KBR, Inc. (KBR) Q3 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the KBR Incorporated Third 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 receive instructions at this time. For opening remarks and introductions, I would now like to turn the call over to Miss Alison Vasquez. Please go ahead.

Good morning, and thank you for attending KBR's third 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 our financial results. After these remarks, we will open the call for questions. Today's earnings presentation is available on the Investors section of our website at kbr.com. I would like to remind the audience that this discussion may include forward-looking statements, reflecting KBR's views about future events and their potential impact on performance 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.

Thanks, Alison. Good morning and thank you for joining us. I will start on Slide 4. Another excellent quarter across the company on health, safety, security and the environment. We close the quarter strongly by achieving zero harm across all of KBR including the subcontractors we manage. And that's on every day in the month of September. The third month we have done so in recent times. This is an outstanding achievement driven and delivered by our committed and passionate 38,000 people. As I often said, good HSSE is quite simply good business which takes us nicely on to Slide 5. In short, I'll absolutely spare the quarter, 11th in a row. The overall business grew 12% year-on-year. Each segment grew and thus contributed to the overall growth. Execution was excellent, margins were in line, cash flow and new business bookings were strong. And I'll give more granularity on the likes of any moment. And also happy to report that we handed over the Texas LNG project in its entirety. And to be clear, this includes the power station with all performance test successfully completed. The trains are producing at or above nameplate capacity and are exporting LNG commercially. The site has been demand with a small team for punchlist and typical warranty support retained. The funding to complete the project is in our previous estimates. That's of course, de-risk the business. And our focus now shifts to seeking recoveries on the counterparties. You may also recall that we won an important award a number of years ago called Army 2020, which is part of the Aspire project which we know well. The objective of Army 2020 was to bring the British soldiers under families’ mission to Germany back to the U.K and in so doing building and modernizing hundreds of structures across double Garrison's. I am pleased to report the program has done really well and in cooperation with the U.K. MOD all critical assets were delivered over the summer on schedule. This is a clear demonstration of our focus on execution. On to slide 6, at KBR we've been talking about winning the right work or sometimes. Strategic and commercial discipline being key things combined with a focus on customers and execution underpinned of course by a strong team leaders and a high-performing culture. We thought it was worth showing recent backlog performance to examine whether this approach was actually paying off and where we delivering on our promises and commitment. I think the numbers speak for themselves and in fact somewhat understated. As we do not include the unexercised option units on longer term government submissions contracts which as you're aware are more than likely exercised. In May this year, at our Investor Day, we said that all segments with growth and we expected energy solutions having reset this business – perform. But strong book-to-bill in 2019 and in Q3 alone our book developed 3.6, we feel positive about continued growth into 2020 and beyond especially as these numbers excluded before LNG which remains on track for FID in early 2020. Also important to highlight, we have sustained our trailing 12-month book-to-bill levels above 1x for six straight quarters delivering the backlog in each of our segments to underpin our growth. This takes us nicely onto slide 7. This slide hopefully gives you a good feel about the opportunity pipeline KBR has in front of us. Multiple sizeable opportunities in all segments with KBR continuing to benefit from a near-term LNG build cycle, new technology offerings and synergy and cash profit expansion in government solutions. Attractive contract vehicles and a government solution business continue to afford opportunities for technical experts to provide upper end engineering and cyber expertise to a large number of defense platforms as the Department of Defense is looking to modernize and sustain its aging effects. The graph on the right shows the progress we are making towards securing our future, admitting double-digit CAGAR targets through 2023. The only certainty in today as well as you well aware is uncertain. As such, we believe some time ago it was a strategic imperative to position our segments on KBR in attractive less volatile markets that delivered differentiated longer-term opportunities. Our book of business of 65% through 2022, is a clear demonstration of the success of this strategic shift. But again, this is also understated. It does not account for smaller short duration projects and of course unknown today and that makes up about 50% of our typical annual revenue. Also and in keeping with our policy, LNG is excluded until it is [Indiscernible] that gives you more insight and confidence on our continued growth. As I've said many times before it is a great time to be part of KBR. I will now hand over to Mark. He will take you through the financials in a bit more detail.

