KBR, Inc. (KBR) Q1 2019 Earnings Report, Transcript and Summary

Good day, and welcome to today’s KBR Inc. First Quarter 2019 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 be given instructions at this time. For opening remarks and introductions, I would now like to turn the call over to Ms. Alison Vasquez. Please go-ahead ma’am.

Good morning, and thank you for attending KBR's first quarter 2019 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, our market outlook, and financial results. After these remarks, we will open the call for questions. Today's presentation is available on the Investors section of our website at kbr.com. I would like to remind you 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 most recent 10-K available on our website. I’ll now turn the call over to Stuart.

Thank you, Alison. Good morning and thank you for joining us. I will start on Slide 4 as ever on health, safety, security, and the environment. The graphs really show that we continue to perform. Our core culture of looking after oneself and those around us is driving this performance. I would like to personally thank all the people at KBR for their continued vigilance and passion around this subject. On to Slide 5, Q1 highlights. Combined with our recently announced LOGCAP V win and also the GICS code change. I’m pleased to report that new KBR has really come out of the blocks strongly in 2019 with our Q1 results. We are of course building on the growth and momentum from 2017 through 2018, and this is actually the ninth consecutive quarter where we have met or exceeded our expectation. Overall revenue was up 29% from this time last year. The growth was delivered in our government facing business and in technology. Technology growth of 48% was all organic, granted over a slow start in Q1 last year, but still an outstanding result. Government growth was 44% overall, but this did include the impact of the SGT acquisition, which closed in April 2018. So, going forward year-on-year growth will be essentially organic. The organic growth in the quarter for government was 22%, which did include continuing upside from the emergency relief work at Tyndall Air Force Base. This work is now ramping down as expected. Excluding Tyndall, organic growth was at terrific levels in the low teens. This is the fifth consecutive quarter in double digits and industry leading in its own right. Margin performance in the quarter was very pleasing, especially considering the technology business had a heavier proprietary equipment mix, and the emergency relief work and government solutions was at lower than normative average margins as you’d expect. Aside of these, all the businesses performed at or above expectation on the margin front. This all combined to deliver adjusted EBITDA growth of 15%. We’re also very pleased with a strong operational cash performance. As you can see, we were positive and inline with annualized expectations. Quite a difference from 2018, which reflects our efforts to better manage cash. We remain well on track to deliver a full-year 2019 cash guidance. On the bookings front, our overall book-to-bill was 1.1, excluding the PFI workoff. Both government and technology had typical seasonally lower bookings in Q1, but obviously the big news in our government business was the win on LOGCAP V. This will hit our backlog later in the year, subject to protests etcetera. The highlight in Q1 backlog growth was actually in our energy facing business with a book-to-bill of 2.4. We are seeing increasing bookings momentum and have already announced the number of key wins in Q2. On to Slide 6, on market outlook. Following on from our strategy sessions in 2018, it became clear that where KBR was heading and what our customers were asking for was converging across all of our segments. This was essentially deep domain knowledge, coupled with increasing digitalization and broader procurement by the length to deliver complete solutions. To recognize this shift and to align with customer needs, we are renaming our segments appropriately to government solutions, technology solutions, and energy solutions. We will of course explore this further and highlight the increasing synergy across segments as a consequence at our Investor Day this Friday. We will also discuss the markets in a bit more detail on the 3rd, but at a high level we continue to experience Buoyant end market conditions across all of our segments. Growing backlog and recently announced wins in all three segments support this. Strategically, we are positioned for attractive rates of growth in each of our three business segments, which underpins the level of excitement and the momentum we are seeing around the halls of KBR these days. On to Slide 7. We thought it's prudent to give a bit more detail on LOGCAP V and what the – recently announced awards could mean to KBR. The LOGCAP V clearly removes an element of uncertainty for the years ahead, plus has meaningful upside. Given the complexity of the transition, we did not expect any material impact in 2019 and thus our previous guidance holds. KBR has secured three of the seven major contracts that were tendered, including the large and challenging Afghanistan area of responsibility. I will remind you that no one company was allowed to win CENTCOM and Afghanistan due to their scale and complexity. Today, two companies support Afghanistan. This will all move to KBR as we transition off current work in the CENTCOM area. We have retained the European command and added the Northern command. The areas are shown on the map. The public data on historical spend across each region is shown in the table, which gives a feel for the upside potential. Importantly, the strategic positioning in EUCOM and NORTHCOM are on training and readiness is critical, and it is worth noting NORTHCOM includes the Arctic and manages a disaster support. One other key point to note is the LOGCAP V includes the far larger training and readiness skill. This is funded from O&M budgets rather than from the traditional contingency budget. This of course leads to greater stability, funding assurance and thus predictability. This all reconfirms KBR is the market leader in logistic services and underpins our position for the next 10 years. I will now pass over to Mark to give more detail on the financials.

