KBR, Inc. (KBR) Q4 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the KBR Inc. Fourth Quarter 2018 Earnings Conference Call. This call is being recorded. 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. You will receive instructions at that time. 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 attending for KBR's fourth quarter and fiscal 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 quarter and year, our market outlook, financial results and earnings guidance for 2019. After these remarks, we will open the call for questions. Today's earnings presentation is available on our Investors section of our Web site 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 as outlined on Slide 2. 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 Form 10-K filed today and available on our Web site. I will now turn the call over to Stuart.

Thank you, Alison, and good morning and thank you for joining us today. I will start on Slide 4. Our health, safety and environmental performance throughout the year has been stellar, as you can see by the graphs. Earlier this month, we celebrated our third annual Zero Harm Day. This happens at all our sites and all our offices across the world and involves all our employees, our clients and the communities where we live and work. Each year, the levels of participation, engagement and passion increases and it brings together all of KBR regardless of geography, nationality, gender, religion, et cetera, to embrace and reinforce our people culture. This is very, very powerful in an aligned 36,000 person team delivering outstanding results, which leads me nicely on to Slide 5. This quarter marked the eighth and I’ll say that again, the eighth consecutive quarter new KBR has delivered at or above expectations. We have not only met or exceeded EPS targets but also margins, cash flow targets and revenue growth, 42% in the quarter alone and we’ve done it while growing backlog with a quality of earnings that provides greater predictability. We’ve included a slide in the appendix that shows the profitability performance and predictability of new KBR over the past two years for your reference. The graphs speak for themselves, but I would highlight two in particular. Firstly, our Q4 cash flow performance, which was very pleasing, particularly given the working capital investment required to support our growth. Mark and his team have done an unbelievable job and are seeing the fruits of their labor as DSO reduced. The second is the book-to-bill, which fuels the continued momentum as we deliver industry leading organic growth. And just on that subject, I would be remiss if I did not call out the 31% organic growth in our Government Services business. Mark will give you a bit more detail on this later. On to Slide 6, this shows the year and it’s a similar story to the quarter. I’ll give you a moment to look at the graphs. 2018 was a very solid year for new KBR. We said that we would return KBR to growth in the year and we’ve done just that with the year-on-year growth of 18%. And recall in 2017, we recognized a $35 million gain on a settlement with PEMEX. Excluding that gain, our adjusted EPS growth was 17% year-on-year, so in line with our revenue growth. Our people have delivered and I wish to publicly thank them. This is a team game and it’s a great time to be part of KBR. The quality of our backlog and the associated earnings and cash conversion profile is worth highlighting. Many were skeptical that we could deliver against our targets while maintaining our commercial discipline. We have done so and positioned the business in exciting markets of the future. I will talk about our markets in a moment and Mark will take that into our 2019 guidance later, but I would like to give you an update on Ichthys. There is a slide in the appendix for your reference. Under the care and custody of the client, the LNG trains continue to ramp up production. On the power station, progress remains on track to be complete and exporting combined cycle power in late Q2, early Q3. Construction is 99% complete and commissioning of the remaining steam turbines is circa 80% complete. Our cash out forecast of $500 million remains unchanged. With a site heavily demining in January and February, the cost growth risk is largely mitigated. Ichthys is now all about commercial settlement or legal recoveries and we will of course update you when material outcomes are known. We have excluded any cash recoveries, any P&L upside or downside from our projections and we have excluded the incremental interest cost expected in 2019 from our guidance. This is to portray the true underlying growth of our business. More on this later. Now onto Slide 7. Firstly, on the U.S. government shutdown, this had a very, very minor impact on revenue and cash collection has effectively caught up. So in short, you should not expect any impact in Q1. Our portfolio pipeline is very healthy and our pursuit and capture teams are busy. Two years post our KBRwyle