Good day, and welcome to the KBR's Conference Call. This call is being recorded. And as a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks and you will receive instructions at that time. For opening remarks and introductions, I'd like to turn the call over to Ms. Lynn Nazareth. Please go ahead, ma'am.

Thank you, Savannah. Good morning and thank you for joining us today to discuss KBR's third quarter 2016 results. Joining us on today's call will be KBR's President and Chief Executive Officer, Stuart Bradie; and KBR's Executive Vice President and Chief Financial Officer, Brian Ferraioli. Stuart and Brian will discuss KBR's financial and operation results, provide an update on progress against our strategic objectives and discuss our market outlook. Please refer to the accompanying presentation that is posted on our website in the Investors section of kbr.com. Following their prepared remarks, we will take your questions. Today's call is also being webcast and a replay will be available on KBR's website for seven days at kbr.com. The press release announcing KBR's third quarter results and our third quarter Form 10-Q are both available on KBR's website as well. Before turning the call over to Stuart, I would like to remind our 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 third quarter earnings press release, Form 10-Q for the period ended September 30, 2016, and current reports on the Form 8-K. You can find all of these documents on our website. I'll now turn the call over to Stuart. Stuart?

Thank you, Lynn, and good morning. So, moving to slide 3, safety. KBR is a people's business. It's essential that – our core values is to look after ourselves and those around us, and our goal is to achieve zero harm. And to that end, I'm pleased to report that we've achieved the 45% decrease in a total recordable incident rate year-on-year and we've got an increase of 19% on the days in which we achieved zero harm, and that number is over 70% of all days that we work at the moment across the world. So, good performance there. So, moving on to slide 4, highlights and some key wins. The underlying business continues to reflect strong progress against our strategic goals. When you look at the revenue line and you take out the effect of Industrial Services and deconsolidating that last year, the revenue is holding up year-on-year. And in fact, we've had revenue growth from last quarter to this quarter. I also think that we are now starting to see the pivot of the business, as we reported last quarter, coming through with an increased backlog. I'll talk a little bit more about that as we go through the presentation. In the quarter, we did complete the acquisitions of Wyle and Honeywell's services business, HTSI, and the full quarter financials of Wyle are in these results, but only a couple of weeks of HTSI. And we'll talk a little bit more about how we're travelling against the integration objectives here later. We continue to see expansion of our U.S. legacy government contract business with an increase in task orders supporting the U.S. Military overseas. Pleasingly, the margin performance in the T&C segment, I guess, against what we've reported earlier in terms of the changing project mix coming…

Thank you, Stuart, and good morning. Turning to slide five. As Stuart mentioned, the revenues are down from last year, but that's due to the deconsolidation of our Industrial Services business as well as the sale of our Infrastructure business. So, the $132 million of revenues from the third quarter last year, obviously, are not recorded in the revenue line for us this year, although the Industrial Services business, 6% of it, we still own and it will come through the equity in earnings line. The gross profit and equity in earnings includes $126 million of charges that we have previously announced, primarily related to the Power business and our Non-strategic business, $86 million of that amount. That project's 85% complete and is expected to be completed and handed over the customer in the second quarter of 2017. And the ammonia project, previously mentioned by Stuart, is $40 million, which has already been handed over to the customer. So, the revenues and gross profit, excluding the project charges, were primarily driven by having a full quarter of the Wyle financial results in there and only two weeks of the HTSI. So, when you think the revenues were basically flat on a run rate basis compared to the prior year, we expect this to increase as we roll forward, getting a full quarter of HTSI, the Army 2020, which will start; and the MFTS project, which we booked earlier in the first quarter, which has not recognized any revenues yet, which will pick up its revenue recognition in 2017. So we remain quite optimistic about revenue growth in 2017. The G&A continues to reflect the cost reduction. There was $8 million in transaction and integration costs related to the two acquisitions, as well as $4 million coming into G&A for those…