Great, thank you Stuart and I will pick it up on Slide 9. As Stuart already covered, we started 2019 really well with good financial performance, contract wins, and new business pipeline progress that bodes well for the outlook for the rest of the year. Strong growth in the government and tech solution segments coupled with stability and energy solutions yield a top line growth of almost 30% year-over-year. Higher revenues coupled with good overall margins were the driving force for 15% adjusted EBITDA growth year-over-year. You will note equity and earnings dropped from 2018 levels. This should normally be in the $10 million to $15 million range per quarter. Last year saw an unusually high result whereas this quarter it’s zero. The reduction was driven was a decision to exit a long-term joint venture in Latin-America and this is primarily evidenced with a one-off non-cash impairment charge of that investment. We also had a net charge from legal matters on the Ichthys LNG Project embodied in equity and earnings. The main message on Ichthys however is that we remain fully on track. As we told you in February, mechanical completion is behind us and we still expect to turn over the power plant in late Q2, early Q3 of this year. We have de-manned the site and only have a small commission and crew in place today. Our estimated cost to complete the power plant has not changed and our 500 million cash estimate to complete project execution is also unchanged. Of that estimate, a little more than 400 million has already been funded to date, but the end of that cash flow is accordingly near. All other matters in the P&L were pretty much as expected. Adjusted earnings per share came in at $0.36 that’s up 6% over last year on higher revenues, good margins, and offset somewhat by the equity and earnings and higher interest. We’re really pleased with the operating cash flow results of almost 50 million and what is usually a soft first quarter. Focus and rigor across the team has been good and there’s certainly no plan to change any of that. Now on to Slide 10, for some takeaways on our performance by segment. The government solution segment continued its streak with the fifth straight growth of double-digit growth as Stuart mentioned earlier and that excludes the effect of the ongoing work at Tyndall Air Force Base, which contributed 9% points of the total 22% organic rate. In other words, we did 13% organic without Tyndall. As Stuart said, margins were a little off as the emergency work, we are doing at that Air Force Base understandably comes at a lower fee. Strong cash collection and government solution helped drive the overall cash result as well. We’re really pleased to see that. Technology also continued its stellar organic growth performance at 48%, revenues were aided by a high proportion of proprietary equipment sales. That did bump down the margin a bit, but we expect to remain on track with our targets and margins for this segment for 2019 as the future quarters unwind. Technology also helped the overall cash result with continued excellent conversion. It’s good to see how these solutions have stabilized in revenue over the past few quarters. With the Q1 book-to-bill of 2.4, recent announcements, strong pipeline, and improving market conditions, we anticipate project wins will start moving the needle for sequential growth in the second half. On to Slide 11, not a lot of change on the capital structure side, although we would note the ongoing deleveraging we’ve seen with gross debt-to-EBITDA now being reduced to 3.1. We’ve seen this consistently calm down over the past few quarters. With Ichthys funding coming to an end soon, we are increasingly confident we will commence gross debt reductions in the second half. This coupled with ongoing EBITDA growth should advance our deleveraging to below 3 this FISCAL year, and also pave way for expanded capital deployments next year as we’ve consistently messaged. On to Slide 12, it’s been a good start for 2019 and we’re re-affirming our guidance at $1.58 to $1.73 for adjusted EPS and operating cash flow in the $175 million to $205 million range. With that, I’ll turn it back over to Stuart to close up our remarks.

Thanks Mark and on to Slide 13 for some final thoughts and some key takeaways. Already 2019 has been a busy year for KBR. A change of GICS code that better reflects the transformation that KBR has undergone, a change in our segment names to align with our customer needs, and on the back of the momentum we built in 2017 and the strong growth we generated in 2018, our start to 2019 has been terrific. Cautious and enormous focus and we continue to see the fruits of our labor. Our end markets remain blank and we are very well positioned in attractive submarkets. Our backlog has increased in Q1, with the standout being energy solution delivering a book-to-bill well above 2. Recent announcements across all of our segments, including LOGCAP V of course mean that 2019 and beyond are shaping up to continue our value and growth story. This is a reminder that the Investor Conference is New York at the stock exchange on Friday, the 3rd of May, so this Friday. I will hand it back to the operator, who will open the call up for questions. Thank you.