transformation, we are reaping the benefits of a portfolio that includes full life-cycle support capabilities across a diverse set of programs and funding streams. We are well positioned for opportunities in our pipeline. In our logistics business, LOGCAP V remains on schedule for award in April. Our other major recompete for the year which is supporting the U.S. Marine’s Preposition Stocks mission is expected to be awarded late Q1 or early Q2. From an OPTEMPO [ph] perspective, we’re seeing no reduction in our overseas support activities in Iraq, despite U.S. Military’s strategic changes elsewhere in the Middle East. Space continues to provide an exciting set of opportunities, including increased activity in military and commercial space. The procurement for the NASA SENSE program progressed through the shutdown and is moving to award in late in Q1, early Q2. And our Kennedy BOSS contract and joint venture with PAE is expected to kickoff in April. The ramp up on POTFF which started this year will continue into March providing good earnings momentum. We continue to see a trend towards best value not only in the U.S. but also in the UK post the collapse of Carillion and to procurement bundling which plays to our scale and breadth of capability. The mission critical focus of a GS business combined with the long-term nature of our contracts with access to multiple funding sources including of course our international business gives us a high level of visibility into earnings and cash and provides resilience in times of budget volatility. We do expect the normal slow start [indiscernible] in Q1 but this is expected to catch up and again as normal in Q2 and Q3. Onto Slide 8. In Technology, our backlog for the fifth consecutive quarter is at record level driven by strong market fundamentals across our portfolio. The new rev rec rules are giving us greater predictability and consistency moving forward and a suite of new technologies is very, very exciting. As an example, you may recall we were building the first commercial K-SAAT plant in China which is now producing and giving us the necessary revenues. And we have recently announced our first U.S. order for K-SAAT. This is one of our newer leading edge technologies that allows refiners to deliver high octane, motor and aviation fuels via a process that is not only more efficient but utilizes a proprietary catalyst that is safe to handle unlike the traditional solution. IMO 2020, the new regulation requiring lower levels of sulphur content for marine fuels continues to drive demand for our ROSE technology which removes sulphur from heavy bottom of the barrel crude, a much better answer for the environment. We are seeing increased demand in fertilizers, KBR’s ammonia technology is market leading and opportunities in gas monetization, crude to chemicals and refining are being pursued. We are confident our technology business will continue to grow given the backlog, increased earnings visibility and the opportunity pipeline. Margins and cash conversion remain very, very attractive. Onto Slide 9. Over the past five quarters, our hydrocarbon services backlog has remained steady as we replaced bad backlog with good backlog. This was no different than Q4 with a book-to-bill at 1. Although we highlighted the continued increase in activity in the CapEx area, we have quietly grown double digits in our services business. Let me give you a little bit more color of what’s included in our services business. That’s high-end technical consultancy, pre-FEED, FEED, PMC and sustaining capital construction services and of course maintenance. We see the market for our services business delivering continued growth in 2019. It is worth also noting that these services represent over 75% of our backlog in hydrocarbon services today. Recent announcements support this and allow us to be highly selective in our major projects pursuits. In the CapEx area, please note that our backlog as of December 31 did not reflect ExxonMobil’s BLADE, FID was announced in Q1 and does not include our team of specialty chemicals project nor Methanex’s methanol facility. FIDs of both of those are expected in late Q2. We talked about these projects last quarter as providing a solid foundation for growth going into 2019 and this is a message we repeat today with Q1 book-to-bill expected well above 1. Our LNG pursuit portfolio continues to mature and our competition is getting busier with Canada LNG, Cheniere’s larger trains and Golden Pass all moving ahead. We will of course retain our commercial discipline as we look at the opportunities in front of us which includes Magnolia, Cheniere Midscale, Nigeria LNG, [indiscernible], Woodfibre and others. All of these are expected to FID in 2019 and with the China-U.S. trade dispute easing; offtakes are more likely to move to contract. I will now handover to Mark who will take you through the numbers and the segments in a bit more detail as well as capital allocation and of course 2019 guidance. Mark?

