KBR Inc (KBR) 2018 Q3 法說會逐字稿

Good day, and welcome to the KBR Inc. Third Quarter 2018 Earnings Conference Call. 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 thank you for joining us for KBR's Third 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 highlights from the third quarter, the market outlook, our financial results and the company's earnings expectations for 2018. After these remarks, we will open the call for questions.

Today's earnings presentation is available on the investors section of our website at kbr.com.

I would like to remind the audience that this 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 our press release, Form 10-Q and current report on Form 8-K, all available on our website.

I will now turn the call over to Stuart.

Thank you, Alison. Good morning, and thank you for joining us.

I will start on Slide 4. As you can see, our safety performance continues to trend well. What you don't see is the huge level of engagement and commitment required to deliver this performance.

Our Zero Harm and Courage to Care programs have been embraced by our people across the globe, and I wish to thank them for being vigilant day in, day out. As we say at KBR, good safety is simply good business. Which takes us nicely on to Slide 5.

The graphs tell the story. It's a great time to be part of KBR, and our strategy is delivering across all our key metrics. All our end markets are strong, and our opportunity pipeline is significant. More of this later.

Third quarter year-on-year revenue growth was a pleasing 24%. And this was underpinned by 59% growth in our Government Services business. And please note, 12% of this growth was organic, which we think is industry-leading.

Technology continues to outperform: great margins and cash conversion, and year-on-year organic growth of 35%.

In Hydrocarbons Services, we delivered good margins. There were no surprises, no execution issues, and in fact we handed over the final U.S. legacy lump-sum project in the quarter and reached mechanical completion on a lump-sum EPC project in Europe, both slightly ahead of budget, benefiting from execution improvement initiatives we put in place after 2016.

Our Ichthys joint venture had a very favorable ruling, which derisks and gives clarity and significantly reinforces our confidence and our position on reimbursable costs, more on this later.

EBITDA was up 44%, which demonstrates not only good execution, but continued focus on cost control and margin enhancement. Cash conversion across the company was 1.2% in the quarter, which is a reflection of the greater mix of low capital intensity, professional services and technologies, a core element of our transformational efforts.

Backlog at the consolidated level was up significantly year-on-year. But importantly, the book-to-bill for the quarter was 1.1, underpinned by strong bookings in Government Services and Technology.

In Hydrocarbons, our backlog has been steady over the past 5 quarters, as we work off legacy projects and replace these with more recurring revenue type projects. And we show this in the appendices.

The quality of earnings and associated cash conversion of the current backlog combined with the longer-term nature of the contracts, record backlog in technology and stable Hydrocarbons backlog gives KBR a solid platform as we head into 2019. And if you layer on the tailwinds in our market, the future is bright. So all up, a very pleasing quarter that keeps our momentum going.

On to Slide 6, the market outlook. Government spending in areas conducive to our service offerings continues to be very, very healthy. Our opportunity pipeline continues to grow, and we are seeing an increasing trend to best value selections and for scope and services to be bundled together and let under one contract. This of course favors scale but also broad capability, and this is good for KBR.

As a result of these trends and the capabilities portfolio we've built, we have substantial additional growth catalysts across the Department of Defense, including the LogCAP V, which has been delayed until April 2019, and we have substantial opportunity in the space community including NASA.

Internationally, our performance has been above expectation with our business in Australia growing significantly. And in the U.K., underpinned by the large PFI contracts, we are going earnings nicely from an already significant base.

The demand for our technology continues across the globe. This is driven by changing maritime fuel regulations, global demand for fertilizers and the ongoing increased activity in the downstream sector.

As previously presented, we have 3 proprietary first-of-a-kind technologies, all have commercial-scale plants under commissioning or in early stage operation and plus, we're the only independent licensor of polycarbonate technology. This all places us nicely for future expansion.

In Hydrocarbons, our OpEx-facing business which focuses on Brownfield Services and maintenance including Brown & Root is also seeing double-digit growth. With many new facilities being built particularly in the Gulf Coast, the outlook remains very, very positive.

The CapEx side of the business continues to gather momentum with LNG and downstream, including specialty chemicals, the pipeline growing across all 3 from the beginning of this year. As you know, backlog growth can be lumpy, but we are well positioned on a number of LNG, chemicals and downstream projects that will FID into 2019.

Our near-term pipeline is circa $38 billion today, and this is broken down to submitted, awaiting decisions and bids under preparation in the pie charts.

On to Slide 7, Ichthys, our last legacy project. So an update, on the main facilities, both trains are now handed over as are all the associated packages et cetera. The customer has announced they've produced first LNG, and the official opening is scheduled for November, so really good news there.

On to the CCP power station. We have now done the final estimate to complete, based on more rework we've discovered to fix the poor quality of the original contractor, taking into account current productivity trends and the fact we're now working with a live LNG plant next door. This has resulted in some schedule slippage and of course, associated cost growth.

We have dealt with the modest P&L impact of this via dilution et cetera this quarter, so no issue there. This does mean, however, we will need to send some additional cash, which again we can manage and Mark will walk you through this later.