Thank you, sir. [Operator Instructions] We will take our first question from Tahira Afzal from KeyBanc. Please go ahead. Your line is open.

Thank you and congrats on the data quarter again. First question is, you know it seems, even based on your slides and the update that Ichthys is essentially in handover phase at this point. Stuart, any update on timeline for final settlements with the owner?

You are quite right, we are moving into what I would call the settlement phase if you like, we have got to get through the next couple of months and handover the power station and therefore the full facility and get to that performance test. I think then the conversation will probably change in terms of the facility working to spec and producing at the levels it should be – but other than that, Tahira, no. I think we’re optimistic that we will start to get a different dialogue once the facility is handed over, but I can’t guarantee that.

Got it okay. And second question is, really in regards to a lot of the big LNG projects that we keep seeing on the map. Stuart, is there is any update that these are for you more a second half opportunity, seems to jive at the FID date, but just wanted to make sure there was no sort of change in timing or any slippages over there?

No, we’re not hearing anything about slippages and I think what we said last quarter still holds the main opportunities that we are looking at. We will know before then of course, but the FID’s themselves will be in the second half of the year.

Got it, thank you very much folks.

Thank you, Tahira.

[Operator Instructions] We will take our next question from Brent Thielman from D.A. Davidson. Please go ahead.

Thanks, good morning, great quarter.

Thank you.

Stuart or Mark any update on maybe some of the other important recompetes you’re looking to secure this year in government?

Yes, so I think the major recompete we were worried about was LOGCAP V, you know we felt pretty well placed, but you never know until the music stops, I think obviously we’re very, very pleased with the outcome there. I think it removes a lot of uncertainty in terms of our future and underpins I guess where we go in the next 10 years. In terms of other recompetes, there is one in for the Marines where we do the pre-position stock, and that’s really the major one this year and not [indiscernible] any day now. We’re feeling really good about that. Our recomplete sort of win rate is very, very high, you know in the high 90s. So, we’ve had pretty good past performance there. We are feeling really good about the level of dialogue with the customer and we will hopefully be announcing that over the next month or so and that will be the only major recompete left this year.

Okay. That’s great and then on energy solution, the CapEx projects, those Methanex and the chemicals project you referenced on last quarter’s call that were expected to FID in the second quarter. Are they still on target for this quarter?

Yes, the methanol project, I think there was quite a lot of debate around that, I think from an activist investor and things like that, now you do without the EMEA stock, but I think that’s all behind them now and so they are moving ahead. So, we’re feeling pretty upbeat and that’s going to FID as expected in the second half of the year, and there’s lots happening in the downstream sector across the Permian and really just the chemicals market in January. So, again, we’re feeling that those will move ahead and hopefully we will be making some positive announcements over the next little while on those. So, we’re feeling really good about the energy solutions market both in the services side, you know for good growth there, and we’re winning a lot of work in that arena, which is fantastic and you know we’re bidding a lot of maintenance contracts and things like that we’re feeling pretty good about and hopefully they will come to fruition in the next little while and then on the big CapEx stuff things like Methanex we’ve talked about before in terms of methanol and we are looking pretty good as I said, and things are happening in the Permian and around the downstream sector in general and then you layer on the LNG. So, I do think that we are pretty well positioned as Mark said to start to see sequential growth tick up in the second half of the year.

Okay, great. Thank you.

Thank you. We can take our next question from Lucy Guo from Cowen & Company. Please go ahead, your line is open.

Thank you. Good morning Stuart and Mark.

Good morning, Lucy.

Hi. Following up on the last question on energy bookings, was there any pull-forward into Q1 just given the strong book-to-bill?

Approximately not. I mean, no, we’ve got a very strict, I guess bookings policy. We only book work when it’s signed, we only book it on the quarter it signed. There is absolute about that within KBR. So, no through forward and no…

Yes. Just in terms of your expected timing of certain projects may have, came in earlier than you had planned?

No. Obviously no.