Great. Thank you, Stuart. Before I dive into the numbers, just another note to add on safety, if I could. We here at KBR were really pleased to see Stuart selected this year by the National Safety Council as one of the sixth CEOs who “Get it” referring to his leadership towards driving a culture of safety in our company. As Stuart mentioned, we just had our global Zero Harm Day across KBR last week and it sure was great to underscore our message of Zero Harm with the announcement of Stuart receiving this recognition. So bravo on that one, Chief. I’ll pick up on Slide 11 in the presentation and color on our financial performance and our outlook. So as you can see, the business really hit on all cylinders in Q4 and finished up fiscal 2018 with remarkable growth on the top line, the bottom line and for the bank account. Q4 revenues were up 42% on a combination of internal growth and the acquisitions of Aspire and SGT which we made in early 2018. Profit margins for the quarter were at or above target for all three of our operating segments. G&A was 53 million from the inclusion of SGT and we also had some timing issues in Q4. Normative levels going forward are expected to be approximately 50 million per quarter. The major drivers of growth in operating income, up 225% or over 60 million included organic growth in Government Services, the addition of Aspire and SGT, which by the way are performing above our expectations, favorable project completion adjustments in Hydrocarbon Services and the non-recurrence of about 10 million in charges from Q4 of 2017. Interest was up quite a bit to 25 million reflecting the two financing transactions done this year for acquisitions and also to fund Ichthys requirements. This level was pretty consistent with levels expected going forward on a GAAP basis and includes non-cash interest related to the convertible bonds. I’ll discuss this a little bit more later on. Adjusted earnings per share was $1.53 at the high end of our guidance which we had increased last quarter. And finally the team pulled off really good cash flow results for Q4 with good focus on collections and also distribution from joint ventures. DSOs ended at 76 days, down 10 days from the prior year. Importantly, you’ll note that with significant cash advances and our government and technology businesses, we are running both of those businesses and KBR in the aggregate at negative working capital. This is a function of favorable cash advance terms on the Aspire Defence program leveraging of our proprietary solutions and our technology business which allows us to negotiate favorable cash advances from our customers there and improve working capital management discipline across the business. Working capital management will remain on the front burner at all times as a fundamental driver of our goals and cash flow generation and deleveraging in the short term and expanded capital deployment opportunities a little bit more down the road. The next few slides go deeper into our three business segments, starting on Slide 12 for Government Services. We completed the fourth successive quarter of double digit organic growth hitting 31% in Q4. That’s probably a new watermark for organic growth at this scale and this space, certainly the highest I have ever seen and it’s a real testament to our Government Services team to win and deliver this type of performance. Growth was enhanced significantly by some special work we were asked to do by the Air Force but excluding that project, organic growth was still 16% for Q4, still the highest I’ve ever seen. The drivers for this level of performance first and foremost start with remarkable people top to bottom in our GS business. This team has continued to win recompetes, capture market share, drive new growth synergies and capitalize on special situations. Q4 saw several growth drivers specifically continued on-contract growth in our logistics and engineering services business areas; strong new tasking of awards and execution in systems integration for the Army, the Air Force and the joint operations communities; ramp up of recent new awards not present last year, like NASA, MSOC, Diego Garcia and new C4ISR work for the Air Force under the IAC MAC contract vehicle. And finally, as mentioned a moment ago, about 15% of the growth was from work we were asked to do by the Air Force to lead in the restoration efforts of the Tyndall Air Force Base resulting from damage received in Hurricane Michael. This work really helped get the base up and running again and has continued into 2019 but is ramping down in Q1. A few additional words on the work at Tyndall. What’s really important about this is that our customer came to us with an urgent and quite sizable problem and our team really delivered. We deployed a large team to manage the storm recovery activities in short order and we’re particularly proud of how we assembled personnel from both our GS business and our Hydrocarbon Services business to serve the Air Force in this way. This agility and synergy across our team is exactly the type of can-do culture that has earned us the reputation to deliver for our clients in tough circumstances and it certainly bodes well for customer confidence in KBR for future opportunities. Government Services book-to-bill was 1.6x in the quarter with wins across our logistics, engineering and space businesses. Just a reminder that our sizable POTFF award in military human performance management for the Special Operations Command is expected to be booked in Q1. This win is a terrific synergy example from our acquisitions and also in market share capture. As you can see on the left side of the charts, profitability has tracked with revenue levels and has consistently remained in the high-single digits across the segment in 2018 in line with segment profit targets established in our 2017 investor conference. And finally, Government Services produced an operating cash flow to net income conversion rate of 120% for the year. That excludes the effects of the non-cash Aspire gain by the way. We had considered this 120% as good and slightly above normative. And while it is great to report such strong financial performance and indeed it is, we are pleased to report our customers are also recognizing us for the quality of our work. Just recently, NASA's Johnson Space Center awarded us their Large Business Prime Contractor of the Year award. Separately, Goddard Space Flight Center also awarded us their Large Business Prime Contractor of the Year award. And third, NASA Ames awarded us for our