Thank you, Stuart and I will pick up on slide 9. As Stuart has indicated, we are pleased to report another successive quarter in revenues and earnings growth coupled with really strong cash flow and bookings. These together delivered a foundation for growth and value from continued focus and discipline in executing our strategy. Consistent with the expectations setback in our May investor conference, we will continue to grow our government and technology businesses and are now seeing our energy solutions business, ES contributes significantly to overall growth. We are experiencing good market conditions in our focal areas within ES where we are able to selectively bring in new business bits our risk profile. ES growth drivers for Q3 were all on a cost reimbursable basis. Our increase in operating income reflects solid execution across the board with margins for all three segments consistent with our long-term targets. The variants and margins year-over-year primarily comes from our energy solutions business. Our margins benefited last year from write-ups, strong execution and project closeout. We continued this trend in 2019, Q3, successfully completing a project in our non-strategic business this quarter recording a closeout benefit about $7 million. [Indiscernible] driven by new projects getting off the ground and as Stuart highlighted coming from all parts of our business. We have new projects ramping up in government solutions, GS, including a new project for the defense health agency providing cyber and risk management services to protect the medical records of our war fighters and their families. Driving our growth in space and mission solutions, which incidentally is our fastest growing part of GS right now are a couple of new contracts including the [Rock 2 Rains] operations contract with NASA at the Wallops Flight Facility and our continued ramp up of our coated contracts where we now have about 500 white-coat professionals providing holistic human and psychological performance services for our elite or fighting force. Also new projects ramping up in ES, including our Greenfield methanol project in Louisiana, a refinery expansion project in Texas and a midstream expansion project in the Permian again all reimbursable and all building momentum as we look forward into 2020. Continuing down the page non-operating items and taxes were as expected all together attributing to adjusted EPS of $0.45 for the quarter. You'll see that we had an excellent quarter in operating cash flow. We're really pleased to see that. Now it's just about $200 million through the first three quarters. This reflects more focused on working capital management across the company. Our portfolio and our discipline enabled the company that continues to operate with negative working capital. You'll see later we are bumping up guidance based on the strong results we've seen so far. Now onto slide 10, our results by segment. Segment performance is trending as planned. All three segments are producing attractive organic growth. Margins are at targeted rates and more effective working capital management across the board. As Stuart mentioned, all segments exceeded a book-to-bill ratio of one in Q3 demonstrating that we are executing well on the projects we have in-house today and we're also seeing success in further building our book of business for future growth. Book-to-bill with an aggregate 2.1x for the company in Q3, truly excellent result and fueled by all business areas. In government solution segment we are seeing ongoing growth in line with our long-term targets but the Tyndall project completed in early Q3 and off-- in logistics a little slower in the summer months. We talked about the Tyndall projects since Q4 of last year after the hurricane and here we certainly like to tip our hats to the incredible team of over 3,000 people on the KBR team for their dedication and commitment to restoring and rebuilding Tyndall Air Force Base and its vital role in serving our national security interests. Government solution EBITDA and margins were particularly strong with good execution across our entire contract base plus a favorable settlement on a previous claim to the government. As you can see EBITDA grew 17% over Q3 of last year. Certainly, a great result which is also accelerating our deleveraging. The GS segment improved its DSOs sales outstanding five days in the quarter which of course contributed to the strong cash flow result I mentioned earlier. The technology segment posted another good quarter with organic growth of 19% as ahead of our targeted pace and 26% margins right on target. Q3 bookings were particularly robust or our ammonia technologies. Certainly nice to see this rebound after a softer market we talked about earlier this year. In our energy solution segment, we are now seeing topline growth in both our services and projects offerings together up over 30% year-over-year all organic. As 2017, the services part of this business which is about two-thirds of the segment has recorded impressive 14% compounded annual growth primarily driven in the U.S., the U.K. and the Middle East with offering spanning project management, engineering and design services, debottlenecking studies, consulting and industrial services. We’re leveraging our global relationships to partner with our clients as they diversify their portfolios and expand into new regions and territories. Good example of this is both Aramco and SABIC pumping up their investing activities in the United States. On a large project side, growth is being driven by the ramp up of new reimbursable EPC projects mentioned earlier with some big-ticket LNG opportunities on the near term horizon. Margins for ES were as expected in the mid single digits. As said in our May investor conference, this is where we expect margins to be in the early stages of this up cycle. In summary, really good progress by all three lines of business particularly with respect to the balanced growth, margins on track, excellent cash flow and healthy booking to propel our future performance. That covers the P&L in the segments. Now, we'll move on to capital structure on slide 11. As you'll see our deleveraging story has continued this quarter with ongoing growth and EBITDA levels and modest debt reduction we now have effectively reached our targeted gross leverage ratio of 2.75. As Stuart mentioned, we completed the delivery of [indiscernible] this quarter and have been able to achieve continual deleveraging while we use substantial free cash flow to meet that commitment. I think this completes free cash flow will now be available for other deployments with the priorities unchanged from what we communicated to you back in our May investor conference. Also about a week ago you might have seen in our credit rating was upgraded by SMT to BB- reflecting our ongoing growth and earnings, cash generation and disciplined risk management. And finally, on the slide 12 building on the strong results through the first three quarters we are bumping up our 2019 adjusted EPS guidance with $1.64 to $1.74 and also increasing our operating cash flow guidance to $200 million to $225 million for the full year. That's the financial summary. Back now to Stuart.

