Welcome to KBR's Fourth Quarter and Annual 2014 Earnings Conference Call. [Operator Instructions]. For opening remarks and introductions I would like to turn the call over to Mr. Zac Nagle, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning. Thank you for joining us for KBR's fourth quarter and annual 2014 earnings conference call. Today's call is also being webcast and a replay will be available on KBR's website for seven days at kbr.com. The press release announcing KBR's fourth quarter and annual 2014 results is also available on KBR's website. Joining me today are Stuart Bradie, President and Chief Executive Officer and Brian Ferraioli, Executive Vice President and Chief Financial Officer. During today's call Stuart and Brian will cover results in more detail and discuss our market outlook by major segment. Please refer to the accompanying presentation that is posted on our website at kbr.com. After our prepared remarks we will open the floor for questions. Before turning the call over to Stuart I would like to remind our audience that today's comments 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 fourth quarter and annual 2014 earnings press release, KBR's earnings presentation, KBR's Form 10-K for the period ended December 31, 2014 and, KBR's current reports on Form 8-K. You can find all these documents at kbr.com. Now I'll turn the call over to Stuart. Stuart?

Thanks, Zac. And good morning, everyone. Beginning with page 2, Zac already discussed the Safe Harbor statement but note it's here for your reference. Moving on to slide 3, safety. We've talked about this in the last two calls. It's a critical focus area. Good safety is good business. And we're driving a culture of zero harm at KBR and driving it hard. And I'm pleased to report we're making significant positive progress, as you can see by the statistics on the left-hand side of the slide. It's a 26% betterment in performance from 0.38 to 0.28 over the period. So, very pleasing but it's a journey that never ends and we will continue to drive safety in everything we do. Moving on to slide 4, in summary, KBR is restructuring, has very much begun -- we use the word begun -- 2015 will continue to be a year where we embed the change. The leadership team is in place, the strategy is defined and we're very much on track to deliver the segment margin percentages and to take out the $200 million of annualized savings we announced in December. It's also worth touching here on two of the issues that we hadn't closed out previously, the first of those being our view on our Canadian module fabrication business. We've had a good look at that. Our historical performance in that business doing the small-scale modules we've done in the past has been a profitable business. And our view going forward is that we will scale that business back and mitigate the risk and continue to do those small-scale modules that has the capability, the track record and the management systems to manage. That's really where we're in Canada in that module business. And in terms of the government services…

Thank you, Stuart and good morning. Turning to slide 5, the first slide here we try to break out the restructuring charges which dominate the financial results for Q4 and, frankly, for the entire year. As you see in the first column we list the items that we had spoken about in December when we were in New York and the second column puts the fourth quarter actual numbers alongside. You see that the charges turned out to be $1.156 billion, so larger than what we had anticipated, driven primarily by increased amounts of goodwill impairment and also some additional tax reserves that we've taken for financial reporting purposes. Looking at each one of the lines individually, if you go all the way to the right you can see where it's mapped to the financial statements that we're filing this morning with the SEC. But the goodwill impairment of $446 million is largely the result of the acquisitions that have been made in the past for Robertson Schaefer and for BE&K. The second line, ERP and impairments, obviously we had mentioned in the past we were going to stop the rollout of our new ERP program. And there are also some charges in there for intangibles and some real estate impairments that we have taken. The tax reserves and allowances, as I mentioned these are valuation allowances for financial reporting purposes. It does not mean that we do not have access to those tax attributes. We retain those attributes. It's just for financial reporting purposes since we have these large losses. We're not allowed to show the deferred assets on the U.S. GAAP financial statements. And there's more information relating to the tax situation in footnote 3 of the 10-K which is being filed this morning. The next line is…