Okay. So, you mentioned, you are already seeing a few key wins in Q2, Methanex sounds like one of them. Anything else that you can point to and that’s expected for Q2?

So, the methanol project you mentioned, we won some time ago both the FID and EPC, which is reimbursable. We are just waiting for FID to move into the next phase, which is in the second half of the year. As I said earlier on this call, we have got a number of things that we think are coming to a conclusion aside of LNG in this quarter. And we’ll be announcing them as we go forward. So, we’re feeling really good about the energy solutions market and if you add on an LNG project on top of that, the growth can be absolutely stellar going forward.

One more if I may on the government side, which is, it seems Tyndall was roughly $80 million in the first quarter and can you just talk a little bit about how that may fall off for the rest of the year and was there anything one time that was potentially on margin item, in general EBITDA margin on the strong volume growth was down more year-over-year than I had estimated.

So, volume is probably above what you estimated, because Tyndall run on a bit longer than, I think we all expected, but the margins associated with emergency relief work are quite likely lower, so that volume comes at a lower margin, which puts a little bit of pressure on the margins, but that work is now ramping down as Mark and I both alluded the underlying organic growth, excluding Tyndall was in the low teens at 13%. So, I think that brings it back to the levels, excluding Tyndall on an organic basis and we will return to normative margins next quarter as that work starts to ramp down.

Thank you, I’ll pass it on.

Thank you.

Thank you. We can take our next question from Steve Fisher from UBS. Please go ahead. Your line is open.

Thanks guys. Congratulations. Cash flow was nicely positive and a good start to the year, just curious how much of that $175 million to $205 million cash flow do you think you could have available for buybacks and debt reduction. I think second half of the year Mark would be debt reduction, I just want to ensure if you consider the Ichthys out flows as an offset to that cash flow or if you consider that separately since it’s already funded by the debt? And then related – when do you expect that cash flow related to Ichthys to kind of fully go away?

The flows related to Ichthys would probably bleed into the third quarter and I hope and expect it should be done by then. So, it will be noticeable in Q2 and I think it will be less noticeable in Q3 and probably not at all in Q4, I would say. And relative to the free cash flow this year and operating cash flow, we do have a shot at maybe much as $50 million mark to our debt reduction this year, because we have as you appropriately said some excess cash on the balance sheet to fund some of that Ichthys components. Our priorities are very clear. You know, we got to meet our obligation on Ichthys. We expect to deliver to the sub 3 area both through EBITDA growth and debt reductions, and I do expect to have some of the happening in the second half, probably more in the fourth quarter.

I think Steve, it’s also worth noting that as we typically do, we’ve been prudent in terms of our guidance in the way that we think about the business in general, but also in cash, and now there are no recoveries at all backed into those numbers either from ongoing settlement discussions with the U.S. Government and historical issues, as well as any recoveries obviously through Ichthys and other commercial ongoing negotiations. So, I think it’s a very prudent position as we’ve laid out, and I think really a very sort of positive place for KBR to be from a cost perspective.

Great. And then, I imagine you’re going to a little bit about strategy on Friday, but just curious what the pipeline of M&A potential looks like in Government business at the moment, and kind of how actively you're looking at deals coming through?

I think we will be very clear that our priorities at the moment are to de-lever, and, you know, we’ve got amazing opportunity in terms of the growth in front of us that we’ll present on Friday without having to do anything from an M&A perspective. But that said, you know, we’ve done very well acquisitively in the past. I think our approach to acquisitions has proven that we will hard at the cultural integration piece and we have not seen any degradation in volume and anything, but we’ve done slightly complete opposite of it actually. I’ve performed in the synergy side. So, we’re all looking, Steve, you know, I’ve talked about [kissing I mean a lot of frogs] in past and that continues, but, you know, I think we’ll be very clear about priorities and we’ve been very clear that we want to de-lever, and, you know, we don’t need to do M&A to transform the business, we’ve done that and we don’t need to do M&A to outpace growth in the industry, we’re doing it, and I think we’ve got back a lot to continue that growth without having to put the company in any way sort of overstress management lives in terms of integration charges and things like that.

Thanks very much.

Thank you. We can take our next question from Michael Dudas from Vertical Research. Please go ahead. Your line is open.

Good morning, gentlemen and Alison.

Good morning, Mike.

Good morning, Mike.

Good morning, Mike.