Thank you, Mark. Now onto slide 13 to close today's presentation. KBR is a true growth and value story. Growth of 12% year-on-year with all three segments contributing, absolutely terrific. Consistent performance for almost three years now, new KBR is delivering. De-risking with the excess now complete and done so within our cash forecast. It's now all of our claims, arbitration and hopefully those are negotiations. But given the unpredictability of timing and quantum on rulings, etc. we will set our targets going forward excluding excess matters. Our clear focus on cash is paying off and we've reached our targeted leverage and this opens the aperture on cash deployment opportunities as Mark presented earlier. Guidance has been raised on both EPS and cash and as importantly there is such positive momentum in KBR today all focused on tomorrow. So thank you and I will now hand the call back to the operator who will open out the question.

Thank you. [Operator Instructions] We will now take our first question from Steven Fisher from UBS. Please go ahead. Your line is open.

Thanks and good morning. Clearly lots of good things happening here I just may be starting off with what exists. Can you just give us what your latest expectations are on the potential resolution from a customer and the subcontractors?

Yes. I mean the arbitration date on the power station is still holding. There's a recent ruling just to confirm that and that's going ahead as planned in February 2020. And I think the expectation is still you never know Steve with the course. As I said that the timing of these rulings is unknown but typically we'd expect resolution of that next year. The main arbitration for the customer of -- will progressively resolve themselves as we go forward some in 2020 but not many mostly in 2021. Not assuming the court process precedes there is always the opportunity now in the facilities of fully under door. I mean they're preparing about nameplate capacity. We're in a different phase of relationship. So I think, there's a great opportunity now to just spend time with the customers move into early 2020 and trying to avoid paying lawyers lots of money.

That makes sense and then just to follow up on cash flow, the operating cash flow in Q4. About 13 million versus the strong 118 million in Q3. So now that we are done on exist and that related drag on cash flow can you just talk about what some of the puts and takes of cash flow are going forward both really in Q4 and without getting into guidance on 2020 just kind of particular working capital tailwind or headwinds that any upfront payments, etc. and would CapEx need to start picking up as your revenues grow?

I mean I'll let Mark follow on from this but one thing I would like to point out is that KBR is a growing business and growing double digits and that consumes working capital and the cash conversion rates are where they are and what we've done year-to-date is an amazing achievement and hats off to market and the team and all the people at KBR actually delivering on that cash focus and sustaining strong working capital as you're growing businesses as you all know is the challenge and I think KBR has done that well but on particular detail I know Mark probably your best answer.

Yes. Hi Steve. Just to clarify it just really does not have an impact to operating cash flow. The metric that we guides. So the funding of this -- which will now stop was an investing activity are they operating activity just to clarify that. So the completion of that really doesn't have an impact on operating cash flow as reported and as expected. We are bumping up guidance so we are pleased with that. So we're making the progress as Stuart mentioned but we are also a growing business which does consume some capital. So we wanted to be cautious in the fourth quarter ahead but still show some improvement reflecting everyone's hard efforts around the company and longer term I think our cash conversion expectations are consistent with what we said in our May investor conferences that we pretty much expect to convert net income on one-to-one basis over time any one quarters tough. Sometimes we'd be better sometimes not better but over the course of a full year that remains our expectation.