Thanks, Brian. On slide 9, our outlook for technology and consulting. The technology market strength continues, driven mostly by low-cost natural gas feedstock. And so the investments in ammonia, refining, olefins and other chemicals continue. We've got very strong technologies today and we're very well placed with those technologies and to grow our portfolio. So there are good opportunities we see for new facilities. But we're also seeing an increasing and a greater demand for revamps as existing facilities and existing customers drive improved economics, looking for a quicker payback. We're also seeing some very strong and good engineering and consulting opportunities. In times of financial challenge customers are looking for innovative solutions where they can get projects more economical and this is a good opportunity for our consulting business to grow and to add value to our customers and allow KBR to have an early engagement with those customers. We're always on the lookout for new products and new technologies that we can put into the sales pipeline and we recently announced the Showa Denka acetyls technology which we recently added to our portfolio. Moving on to slide 10, E&C. E&C is our project delivery business. Again, we've we highlighted there the recent awards supporting our strategic focus areas. I won't touch on them again, other than the final one which I didn't mention earlier which is really around the award of a major reimbursable construction services, reimbursable construction project, significant for us in the U.S. and very much supporting our strategy of reimbursable stand-alone construction. We continue with a healthy base of large projects in backlog -- the two LNG projects you are well aware of and we're now executing four EPC ammonia urea projects in North America using our technology. Moving on, the key near- and long-term…

Operator, we would now like to turn the call back over for questions, please.

[Operator Instructions]. We will go first to Tahira Afzal of KeyBanc.

I was wondering if you folks could give me a bit of trajectory on how we move through 2015 in terms of reaching your margin goal for 2016. Clearly fourth quarter was a little lighter than the goal you set for 2016. So, I would love to get an idea of what you are embedding in your guidance. And also in terms of margins, if you can also give us an idea of how much of your guidance is really being influenced by cost savings.

Okay, I will try that. First, we've identified in excess of $100 million in cost savings which is in various stages. Some already has been actioned, some is in process. So, that will be a phased approach throughout the year. It's embedded in the guidance that we had given you. And I also just want to caution, given the current market, even as we take cost out, not all of that cost savings will be an incremental increase in earnings because of a tighter market than maybe we have experienced over the last several years. So it will be a phased approach. Like I said, greater than $100 million has already been identified but the goal still is $200 million by the end of 2016.

Okay. And if you look at your backlog growth, Stuart you said earlier on at the analyst day that outside of LNG we could still see backlog growth coming through. Of course that was before oil took a bigger dive. So would love to get a sense on how you look at the competitive environment and build a quality backlog, how your opinion has changed over there?

You are right. We talked about that before the oil price really started to drive down further. But that aside, I think the announcements we've made recently in this quarter signify that we still are firmly of the opinion that outside of LNG we can actually deliver a backlog of value into KBR and obviously to the shareholder base.

Thank you. We will go next to Andrew Kaplowitz with Barclays.

It's Vlad Bystricky on for Andy. How are you? Maybe just following up on to Tahira's questions, it seems like in this environment it's going to be very difficult to grow backlog from here. So, how are you thinking about earnings growth from here? We see your guidance for next year but how are you thinking about KBR's earnings potential beyond 2015?

I think in terms of our thinking about backlog going into next year it's obviously a front-of-mind question for all of us and a focus. And I think that as far as we're seeing in the marketplace where we're positioned today and across our three business lines, we're actually seeing top-line growth for the technology and consulting business and the government services business, as we talked about before. In terms of E&C which is the sizable of the businesses, certainly as you look across the various regions they all differ. And I think you have to actually say, in Asia-Pacific, where we've got the big LNG projects, the backlog there will come down as we work off those projects. As you look into Europe, we believe what's in front of us today will be essentially the opportunity would be flat. And as we look into what's happening in the U.S. and across the Americas I think the opportunity to capitalize on the low cost of natural gas is a good one in the downstream sector. So I think the opportunity to build backlog there is strong. And so, in terms of the earning potential, we've given guidance for this year and as I said we're taking one step back to move two steps forward. And in terms of looking at the potential into the following year, our belief is that as we continue to take costs out of the business and we continue to get a strong focused in a strategic direction, that we will grow earnings. But we're not in a position to give guidance or an indication of what 2016 is at this juncture.

And then maybe as a follow-up, we know about the three large LNG EPC contracts that you are bidding on and that you have highlighted. Can you talk about, given the uncertain timing of potential awards on these projects, how you are balancing the need to take out costs today versus the longer-term opportunity you see on those projects? And maybe at what point would you become more concerned about the potential viability of those three projects?

Viability in terms of them going ahead or us supporting our--?

In terms of them going ahead.