Thank you, Brian. So, 2017, as you've seen from the donut charts, as we call them, there's a higher proportion of earnings driven by differentiated professional services and technology going into 2017. We'll get full-year impact coming through of the Kuwait BOSS contract, Army 2020, which we announced this morning, and the revenue starting to come through on MFTS. So, a growing part of our business and growing overall for KBR. We will also get full-year impact of Wyle and HTSI. In Hydrocarbons, we're very much focused on the Industrial Services, the debottlenecking and revamping of existing LNG projects, ammonia and downstream petrochem, ethylene and increasingly in small-scale LNG positions in North America, given what we're doing in front-end design of those today. There's a greater proportion of a differentiated reimbursable services. This is leading to margin expansion and also de-risk our business considerably. So, the majority of the backlog is in that differentiated reimbursable area. We're expanding capabilities and executing on growth plans in the U.S. and the Middle East for our maintenance and turnaround services, very much focused in sort of getting involved in more of the OpEx spend and this is a growing part of our business, and we'll talk about that in the coming quarters a bit more. Again, it's more focused on reimbursable services and long-term annuity-type contracts. We will continue to evaluate M&A opportunities, seeking additional earnings power with long-term and stable earnings streams and strong free cash flow. One of the great things about, I guess, the reimbursable differentiated professional services, particularly in the Government Services sector, is a strong correlation between earnings and free cash flow, which is a prime focus for us. And of course, we will continue to be tough on cost control and focus on efficiency. Moving on to…

Back to you, the operator.

...the operator. Thank you.

We'll take our first question from Chad Dillard of Deutsche Bank. Please go ahead. Your line is open.

Hi. Good morning.

Morning, Chad.

Good morning, Chad.

So, I just wanted to walk through the moving pieces of revenues actually entering 2017. So, just doing some back-of-the-envelope math by taking that 41% of backlog to be burned in – in the next 12 months and subtracting consensus revenues by $1.2 billion for 4Q, it suggests that you'll be able to – you actually have about $3.5 billion of revenues in backlog for 2017, or about 75% of consensus revenues for 2017, which actually seems pretty decent, given the current environment. So, I guess, like my question is, are you in a position to grow revenues and earnings in the 2017 versus 2016 excluding the project charges that you just took?

Well, yes, that's the plan. And I agree with you: 75% in backlog going into the beginning of the year is a pretty healthy position to be. And clearly, we'd expect to grow the earnings and not have any issues on the major power – or major projects that we had this quarter. So, absolutely, the Government Services contracts that we're booking that are not yet in backlog will also add significantly to the revenue line. Remember, the MFTS that we booked, that has not had any revenue recognition yet; the Army 2020 that we start with a construction phase, and obviously that is shorter, that spread out over a three- or four-year time horizon. And then you have the – running the facilities which extend out over 25 years. So, that will add to it as well, as well as having a full year of Wyle and HTSI. So, we're quite optimistic about 2017.

Great. And just actually just sticking with 2017, but more so on the LNG side, I know that you guys talked about LNG earnings being flat year-over-year in 2016. But given that Gorgon's running off and you still have all of Vivictus (26:40), how are you thinking about LNG earnings contribution as we enter 2017?

I think, Chad, we said previously, we still believe it'll be significant – significantly similar, and we continue to work through the projects in Australia. You mentioned Gorgon there, that's been essentially for us complete for quite a few quarters now. So, our statements around LNG exclude, I guess, the revenue from Gorgon, have done for quite some time.

Thank you. And we'll take our next question from Tahira Afzal from KeyBanc. Please go ahead.

Hi, folks. How are you doing?

Good morning, Tahira.

So, I guess, I just wanted to clarify Chad's earlier question. So, I think he was asking in terms of earnings. I think, what Chad was asking was, versus the midpoint of your original guidance of, let's say, $1.32, do you think you can grow earnings, and the clarification around that, Brian, that you can?

Compared to – I'm not clear what you're measuring against.

Your original guidance of $1.25 to $1.40.

We haven't given any guidance for 2017.

Yeah. I know, but I wasn't sure based on your earlier comment whether you were referring to your 2016 guidance as a reference point to 2017 when addressing Chad's question or the revised guidance.

We don't want to be too specific yet. We will give guidance with our next quarterly result, but clearly that's our goal, is to grow the bottom line and now we think we have earnings power to be able to do that.

Okay. Maybe not to belabor the point, but would that be growth versus the original guidance, because there's a huge difference between that in your current $0.30 to $0.50.

Sorry. You cut out there.

I guess I'm still not sure whether you – when you're talking about growing earnings, it's versus the $0.30 to $0.50 or the $1.25 to $1.40. Of course, that is a considerable difference, so I just wanted to get a clarification on that.

Again, we don't want to give guidance for 2017 yet, but we're focused on growing the bottom line without the charges.

Got it.

I think, Tahira, we try to give you far more color and flavor around the backlog, so that you can actually ascertain, at this juncture, before we are in a position to give guidance, it gives you a good feel as to where we're growing backlog, what the scale of that backlog is and what it was made up of in terms of the risk profile and the margin performance. So, I think that's the area where you need to focus in on in this next little while.