Mentor-Protégé efforts. These awards with NASA clearly demonstrate our strong presence in the space community and the importance of our role in favorably impacting the missions of those organizations. Moving on to Slide 13, our Technology segment has continued its consistent track record of growth, strong profitability and cash flow efficiency throughout 2018 and including Q4. Organic growth was 12% for the quarter across a wide footprint of projects and across the spectrum of offerings that are in demand; petrochemicals, ammonia, ethylene and cleaner crude refining. Margins have continued to track the high end of our targets in the high 20% range with bundled license, equipment, engineering and catalyst sales packages coupled with a highly efficient overhead cost structure in this business. Mix has done really good this year in terms of license content which had aided margins. Cash flow conversion to net income was 120% for the year, certainly a good year for this group and above the normative level for this business. In summary, our team in Technology business continues to post stellar results with 13% plus top line CAGR over the past 10 years. In addition, as Stuart said earlier, the team has recorded record highs in backlog five quarters in a row and that provides a solid foundation for continued strong business performance into 2019 and beyond. Slide 14, Hydrocarbon Services, market conditions and our ongoing commercial discipline here have clearly affected the growth trends in recent years. Indeed, performance reflects the company’s strategy to build a recurring services base of business. That by the way comprises over 75% of revenues and backlog in 2018. And this business provides more stable profits and cash flow. Our commercial discipline and execution focus have enabled us to avoid the volatility that plagues the E&C industry. As a result and as you can see in the upper left part of the chart, profits are now correlating much higher to revenue levels. Margin targets has been exceeded through excellent growth in profitability in our services offerings plus strong execution in completing a number of projects this year at planned results of better. We continue to anticipate new wins in 2019 to bolster backlog and position this segment for aggregate sequential growth during 2019. We expect margins to return to normative levels mid to high-single digits as we transition from project closeouts to project ramp ups. Slide 15, now moving on to liquidity and capital structure, fiscal 2018 was denoted with increasing leverage to fund Aspire and SGT and also to fund the completion of Ichthys LNG project. As mentioned earlier, Aspire and SGT are contributing above our expectations in earnings and cash flow, plus we’re generating synergies that are benefitting other parts of KBR. These were clearly no-regrets investments. We view the funding of Ichthys unchanged relative to our outlook from last quarter Q3 as a temporary cash outflow with recoveries expected over the next couple of years. A few takeaways from this schedule. First, the growth in cash reflects cash flow generation from operations and also proceeds from the convertible notes issued in early Q4, a portion of which has been retained for use on the remaining Ichthys funding obligations in 2019. Second, with the convertible proceeds and cash generated from operations, we do not foresee the need for further increases in debt and as consistently we have said, we are focused on deleveraging in 2019. And third, growth in EBITDA from strong business fundamentals has enabled ongoing deleveraging with gross debt to EBITDA of 3.4 at peak in Q2 and reducing nicely to 3.2 at year-end. As we have said before, we have a deleveraging target of sub-3 by the end of 2019. Now moving on to guidance on Slide 16. Adjusted earnings per share guidance is set at $1.58 to $1.73 with the midpoint being 8% above 2018 adjusted EPS results. We expect operating cash flow in the range of 175 million to 205 million which reflects an operating cash flow conversion of 90% to 110% of net income. As you may recall, we set long-term earnings growth and cash flow conversion targets in our May 2017 investor conference. We are basing 2019 adjusted EPS guidance on an apples-to-apples basis with that set of targets and also to be as comparable as possible to 2018 results. An important takeaway is both our expected adjusted EPS growth rate and our operating cash flow conversion rate for 2019 are consistent with those targets that we set back in 2017, yet we are performing at a higher absolute level with stronger performances in 2017 and again in 2018. There are two new items comprising adjustments to EPS this year. We are excluding the non-cash imputed interest on the convertible offering estimated at $0.06 for 2019 and we are excluding $0.09 for the incremental interest expense we expect to incur as a result of the higher funding levels for the Ichthys project in 2019. The guided EPS range includes the same amount of interest expense for Ichthys that we incurred in 2018 which was 8 million or $0.04 unfavorable to EPS. With these adjustments, net interest included in 2019 guidance is a little over 70 million compared to 61 million in 2018. We expect the effective tax rate for 2019 to be in the 23% to 25% range. That’s 1% or 2% higher than 2018 due to more cost not being deductible under new tax rules. As for timing in 2019, we expect roughly 40% of earnings to come in the first half of the year, 60% in the second half with Q1 lower than Q2. This is driven by timing of ramp up of new wins across all three of our segments plus seasonality in our GS business where our Q1 historically lags behind other quarters. So all-in-all, we made excellent progress on our journey during 2018. Looking ahead, we have some important recompetes to secure in 2019 and we have a robust set of new opportunities to convert into smart wins across all three of our segments. As I said earlier, we remain very focused on cash flow production aimed at continued deleveraging so we can open up more capital deployment options as soon as possible. Finally, I’d like to announce that we are planning an Investor Conference for Friday, May 3 at the New York Stock Exchange. Invites will go out soon on this. We’ll have some exciting things to talk about and also show you at the event and we’ll provide a refresh view on our long-term financial targets at that time. We look forward to seeing many of you then and I’m sure some of you even sooner. Thanks very much. And I’ll turn it back over to Stuart to wrap it up.