Thank you. We will now take our next question from Sean Eastman from KeyBanc Capital Markets. Please go ahead. Your line is open.

Congrats on job well done this quarter. First question for me is, just given the better cash outlook here in 2019 bumping up against that leverage target in the third quarter just be a good time to dig in on the capital allocation plans as we look into next year. Could you just speak to the appetite for acquisitions versus buybacks at this point and maybe relate that back to how the acquisition pipeline is looking like in terms of where you guys are focused on adding capacity?

Shawn thanks. I mean we talked about this many times and I think we've been successful on our precedent pursuits and integrating with the way that has value over time but we've done that very considered and very strategically and we as I said where we've kissed a lot of frogs and we continue to do so. So we're highly focused in two or three areas in terms of potential acquisitive rules and we talked about things like overseas government. We've talked about technology obviously and submitting it [Indiscernible] but ultimately doing acquisition is difficult and we've been very clear that unless we can find something that's compelling and can -- and of course is a cultural fit and that's very-very important to us. Strong passionate culture and we don't want to prove that all kilter in any way so it would be very considered about that but with no options in the acquisitive arena as I said or the aperture is now open for us to look at cast appointment opportunities and we have been very clear that buybacks are very much an opportunity as we go into 2020.

Great and the government margins actually came in quite a bit better than I was forecasting in the third quarter. I'm just wondering if we can infer anything on the future here or whether there was some one-time type of elements hitting the third quarter?

As I mentioned in the prepared remarks Shawn, we did have a favorable settlement in that sector in the third quarter. Also that bumped it up to some degree. We've also seen really strong performance on Aspire. We mentioned that in our prepared remarks the delivery of a lot of structures in the third quarter to be ready for the Army's return from Germany was very successful and that program really has done very well for us. I think the way to think about government margins is the targets we've set as the norm and so upper single digits is what we would expect longer-term and occasionally we have some favorable adjustments like Q3 which helped us but the mix of international continues to be very favorable to our margins and blend it down by the domestic piece again together upper single digits is where you should be focused going forward on a sustaining basis.

Thank you. We will now take our next question from Jamie Cooke from Credit Suisse. Please go ahead your line is open.

Hi good morning. Congratulations on a nice quarter. I guess a couple questions. One on store I would be interested in your sort of view on your broader portfolio just some of, given some of the dynamics that have happened in the industry, people acquiring government assets a pretty nice valuations a technology business now being back on the sale whether that makes you think you could unlock further shareholder value by looking at the portfolio. I guess my second question again back to the competitive dynamics limited competition in a space in an energy solution so sort of your view on how the terms and conditions change whether we can move more towards a cost-plus environment just given there's not a lot of you guys left and you have pricing power. And then sorry, my last question Mark, did you quantify the close out on government just so we know how of that contributed to the quarter and to the guidance. Thanks.

Okay. So, I think Jamie on your first question, we could tell you to look at our portfolio and we're happy with it as it stands today. If you look at the growth vehicle going forward particularly in the quarter and as we said at in Investor Day and to the energy solutions side. But all the other businesses are contributing and so I think this is a great balance we've got. There's culture that allows us to just sort of operate in the commercial world and in the government world and we're seeing a lot of synergy particularly in the digital side and robotics and things like that from NASA and the government and we're now into the commercial space. So, I think we'll probably have to give the market a little bit more on our progress on that and why that's not compelling. But we said a bit of it on the Investor Day. So, we're pretty happy but with the portfolio and the balance we have in the business and Mark commented on that. But we continually look at the value that options brings but we're pretty happy on that today. In terms of where we are on the energy market, it is a very interesting time. If I went back, everyone is congratulating KBR on a nice quarter. It's actually nice eleven quarters and the reason for that is that we've been very disciplined about the work we've taken on and I think that's more improved and I'm not going to comment on others. But certainly the way the market is shipping up gives us great opportunity in terms of filling work at it fits our risk profile. And registering the number of players on LNG projects particularly in the U.S. and so, I think that's why we're very upbeat about tomorrow. I think that's why we are talking about a very strong momentum that is seen that's continuing on. So, feeling pretty good about tomorrow, feeling pretty good about the competitor position and being feeling pretty good that against the backdrop we can actually win what restricts our risk profile again as Mark will lead to earlier or and then Mark on the government numbers?