The 5 gas turbine generators are now with the client and handed over, which leaves the 3 steam turbines to complete. Mechanical completion is scheduled in circa 9 to 10 weeks, and then we'll move into a commissioning phase which will finish in Q2, 2019.

So we will be de-manning as we head into the year-end, with a small commissioning team continuing into 2019. So in short, we have a clear line of sight to the end.

As I mentioned earlier, there was another important development recently on the Ichthys project. Earlier this month, JKC, our joint venture received a very favorable ruling via arbitration which is binding, related directly to reimbursable costs that were being contested by the client. This significantly derisked this portion of unapproved change orders and JKC will be seeking a contractual change accordingly. We have full disclosure of this in our 10-Q, which we filed today. The CCPP arbitration has been set, both for merit and quantum for early 2020.

So greater certainty on Ichthys with LNG being produced, a clear line of sight to the finish of the power station, the favorable ruling resulting in a derisking in the quarter and firm dates for the CCPP arbitration.

Now I'll hand over to Mark.

Thanks Stuart. I will pick it up on Slide 9. First upfront, let me remind you of a couple of things. First, Q3 includes a full quarter for SGT that we acquired in late April 2018. Additionally, due to the consolidation of the subcontracting entities in the Aspire Defence program in the first quarter of this year, just be reminded that earnings of those entities previously recognized through equity and earnings, are now reported through revenue and gross profit. So now let me move on to the numbers.

Q3 2018 financial performance was favorable, where we achieved at/or above expectation on all fronts.

We are particularly pleased with the double-digit consolidated top line revenue growth for the second consecutive quarter, and also on a year-to-date basis. This has been driven by continued double-digit organic growth by our Government business in each quarter this fiscal year, including 12% organic growth for Q3.

Our Technology business has been driving our overall growth results as well with double-digit organic growth rate on a year-to-date basis, and 35% organic growth in Q3. The overall revenue growth has translated nicely to earnings growth with strong margins across each of our 3 segments all year including Q3, which we attribute to execution by our employees, portfolio moves made as part of our transformation and healthy market conditions.

Our base margins in Government are now targeted consistently in the upper single-digits, enhanced by about 1/3 of its profits coming from international sources, which run at a higher margin than our U.S. sources. Government margin in Q3 of about 10% was also boosted by 1 percentage point from favorable project close-outs.

Technology continued its strong momentum with growth across its offering base and with margins at 28% above our guided targets. We're seeing an expansion of project contract values in line with our strategy to package or bundle our license technologies, our engineering services, proprietary equipment and catalysts together as a complete solution.

For Hydrocarbons Services performance was in line with expectations. We particularly like to highlight the strong performance of our Brown & Root Industrial Services joint venture, which is continuing to grow and deliver profits well above last year's results.

Additionally, as Stuart mentioned earlier, we achieved significant milestones during the quarter on 2 lump-sum EPC projects, both having favorable impacts to Q3 results.

G&A was flat quarter-over-quarter, and due to timing items was less than the normative rate we would expect going forward. The normative spending level is in the low to mid-$40 million range per quarter, so take that into account going forward.

Nonoperating items were largely on track, whereas our tax rate of 28% was higher than our normative rate. This was due to new guidance received this quarter from the IRS from last year's tax reform act. The impact of the new guidance limits our ability to offset taxes on international operations with foreign tax credits. And with our mix of international business, we see this increasing our annual effective tax rate by 1% this fiscal year. The effect was higher than 1% in Q3 as we had to catch up on a year-to-date basis.

Despite the incremental tax expense, we still delivered strong earnings and execution across the business. GAAP EPS was $0.41, and adjusted EPS was $0.46. As expected, we continue to make progress on operating cash flow bringing in $72 million of net inflows for the quarter or 25% above our net income level.

Moving on to Slide 10. As highlighted here, our quarterly revenue and profit margins are trending nicely, and earnings are highly correlated with revenue levels. This is consistent with our strategy to increase our exposure to more attractive markets, and increase mix of recurring professional services and technology-based offerings. And as we've said and recently demonstrated, this strategy enables selective pursuit of strategically aligned lump-sum EPC projects going forward.

In Government, recent profit growth is attributable to our greater role on the Aspire Defence program in the U.K., the addition of SGT and also double-digit organic growth and healthy margin levels in each quarter this fiscal year.

Technology continues to deliver double-digit growth and has exceeded our targeted mid-20% margin level each quarter this fiscal year.

For Hydrocarbons Services, there's been more revenue volatility with project completions and adjustments. Profits have tracked within our target expectations.

The performance of our joint ventures in this segment, particularly as I said earlier, with Brown & Root Industrial Services and also other international joint ventures has registered strong performance throughout this year and contributed more consistently to profitability.

Now on to Slide 11 and some capital structure remarks. Our financial position is tracking as expected with debt increasing as we fund our portion of the final stages of the Ichthys project.