Thanks, Mark. And onto our final slide, Slide 18. So in summary, 2018 was a terrific year for new KBR. We met or exceeded our targets from the bottom up with the segment under corporate levels. We were also successful in retiring a number of legacy issues throughout the year. And frankly as we did in 2017 and in the most simplistic of terms, we delivered on our promises. Our cash conversion was very pleasing and worth a special mention as it was a distinct area of focus as we transform the business. With market leading organic growth across Government Services and Technology and double digit growth in the services part of our Hydrocarbon Services business, our backlog supports continued growth. The pipeline of opportunities and market conditions are favorable and new KBR is very well positioned and more importantly has the right team to continue to deliver on its promises. With that, I will hand over to the operator who will open the call up for questions.

Thank you. [Operator Instructions]. As a note, please kindly limit yourself to one question and one follow-up question. Thank you. Our first question today comes from Tahira Afzal of KeyBanc. Please go ahead.

Hi. Thank you. And congrats first of all on a very good quarter. I guess my first question is it seems that the guidance does reflect some incremental bookings coming in and while the Government Services have seen those play out as the plan, the Hydrocarbon side has been a little more patchy last year. So would love to get an idea if you’ve taken a more prudent view in terms of what you’re baking in?

Thanks, Tahira. I think we always take a pretty view would be my statement there. We’ve met or exceeded consensus and expectation over the last two years for every quarter and raised guidance four times. So I think it’s better to be a little bit prudent and under-promise and over-deliver rather than the other way around. But I think we also talked about the fact that we’ve quietly been growing our services business in Hydrocarbons. It’s growing double digit through the year. We’ve replaced what I think is quite bad backlog as we worked off some of the legacy projects and retired them through '18, and as you know we’re now out from under that. And we’ve replaced it with good backlog and I think you can see that on the consistency of our backlog over the last five quarters in Hydrocarbon Services. So I think we’ve not done the big rah-rah but we’ve just been quietly doing our work and I think we’re well positioned. And I think what it also demonstrates is that as long as we retain our commercial discipline, when we do book something of a larger nature as we go through '19 and there’s a number of those opportunities in front of us, we would be doing it in a way that we expect to make some money. And that’s probably enough said about that.

Fair enough, Stuart. I guess the next question might be for you also Mark and I’m going to let someone else take the stab at the adjusted EPS adjustment. But I guess for me on the cash side, obviously a great conversion rate which is good to see. Does that – can you sort of indicate what that includes or bakes in, in regards to maybe some advanced placements you might get on some of the mega projects and any incremental Ichthys that might come in this year that might materialize around this point?

Thanks, Tahira. It’s a pretty straightforward view to operating cash flow next year. You take the cash earnings and you subtract the pension payments plus some growth relative – working capital oriented growth across the business since we are growing in the three segments on the top line. And so when you factor that out, you get to the middle of the range. We did not include any advances for our Hydrocarbon Services projects even though that is certainly possible and we did not include as we have consistently not included any beneficial impacts relative to settlements on Ichthys or any adjudications of that nature. So we have taken the prudent conservative view as we’ve consistently done there.

We will now take a question from Jamie Cook of Credit Suisse.

Hi. Can you hear me?

We can, Jamie. Good morning.

Great. Congrats on a nice quarter. I guess two questions. Mark, my first question is directed towards you in terms of the guide. The adjusted EPS guide looks good because you’re adjusting out the interest on it. It gets in the convert. But I’m trying to understand what’s implied in your guide for operating income or your gross profit in equity and earnings. Is that expected to be up year-over-year because I have a hard time getting there based on the below the line item adjustments? So if you can help me with that. And then also what’s implied in the guide in terms of rev recognition for 2019? And I guess my second question not to being up the bad topic, but there’s been a lot of press before you guys reported on Unaoil if you think about Petrofac and if you think about FPI. So I’m just wondering if you could provide an update on where you stand in terms of that investigation. I think others took a reserve on this during their quarter, so I haven’t gone through your 10-K yet. Just wondering your thoughts on that. Thank you.

Okay, good. You packed a few in as you normally do, Jamie, but that’s cool. Thank you for calling in. Relative to 2019, the margins that we are forecasting are consistent with the long-term targets that we have provided consistently since 2017. Although I will say we have or reasonably expecting a downtick in margins in our Hydrocarbon Services segment because we did have some favorable closeouts in 2018. And in addition, while we’ll have strong equity and earnings, we’d expect 10% to 15% reduction in equity and earnings year-over-year. We have some projects moving out, like the fixed price project we had in Europe last year. And so that will downtick a little bit as well. But again, the overall gross profit plus equity and earnings margins are very consistent with the zones we gave you in 2017 and have consistently hit, sometimes exceeding. I didn’t quite follow the question on rev rec but we have adopted the new rev rec rules in 2018 and that remains steady Eddie for 2019. So that did have a beneficial impact of bundling some of the individual components of Ichthys business together and that results in just a more predictable consistent earnings string there.

And I think on oil, Jamie, our position hasn’t changed. It’s been quiet. The circumstances of Petrofac and TechnipFMC are specific to those companies and their history. And I think TechnipFMC was as I read it dealing with not only Unaoil but Brazil and other places as well. It wasn’t just specific to that. And our position remains as is. It’s no change whatsoever. And I know you’ll recall that this is for us an issue that goes way back in time when we were actually part of Halliburton and then we had the U.S. monitor from the DoJ sitting in our offices through that period. And we certainly feel that we’ve got a market leading compliance program and one that we adhere to very, very strictly particularly given our history. But no change, no noise around the quarter or over the last quite significant periods in fact.

We will now take a question from Anna Kaminskaya of Bank of America. Please go ahead.