I think if you look at the various differences in those LNG projects, you've got Pacific Northwest which is essentially a greenfields plant and I think greenfield plants will be more challenge economically. If you look at the Lake Charles project for BG, although it's been pushed to the right by a year, we're continuing to progress with the dialogue through the bidding phase of that. And the economics around that are probably less challenged than the ones in Canada because there's a lot of associated infrastructure there. And then when we look at Tangguh in Indonesia, that's the third train. The associated infrastructures are very much in place. The gas sales agreement with the Indonesian government has already been signed. So, you've got to think that that also stands a very good chance of proceeding, dependent upon the EPC price that comes in. So, I think the bottom line in this is that the LNG projects with associated infrastructure are clearly in better shape economically. The greenfield projects, because of the level of infrastructure that is acquired, are more economically challenged. That's probably the best way to describe it. And the Magnolia LNG opportunity that we have, as well the associated infrastructure around it as well. So you've got to think that, again dependent on EPC pricing, the viability of that is probably less challenged than the greenfield ones. And it's probably worth saying, as well, that our guidance for 2015 assumes in that guidance that these projects, the big three LNGs that we've been talking about for a while, that none of them go ahead in 2015.

Thank you. We will go next to Jamie Cook of Credit Suisse.

Just another question as it relates to guidance. Brian, you said you've identified $100 million in costs. It doesn't sound like all that hits in 2015. But my question is, one, when you think about your guidance for 2015, how do we think about your burn rate for backlog, because I'm trying to understand what you already have in place versus what you think that you have to win because as I look at your fourth quarter and if I try to normalize fourth quarter after charges and then annualize that, I think I get to base earnings of $0.65 which implies you need $0.40, $0.50 or so to make your numbers. So, how much is cost, what's in backlog and what do you need to win? And my second question is, you guys still sound positive on the ability to grow backlog. Stuart, since we talked to you in December has your prospect list declined? Was your prospect list X billion and now it's this? Because I'd be more concerned on your ability to grow backlog and what that, again, implies for 2016.

Jamie, your first question, we would anticipate backlog at the end of 2015 to be relatively flat to where we're going into the year. We're not expecting to have to book huge amounts of new work in order to be executed this year. Obviously you book any large jobs this year, the amount of profit to be accrued during the year is relatively small given the ramp-up of engineering services which is typically about 8% to 10% of the value of the project. Again, we think even in the challenging market we can maintain a flat backlog.

And then, Brian, is there anything we should be aware of in terms of earnings first half versus second half maybe with the cost actions you've taken? Do earnings ramp throughout the year? Is it back-end loaded?

I would say ramping throughout the year because, you are correct, in some of the savings are more to the back end of the year than they are in the beginning of the year

Sorry, Brian, one last question before the prospect listing. As you think about -- obviously your balance sheet is fairly strong today -- but as you think about the market that we're in and the energy headwinds that we face, does it cause you to be more conservative as we transition through 2015 and get a better feel for what energy CapEx is longer term, that you would want to be more conservative and perhaps sit on more cash versus return it back to shareholders?

I don't think I'm so concerned about the market per se in terms of changing our behavior. I think we've been pretty clear on capital allocation. We're interested in still growing the business. We've talked about technology in the past. And we also talked about a balance where we return cash to shareholders through dividends and through share buybacks. So, I don't think my views have changed significantly from where we were in December when we talked about this last.

Okay. And last, any cut on your prospect list versus December besides the LNG projects?

Not really, no. I think some will move to the right a little bit but we're actually seeing a good level of activity in our key markets, as I described on the way through. I think it's also worth saying, Jamie, in terms of the $100 million of costs we've identified they are in various buckets, as you can imagine. One of those key buckets and we're substantially complete in this exercise is identifying where we had duplication and things like that and be able to take the people cost out of the business. We've substantially addressed that. And although some of the cost savings will come through in a phased way as Brian says, because we're down the track on those and addressed them in Q4 and Q1, now that phasing will be less marked, is probably what I'm trying to say

Thank you. We will go next to Steven Fisher of UBS.

Q4, obviously you had a lot of your restructuring activity. You are now 2/3rds of the way through Q1. I'm just curious how quiet do you think the first quarter would be? And is this the quarter where you really turn the page on a lot of the noise filtering through?

Steve, I think that's the plan.