On government services, can you maybe elaborate a little bit on – the growth has been terrific in industry-leading for the last several quarters, maybe on the mix of where it came from, from funding or department sources and anything unusual? And does that type of trend still kind of look reasonable given, you know, the set up on what’s ahead of you guys?

Yes. It’s a really good question, Mike. And something we’re quite excited about – we’ll explore a bit more obviously on Friday, but one of the areas where we’ve really seen significant growth is actually in the engineering side of our business, you know, with a lot of cool stuff in there and we don’t – we probably don’t talk about enough in truth because everyone is consumed with things like LOGCAP and maybe rightfully so just given the scale, but our growth in our engineering business and our science businesses are being actually terrific. And they typically are funded through RDT&E obviously. We've done very well, I think in our logistics business and those are a strong mix of O&M funding and obviously some continues refunding, so its supporting what we’re doing in CENTCOM at the momentum, and I think going forward, you know, we’ve talked about sort of, you know, bids for NASA and where we sit with our research. Really, it’s a cross-section. I think that the important thing for us is that the government spending in those areas is, you know, is highly attractive and we feel that we’re very well positioned in those markets to continue that growth. I would also say that, you know, our performance will continue to do really well internationally. You know the performance on the PFI contracts is stellar and outside of that we’re winning quite a bit of work and growing in different directions and I think we’re realizing synergy being brought from the U.S. into places like the UK, and we’ll talk again a little bit more about that on Friday and give you a little bit more color, but it's – yes, now it’s a really good time in terms of the – not just the business and how its growing, but actually the future and they access the multiple funding sources, and as you know, that was a key part of our strategic build out in the past.

[Indiscernible] see you on Friday. Thank you.

Thanks Mike.

Thank you. We will again take our next question from Andrew Kaplowitz with Citi. Please go ahead. Your line is open.

Hi, this is [indiscernible] on for Andy.

Good morning.

Good morning. The quarter had organic growth of 48% in technology solutions and we know the Investor Day is coming up shortly and you’ve talked 7% to 10% CAGR in technology in the past. So, without making too much of one quarter, is technology on a path to grow double digits or at the high-end of that range going forward? And what's the biggest change that will allow technology to grow at this pace?

So, I think we laid out in 2017 that, you know, we’ve grown that business 7% to 10% and it’s actually outperformed it. Over the last 10 years, we’re actually looking back over 10 years, and we've talked about this before, it’s CAGR in the low teens. So, regardless of, you know, economic strife across the world, that business has just kept on going forward and growing. I think the – one of the key – there’s a lot of good things going on in technologies, so a little bit of a perfect storm. We’ve got things that IMO 2020 driving, you know, a lot of opportunity for our lowest technology. We’ve got obviously a buoyant downstream, it’s sort of gas monetization market that really is driving a lot of opportunity for things like ethylene and other technologies. And excitingly, we’ve got new technologies that are, you know, are coming to market that we were getting into the phase where we’ve got the first commercial scale plant, you know, working very well in China today and we’re able to use it as a reference site, and then go back and retrofit a number of facilities across the U.S. and other places.

For the case of our technology.

For case of our technology, yes. So that’s a – you know that’s an exciting times. So, I think there’s lots of things happening; there’s strong momentum in the market. I think our technologies fit those dynamics in the market very well. We’ve got continued investment in the development of those technologies and we’ll talk a lot more about that on Friday as to how we do that, where we do it and what we see the future might be. So, I do think the strong growth is going to continue in technology, and again, we’ll talk more about that as we set our targets on Friday.

Thanks. And as a follow-up, we’ve seen an increase in oil and it seems China trade relations certainty may be wrapping up in the coming months, if not weeks. Have you seen customers coming back to the table in the last few months? And has the cadence of order growth improved from the beginning of the year to where we are now? Thank you.

So, there’s more certainly positive sentiment across the market because of the China trade negotiations hopefully concluding as you rightfully say in the next little while. Certainly, the LNG supply demand piece hasn’t change at all. We’re still seeing a lot of activity in that marketplace. One of things we are seeing, which is, you know, increasingly evident, it’s quite a lot of NOCs investing in the U.S. to get a slice of the action around the gas market. You know SABIC and Aramco etcetera are sort of good examples of that, but there is a number of them, and I think for us that's terrific because we’ve got very strong relationships with what we’ve done, and using those two as an example in Saudi Arabia, and they know us very well, they know our skills around, you know, project execution and that we say we do what we say we’re going do and, you know, that really plays well when it comes to the U.S. So, we are seeing heightened momentum is that market. You know, I think our book-to-bill of 2.4 in the quarter clearly demonstrates that, and I think we’re being quite clear on this call and Mark’s remarks earlier that we expect that to continue and we expect to see sequential growth coming in the second half in our Energy Solutions business. So, it’s good times.