The strong growth in EBITDA outpaced the additional leverage and fueled a downtick in the leverage ratio this quarter, which is comfortably in the targeted 3x to 3.5x zone we set coming out of the refinancing transactions done earlier this year.

As Stuart mentioned earlier, we expect to incur additional estimated cost to complete Ichthys.

As a result, we are increasing our estimated cash investment to the joint venture by $100 million to carry us through the completion date in Q2 of next year.

As we have consistently disclosed, we ultimately expect significant cash recoveries in future periods as we go through various negotiations and adjudication processes.

The favorable arbitration ruling we received in October further bolsters our confidence in resolving these matters with the client in a manner consistent with how we have reported. There's plenty of headroom in our credit agreement to accommodate all of this, and that assumes we do not receive any recoveries in the interim.

We also executed a swap transaction to fix rates on $500 million of debt. We did this in October to mitigate variable interest rate risk. This represents a fixed to float ratio of 43%.

Now on to Slide 12. And as Stuart tipped earlier, our recent performance and earnings growth momentum allows us to bump up guidance that we increased back in Q2. Despite the impact of the increased tax rate, we are now guiding to an adjusted EPS guidance range of $1.45 to $1.55. The guided cash flow range of $125 million to $175 million is unchanged.

With that, I'll turn it back to Stuart for closing remarks.

Thanks, Mark. On to Slide 13 and to wrap up today's presentation.

As I said in my opening remarks, this is a great time to be at KBR. We have solid momentum, a line of sight to year-end and a very healthy backlog and more importantly, a strong associated quality of earnings and cash conversion outlook into 2019 and beyond.

Our Government and Technology businesses are growing above market, and our Hydrocarbon business is performing well and poised to take advantage of the market upswing.

All our end markets are buoyant, and we are delivering without negative surprises or material write-downs. Our new business pipeline is significant and supports continued growth expansion. We are again increasing our EPS guidance.

I will now hand back the call to the operator, who will open it up for questions.

(Operator Instructions) We can now take our first question from Tahira Afzal of KeyBanc.

I guess first question is, if you look at all the moving parts and the timing of some of your outsized LNG awards, Stuart, how much of a confidence level do you have that by the time you report fourth quarter, you will have announced 1 LNG project in your backlog? And if so, are you still of the opinion that you could as a consequence start to see your breakout scenario for oil and gas really emerge into the second half of '19?

Yes, I think, to your timing, it's tricky. I mean it's not really within our control, as you know. I think we're -- I think the important thing is to look at the size of the pipeline, and I think that the market well understands the projects we're following and where they sit. I think if it doesn't happen pre the end of the year, it will happen as we move into the early part of '19. And we're -- we were feeling pretty good about that. And I think that the other piece to note here is that, we're actually achieving our breakout case essentially in Government Services without the award of LogCAP V, and that's now moved to April. And we're achieving a breakout case in Technology that we didn't think we would be achieving. So it's an interesting question on the one area where we're not achieving the breakout case today. But certainly, I think the market is there to support that. And I think the pipeline of opportunities that we showed you in the graphs and the pie charts support that.

Yes. And Stuart, just on -- and maybe this is more for Mark, but just on Ichthys, the $100 million for me is a little high. Can you put that into perspective? Have you built a bit of a cushion into it? And how much confidence do you have, more so because our history of power plants and how the end has essentially been a little mixed?

Let me talk about the power station, just where we are in that process, and Mark can talk about the cash element. So you're quite right Tahira that the industry is -- there's a lot of gravestones in that graveyard that say power station on it for companies. And we lived that as you know, through Marshalltown and others back when I first joined KBR. I think we've got -- we've gone through the scars that we've had in that history. We're pretty clear about where we are in this execution process. As I said earlier, we are heading to the finishing line. The 5 gas turbines are handed over. We know exactly what we've got to do. We're well -- on the steam turbines themselves, we are well over 90% complete in construction and we've got a clear line of sight to the end. So we're -- I'm pretty confident in terms of where we are in the construction phase. I'm pretty confident that we've got the right productivity numbers in there, based on what we're actually achieving today. So we're not looking at acceleration of doing better. We've actually forecast this in that manner with the appropriate sort of weather risk and LNG sort of live plant risk just causing delays. So that's why we've bumped it out a full quarter because we think the commissioning will take longer just because of the -- it is a combined cycle we're commissioning and we understand that fully from our Marshalltown experience. So I think we've got the right people there, a lot of them from Marshalltown. We've got a clear line of sight to the end. So I'm feeling pretty good about that forecast. And I'll let Mark just talk about the cash.

Tahira, a majority of the $100 million is the cost or estimated cost increase as Stuart just mentioned to finish the power plant. So we feel comfortable with that estimate. The remainder is actually -- what we didn't expect was the client applied some offsets and effectively required us to pay the LDs this quarter, which we otherwise would have expected way down the road in an ultimate resolution of one kind or another. And quite frankly we would expect that to be a net inflow for us. So that was the difference between the cost estimate on the power plants and the remaining part of that $100 million. We know we'll search -- try to get that back in some way or the other, but it's prudent to lay that out there as an expectation to the market. And of course, I mentioned that we assume no other recoveries relative to amounts due us until we go through the litigation process or settlement process. So we think it's a prudent and conservative number at this time.