But we also don't want to get into giving quarterly guidance, Steve, as you know. But, yes, clearly we're trying to project to the end of these jobs. As I mentioned before some of the noise we do not expect to recur.

And then wonder if you could just give us an update on the wind-down period of Gorgon and Ichthys, how and when those roll off. And then in the event that in 2016 you were to win both Trunkline and Tangguh, when those get ramped up in 2017, would those equally make the same contribution to earnings that you are getting from Gorgon and Ichthys in 2015?

I think the timing on Gorgon is being driven largely by Chevron. But we see activity throughout, I would say, this year, that the announced target is to get the first train up in the latter part of this year and then train 2 and train 3 to follow. So there will be continued activity into the next financial year. And in terms of Ichthys, that will progress. We're just ramping up to the peak on-site on Ichthys so that will continue through the next couple of years, also. In terms of the Tangguh, the same sort of -- we don't actually comment on returns on individual projects. But I think if we secured both Tangguh and Lake Charles that would be a terrific problem to have.

Thank you. We will go next to John Rogers of D.A. Davidson.

I just want to follow up a little bit on the guidance for 2015. What tax rate are you assuming in there, Brian?

We'll probably be somewhere in the mid-20%s.

But no significant cash taxes?

No significant cash taxes in the U.S. but we always pay some cash tax internationally. We did last year, as well. That's one of the things that you see in the tax provision, an amount greater than the valuation allowances and that's the international cash taxes.

Okay. With those earnings and I understand what you said about future cash outflow of the power projects in U.S. government, but I'm just trying to understand your sentiment on negative cash flow. The projects that you've got burning off in 2015 are they cash negative significantly? I'm trying to understand what's happening there because it looks like the earnings are essentially in line with what you're talking about with these projects or maybe it's just not that significant a cash burn.

We have a couple contracts where we've had favorable working capital positions on and they are turning this year. So, you have the combination of the cash associated with the restructuring that we pointed out on slide 5 and then you have some of the timing on some of the projects that are getting near the end. These are not the large mega projects that you may be thinking about but these are other projects elsewhere in the world.

What we're trying to do is be very up front and straightforward around the fact that we do have forecasts in these power projects that there are charges there and as a consequence of that there's a cash outflow. But in the projects that are ongoing we're not forecasting any negative cash flow in those projects.

And Stuart, in this bidding environment with depressed oil prices but hopefully decent attraction for gas monetization work, the cash process or the cash flow of the project that you are bidding, do you sense that that is changing substantially? Over the past couple of years a lot of contractors have been able to get substantial upfront cash payments on projects. Do you expect this bidding environment to change?

There will always be pressure on it. I think, as Brian said, like what we did on one of our larger projects that's coming near the end now, we've got a very healthy cash up-front balance that's being worked off now. I think that there is a recognition in the marketplace, as well, that when you do lump sum EPC like that, there is a cost of mobilization. So, it really comes down to the maturity of the client and choosing those clients specifically. There will be pressure going forward as the market tightens, but I don't see it really changing to the point of a significant difference to what we've experienced in the past. But there will be some tightening, I think. That's obvious. And I think, also, that our subcontractors and our vendors will see that tightening, as well.

Thank you. We will go next to Jerry Revich of Goldman Sachs.

I'm wondering if you gentlemen could just flesh out a little bit more, on slide 11 you spoke about downstream opportunities in the Middle-East. Can you just give us an order of magnitude of the size of the projects. Based on Brian's comments of flat backlog exiting 2015 and over $1 billion in gas monetization burn this year, that implies some really sizable projects elsewhere and wondering if you could just give us some more color.

I think in terms of -- we don't really talk about the individual project specifics, but really, if you looked at what's happening across the Middle East and where we're positioned in the Middle East, our position in Saudi Arabia is reasonable. We're executing the large Sadara Petrochem complex there today and that will continue. We're seeing opportunities in and around Saudi Arabia, both with Saudi Aramco and with SABIC, who is essentially the large chemicals company in Saudi Arabia. And the scale of those are typically significant. And we're also looking very aggressively across the rest of the Middle East which is a good opportunity for us in Kuwait and Oman. We recently announced the award of the Nasr project in Abu Dhabi that we're executing out of our Singapore office. The activity in the Middle East is a good opportunity for us. And typically the scale of those facilities, they are typically significant.