Good morning, guys. So maybe I’ll start with Government Services just kind of trying to figure out sustainability of growth even excluding the one-time project 16% is pretty – is very impressive. So, a, how much of that one-time project will you still see in the first quarter? How much of that will drop into the revenue? And secondly, what’s baked into your organic growth guidance for 2019? And as I think about more NASA projects coming in, what does it do to your margin? Because I always thought that we might see some pressure on some of those new awards coming through. Again, what can Government Services margins do? Can they be sustainable next year?

Great, Anna. First, relative to Government Services, 16% we’re very proud of. We’ve seen increased OPTEMPO across our logistics and engineering services business. There’s still some interesting outstanding proposals out there that can drive growth going forward. So we’re certainly competent in sustained growth. We have been more cautious in our outlook relative to our guidance at this point. We have healthy organic growth in the range of the long-term targets we gave you at this point in time and we’ll see how the rest of the year shakes out with new wins. But we I think have been prudent there but still very attractive organic growth there. Relative to NASA, as I think we’ve consistently said, our business does benefit very much from the international component relative to margins. We are growing in that area. But if we have particularly large growth triggered from a NASA SENSE win or upside in LOGCAP V, we would reasonably expect a modest downtick in margin percentage terms with the Tyndall growth in profit dollars which we’d be delighted to see.

And then how much of the Air Base restoration?

We had obviously an excellent quarter in Q4 with Tyndall and that’s moved in obviously to Q1, but our expectation is that it will start to dwindle down from here on in and as that moves into a different phase of restoration of those facilities. But I think – I would actually think about the growth, excluding Tyndall, is still market leading. And as Mark said in his speech that at the end of the day he’s not seen growth like this across the Government Services business so outstanding. So we’re feeling very, very bullish about where we’re positioned. I would say that the work that we’ve announced and won recently POTFF and Kennedy BOSS, et cetera, has yet to come through in the revenue line and it really sort of underpins our earnings growth going forward. So we’re feeling really good about that.

And then just a bigger picture question, not sure if you will address it at your Analyst Day, but clearly your valuation does not reflect double digit organic growth for Government Services, more stable business than they used to be. Can you just talk how about your thoughts have evolved on the portfolio over the past year, especially as you saw your stock cycle up and down with oil prices and the E&C sector? Not sure if you can share some of your kind of thoughts inside of the company.

Yes, it’s the eternal question at the moment. You’re quite right. We’ve had a very strong performance over '17 and '18. We’ve done all the things we said we’re going to do. We’ve avoided the volatility that plagues the E&C segment. We had skeptics that said that we couldn’t win work in Hydrocarbons, in particular, without taking significant risk and I think we’ve proven them wrong. We’ve grown a very strong services business that’s very akin to the risk profile associated with Government Services. And we’re still very much in the big project business, but we’ll do it on a highly selective basis. So my – everyone has a different view on this, but I guess my view, Anna, is that we will be rewarded through time for consistent performance. I would bring you back again to a cash performance. I think that really demonstrates where we’re heading as a company and it really sort of gives us optionality going forward as well. So I think the market will respond accordingly as it does and as you’re aware we are looking to change our [indiscernible] in a way that we’re positioned and we are working hard to do that to reflect our current mix of business because we think a lot of the ups and downs are driven by electronics at least. So that’s the actions we’re taking and hopefully consistency and delivering on your promises pays off.

We will now take a question from Alan Fleming of Citi. Please go ahead.

Hi, guys. Good morning.

Good morning, Alan.

Can you hear me?

Yes.

Stuart, maybe I can dig into Technology a little bit. You’ve seen good growth there and I know you moved some of the consulting work out of Technology and in the Hydrocarbon Services business at the beginning of the year. But it does look like backlog is still outpacing growth or the organic growth. So is it fair to expect the revenue conversion there then start to accelerate in 2019? Or I guess said another way, we shouldn’t see a catch up in revenue given some of the strong growth we’ve seen in backlog?

I think the message here – the question you’re asking is exactly the message we’re trying to convey. We grew in backlog significantly through '18 at record levels I think for a number of quarters now. The delivery side of that business is fantastic, particularly given the risk profile and we’re excited about new technologies and I talked a little bit about K-SAAT which could be a significant contributor to KBR going forward. So we are very, very excited and we think we can – we historically have CAGRs over the last 10 years in Technology of about 12% and we don’t expect that to slow down.

Okay. And, Mark, maybe one for you. You talked about leverage kind of kicking at the 3.4x level in 2Q and it’s come down a little bit and you’re targeting below 3x by the end of '19. Is that the right long-term level of leverage for the business? Now you got a portfolio that’s 75% plus mix from Government Services and I would assume that’s probably going up in '19. But maybe if you can talk about that and I’m sure you’ll probably lay some of this out at the Analyst Day, but what are your thoughts here.

