we're seeing so much in terms of terms, but we're getting more realism in the market in terms of schedule, and we're getting more realism around the fact that funded liabilities and things like that. So it will really reflect itself in the pricing and that sort of thing. So -- but certainly, the conversations are changing, and certainly, they're becoming far more serious and heightened in terms of the belief that these things will FID and the second thing is that the level of, I guess, sort of contingency and funded liability that is built into the pricing is getting back to sensible sort of market levels.

And our next question comes from Steven Fisher of UBS.

You guys have certainly come a long way here. Related to margins, can you just help us with how much the close-out in LNG was in the quarter and maybe can you give us the sense of what the margins embedded in the Technology bookings are versus what you reported in the quarter?

Mark, you probably need to answer that.

Yes. The LNG project referred to was something where we had a performance test in the second quarter, which was the trigger for releasing that. We had already, a long time ago, in fact, received the cash on that. Net-net, which is the gross impact minus the NCI because in this case, we were consolidating a joint venture, but we only owned about 51% of it, so there is a big NCI component, it was about $5 million, $6 million impact, which -- it moves the needle a little bit on the margins, but we have adjustments like that all the time in that HS business as we undergo some of these larger projects. So I would not call that terribly unusual, and we're generally expecting margins to be pretty consistent net-net in that business over the course of this year.

And then in terms of...

The margins embedded in the, yes, Technology?

Yes, on the Technology side, we've had outstanding margin performance over the last 2 quarters in Technology, close to 30%. And with the bookings that we're receiving today, certainly underpin our guidance of going -- delivering mid-20s for the foreseeable future. And I think that's probably the right answer at this point, Steve, to say that we're very confident of delivering our guided margins in that business, which we increased from low 20s to mid-20s last quarter.

Okay. And then Mark, how high do you think that leverage is going to go before it starts to come down and when will it start to come down? Have we hit the peak right now?

I don't think so. I think as I'd said all along, we would drift a little northward in Q3 and Q4 as we tap the rest of that dedicated line to fund Ichthys. And so I think the debt number will outpace EBITDA by a little bit and will creep up. I still expect it to be in the mid-3 zone relative to gross leverage ratio. And depending on things like advanced payments and so forth that was just discussed in the last dialogue with Tahira, I think we have a shot at reducing debt in the fourth quarter, and if not, then I expect soon thereafter Q1, Q2 of next year and march down toward something like low 3s or 3 or it might even dip below that by the end of '19.

And our next question comes from Chad Dillard of Deutsche Bank.

So I just wanted to dig into your cash flows. So it looks like you raised your net income guide [by the] cash flow guide is the same. So I just want to get a sense for what are the moving parts there. Was there maybe a more expected use of working capital? And if so, would you go over that? And then secondly, on the Hydrocarbons Services side, how sustainable do you think like a 2x book-to-bill will be as we look through the rest of the year? You think you continue growing backlog sequentially?

Okay, well, I'll take cash flow, Chad. Thanks for the question. So we had a pretty rough first quarter, as you'll remember. We did indicate we expect the recovery in Q2. That did occur. We're still negative on a year-to-date basis. And so we've got to hit stride in the second half. The composition of going from where we are now, negative $35 million year-to-date to the guide is, we got about $100 million of net income in the second half ballpark and about $30 million of EBITDA -- sorry, of DA, so you've got cash earnings of $125 million, $130 million. And in addition to that, we do have some specific retentions on a couple of projects we expect to bring in, which should notch down DSOs a little bit in those sectors, plus some other upside. So we have a pretty wide range of $125 to $175 million. With the size of that range and the modest uptick in EPS guidance, we didn't think it was prudent to change the cash flow guidance at this time. But there are opportunities I'd mentioned in my remarks about ongoing DSO reduction across our business. Those efforts will remain high going forward and never stop. And hopefully, we can do real well in the second half. But generally speaking, absent the Q1 episode we have in some mostly M&A and systems conversions related things, we expect cash conversion relative to net income to be in that 1.0 zone longer term. And that's our game plan.

Okay. And then I guess, the second part was really around the ability to sustain a book-to-bill in Hydrocarbons Services of above 2. I mean, if you put it in context, if we -- if one of the LNGs goes ahead, I think that's more than achievable and would eclipse the 2 number. I think the level of activity in the marketplace and our ability to convert the FEEDs that we're doing today into the EPCs would certainly support a continuing trend of that fashion.