Got it. Okay, Stuart, and actually that's pretty helpful. I guess, second question, obviously, the Government Services shift seems to be working out very well for you guys so far. But just pivoting back to the E&C business, Stuart, you have been booking some more E&C projects for the last two years in what you would probably describe as a fairly tough environment. How do we get comfortable that what you have on your E&C backlog is fairly – in terms of risk, has better profile than the ammonia project you just closed out on.

I mean, I think we – again, in the backlog slides, we gave some clear color as to the level of lump-sum assets, like what we call, reimbursable PFI-type contracts. I mean, certainly, we got some of that – some of that backlog in there relates to the power project, of course, which we are dealing with. So, I mean, I think we've de-risked the business considerably. I think there's a very good understanding of some of the legacy projects that were in the portfolio, when I joined and we're driving them to conclusion. So, my sense of the business going forward, again, is that there's a far greater proportion coming through in reimbursable services, and I think that would de-risk the business considerably.

And we'll take our next question from Jamie Cook of Credit Suisse. Please go ahead. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): HI. Good morning. I guess a couple of questions. One, Stuart, you talked about in your prepared comments being able to improve margins in 2017. And again, just to be clear, what are your assumptions on the margins? I mean, are we adjusting for the project charges that we had this quarter? What does it assume in terms of close-outs for the LNG projects? Because I guess I'm just trying to think about, are you saying margins should improve on a normalized basis or just because of adjustments that we had?

No, no, there's no smoke and mirrors in that statement, Jamie. I mean, if you think of the returns that we get through the Government Services sector and compare it to sort of the E&C sector in terms of margins, you can see there that there's enhanced margins coming through from those differentiated services contracts. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Okay. And then, I guess, two more questions. One, Brian, with the two acquisitions, how should we think about, on a normalized basis, free cash flow versus net income moving forward as your business profile changes? And then, I guess, the second or my third question is, Stuart, back to the E&C business, I appreciate you're trying to refocus to Government, but are there any opportunities to win work on the E&C side or should we expect your win rate to be lower just because of the competitive environment remains challenged? Thanks.

Okay. I'll take the free cash flow question first, Jamie. As we previously discussed, the two new acquisitions and Government Services, in general, have a high correlation of free cash flow to earnings. And we would expect the conversion factor to be somewhere in the 75% to 85% of earnings. There's not a lot of CapEx typically associated with those businesses unless we're doing one of the PFIs in the UK, which tend to be off balance sheet and not consolidated. So, again, pretty high correlation. As you know, the Wyle business was acquired from private equity and I think that's a pretty good evidence about the ability of these businesses to generate cash flow. That's what's attractive for private equity-holders. So, we would think somewhere in the 75% to 85% conversion going forward. On the E&C side, though, we have get through the legacy projects. So, we'll burn some cash on the ammonia plant as that has now just finished in the fourth quarter and we still have the power project, which will run through Q2 of next year.

Okay. I guess, the E&C side of the question, you're quite right, Jamie, we continue to – it's very much a focus for us. I think the OpEx side of the business at E&C continues to perform well. We've put on over 2,000 people in that area in the U.S. in the past 12 months. And again, we're going to talk a bit more about that in the following weeks and quarters as we complete the build out of the Industrial Services. We're seeing a lot of activity in that arena in the Middle East and in Europe. So, that's a growth story for us in the Hydrocarbon sector. And I think, pleasingly, we're seeing a number of sort of inquiries coming through in the LNG side, particularly the mid-scale side of the house and in the U.S., and a little bit in Canada. So, I think, all in all, yes, we continue to focus in E&C. I think the key point of it is that we're not going to be rushed into doing anything stupid and signing a contract that we can't execute, and booking revenue for revenue's sake. As Brian said, we are focused on the bottom line. We pivoted the company to have greater proportion of differentiated services, whether that's in Hydrocarbons or in Government or in Technology, and allows us the ability to be highly considered when we take on EPC risk, we will do it, but we want to be highly considered when we do, do it. Jamie L. Cook - Credit Suisse Securities (USA) LLC (Broker): Okay. Thanks. I'll get back in queue.

Thank you. And we'll take our next question from John Rogers of D.A. Davidson. Please go ahead. John Bergstrom Rogers - D.A. Davidson & Co.: Hi. Good morning.

Good morning.

Good morning, John. John Bergstrom Rogers - D.A. Davidson & Co.: I just wanted to follow-up on the LNG awards. I mean, there's a number of them in the early stages. And can we characterize when those projects might get FID? And I mean, is this 2019, 2020? I know it's always hard to forecast, but...