Yes real quick, Jamie. First thanks for your remarks. The favorable adjustment was in the $5 million to $10 million range and excluding that our margins were right where you would expect them around 9%.

Thank you. We will now take our next question from Gautam Khanna from Cowen & Co. Please go ahead, your line is open.

Hey guys, this is Dan on for Gautam. Good morning.

Good morning, Dan.

Hi, Dan.

So, just one on LOGCAP. What's the expected timing on that protest resolution?

Yes, good question. As you know it sort of moved out of that traditional sort of protest that into the core arena. The date has been set for the reeling in early December and certainly there's been no and quite absolute commitment to stick to that date by the army and the courts. So, we're expecting that to proceed as one if you like in December. And whether book it to back log in December of it looks or to Q1 is not quite clear yet but certainly resolution is expected in that December timeframe.

Got it, thanks.

Thank you. We will now take our next question from Michael Dudas from Vertical Research. Please go ahead, your line is open.

Good gentlemen and Alison.

Good morning, Mike.

Like I was laughing I was pointing to Alison because you're the only one who mentions us, so thank you for that.

Yes. That's great, chaps. So, first question, I think you mentioned in your remarks on government services. Risk profile and it's getting better or changing and what the opportunities for you there. Maybe could you elaborate a bit more on like it’s a risk with better margin or just better terms or is customers in NASA, DoD or OCR just asking to for you to do more? And you can generate better growth and better fees from that. So, just a little thought on that when you're going into 2020.

Yes, I think I don’t think we've really mentioned risk in the context of GS, Mike. It was maybe we've had to the energy side of the house. And but certainly in terms of the opportunity set we're seeing a progress particularly in the areas where we're focused in government. You're quite right, we've got a continued bundling, we've got some significant opportunities in the pipeline multiple of those over a 100 million as we laid out in our prepared remarks. So, yes, space is exciting and that was the fastest growing part of our business. And you see which was shows a great balance as well because last quarter it was engineered. So, we're seeing a lot of good balance in the business and I think in between the business lines the synergy is playing out which is terrific.

And to other parts. Any thoughts on a continuing resolution issue, any near term visibility or what's expect in pick up for you guys at all?

Here we are again, right?

Yes, so we're getting used to this and the arm for many of years. And so, what's good is that their congressional consensus how much the firms spending should be for the next couple of years even through the election cycle. They just got and the paper on it and hopefully that will happen. Though we're seeing normal CR activity as we start the government fiscal year here in October. And now there's really risk of things like shutdowns, we've dealt with those in the past and really have had a measurable impact to the business. And so, it's helpful to be in the mission critical areas that we are that allow that work to sustain through those period. So, not particularly worried, we've been here before you know we've really navigate through it. And again, the better news is congressional consensus to happen in the spring, the summer that hopefully will pave way to the strong defense budget growth that we have articulated back in May and send from.

I think that's right. And just, I mean we went through this across which you know Mike last year. And the impact the KBR as Mark said was minimal and really. I think the strategic focus on mission critical activities played out and again and what if -- the expectation from everyone is that that will not happen. But as you know government is unpredictable. But I think the impact in KBR would be minimal just given the areas where we are focused.

I appreciate that. And my final question is on the technology front. When we share about some of the opportunities you see, there are better paced to enquiries or opportunities or for licensees or are the still the strong areas that you guys are focused on. You're getting their type of interest. And can you maybe reflect on is there still despite the concerns about global economic roads and real prices. There's still this appetite to go ahead with these types of investments and for future CapEx on that front?