That's helpful. And then just going back to the $9 billion of bids in Government Services. Can you actually specify how much is LogCAP V? And then also how much you expect to receive in 2018? And whether the remainder is new bid or recompete.

The...

Yes, Mark, you go ahead.

For competitive reasons, we don't think it's wise to disclose the LogCAP V number, but it is several billion, and we'll leave it at that there. There are others in the pipeline that are sizable, including 1 or 2 that are north of $1 billion as well. So there are some needle-moving items. We're certainly hopeful that we can see some decisions in the second half on some or even all of them. Relative to just a few of those that are really big, LogCAP is a recompete, but it is an expanded recompete because the areas in which we are currently incumbent do have greater scope by the construct of the procurement, and so effectively retaining what we have and how that's come out can and should lead to a modest -- I'm sorry, not modest, but a material uptick in our revenue run rate there, and that speaks to the potential breakout opportunity that Stuart mentioned earlier given how that procurement is constructed. And then the other ones that are in the pipeline that are big are basically all new work, and so those represent significant growth opportunities as well. Of course, there are some recompetes in there in the $9 billion, but in terms of the real big ones, they are either new or expanded recompetes, which is exciting.

And our next question comes from Andrew Kaplowitz with Citi.

Stuart, obviously you had strong Hydrocarbon bookings in Q2 as you guided to last quarter. But could you give us a little more color to the conversations you're having with customers regarding large capital projects just in the wake of the protectionism stuff that's come up over the last couple of months? And maybe also refer to your Technology business, which we know has decent Chinese exposure. It doesn't seem like any of your customers are that hesitant based on your bookings last quarter, but maybe just talk about if the landscape -- what's going on in the landscape over the last couple of months given the increased volatility that's out there.

Yes, you're quite right. There's very little conversation at all in terms of Technology. The customers are not wary of that in the slightest and I think there's quite a bit of dialogue going on between the U.S. and China on IP protection, which is probably a good thing for -- in the long term for the U.S. on technology and really for doing business in China. So -- but no restrictions there at all. So we don't see any change in that market dynamic. In fact, it's picking up as we announced, particularly things like polycarbonate and some of our other new technologies, which is great. In terms of the discussions around tariffs and protectionism that's ongoing in things like steel and aluminum, et cetera, we -- our exposure to that is very, very minimal, and in most cases, in fact, all cases, it's dealt with under the contract. It doesn't change. And so if tariffs are added that don't exist today, it's a change in law or a change in commercial circumstances that we are not exposed to. It doesn't seem to be slowing down the appetite in terms of doing modules and things in China and bringing equipment in from China. It does make the local environment, however, also competitive. So it gives more options. So I mean, all up, it may put a little bit more pressure on to the cost base, but it's not putting such a pressure that it's actually causing the customers to think twice and it's just a -- it's not really sort of changing their view as to whether projects are economical or not. It's not causing that much of a change in the work that we're looking out anyway. And for ourselves, we've got minimal exposure in any sort of change of tariffs or imposed restrictions.

And then last year at your Analyst Day, you guys had mentioned that you could hit $300 million in annual synergies for larger Government Services acquisitions that you did already, in HTSI, Wylie. Obviously, it's tough to disaggregate the good growth that we've seen over the last couple of quarters, the low-teens organic revenue growth, and whether it's share gains or just the Government Services market, but how do we think about, if we could, looking back at that sort of synergy target and looking at that 11%, would you say it's more share gains when it comes down to it or is it just strong growth in the underlying market, as you mentioned?

Yes, it's -- I mean, we're very pleased with the share gains, I have to say that off the bat, but it's a combination of both. I mean, I think we've talked about the fact that a lot of what happens in Government is around what we call citable past experience. So as you layer in through the acquisitions, that certain relevant areas of expertise and past experience and that just strengthens your position in these bids. And so we do look at the collective today. There is absolutely no doubt that our performance would not be as strong without the growth and citable past experience and the technical expertise that was brought to bear on some of these bids. So I think it's really a combination of both, when we do the analysis and we look internally, we're very, very happy with, I guess, the combination and the -- where our business is positioned today. And I think that's reflective in the overall organic growth, which I do believe is above market today.

And our next question comes from Michael Dudas from Vertical Research.

Welcome, Alison.

Thank you.