We can now take our next question from Jerry Revich with Goldman Sachs.

Can you hear me?

Yes.

Okay, perfect. I am wondering if you could talk about, as we head into '19, how the timing around major project opportunities have shifted? I guess we're hearing from a number of LNG operators that are potentially moving forward towards FID faster than we would have thought, just 3 months ago. Can you just talk about what you're seeing in the marketplace on LNG specifically? And across other energy projects?

Yes, I think similar. I think there's -- Magnolia came out and actually said they were delaying FID as the -- over the last couple of days. And still very confident they're going to achieve it, if you listen to what they say. But that's moved to first quarter '19. Others are coming forward. I think there is a recognition in the marketplace that as the market heats up, the first to get going, get the best pricing. And get -- probably get the best people and that sort of thing. So I do think that there is a drive to move forward reasonably quickly. But again I would just -- I would take you straight back to the pie chart and just look at the pipeline of opportunities that is coming through. And it's the number of projects that we've tendered and the number under preparation which will be tendered in the next month or so or couple of months. It's a substantial volume. And if we win our fair share of those, I think we'll be in really good shape in both Government Services in terms of looking at growth going into next year, but also in Hydrocarbons Services in terms of that backlog picture. So we're feeling pretty good about that.

And can you expand, within the Government Services opportunity set? How much of what's in that bid pipeline is core in terms of the existing portfolio, versus what are some areas in terms of how big is the opportunity to expand into new capabilities that have not been part of the KBRwyle portfolio in the past?

Yes, so there's a number of those that are right in our wheelhouse like LogCAP V and obviously, a number of NASA bids that we -- that are circa a billion dollars that we've got ongoing today. But I would just add, we've -- it's been announced not by us but by the customer that we've been successful in a bid recently called POTFF, which is -- it's really to do with human health performance around the special forces. And we took really the work that we're doing with NASA on a human health performance contract, and combined that with our relationship and understanding of the Army, and put that sort of side of our past experience together in 1 bundle together with, obviously, the technical skill sets, whether that be on the psychological side or the medical side. And pooled that all together and we've just been awarded that. Which is circa $500 million. And that's an absolute slam dunk synergy win. That's a takeaway. It's new business for KBR. It's a complete part of our growth story. So I think there's a combination of both in that space. And I think we're proving that out with the wins that we're securing.

(Operator Instructions) We will now take our next question from Jamie Cook of with Credit Suisse.

I guess my first question, Stuart, to you is more of a strategic one. Obviously, you saw that Jacobs announcement to sell their energy, chemical and resource business to Worley. I think the multiple that they got was pretty good, and it was sort of a business model that you were shifting more towards, more sort of OpEx versus CapEx or lower risk. So in that context, how do you think about the strategic importance of the Hydrocarbons Services business given the multiple that Jacobs just received? And then my second question within Hydrocarbons Services. When you're looking at some of these big LNG projects or petrochemical projects that are starting to move forward, we're hearing contractors getting concerned about labor constraints or ensuring that they are going to sequence the projects correctly. Is any of that concern out there changing sort of terms and conditions of these projects? Or is it still too early to get that constructive?

Yes, Jamie. The -- yes, on the services side of the business, that's grown very nicely for KBR over the last few years as you're aware. And as Mark alluded to, it's -- or not alluded to, stated, the double-digit growth in that side of the business. So I think it's -- I think what it does do, is it prevents -- it presents a remarkable firm base for KBR and allows us to have predictable earnings and be very, very selective. As we've always said that, I guess, we are more in the LNG club than Jacobs or WorleyParsons, and certainly on that big project side our reputation and our capabilities are a little bit different. And so I think that we -- it allows us to really, sort of, get a firm baseload of work strategically focused on key pursuits that we feel are of the right risk profile, or we can negotiate the deal, or it's our technology et cetera as we said all along. So I do think it's very, very important. As you've seen with the Jacobs transaction, it's very, very sort of valued in the marketplace in terms of where it sits. And it should be a very strong cash generator in albeit a lower margin business, but lower risk. So I do think it's very important. I'm very pleased that we've managed to grow that bit of the business very well. In terms of resource constraints on larger projects, I think it's too early to call. I think people are -- it's interesting how the market shifts. A few months ago it was oh goodness me, people were letting go people. And now things are changing and people are getting concerned about resources and probably rightfully so. But as we know Jamie, the predicted FID dates never happen on time. They tend to slip and so I think it'll be more staged, and I think we'll watch that, obviously, carefully. But I don't think it's going to be constrained to KBR in terms of ramping up on those projects.

We can now take our next question from Michael Dudas of Vertical Research.

Looking at your book-to-bill numbers and terrific organic revenue growth in Government Services, which has been above most any other of your peers in the space. Maybe how -- some of the success, I know that $500 million project is probably part of it. But to have that type of growth, and how could we look at, when you look at the book-to-bills and the revenue opportunities going into 2019, as you start to anniversary SGT in Aspire for the level of organic growth seeing now that business going into '19?