Great question, Alan. We did set the 2.75 target prior to Aspire and SGT and that merits reconsideration of that, which we will do in our Investor Day. So perhaps a modest uptick in that target would be appropriate depending on what the interest rate environment is like and the composition of our capital structure and so forth. So we will always give that heavy thoughts. But we certainly know that tactically speaking 2019 is a year where we focus on cash generation and debt reduction. And we at least want to get to the – breakthrough the 3 barrier, if you will, on the south side. And hopefully at that point we’ll have some other opportunities relative to deployment to consider. But we’ll lay that out on May 3 as you’ve suggested so that it’s definitive and shared for everyone.

Our next question today comes from Michael Dudas of Vertical Research.

Good morning, gentlemen, Alison.

Good morning.

Good morning, Mike.

Good morning, Mike.

Maybe Stuart you mentioned previous to a responsive question in your remarks about getting some of the – you’ll get the benefits later in Government Services, some of the new project wins that haven’t shown up in backlog. Can you just further elaborate on timing of some of the recompete? You mentioned LOGCAP in April and such from the Government Services side and how that can impact later this year or momentum or not in 2020. And also on the Hydrocarbon side on the non-services, on more of the larger project side, your expectation timing that you’ve seen over the past few months and can we expect something in the next 30 to 90 days on one of the big hits that you guys are targeting?

Okay. Thanks, Mike. So just starting off with the Government Services, I think we were quite clear when we acquired SGT there were no major recompetes up for a couple of years associated with that business and that still holds. The one – probably two we talked about as part of the presentation, the one in Jacksonville for the U.S. Marine is this is a Preposition Stock. It’s underbid now. We’d expect that to be awarded end of this quarter or early next quarter. So that will come through in the next 30, 60, 90 days. NASA SENSE we expect similar timetable. So that’s not a recompete. That’s a new type of award. So I think we’ve got very strong momentum regardless in our business, our Government Services win rate is very, very high on recompetes, so it’s well above 95% and obviously everyone’s waiting for LOGCAP V in April. But again, we feel we’re very well positioned across that. So in terms of the oil and gas, the big prospects in front of us today are in the main and the LNG environment. I’ve talked about a number of those. I think we’re increasingly in a good position and I think that it’s difficult to really nail down FIDs on those as we’ve seen. But certainly we’ve got I think line of sight for – Nigeria LNG is still expected to FID late in the year. We’re bidding the [indiscernible] which we think will be a reasonably quick turnaround that we could bid in the next 90 days. I think the mid scales of things like Magnolia – if the trade disputes soften and their offtakes has been even quite vocal on there where they’re positioned. Their offtakes, if that softens and they get their offtakes away, I think again that could move in the next sort of 90 or 120 days. So I do think we’ve got very strong optimism. I think there’s an enormous opportunity and even our pipeline is very, very significant and we’ve got that coming through, through the rest of the year. We do think '19, we’ve talked about BLADE which we announced yesterday. We have talked about the methanol plant and the specialty chemicals plants coming through. So we’ve got very solid foundation of growth; at the same time, very excited around some of the opportunities in front of us. So I do think that '19 will be a year where we build backlog just because of the way these projects ramp up. But that would be a good place to be.

It sounds like great visibilities to it. Thanks for your thoughts.

We will now move to Lucy Guo of Cowen & Company.

Good morning, Stuart and Mark.

Good morning.

I wanted to maybe do a couple of follow-up questions just to clarify in terms of your EBITDA margin year-over-year. I believe you said something close to flattish, but if you can point to any significant needle movers at any of the segments that would be helpful.

No, I think we’ve been pretty consistent now for a couple of years, Lucy, in the way our margins are sort of coming out. And I think we’ve met or exceeded those margin targets. I think Government Services is high single, low double digits depending on the quarter and what’s happening in our international business. And as Mark said earlier that might tick down a little bit depending on volume and things like LOGCAP V. But in truth I think in '19 that’s unlikely just given the fact that the timing of LOGCAP V is April and by the time the transition and protest periods, if there is one, come through, it will really be a '20 event. So we see that pretty consistent. We’ve pitched our Tech business at mid-20s and we upped that from low-20s at the beginning of last year to mid-20s as we outperformed, and we think that’s a pretty good baseline to model on because if the mix changes in terms of heavy procurement or a mix of licenses, then the margin will come down a little bit. But given it’s a negative working capital business growing the CAGR as we’ve discussed, we feel pretty good about that. And then on Hydrocarbon Services, we’re sort of in the – I think after NCI we’re in low double digits there this year. We’ve always said that’s a mid to high single digit business. And as Mark said, we think that will come back to normative levels through the course of the year. And it might uptick a bit if we do well. But I think again the prudent position is to say that’s where we would see that business heading.