Okay. And it sounds like you have some momentum with the UK MOD. Can you just flesh out for us the contribution you expect as far as defense JV? Is that a major driver of the margin profile that you're outlining for government services in 2016? And how much visibility do you have there?

Jerry, I would just say the majority of the work that the UK business does with the UK MOD and others flows through that equity and earnings line. We typically joint venture with partners. That's where you see the majority of our international activities. But we're not going to comment on any specific project. The one you referred to is ongoing. And we have other opportunities. As we mentioned, the second phase of that [inaudible] type project as well as others with the Ministry of Defense and other local agencies in the UK.

Thank you. We will go next to Vishal Shah of Deutsche Bank.

This is Chad Dillard on the line for Vishal. Your margin targets for 2016, how does it compare to what you have in your margin in your backlog? And how dependent are these targets on bookings that you're going to get in 2015 and 2016?

The answer is probably yes to both of those questions. We've had a good look at the work in backlog. We think we've set those projects up for success in the best of our abilities. No guarantees of course, but to the best of our abilities. And that features, of course, going through. And obviously looking at the market today and our expectation on margin performance on backlog is a critical element of the future and one we've worked out very carefully. So, it's a combination of both Chad.

And just to continue on that, just wanted to get a sense of what you are seeing in the bidding environment. Are you seeing project sponsors pushing back on your price or are you seeing more competition driving down the bidding price?

We're not seeing particularly more competition, I would say. I think that the markets we're in, it's the usual suspects, in some regards. But what I would say is that the speed of response of our client base has been quick to act on the reduction in oil price. They've announced, almost without exception, a reduction in CapEx spend over the next little while. And certainly they are looking at their own cost base. That sort of thing only flows one way and that's downhill. I think that what we've done is we've tried to actually pitch that and fit it into the guidance that we're giving going forward. As we said, the fact that we were ahead of the curve and looking at taking cost out of the business is good. We were ahead of the oil price somewhat in that exercise because of the restructuring that was required. So I think there is pressure from the customers but we've responded. I think and got ahead of the curve on reducing the cost base. And we factored both of those, positive and negative into the guidance we have given.

Thank you. We will go next to Chase Jacobson of William Blair.

Stuart, the first question is on the ammonia market. You guys have done a really good job in ammonia over the last year and a half or so and I know you mentioned that as a potential growth area. Can you just talk a little bit about where we're in terms of the cycle of that ammonia market?

There is lots of activity, of course, in the U.S. just now because of the cheap gas. There's a number of prospects still coming down the pipeline. But ammonia, of course, being a fertilizer very much relates to GDP growth. And we're seeing a lot of opportunity still in that sector in Asia, we're seeing it in the Middle East, we're seeing it a little bit in Africa and a bit of it in Latin America. So, it's not just a U.S. opportunity. It's a global opportunity and we run it as a global business with our global sales force. That is why. Our technology is one of, if not the leading technology, in the world and as a consequence of that we've got good market penetration. And the second piece to that question is really around the revamps. Our technology has been used in many existing facilities. And of course, they are trying to modernize those, become more efficient and revamp them. And as a consequence of that, we have significant opportunities because we've got a very strong, not only the technology base, what we can bring to bear are industrial services type capability, our brownfield construction and brownfield engineering capability and do a wrap on the revamps, as well. We're seeing good growth in both of those areas going forward.

Okay. And then second question is, as it relates to the non-strategic businesses, can you give us an update as to where you are, or if there's still opportunity for divestitures there, how that's going to progress? And also, what's assumed in guidance for the non-strategic businesses in 2015?

I'll take it. First, the building group we talked about at the Analyst Day, we have some interest in there with potential buyers. And we would hope to be able to make an announcement within the next several months on that one. Infrastructure also is in process and we have a good interest there, as well. It's a nice little business. So, those are in progress. And mining is well on its way. Probably less of an opportunity for divestiture there, it's more restructuring in the U.S. associated with that business. And in terms of guidance there's really not much of anything in there for guidance from an earnings perspective, but it does have an impact from the cash side, particularly related to the power projects.

Thank you. We will go next to George O'Leary of Tudor, Pickering, Holt & Company.