Yes, Mike. The -- I mean, that's why we call it out. We don't just look at the actual growth in Government, we actually call out organic growth, sort of, from one year to the other based on the, sort of, apples-for-apples comparison. So I think the organic growth is terrific, and that's why we called it out. It is industry leading. So I think that's one point. The second, the POTFF bid I talked about has just been awarded. It's part of the future, it's not part of the past. So again it will sustain that growth as we move forward. Mark, anymore?

Well I think I'll build on one of the previous questions as well. And Stuart alluded to this, the synergy opportunities are really piling up. Stuart mentioned the POTFF opportunity, which is providing health and human performance to the special operations. We announced the Identify Friend or Foe opportunity that we have won with a foreign customer, which I think is a synergy with our commercial business and our geographical presence. We also are working on something pretty substantial in the Middle East on the government side through our U.K. positioning and others. And so all those and others including LogCAP V and some of the things we've talked about in NASA, which are to some degree bundling of procurements and teamwork across SGT, Wyle and HTSI are very sizeable opportunities that could really move the needle in book-to-bill in future quarters. And much of that is incremental growth opportunity. Some of it is all incremental growth opportunity such as POTFF, such as IFF, such as the Middle East opportunity and some of the NASA stuff. So we're running well with the current base of business we have in our global positioning across all elements, so SGT is contributing. We don't include Aspire growth in the organic calculation because it's a little distortive, so we look at our logistics business, our space business, our engineering business and even Asia and Europe are driving elements of that 12% and have done so all year.

But I think the final piece there is really LogCAP V as well, which we did expect to happen sooner and it's now been confirmed to be awarded in April. And the -- I guess the growth opportunities surrounding that 1 contract is significant.

Duly noted. And my follow-up, looking at current budget going into 2019, a lot of bills have been passed for release and such. Do you get the sense that the customer base DoD is feeling comfortable about driving forward with spending and getting and letting out award and opportunities for you? And is that providing opportunities to help maybe bundle and get some of these new innovation of your -- putting your -- running your skill sets together to win that new type of business with that increased confidence level from DoD?

Yes, no, absolutely, Mike. The -- and I think I said that in my remarks, that we're seeing that change. There's more bundling of procurement. There's more best-value awards. And this really -- it really plays to our sort of breadth of capability and scale in the areas where we play. So I do think it's -- it really, sort of, sits well for KBR going into '19.

We can now take our next question from Steven Fisher of UBS.

Wonder if you could just talk about and clarify, what the cash impact of the favorable ruling is related to Ichthys on cash flow? It sounds like there might be some puts and takes here with $100 million above the $322 million of the ruling? And then, I guess, related but separately, what drives the ramp-up in cash flow in Q4?

Okay. Steven, it's Mark here. The favorable ruling, I know it's a fairly complex, but this is why we've provided a very robust disclosure in our 10-Q. Within the unapproved change orders of roughly $950 million, to round a little bit, we disclosed in this morning's Q, hopefully you've seen it, that about $330 million of that number pertains to, directly to this decision. And we've already received that money. So this decision affirms our confidence that we won't have to pay it back. And so that was a risk that is mitigated, and there are -- there's probably some other minor change orders out there that may be collectible as a result of 2.6.3. But I think the main takeaway is, we have already received that money but is not a threat, relative to having to refund it as was stated in the deed of settlement also laid out in our disclosure. So hopefully, it clarifies that. Relative to the cash flow for the fourth quarter. So we are sitting at $35 million positive year-to-date. Q4 net income, ballpark, is about $50 million. We expect to convert that on a one-to-one basis. We also have somewhat, I would call pent-up dividends from our joint ventures. We have not received much in terms of cash from our JVs all year. We expect to change that in the fourth quarter. That's a double-digit number. We also have a retention, pretty significant one, due on a Hydrocarbons Services project that we expect to collect in the fourth quarter. We were hoping to get it in the third quarter. Didn't quite happen. And then we also have a government settlement that we expect in the fourth quarter. So all those things piled on to the year-to-date number plus the cash earnings in Q4 get us comfortably in the range.

Great. And then can you talk about the trajectory of government margins from here? Will NASA mix increase materially over the next year? And if it does, how would that affect overall margins? Or are there other pieces of the business that would be growing to, sort of, offset that potential mix headwind?

Yes, I think there's other bits that are going to offset that, Steve. And I think, we are -- we sort of said high-single digits, mid-to-high single digits going forward. And that might tick down a little bit going into next year. But it's going to be in that ballpark.

We can now take our next question from Chad Dillard of Deutsche Bank.

So I just wanted to dig in to the T&C business. Can you talk a little bit about the project pipeline, what you're seeing there? And in particular, how much of that business comes from China? And what are you seeing and if you're seeing any change in confidence for capacity additions in that part of the world?