Thank you.

Thank you. We can take our next question from Chad Dillard from Deutsche Bank. Please go ahead. Your line is open.

Hi, and thanks everyone.

Hi, Chad.

Hi, Chad.

So, just a question for you guys on Energy Solutions, you guys called out that there are [indiscernible]. I was hoping you guys could quantify that and talk about whether there is any cash impact related to that? Or any change on the quick-change orders? And then also, the Hydrocarbons Services margins were up pretty nicely in the quarter, so I was just wondering if kind of there was any one-time event to contemplate there?

Sorry, we didn’t hear the first part of your question, Chad. Was it related to the venture in Latin America?

It was the excess [indiscernible]?

Yes. So, in terms of cash Mark was very clear that our target for cash of $500 million still remains intact and we’re getting very close to the end, so we’re very confident around that number, so no real cash outflow impact there. And in terms of the equity and earnings sort of performance this quarter, the majority of that was actually impacted by what -- you know our decision to get out the venture in Latin America. It’s one that’s been in – Oh! I think it was you know, it came across with the – as we spun off Halliburton many, many years ago. So it’s a very sort of old joint venture and we decided that it didn't fit with where we were going strategically, and with this part of new KBR, so we decided to exit it, and you know, we had obviously some balance sheet to address there, so most of that was related to a non-cash impairment of that investment. So that’s really the story around that. In terms of margins in the quarter, Mark?

Sure. We tend to look at margins, including equity and earnings on a segment basis and that was actually a little low due to the reasons that Stuart just mentioned on Latin America and to a lesser degree Ichthys. But there was favorably a little pickup on closing out a lump sum project in the first quarter in that segment. This was the only lump sum contractor undertaken since 2014 and it successfully sealed the way in the first quarter. So, there was this single digit, you know, sort of number, but it did conclude that project nicely. And so, that did hit the gross margin a little favorably. But again, it was offset at the end of the day with the equity and earnings results, if you look at the total segment.

Got it. And then just back to LOGCAP, how should we think about the margin profile of, you know, that when relative to what you guys were doing in LOGCAP IV?

Yes, I don’t think we’ve really sort of disclosed the margins associated with the LOGCAP IV. So, it’s a – but it’s a good question in the sense directionally. I think the way to think about it is that, you know, this was the best value procurement. You know we felt that we were, you know, pretty strong in – particularly in the big areas just because of our capability to do these big complex theaters. So, you know, I think you should put it in that context. You know certainly that will not – we don't believe there will be degradation in margin at all, and that there may be an opportunity to do a little bit better. I think that the big piece for us of courses is across the piece we do think those revenue upside potential because we’ve got three of the seven regions. We think strategically, you know, we’re very well placed, particularly in NORTHCOM and EUCOM and particular around readiness and capability, you know, setting capability and for the Army. And that, you know, as said before, that’s funded from O&M and that’s a big shift, and, you know, that should not be underestimated in terms of the predictability that gives in terms of funding assurance. So, I think all up, you know I think no degradation in margins maybe potential for upside, and then, you know, beyond that I think we’re really looking at growth in volume and being very well placed strategically with more assurance about the future.

Great, thanks guys.

Thank you. We can now take our next question from Jerry Revich from Goldman Sachs. Please go ahead.

Yes, hi. Good morning everyone. Can we just continue the LOGCAP discussion? Congratulations on the win. I’m wondering if you can comment on relative to the program sizes you laid out or task orders on Slide 7? Can you talk about directionally how 2019 task orders are expected to shape up relative to the actual numbers in 2018? And as we think about modeling your business in 2020, what's the cadence of the transition to LOGCAP V as we think about, you know, effectively, you know, doubling your addressable market? How quickly does that ramp?