Yes, we did. We're not seeing any slowdown in the pipeline of opportunities in technology. I think that the beauty of technology where you we just have aboard. Actually in India last week I'm looking at our India technology center and really so examining that business in a bit more detail. And we found it, we're going to double the portfolio of technologies and are stable over the last few years. And it really has played out very well and we've talked a little bit at Investor Day I think like K-SAAT our like you know Alkylation Technology and is a disrupter. And anyway that's starting to get a lot of traction the first sort of commercial scale plant is up and running and performing really well. And from a safety perspective, that is terrific in terms of and we own the proprietary rights for the catalyst. As Mark said, that the ammonia market is coming back and certainly in the past last few weeks and where the pricing has backed up a little. So, we're and not seeing that you know that's driven by GDP and sort of food production and things like that. So, we're seeing we're not seeing any slowdown in pipelines of opportunity. We've got some fantastic disruptive technologies that we feel a large huge about into KBR globally. We're not at the mercy of so much of ammonia cycle and more because of that better portfolio. So, I think that business has feeling back over 10 years, it's got KBR is 13% I think and we see that continuing and certainly the backlog that has today, we certainly -- we do to conclude that that will continue.

Thank you. Our next question comes from Brent Thielman from D.A. Davidson. Please go ahead, your line is open.

Great, thank you. Hey Stuart, just a follow-up on technology. The pick-up in ammonia that you talked about being slower this year. Is there any good revamp into the energy solutions business where I think you've got some established capabilities there?

Well, I mean I think we did a lot in the revamp arena and things like that. But we've been very clear from lumpsum turnkey perspective that we are not doing lumpsum going forward and assigning people too is you know we will be focusing on the licensing proprietary equipment and catalyst in that arena. We've been very clear on our focus in lumpsum is LNG and to some extent everything that there happens. But certainly the key focus area is LNG. Ammonia typically new build doors lumpsum EPC and so we'd be focused again supporting others who want to build on the provision of that technology. And that quite frankly if you look back historically but at KBR that's when we make our money, that's where the good at shareholder value, its.

Okay. And then, I guess again on energy solutions, that I think we've all seen and you guys have talked about sort of the evolution of the competitive environment on kind of the high profile visible projects out there. Can you talk about what you're seeing in terms of made it a smaller projects that make up a big piece of the backlog still just from a competitive standpoint?

Yes. I mean it varies from market-to-market. There is a sort of a license market if you like you know you need to have a what is called the GS plus license if you like and [indiscernible] for example to compete them is in you know four competitors there. And as you know some it will work. We are probably the main stay and as of the joint where because of the joint venture with the SOCAR there. So, I think it really depends. I think for the smaller frontend designing's that's the usual suspects. There is a lot of emphasis put on an incredible technical and commercial solutions from the customers. So, they are looking for really sort of smart concept and pre-feed thinking around that. That's a lot of what we're doing there next stages. So, it's being usual people you know the adjusted Tech Needs [ph] and the Wally's [ph] and that crews [ph] etcetera there. So, not really much change there in that competitive environment. And I think it's in the larger projects that we're seeing that that significant shifts.

Thank you. Our next question comes from Tobey Sommer from SunTrust. Please go ahead, your line is open.

Thank you. Could you elaborate on the opportunity of in for LOGCAP V and the Freeport LNG train forwards some sort of kind of not in your backlog?

I mean I think we laid out Tobey in Investor Day really the historical spend on LOGCAP V on Afghanistan and then you see what the Europe Command and what we're doing in the U.S. and sort of kind of to put that together in a way that gives some indication of the uptick there. I think most of it 600 million got [indiscernible]. It was probably quite a reasonable uptick but there's no guarantee of course if that comes through. So, I think we'd have to go back and look at that why and LOGCAP is officially award and we'll try engage you a bit more when we start to get the [indiscernible]. But the best reference we've got is the one that we presented in May. And in terms of Freeport LNG, we have signed the EPC contract the negotiations on financing seem to be well advanced. I don’t think there's too much risk there and then really comes down to off takes and I know the discussions with tier 1 uptick is going pretty well. So, we do expect that to come through in Q1 and as a consequence of that we'll be putting into backlog then. But we have not disclosed the number on the EPC contract yet. And that's in keepings that are really with our policy that we've been doing that until by that. But there's lots of benchmarks are there. I think we can sort of get the zip code and we've said before that train three of this we're signed up by CB&I and you know the disclosed value of that $2.1 billion. And that's on to say that in that. That's the number you can look at and probably given the difficulties that CB&I and then we gotten some pushing probably too, well. So, that's all I can say there, I don’t really want to give specifics until such times we are fighting. Probably Mark just to clarify on cap, if I could everything is correct. But just more specifically if you assume that our incumbent positions go forward at the same pace like Eastern Europe, our European Command for example, and then you add in what the previous contractors did in NORTHCOM and the previous contractors in Afghanistan and it would imply about a $300 million bump up in run rate, if you were assuming -- exactly the same as 2018 which is a risky assumption. So up temple, go up and they go down and so we only have those data points really to be honest that's why we provided them but the Afghanistan 2018 was bigger than our Iraq activities and we have that to go by. We've been cautious in our targets, our longer-term targets and more conservative than those numbers suggest. But nonetheless we did expect an uptick because that area responsibility is bigger than our previous position.