Yeah. I think that it's hard to forecast, John, I guess. If you looked at – they're all at various levels of maturity. I mean, we haven't talked about Magnolia on this call, that continues to be part of our future assuming we can get the off-take agreements, and their recent sort of announcements that would drive towards the end of 2017, where they hope to conclude deals. Whether that is realized or not, that remains to be seen. But I think the timing is late 2017 and into 2018. John Bergstrom Rogers - D.A. Davidson & Co.: Yeah. Thank you. And then just as far as additional acquisition opportunities out there, I mean, how do you think about the balance of the portfolio right now between the – I mean, you've obviously de-risked the backlog, but how do you think about that in terms of positioning yourself for, I guess, hopefully, recovery at some point in Hydrocarbon sector?

I mean, acquisitively – I mean there's two bits to it. I think that you've got to retain your key talent through these market – difficult market times. And I think we're being able to do that by winning pre-FEEDs and FEEDs, and keeping that key talent. The construction side of our business continues to be quite busy on stand-alone construction work. So, again we're retaining the key talent there. Acquisitively, we've been very, I think, transparent that we're focused in on three areas. The Government Services side, I think, we've addressed in the U.S. But we are focused in Hydrocarbons, both in technology and in the industrial services maintenance reliability-type performance area. And that's where we'll be looking to sort of build out capability, that's where we'll be looking to, I guess, grow the business acquisitively, because it's enduring. John Bergstrom Rogers - D.A. Davidson & Co.: Thank you. Appreciate it.

Thank you. And we'll take our next question from Steve Fisher of UBS. Please go ahead.

Thanks. Good morning.

Good morning.

Steve.

Continuing on the discussion about pipeline of new awards, can you give us a sense of visibility and timing on the next big contract, because mainly, in Government, once we get through Army 2020 and KBOSS, and then, I guess, if you want to talk about E&C as well, you mentioned the LNG, but is there any other bigger prospect outside of LNG?

So, on the Government side, there are a number of substantial opportunities, Steve, I mean, both coming through heritage HTSI and Wyle on legacy KBR, and in the UK, and actually in Australia. So, the pipeline of opportunities, we haven't sort of been specific on naming them, but there are a lot of opportunities that are significant and coming through that pipeline, which we feel quite good about. In terms of the E&C side, yes, we talked the LNG side just briefly there and starting to see activity there. And of course, there are opportunities in the Middle East and in the U.S., and particularly in the downstream side that we are tendering now. So, again, we haven't been specific on particular projects, but the opportunity to land those is in front of us.

Those are in 2017 on the Government side?

Yes.

Okay. And then in terms of Wyle and HTSI, now you've had them close for a little while, you gave some examples of some strategic wins or synergy wins. Can you give us an update of the quantification of the synergies and the timing? I think you had been looking for about $0.30 to $0.40 of accretion in 2018. How has that changed now that you're more into the details of it, seeing what can actually happen?

Steve, I'll take that. I don't think anything has changed significantly. We had said we would have about $325 million of revenue synergies by 2020. To Stuart's point, we already got $49 million in the first quarter, but we still think that the revenue synergies will extend out over a period of time that we've initially announced. The government procurement cycle is rather slow and long. So, we think we're doing well, but no surprises. I think things are going pretty much according to plan. I think the team is working well together. And there are a number of synergies that really we haven't talked about, but small things in re-competes and on new awards, where just the experience that one of the groups had adds to the ability of the bidding entity. So it could be that Wyle was bidding on something, but they were a little light on experience in one particular area, which now either KBR or HTSI has that experience. So, it further enhances the ability for Wyle to either win new work or to win on re-compete. So, there's a lot of smaller synergies behind the scene that are really starting to take effect now. There many of these opportunities have been bid or coming up to be bid shortly.

So, no change to the $0.30 or $0.40, then?

No. No major surprises yet.

Okay. Thank you.

Thank you. We'll take our next question from Andrew Kaplowitz from Citigroup. Please go ahead.

Good morning. It's Alan Fleming on for Andy this morning. Stuart or Brian, just want to follow-up on margin. So, you recently talked about cost out positively impacting margin in 2017. And I think you've basically finished your $200 million program. So, what kind of cost tailwind could you see in 2017 and how should we think about that impact on margin, maybe particularly in E&C? So, are you saying that you think cost out can offset pricing headwinds or do you think you can see more cost out drop to the bottom line next year?