Yes. I mean the – we don't know how 2019 is shaping up, and yes, I mean that what we put there is really publicly available data that the, you know, the government publishes. You know that’s – it really is to give a fuel for what could be possible and in terms of what tasks are actually issued and how that comes to fruition. It’s difficult to assess that accurately today. But I do think the upside potential is clear and, you know, we’ll obviously disclose more as we move forward. In terms of transition, I mean, I think it's probably well-known now as publicly. One of the bidders did protest and, you know, that's a 90-day process under the rules to come through that. So, for us, 2019 is going to be as is. You know I think we will continue to do our work in CENTCOM and in what we’re doing EUCOM through the course of this year and we’ll start to see the transition in the early part 2020, maybe late 2019 at the earliest. And then, we’ll start to see that ramp up happen progressively through 2020 and beyond. To the scale of that, we just tried to give an indication of what that could mean based on historical spend on 2018 numbers etcetera, but there’s no guarantee that’s what it’s going to be in 2020. I mean, I can, the one thing I can’t tell you is that, you know, things change, but they don’t change quickly in these arenas. That’s for sure.

Okay, thank you. And then can you just talk about major new project opportunities and government solutions you mentioned no major recompetes coming up, what about incremental new project opportunities for you folks, what’s the magnitude and timing looks like based on what you see today?

Yes. We’ve talked quite a bit about things like NASA SENSE, that’s probably the near-term largest one. We’ve got a number coming up in NASA also. I think though that one of the key things to take away or certainly key takeaways for this quarter, we will talk a little bit more about on Friday is the growth in our engineering business. And our engineering business is not, you know they don’t really have these massive big awards, you know it’s a lot of idea IQs, there is a lot of working with small business issue, kind of we set up an idea IQ machine if you like that really works hard to sort of be local and work with customers whether it be in Huntsville or Lexington or wherever it might be, and they are doing amazingly well. And I think really that as a testament to that the growth in our engineering business is – we’re very excited about. So, I think there’s one or two big things that Jacksonville recompete we talked about for the Marines, obviously NASA SENSE and we’ve got a number, I don’t really want to steal the thunder from Friday. Here, but we’ve got a number coming up that we’ll talk about, and not just in the U.S., but also in the U.K. that’s actually very, very exciting and I think that you know as we said before the synergy that we’re seeing between the business lines and I guess from the historical acquisitions that we’ve done, but also across geography synergy and across businesses are terrific. So, again I’ll explain that further on Friday.

Okay. We’ll see you then. Thanks.

Thanks.

Thank you. We will take our next question from Jamie Cook from Credit Suisse. Please go ahead. Your line is open.

Hi, good morning and congratulations. I guess, most of the questions have been answered, but I guess just congratulations on changing your GICS code. But in that respect, how do we think about the strategic importance of the energy solutions and technology solutions business as we try to transition more to a government services type firm? And then my second question, whether there has been any feedback from customers on the energy side with this announcement? And then I guess just last question, you know there’s been a lot of LNG projects that have moved forward, which is probably a positive for you and how that impacts the competitive dynamics over the market of the projects that you expect to win going forward? Thank you. With capacity just getting tied up, thanks.

Yes. Thanks Jamie. So, I mean the first question on the GICS code, I think the rules are quite simple within GICS code land, and that is that if your revenue is greater than 60% in one particular segment, your GICS code gets changed and I think that’s what’s happened here. We hit a whole, you know many quarters in a row, while we were well above that level in a government business and so the change of GICS code is appropriate. I don’t think it really affects our strategic positioning at all. We are still firmly on the path that we set out in 2014 and reaffirmed in 2017, and you would hear a bit more about that on Friday as to what we thing our strategic advantages are and where we’re pointing the company. So, no change there in terms of customers, you know we didn’t get push back when we were labeled E&C from our government customers and we’re now seeing much push back the other way around either. I think Friday when we affirm that, you know we’ve not changed path to our commitment to KBR’s position in those markets is still what it was and it will continue to be that way. I think that the key piece for me is just how you can actually leverage the capability between those businesses and how that differentiation in the market and again we’ll explore that further on Friday. And I think you’re right in terms of LNG’s moving forwards. You know, I’ve been very clear that, you know we’re are going to maintain our commercial discipline. We’re not going to – we don’t need to rush in and book revenue for the sake of revenue. We’re all about the bottom line. We are all about quality of earnings and as the cash profile is not right, we won’t do it. But that said, we’re getting very mature conversations today that, you know the level of activity drives that of course and I’ve been quite clear that it’s okay not to win the first one and maybe not the second one of these LNG projects because you cannot want to be in a position with limited people who can do these big complex projects. You want to be in a position where you are having that mature conversation. And that’s certainly the case and we’re feeling hugely optimistic about LNG and we’re very optimistic just on the energy business in general. Our growth profile, we will explore this on Friday as it’s really, really exciting and I think that across the company all the markets are aspirant and you know we’re very well positioned. So, I’ve said before it is a good time to be at KBR and I think we will lay out that on Friday.