Thank you. That's helpful and if I could ask you something on the kind of big government business given the two-year budget agreement and even though we're in a CR what kind of visibility do you think you have for organic growth in that context? So how many quarters or years can you see out and kind of think that you're going to grow organically?

Yes. I think we would relate that back to there the graph represented in the prepared remarks and the level of what we've secured which is a big chunk of that of course is in the long term government arena and that supports a double-digit organic growth going forward and we laid out in the government itself somewhere between 6% to 10% in terms of growth over the period. So and I think we would probably. We're seeing that's a sustainable number and certainly willing to work to actually deliver on that.

Thank you. We will now take our next question from Michael Feniger from Bank of America. Please go ahead. Your line is open.

Yes. Thanks for taking my questions. KBR disciplined strategy on LNG has certainly helped the company avoid missteps observed by competitors. I'm just wondering what the growth you're seeing in the energy solutions, the service offering, the backlog growth include -- does it make you should pulling, even pulling back on some of the LNG opportunities based on the risk/reward framework suggesting such momentum in ES?

I mean, I think we're being very considered. I think that's probably the best way to describe it. We've got good portfolio of opportunities all of which are either in a negotiated on a two horse race then with customers that we feel will behave properly and then against competitors now that we feel won't do anything silly. And so I think from that basis we feel pretty good our opportunity set, I mean I long range targets are between zero and one in terms of LNG's and we've won one assuming the FID. So we feel pretty good about that. And we've got opportunities over and above that with a risk profile and a margin profile that I know this might sound a strange concept but we're actually going into them thinking that we're going to make money and that we can deliver on the promise in terms of shares and things like that. So I do think it's an interesting competitive market today that's in our favor and as I said many times sometimes it's not good to win the first one or the second one but I think it's okay to win one later down and hopefully that proves out to be correct.

Thanks. And I know its sensitive talking about a specific customer but just on a -- can you just highlight and discuss really the opportunities there that you're seeing just into 2020 and on a multi-year basis?

Yes. I mean, obviously they're moving towards IPO. They've acquired quite a significant portion of Sabich. So there have been the chemicals of also if you think about it in that context. So they're making a number of between the two of them strategic investments in the U.S., and looking at a very large ethylene complex and etc. in the U.S. as well as the work that continues to be ongoing -- on the golf course ventures, so pretty good opportunities there. We also do quite a bit of work in country for both kinds of supporting the ongoing developments in Saudi Arabia itself. And more and more we were seeing them looking for help as they start to branch out investments in places like China and other places. So I think that they've got a very large capital budget that they're looking to deploy over the course of the next five years. What they are probably doing a little bit of that prioritization today is they're moving towards IPO. I think that would be a sensible thing is I think we're seeing that. So along these projects that go at the same pace probably not, but I do think that the opportunity and the relationships at the end of the day frankly doing a good job is the best business development you can do and I think our delivery record over the past three, four years is certainly helping us be positioned for those opportunities.

Thank you. Our next question comes from Chad Dillard from Deutsche Bank. Please go ahead your line is open.

Hi. Good morning guys.

Good morning Chad.

So I was pretty pleasantly surprised by the 3Q ES revenues. I just want to get a sense for whether this is the baseline and from what you expect to grow and you mentioned some of the big projects ramping up the methanol, the firing facility in the midstream project. Can you talk about when you expect to hit the peak run rate and how far we are away from that?