So I guess first -- last part first. We're seeing no change in confidence in that regards, no slowdown in activity. Our pipeline today is at record levels. We do, do quite a bit of business in China, as you know. But we also -- I mean the Technology business by its nature is global. So we've done 4 ethylene licenses this year to Korea, for example. So I think it's firing on all cylinders. We're excited about the new technologies that we're bringing to market. We are excited about our polycarbonate technology. It's returning very, very good numbers for us. And so I think all up, we're not seeing any slowdown. In fact, there seems to be momentum behind that market. And particularly, with the changes in maritime fuel and things like that it's going very, very well. And we're seeing absolutely no slowdown. It's actually going the other way.

Got it. And then over to the Hydrocarbons Services business. So you have about $20-odd billion in your project pipeline. Could you break out how much is LNG versus other oil and gas? And then what's your confidence level in being able to grow backlog through the end of this year?

So I'm just trying to look at it. It's pretty clear, majority is LNG. There are some downstream petrochem projects there in areas we've talked about in the past. But you can say that well above 50% is clearly LNG in projects that we have talked about over time.

And I think the other piece to that is that we have secured projects that you're aware of. Things like the Methanex project that the main EPC component is not in backlog yet. The [Akima] specialty project -- chemicals project, the EPC is not in backlog yet. And bills will convert into backlog as we move into '19. So we're feeling pretty good about some of the non-LNG components as well. But Mark's quite right, that I guess, there is a number of needle movers there in the LNG side, just by the very nature.

We can now take our next question from Lucy Guo of Cowen and Company.

Follow up on the earlier question on Government Services. Mark you gave a host of new opportunities and potential existing opportunities. I was wondering if you can help us quantify roughly, in your $13 billion pipeline, plus $2 billion to be submitted, what's the new business and takeaway mix versus recompetes?

Well, Lucy, first thank you for joining the call. It's a pleasure to hear your voice. We have pretty -- been pretty open that the largest single item in the pipeline there was the LogCAP V opportunity. And as you, I think, well understand that would be an expanded recompete opportunity. So it's a mix of sustaining business and incremental business due to change in scope and the structure of that procurement. So that's a mixed bag. The next biggest one that we have not quantified other than saying it's over a $1 billion, is a large NASA opportunity that would be all incremental work. That is a -- I would call it command-and-control or even a C4ISR related opportunity that you probably have heard of. And the others are -- we do have one pretty big recompete with the Marines under pre-positioned stock. That's north of $500 million. And we're working on a couple of opportunities I mentioned that are not in the U.S. to include a U.K. and a Saudi opportunity that are in excess of $500 million that are all incremental work. And so just scanning down the list, I would say that a majority -- a good 50% plus of this number is growth opportunity incremental to current scope.

Yes. And if you layer on POTFF, which we've already secured and the Kennedy BOSS award which we won last quarter, which is under protest and that protest is -- we'll hear about that before the end of the year. So -- and both of those are complete takeaways.

So it sounds like in your pipeline, the mix of new business is probably more than what's in your existing funded orders and your current revenue profile?

I think excluding LogCAP V, that's absolutely correct.

Right. So in terms of excluding LogCAP V, do you -- so it sounds like there's maybe one other large recompete that may be coming up in 2019? Or what -- how would you calibrate the recompete risk outside of LogCAP in 2019?

So our current recompete win success rate is above 95%. So we're feeling pretty good about that. It's a very, very strong focus area for us of course. And so we're -- I guess we feel good about it.

Yes, and I would say that recompete is in our logistics business. That has the strongest recompete success rate across our different business units within our GS business. It's a very strong team, very impressive team.

We can now take our next question from Brian Ruttenbur of Drexel Hamilton.

So I have couple of questions around the Government Services, on the macro side. Just wanted to hear your opinion on government budgets going forward and the sustainability of your growth. So it appears that people are talking out there -- from other conference calls, they're talking about fiscal '20. '19 seems to be relatively set. But I wanted to hear what your -- you have to say. And I think that a lot of the questions so far have been, how sustainable is your growth. Let's just say you get LogCAP, and we're trying to figure out how fast the industry is going to grow because you're way outpacing the industry growth. So if could address the macro and then get into some of the detail?

Okay. So I think you're quite right. 2020 is a little bit uncertain just because of the political situation today. '19 is very firm. We do have a number of, what I would call, critical programs within our portfolio that probably will not be affected by any slowdown, and those will continue. And I would also point out that out of our Government Services business, circa 1 billion dollars of it is overseas and got nothing to do with the U.S. political situation. And that part of the business is delivering the highest margins. In fact, we've talked about this before. The Aspire contract in its own right makes up about 30% of our Government business today. And that -- the margins and the return of capital associated with that are very, very attractive. And that is growing and doing very, very well. So we're seeing good growth in Australia, a double-digit growth. We are seeing a good growth in the U.K. business. And as Mark said earlier, some significant opportunity coming through into the Middle East via the Ministry of Defense. So quite -- we're feeling pretty good about the sustainment of that growth, but you're quite right, there are -- there is -- there are uncertainties around the 2020 funding.