Yeah. I mean, I think – so firstly my statement on margins was really, I guess, the change in mix from reimbursable services, whether it's in Hydrocarbons or in Government Services we go forward, and that's reflected in the backlog. And certainly, from the – and if you think about the number of people that KBR now employs is circa 32,000 and the increasing number of, I guess, sort of high-end white-collar workforce within that 32,000, so it gets [ph better (42:55) returns from a differentiated professional services basis. So, that was really the [ph] what (42:59), I guess, that where we were going from the margin discussion earlier. In terms of cost out, as I said in my prepared remarks, this is an ongoing effort for us. And we've achieved $200 million, but we want to take more out as we go and drive efficiency where it makes sense and we'll continue to do that. The E&C sector in terms of tailwinds, it is highly competitive. You know that we said all along that the cost out does allow us to hold up margins, not increase margins in E&C, particularly, and that's – I think we would still say that today.

Okay. That's helpful. My follow-up is on Technology, and maybe you can talk a little bit more about what you're seeing there in the earlier cycle business. Backlog was down modestly versus 2Q. But several of your competitors have talked about seeing an uptick in orders there on the engineering or the catalyst side. Are you seeing similar type of pickup there? And when could we maybe expect to see backlog turns or sequential growth, again?

I mean, remember, in the Technology & Consulting arena, we've got the Consulting part of our business, which is predominantly oil and gas facing, which has probably backlog challenge rather than upside. So, the Technology piece is actually holding up well with them, and it's a global business for us. So, particularly in places like China and India and former Soviet Union, we're doing particularly well at the moment. So, I think you've got to take out or understand it as a consulting backlog piece within there that is challenged at this particular juncture.

Okay. And then, maybe just one more, Brian, do you have any more ammonia projects in backlog that you're currently working on and...

Yes. (45:05).

Yeah. I mean, we've got three to four – we've got three major projects that we're working on a number of sort of like sizeable, but not quite of that scale type projects we're working on also. And we've got a number of technology projects we're working on in ammonia.

Okay.

Particularly in the revamp arena.

Okay. All right. Thank you, guys. Good luck.

And I just was actually just commenting there that a number of those projects are actually reimbursable as well.

And we'll take our next question from Rob Norfleet of Alembic Global. Please go ahead.

Close enough. Good morning, guys.

Good morning, Rob.

Good morning, Rob.

So, most of my questions have been answered, but just a couple of follow-throughs. When you look at the existing or legacy backlog within E&C, are there any projects in there in which you see the potential for some scope changes or additional add-ons for work?

Yes, of course. I mean, that's always part of the project environment. I mean, we've talked often about various change orders, particularly as it relates to some LNG projects that we're still working through. There are additional scope changes in some of the ammonia projects that we're executing. So, I think that – yeah, we do see that opportunity. And as you continue to perform well, you get opportunities for more work.

Okay. And then, I know you guys are kind of wit (46:38) a little bit, getting specific about potential projects. But when you look at some of the E&C prospects that are out there, which we would think you guys would be interested in, you have BP's Mad Dog project, obviously some additional ammonia and ethylene projects, can you just kind of talk to us a little bit about what you're seeing today in terms of customer CapEx? I know it's still a very cautious environment, but are you starting to see some of these projects that have been held up for the last 12 to 18 months starting to move towards that FID stage for 2017?

Yeah. I think that oil companies will move cautiously, but we are starting to see a little bit more activity in the marketplace, for sure, particularly at the early stages, the consulting-type areas, as they start to recycle things and have a look at whether there's some smart solutions that can be brought to bear some innovation, which I think we're well placed to provide. And as I said earlier, we're starting to see a bit more activity in the LNG sector also.

Perfect. And then last question for me. Can you – obviously, with Pemex – and that is the question you get every call, but now that they have appealed, Brian, can you kind of walk us just through what the likely timeframe is until we get some resolution to the matter?

Okay. They've asked for a rehearing for the Second Circuit Court, which there's no specific time requirement for the Court to rule. Basically, what they're asking for the Court to come back and reverse its decision that in itself has unanimously reached. We would expect something, hopefully, before year-end. If that were to occur, that would allow Pemex, if they so chose, to seek an appeal to the U.S. Supreme Court. If the Second Circuit Court does rule by the end of the year, that would allow possibly the request to be made to Supreme Court to be done in the spring in time to be heard in the fall of 2017. Again, our outside counsel does not believe there's a high probability of the Supreme Court taking up such a case. That's more of a commercial case, and also do not believe that there is a high probability of the Second Circuit Court reversing itself given the unanimous opinion, and that rarely happens where a court reverses itself; although there could to be no assurances, obviously. So, that's kind of the timeline. We still are thinking, for our own planning purposes, that within the next 12 months, so we would hopefully have this resolved.

All right. Thanks a lot.

Thank you.

Savannah, I think we can go ahead and end the call. Thank you, all, very much for your participation this morning and have a good day.

Thank you.