Okay, so she is officially on the board. So just 2 thoughts. First, looking at -- you did indicate in your last prepared slide that you had 90% of earnings covered by backlog at the end of Q2. What's needed to get you comfortable with the full year and where you are now to your current backlog? And you did talk about quite a few good opportunities in our discussion this morning, just early on indications where you are versus other years? Since you've been there, Stuart, how you feel about cover into '19 to '20?

Yes. So I mean, what do we need to do to get the rest of the year? I think we're pretty confident in the rest of the year, that's why we've raised guidance. It's just -- I mean, that's a significant sort of underpinning of that result today. So we're not too concerned. It's really about building backlog for '19, and I think just with the levels of success we've had in recent times, we're getting, obviously, increasingly confident that '19 is going to be a stellar year for KBR, and Jamie raised the sort of the breakout case that we presented back in our Investor Day as one in Government and one in Hydrocarbons and there is an opportunity to do both at the same time. So I mean, if that comes to bear, the level of backlog going into '19 and further into '20 will be substantially different. And that being the case, it will also be just given our commercial discipline with a risk profile that gives us confidence on margin performance. And I think if we can get that right, then I think we'll be feeling pretty good about life.

And relative across your 2 major divisions, GS and HS, where you are on the labor front given that there is quite a bit of opportunity in backlog that you might be able to book, and therefore, needing to fulfill. How do you stand on from a labor hiring professional front? Are you seeing more talent come in? Is it a more competitive marketplace? Are you -- just how do you feel relative to being able to generate those man-hours to burn those revenues?

Yes. I mean, we just did an internal workshop in our Government business just around that very subject and came away very confident that we could recruit, promote, attract the talent that we need to do what's in front of us. So I feel really good about that, and we're doing similar exercises on an ongoing basis in the Hydrocarbons and remembering that the LNG piece that we're chasing, we're looking at some executed out of the U.S. and some executed out of London, so it's not all in one center. So we certainly have got 2 labor markets that are very, very mature to tap into. So again, no concerns on being able to recruit the talent and the labor that we need to do the work that's in front of us in that sector either.

I'd just add that the -- sorry, more of the work that is planned for Hydrocarbons Services projects is through increased modularization solutions through the fab supply chain in the Far East, and so that does dampen the requirements for construction-related personnel in the States or in Australia wherever the end project may be. So that shift has been very helpful relative to the supply/demand issues on labor.

And we'll take our next question from Brent Thielman from D.A. Davidson.

Mark, should this higher level of NCI sustain another quarter or with this job complete, that should mostly behind you?

This should end any real significant NCI. So that joint venture, this was really the last transaction we expect from that, and it was sizable given the nature of the ownership and the project itself. So we don't expect a lot of NCI impact going forward.

Okay. And then I guess, just understanding the moving pieces in Government backlog. What was SGT's contribution? And then can you just talk about the pace of new wins or awards in that business? Is it consistent with the core KBR franchise?

The SGT was a range of between $500 million and $1 billion just to give you a range of that in terms of how we define backlog. And that business, as you know, is concentrated with NASA relative to its customer set. That customer funds incrementally and also is a heavy user of options on their projects as well. So under our definition, again between $500 million and $1 billion. But in addition to that, their book of business includes well over $1 billion of unexercised options that we consider is a book of business. And based on their track record, they've got an excellent ability to ultimately convert those to revenues. So through a combination of the strong backlog under our definition, plus the very significant options, we have great visibility in that business.

And we will take our final question from Jerry Revich of Goldman Sachs.

This is Corinne Jenkins on for Jerry Revich. You highlighted an award in the Hydrocarbons Services business for increasing sulfur derivatives. Is that associated with compliance with the IMO 2020 regulations? And can you talk about how you're thinking about the size of the opportunity for maybe that -- or if you feel like there is a sizable opportunity there?

Yes, I mean, there's -- certainly the new maritime laws that are actually driving the reduction in sulfur in maritime fuel, as you're well aware. And we've got a number of technologies that really enhance bottom-of-the-barrel production in line to meet those legislative changes. So we're seeing a lot of activity in our Technology business associated with that change. And we're seeing, I think, quite an increasing opportunity to modularize that technology. So really expand, as Mark said, the end-to-end solution associated with that. And we see that continuing through into next year. So I think high in demand and continuing to be in demand.

And this concludes today's conference. Thank you for your participation, and you may now disconnect.