Yes, Chad, take your question I think we're just beginning. So I would say the peak run rate on those projects is well into late next year and even into the year after and if you're layering sort of the uptick in things like Freeport and other LNGs that will come through during the period. We really do think that that 20% to 30% targets we said are certainly well achievable and probably that's the best way to say that and we're feeling pretty optimistic about the future of that business and the growth within the risk profile that we set out. So I think again we are getting some quite a lot of repeat awards and an interest because of the work that we're doing and the discipline we're employing in our execution. So I think it all be as well for 2020 and going forward. So I think you'll see continued growth. I think you'll see continued excitement around that sector for us and may continue.

Got it and then Stuart I think you mentioned that you're seeing a smaller competitor based on the LNG side. Just curious whether you're actually that's actually make it into just market dynamics. Are you seeing any incremental opportunities? Or are you seeing better terms pricing just broadly maybe you could talk a little bit about just what you're seeing in terms of LNG opportunities beyond Freeport as we go up to 20?

Yes. I mean certainly the prime market for us in the next little while that we thought about is the U.S. market and the gulf course that we know very well. So I think from a knowledge base and an execution understanding arena that's really good for us from a management of risk perspective. We certainly see obviously some of our competitors either filling up or struggling to some extent and as a consequence of that the competitor set and the appetite to do work in the Gulf Coast and the way that we would do it has reduced significantly. So I think that all comes down to at least two conclusions. The first of which is that the companies that are left competing in that arena will not sign up to stupid terms and conditions. And so the transfer of risk and the balance of transfer of risk will start to balance out as -- but that's where it will end up and so I think that's the first thing and then the second thing is that it's just the laws of economics and competitive world if competition reduces the margins should be a little bit nicer and we'll be thinking about that as go forward and I'm sure competitor is also. So again, I think the market dynamics there are very much there's a fair wind helping us and I think you need to think about it on those terms. However, that opportunity set will manifest itself I'm sure but again, I’ll reiterate that we will be, we're not going to get out over our skis recognizing coffins big jobs because they are risky and you end up in getting to the construction phase. So as Mark said, we are sticking by our single-digit margins for the next little while and as those jobs get to the end and hopefully we can release some contingency and some sort of provision against potential liability and things back into profit. So I think that it is a growth story of a lot of EPS upside of these LNG projects proceed but we will be very prudent and how we manage our how we come through in the numbers.

Thank you. Our next question comes from Andrew Kaplowitz from Citi, please go ahead. Your line is open.

Hi guys. This is Andree on for Andrew Kaplowitz. So congrats on the quarter, on your 11 quarters of solid results. I just have a one quick question about the re-compete and the overall project run rate, can you just give a little bit color on that in the quarter and how do you think of going to 2020? Thanks.

I mean, our re-compete win rate is absolutely far, but it's I mean -- our –re-compete win rate is 98% as it stands today and I think typically you would be seeing around in 95 so I think we are doing well. I think we're really, really strong not I mean I'm very focused in on it. So, continuing but it comes down to delivery again you've got to be very be performing well and you've got to have the relationship with your customer understands the value you bring. So I think I team does very well in that area and really the re-competes in the next little while are quite no biggies and coming and coming through to the end of the year. So I think the big ones that we had this year in Jacksonville [indiscernible] behind us successfully. So we feel pretty good about that.

And our overall win rate is above 50% across all businesses within the government piece which people often ask about is well above that when you think them all in including new business and re-compete. So we're really pleased with the performance of the business development teams across the whole company on the re-compete but also the new business has been quite strong and that's why you've seen couple of market growth for all sectors.

Thank you. We have no further questions over the phone at this time. I would like to hand the call back over to Mr. Stuart for any additional or closing remarks.

Just, the usual thank you. Thank you for your interest. It's been a terrific time at KBR. We're not perfect. We've still got lots to do and lots of opportunity to get more efficient and move the company forward but the momentum we have to do is very, very exciting and I think it's, we're set up for that to continue. So thank you again for your interest. Obviously, we'll talk to you many of you one-on-one over the course of the next little while.

Thank you all for your participation. You may now disconnect.