And another thing, I think the key is to win as much as we can in the next 12 months and get that under contract and get programs under our wing. So we can ramp-up, hopefully, as new projects during '19 and '20, having those in the portfolio. And then focus on cash flow generation and deploying capital thereafter. A model that's been very successful in the GS business as you've seen over and over again.

So just as a quick follow up on that. Do you read anything into the delay with LogCAP V? It's gotten delayed several times. I know that you're already on LogCAP, but I didn't know if there was any reason that you could give on the logic on the delay out to April?

I just think it's a big complex change for the Army and it's they're just working through their processes, which are at times bureaucratic. So it's -- with such significant change and scale, and clearly that's what's causing the delay. I don't think there's anything sinister or going to change around it. So we -- I think that's all it is.

Okay, and then...

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We can now take our next question from Bill Newby of D.A. Davidson.

Just a follow-up on the Technology business. I guess another great quarter of margins there. I guess one, just -- is there any more color on what's allowed you guys to outperform that target you set initially this year? And then two, given the momentum you guys are seeing, is there any reason to think that that's a sustainable number? Is it still prudent to think mid-20s is the right number going forward?

Yes, it's -- yes, I think the -- we have been a bit surprised by the performance in the margins, but I do think, it's actually a combination of 2 things. One is market forces, obviously, with the heightened activity in the market, you can do a little bit better. But also I think, it's the introduction of some of our new technologies which are pretty unique and leading the pack in certain areas that's allowed us to perform at those levels. We do still think mid-20s going into next year. We'll look at that as part of guidance, as we get to our budget process next year and just what's in the hopper. But we don't see a slowdown there in the slightest, and I think the beauty of that business is not only the margins, but the fact that it's negative working capital. It's a terrific business. And the faster we can grow it the better as far as we're concerned. And I think we've got a strong platform to do so. And I think we've got a technology portfolio to do so, which is just as important of course.

I appreciate that. And then, I guess shifting over to hydrocarbons. And just another follow-up on LNG. I guess, just as you're in dialogues with customers and that -- they're looking at FIDs. How much weight are these guys given to all this tariff noise that we're seeing with China? And I guess, is -- or do see any projects that could be pushed due to that kind of risk? And how are these guys thinking about that?

Yes, it's interesting. Magnolia did come out and say that they are struggling to close deals with Chinese off-takers. However, I think there's a fantastic opportunity now and you saw this with Germany more recently in fact, this quarter, basically opening up for LNG imports. So I do think there's probably a higher demand from Europe than expected. And I think that at the end of the day that when you look at companies like Venture Global, their off-takes they've announced are with people like Shell and BP and into Repsol in Spain et cetera. So I do think that there are other avenues for LNG off-takes that we're seeing. And of course, the big traders, I guess the big names in LNG trading are not worried too much about that. So I think ultimately, we are not seeing really any negative impact of tariffs at the moment. We are watching it, of course, very carefully.

We will now take our next question from Alan Fleming of Citi.

Stuart you talked about the Brown & Root joint venture a couple of times in your prepared remarks. Maybe you can just put a finer point on what you're seeing in that business? How much of the growth there, the acceleration is kind of market-driven versus you're just putting more of a focus on that business?

Yes, both is the answer to the question. And it's global rather than just in the Gulf Coast. But just talking about Brown & Root itself, which is focused on the -- in the U.S. and predominantly headquartered in Baton Rouge so around that part of the world. We've grown that business significantly from circa about 6,000 people when we put that joint venture together and it's up nearly 11,000 people today. So I think there's been a real sort of focus gone into that business by creating the joint venture and creating an overhead structure that's right for that type of business and allowing it to flourish in an empowered manner. So it's been a highly successful transaction. At the same time, we're seeing shifts globally. Our business in Poland has grown 50% doing industrial services throughout Europe. I was there over the summer, and that's an absolutely terrific business with a technical quality that's unsurpassed, in truth. And our business in Russia is doing very well. And one of the businesses really doing -- outperforming well is the one in Saudi Arabia. Where we work for an integrated refiner there in really the first true outsourced maintenance program, and we see significant opportunity because we're saving -- we think we're saving them money by the outsourcing process, and of course, there's a lot more cost pressure and a change happening in the Middle East around that. So I do think there's opportunities for that business globally to really become a global onshore maintenance provider, which as you know is in essence is I think a bit of white space that we want to move into and one we're going after aggressively. So I think it's a terrific business. It gives us longevity of contract, strong customer relationships. And that services model allows you to be in the middle of things as plant expansions and CapEx starts to get spent again. So it is a very important part of the business and one that we are very, very pleased with to date.

Okay. And Mark maybe I can follow up on the favorable settlement on the unapproved change orders. What does that mean for the balance of unapproved change orders for you? I guess your -- it will be around $600 million if you move those, that $330 million from unapproved to approved. Does it -- does that balance, kind of, more or less sit here until there's a ruling on the deed of settlement or the arbitration with the construction consortium on the power plant? Or can it also kind of continue to bleed down as the project itself winds down? I guess, I'm asking in a sense of, is there an opportunity for you to get any recovery here before 2020?