That’s helpful color. The follow-up question is in terms of Government Services. You have a number of potential NASA new awards ramping up POTFF as you spoke to, Kennedy BOSS is another potential you’ve mentioned previously, NASA SENSE. It sounds like you’ve factored in some percentage of probability of when on those in your guidance. But just in thinking perhaps longer term, right, your exposure is fairly concentrated with the Army and NASA still. Thinking of – there’s a lot of conversations around M&A within Government Services that hasn’t slowed down. But if you think about areas of potential diversification and how valuation tends to be on the more appealing Intel cyber type work, how are you thinking about that tradeoff just longer term?

Yes, just to clarify. In terms of we talked about POTFF and Kennedy BOSS as part of we’ve won already. Maybe that’s a second chamber [ph]. We’re well advanced ramping up through Q1 on the people side of that, quite a few hundred people now that have moved across and recruited in POTFF and growing. And in Kennedy BOSS, again, we won that and it’s under protest but NASA pushing ahead with the transition and that kicks off in the first of April. So again, that’s pretty set. And on NASA SENSE, you’re right. That’s still a competition. I think there’s a couple left in the race and we’ll find out about that in the next few months as we’ve said. In terms of – if you look at our portfolio, the one piece I think that often gets undervalued in our Government Services profile is our international business. That consistently has margins and teams which exceed what happens in the intelligence and the cyber community often. It’s locked in for the next – until 2041. It’s negative working capital. It’s a hugely attractive part of our business. And I think as well we have diversified the business. Army is a big customer but so is other parts of the military. And Mark can talk a little bit more about that. But I’ll bring you back to really where we’ve intentionally moved to a very balanced funding stream portfolio across [indiscernible] NASA and of course our international business is pretty well balanced across all of those. So I don’t think we’re too heavily dependent on one particular part of the Department of Defense and I think we’re very well spread across the funding buckets. Mark, any more clarity?

I’d just add that POTFF is special operations and so that is a major new customer with some exciting things to follow there as we think about military health across all of the armed services and so really excited about a greater role in the military health market there. And then Air Force, that’s one of our significant contributors for organic growth the last couple of quarters, particularly work in data and systems integration through a number of contract vehicles. So the team has done a real nice job expanding organically there. And so you’ll see the pie chart start to reflect more Air Force and special ops in 2019 and that will be fun to see.

We’ll now take our next question from Brent Thielman of D.A. Davidson.

Thanks. Good morning.

Good morning.

Mark, the additional $100 million cash investment you estimated would be needed to complete the rest of Ichthys, I guess as you’re progressing toward completion given where everything seems to be at, do you feel confident at this point that forecast is going to prove conservative or what are some of the factors out there that might get you to the upper end of that?

To say that we’re not going to spend all that I think would be – that would be really getting over in front of us and we’re not going to do that. I think what’s important is that the commitment we made, the overall 500 million a few quarters ago is holding. I think for me specifically the benchmarks there for demining at site and the fact that we’ve got visibility to the end and we’ve got – we’ll end up with a very small commissioning team there through to the end of Q2. So our risk is mitigated substantially. I think for us we are certainly thinking this is really now about settling claims and pursuing legal matters to recover the monies that are outstanding and we’re going to update the market as we go. But in terms of thinking about the exposure and the cost growth opportunities and things like that, I think that – and the main behind us, so we’re feeling pretty good about that 100 million being the end.

Okay. That’s helpful, Stuart. And then I guess second question, the activity you’re seeing related to IMO 2020 for Technology, is that something you think can continue beyond when the regulations become effective? And I know we obviously focus a lot of LNG, but are there meaningful opportunities with the Hydrocarbon Services business related to that we should consider?

Yes, massively so. I think both IMO 2020 and K-SAAT really saw the introduction of that into the U.S. as an enormous opportunity. I think we’ve talked about the technology opportunity. But if you layer in the fact that when it comes to the U.S., we’ve got a blue collar construction workforce and a capability here we can leverage in through our services and delivery businesses. We’re feeling very, very upbeat about that.

That will conclude today’s question-and-answer session. I would now like to turn the call over to Stuart Bradie for closing remarks.

Thank you again for joining us today on the call. We obviously look forward to seeing you in New York on May 3. As Mark said, we got some exciting things to talk about and to show you. I think in closing, for me, the last two years has been fantastic. The way that KBR has responded and the people across the world have responded is amazing. And it’s really coming through in the results. And again, I’d like to thank them publicly. We’re hugely upbeat about the future. I think we’re well positioned in growing markets. I think we’ve really set us well and more importantly the cash conversion piece is really, really exciting because it provides optionality going forward. So with that, thank you very much again and we’ll obviously see some of you on the road. And if not, we’ll see you in New York. Thank you very much.

This concludes today’s call. Thank you for your participation. You may now disconnect.