Most of my questions have been answered so I'll toss an easy one out there. Just as you look out in lieu of oil prices falling off pretty hard, you've got a lot of people coming in, especially from the Gulf of Mexico with jack-up rig count falling off pretty hard, a lot of labor coming in. So are you seeing the labor cost worries or are your worries about labor costs abating in the U.S.? A lot of those rigs have two welders per rig, so welding was an area where labor costs were really tight. Could it be the case where we see labor inflation slow or stop or potentially even move the other direction? Just curious on your thoughts there.

You would think instinctively that would be an ultimate outcome of this. We're not seeing it today but you would think instinctively that there will be a less tighter labor market. But, really, the market that's probably of most interest to our peers and ourselves at the moment is around the Gulf Coast and the level of activity there is still very high.

Thank you. We will go next to Robert Connors of Stifel.

My questions are a little bit more strategic in nature. Over the past 10 years the fixed-price portion and the risk of KBR's backlog have see-sawed. We went from 40%, 45% of the mix with fixed price, it got as low as 20%, but it's back up around that 40% range. So my question is, when this restructuring is complete and we fast-forward to 2016, do you guys have a target range where you would like the fixed-price versus cost-plus portion to be? Maybe more of like a 20%/80% split between the two like other E&Cs?

We certainly want, Rob to get a balance in what we're doing. And as we announced, our strategic positioning in terms of fixed-price EPC is to get out when we're only completing on cost. And we certainly want to be differentiated when we're doing fixed-price EPC. We lay down strategically where we feel we can be differentiated around our technology, our self-perform construction or reference plant that we've done before. And a number of the scale of some of these facilities is significant. It would be probably remiss to actually put a peg in the sand to say 1 percentage or another. I think the right thing to say is there will be a balance in the business and as we move into fixed-price EPC we will do it in a very considered way.

Would you say 40%, though, if I could push you, it probably a little bit too high?

I think you are pushing me and I'm probably not going to answer that question.

And then just related to the long-term margin guidance, the equity earnings, it also flows through both revenue and profit without a cost element to it. So, I was wondering what those numbers would be or a range for those numbers if we were to exclude equity earnings, because this is going to be a large portion of that.

First of all, it doesn't flow through revenues, it just flows through the equity line. We have so many joint ventures. And trying to predict the way you're going to contract in the future is always a challenge, whether we're going to have controls or it gets consolidated, whether we're not going Ott have control. So we just look at it on a blended basis on the long term and we would assume that the trends that we have had in the recent past would continue. It's difficult to start breaking those lines individually and predicting exactly what margins are going to be one way or the other.

Thank you. We will go next to Michael Dudas of Sterne Agee.

Two thoughts, first Stuart, your award on U.S. construction services, is there any trend that shows some support for some activity in the U.S. on that front, generally and maybe for you guys in particular? And, secondly, the opportunity for EPC awards relative to your technology business, any thoughts of seeing some significant opportunities for bookings in the next, say 6 to 18 months? Thank you.

I think the answer to both of those questions is yes. Taking the last one first, there's a number of technology differentiated EPC opportunities in front of us today. There's no guarantee any of them will go ahead but we believe that we're in as good a position as any to actually capitalize on those opportunities. So, definitely a positive on that question. And in terms of the reimbursable construction market, yes, the level of activity continues. We continue to have good traction in that marketplace and it's a good business for us. And not forgetting, of course, our construction business also supports what we're doing in the EPC environment.

Is it more regional or is it industry specific on the construction side?

Yes, it's probably energy specific and certainly for us it's not regional per se but certainly we would be looking in areas in the U.S. where we have a very strong track record in history in terms of how we understand managing the labor and the relative influences of that labor market.

Thank you. At this time for closing remarks I would like to turn the conference back over to Mr. Stuart Bradie, President and Chief Executive Officer of KBR.

Good. Thank you for your time this morning. It's very much appreciated. The key message today is that we're very much on the path to the new KBR. We're very focused in our strategic vision for tomorrow. We really want to talk about what we're going to do, not what we have done. We've laid down some targets that we feel we're well on the way to meeting and we do believe that 2015 will return KBR to firm profitability and within the guidance that we have given. So, thank you very much again.

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