So if you look at the unapproved change orders and you reduce from that the $330 million that we disclosed today. I discussed earlier, related to the 2.6.3, it should clear up that piece of which we've already received the cash. So that leaves ballpark $600 million left. And to keep it simple, roughly 50% of that is our claim from the consortium's original subcontractors on the power plant. And we will try to achieve a settlement with them, but it could go throw an adjudication process and that could be a long time. And so that's, ballpark, half of the remaining there. And so timing is hard to predict. And the other half are other change orders, some of which can just be negotiated and hopefully can come down. And one chunk of that is up for another arbitration case that we're working on right now as well, that hopefully, will turn out in our favor. So that's how that breaks down.

It's probably worth noting that we've got a number of legal cases that are ongoing with -- associated with the Ichthys project. And we've got, obviously, the CCPP arbitration, where we're trying to recover the monies we spent to finish the power station from that consortium. Which will result, purely, in a cash upside for us, assuming that goes in our favor to some level. In terms of the other arbitration proceedings that are ongoing, they're all claims that we have made against the customer. So the only case the customer, at this point, though they might bring others, but at this point that they had against the JKC, ourselves and JGC insured of the JKC joint venture was 2.6.3. So really from a cash perspective, depending on how these work out, it's all upside. And as we look forward -- and that's why my opening remarks were pretty upbeat about Ichthys with a line of sight to the end as we move forward. And these legal cases, we're hoping we don't have to finish them. We're hoping when the customer know we are out producing LNG, and that venture starts to get cash as a consequence, we can sit down with the customer and actually conclude a negotiated settlement. And similarly, we would like to do a separate negotiation with the consortium who -- on the power station but there's no guarantee with that. Both go into arbitration, when the arbitration is done, it's binding, and that will be the end of it over the next couple of years. But I think the takeaway in this is that we've got a clear line of sight to the end. We are well structured in terms of how we're doing that from a balance sheet perspective, and we'll be set out with -- the light at the end of the tunnel and finishing that job is there. And it will be good to sort of get off site and get the LNG facility producing to full capacity. And then it's really just an upside in cash as we recover through these negotiations or arbitrations. So hopefully, that takes a bit of uncertainty away from the KBR story because I do think there's been a level of uncertainty surrounding Ichthys for some time. And I think now we're getting close to the end and have this ruling that removes a large element of that uncertainty.

We can now take our next question from Lucy Guo of Cowen and Company.

Just a quick follow-up on the earlier question about your strategic thinking on the Government Services business. Just kind of given what Jacobs has done as well as your own transactions and kind of industry-wide within Government Services, how are you thinking on which may be set of customer agencies or capabilities where you may still would like to add or bolster?

Yes, that's a good question. We're actually just going into a strategic process now for next year. But clearly, I think Lucy, we're probably the leading provider or 1 of the top 2 anyway of services to NASA. That's a clear focus I think, the ability to take that capability and move that into the commercial space arena as that continues to grow and they get into manned-space flight is clear. I do think there's a great opportunity to really leverage that into military space in due course as the focus on that with space force et cetera continues. So I think there's clear opportunity from a strategic upside perspective in the space arena. I think our logistics business is probably leading edge at the moment. So very focused in the customer base there, and I think a significant opportunity with LogCAP V and just what's in front of us organically. I don't -- we've got that major recompete we're focusing on. And I think there -- that the path is clear. We've got some real smarts within that business from a digital platform perspective that's really driving efficiency. So we're -- I think we're forever trying to improve our, sort of, efficiency and level of service there that really, sort of, positions us well for expanded growth on the base operational side as well. And then into the engineering platform side, you do -- you know that through the Wyle and the HTSI acquisition, you are sort of locked into platforms where you've got a very strong and deep domain knowledge. And really our focus is really on those mission-critical elements across all of what we do. And we think that's a key differentiator for us. And there's some -- certainly some mission-critical platforms that we're supporting around things like Patriot and F-18 and others. So I think, in terms of adding capability, we do have a very strong mission-critical IT platform that we feel we can grow and leverage, and we're doing a bit of work strategically around that today. And we do think there are opportunities in the intelligence side of the business that we would look to exploit. But that's the next wave if you like. So we -- so I think there are significant expansion opportunities in front of us. I think we've got enough capability for synergy that we -- that near-term will grow the business. I think that's a key takeaway. And any future expansion into different areas will be considered along with, I guess, the relative merits of share buybacks and cash back to shareholders.

That concludes today's question-and-answer session. At this time, I will turn the conference back to Stuart Bradie for any additional or closing remarks.

Thank you very much. Thanks for listening. I think really, it's a good time -- it's a great time in fact as I said to be at KBR. I think we're very much moving along a strategic pathway. I think our strategy is working. I think this is the seventh or eighth quarter in a row where we've delivered and a number of times delivered above expectation, and again raising guidance. So with that, I'll conclude and I look forward to talking to some of you or all of you later on. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.