Great. I look forward to it. Thank you.

Thanks.

Thank you. We can take a follow-up question from Lucy Guo from Cowen & Company. Please go ahead. Your line is open.

Hi. I couldn’t let you go without asking a LOGCAP question, which is, can you just talk about what gives you comfort or confidence that the historic level of cash ordering is good reference point going forward? And then, second part to that question, maybe if you can give us a preview on the mix of funding between base budget versus overseas contingent fee and what sort of troop levels maybe expected in your forecast?

I think these are very difficult questions to answer Lucy. I think the – we do know that Afghanistan is very, very complex. There is quite a significant troop level there. That has been, it is very difficult to change that quickly. So, we feel that over time things of course will change little over the next little while, it’s unlikely. Although there is lots of high-level discussions going on between the U.S. and the Taliban today, and I’m sure those will continue. So, we basically, we don’t know the answer to your questions, but all we try to do is to say, look this is what’s happened in the past. You know, we will work-up as we work through the transition and get to know this arena and this theatre a little bit better, we will be able to give you better guidance. But that’s all I think we can really say today. But I think the key takeaway on LOGCAP V really for the audience here is, I think there is a lot of uncertainty. The worst thing that could happen to KBR was that we were not a winner and of course in a tendering situation not as obviously a risk and we’ve come out of this, I think really winning fee of the seven regions. One could argue we’ve come out the winner across that and I think the opportunity for growth across all three of those, particularly, you know not only Afghanistan, which is the largest, but I think, if you think about the geo political situation, you know this readiness and capability started building an exercise and things that are going on in Europe and I think increasingly in the Artic. It was as quite exciting and I think we can do a lot around that. So, I think that’s really the key takeaway and we’ll explore a little bit more on Friday, but I do think that we will know more as we transition.

Yes. I look forward to catching you up on Friday. Thank you.

Thanks Lucy.

Thank you. We have another follow-up question from Tahira Afzal from KeyBanc. Please go ahead, your line is open.

Hi folks, I saw you had 10 minutes, I thought I’d take advantage. So, first question as a follow-up, you know given the G&A reclassification, any chance we can get an update on the segment margin ranges? And second question is, I know, you probably discussed NASA more at length on Friday, but you know it’s been a year since you got all three pieces in a SENSE together. You know, you’ve talked about SENSE for a while, but I sensed, no pun intended that you might be seeing more market share gain opportunities as well?

Yes, I think on the margins Tahira, if you don’t mind, we probably are going to give you targets on Friday, so if you can wait a couple of days there, otherwise our current margins hold – and we’re feeling pretty good about that and we reclassified SG&A just to fall in line really opposite with the way that government looks at that in terms of rate recoveries and things like that. So, that was an appropriate stat as we did that. So, we will give you the targets with the new classification on Friday and without going further that’s probably we want to stop there, and, but you know all good. And in terms of NASA, you’re right, it’s almost a year since we put these businesses together, the integration has gone really, really well and we’ve – we talked about SENSE for a while because actually the procurement cycle takes a while. It’s not, as you know we are down in the final two where we’re expecting that to come out for a decision, I guess probably middle of the year, there is still a couple of months to go. There is lots of excitement around what we’re doing in space and interestingly enough not only in the U.S. and again we’re going to explore that a little bit more on Friday.

I better bring a fat notepad for Friday then. Thank you.

Yes. Good.

It appears there are no further questions at this time. Mr. Bradie, so I’d like to return the conference back to you for any additional or closing remarks.

Yes. So, thanks again for joining us this morning. As I’ve said before, it’s an exciting time to be part of KBR and of course we look forward to introducing you to the full management team. We’re going to bring the full management team along on Friday and to tell you a little bit more about the shareholder value that new KBR can deliver. Not only in 2019, but beyond 2019. And really to close, I regard your attention to the KBR logo that might be the last time you see it. Thank you.

This concludes today’s call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.