Nelson Rowe - VP, IR Stuart Bradie - President and CEO Mark Sopp - EVP and CFO.

Brent Thielman - D.A. Davidson Tahira Afzal - KeyBanc Capital Markets Nick Chen - Alembic Global Advisors Michael Dudas - Vertical Research Jamie Anderson - Credit Suisse Alan Fleming - Citi Cleve Rickard - UBS Ben Burud - Goldman Sachs.

Good day, and welcome to the KBR's second quarter 2017 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 the remarks. You will receive instructions at that time.

For opening remarks and introductions, I would like to turn the call over to Nelson Rowe. Please go ahead..

Good morning, and thank you for joining us today to discuss KBR's second quarter 2017 financial results. Joining us on today's call will be Stuart Bradie, President and Chief Executive Officer of KBR, Stuart Bradie; and Mark Sopp Executive Vice President and Chief Financial Officer.

Stuart and Mark will discuss KBR's financial and operational results, market outlook and the earnings expectations for the remainder of 2017. Please refer to the presentation that is posted on our website in the Investors section of kbr.com. Following their prepared remarks, we will take your questions.

Today's call is also being webcast and a replay will be available on KBR's website for seven days at kbr.com. The press release announcing KBR's second quarter results and second quarter Form 10-Q will also be available on the website.

Before we turn the call over to Stuart, I would like to remind the audience that today's discussion may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance.

These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in KBR's second quarter's earnings press release, second quarter Form 10-Q and current reports on the Form 8-K.

You can find all of these documents on our website at kbr.com. Now, I will turn the call over to Stuart..

Thank you, Nelson. And thank you all for joining us this morning. Starting on Slide 3 safety, our cost towards achieving zero harm continues. This safety is quite simply good business. Looking after oneself and those around us is quarter culture.

As a people business, I'm pleased to report our total recountable incident rate reduced by 60% over the past 30 months and continues to improve into 2017. The credit goes to every single person at KBR, this like all we do at KBR is a team game and I thank them for their commitment. Onto Slide 4.

Following on from a good start to the year in Q1 quarter two saw positive performance across all areas of KBR's business. Revenue grew by 8%, our earnings result on more predictable business mix gives us confidence to raise guidance this quarter.

Project execution was strong with projects meeting or exceeding expectations including our remaining lumpsum EPC in the U.S. Our continuation of de-risking the business with resolution of a number of legacy issues was pleasing. The key matters are highlighted on the slide.

Resolution on payment of the long-standing payments dispute and positive judgments in our favor on both the private security and benefit cases. Government services delivered strong earnings with backlog growing under quarter.

Technology and consulting delivered good margin performance with an increasing and attractive pipeline of opportunities, and E&C benefited from solid execution and less reliance for mega projects as our strategic shift into a most favorable and recurring revenue base continued to de-risk our future.

Overall backlog remains high and consists of work with less volatility. Four wins for KBR are widely highlighted on the slide to give you a flavor of the type of work we won in the quarter. First high end technical support services contract over five years, but not the satellite program I got at space center.

Differentiated base operational support for the U.S. navy at Diego Garcia, an eight-year contract currently under protest but with resolution forecast in Q3 of which time, we will include it in backlog. High end engineering and technical support services before in the department of defense missile program.

And a multiyear seat on newer satellite contract $2 billion program. These highlighted wins show the volume of our life cycle strategy. From technology and demand expertise to high-end engineering and program delivery and across operations and maintenance. Book-to-bill for government services in the quarter was 1.3.

In addition to solid execution, positive earnings, winning the right work and resolution of legacy issues our associated cash management performance was excellent in the quarter. This allowed us to deploy the capital in a disciplined manner for paying down debt and returning capital to shareholders via share repurchases in addition to our dividend.

I'll now hand over to Mark, who will take you through the numbers in more detail. .

Great, thank you, Stuart. I'll start on slide five of the earnings presentation. Overall our performance was on or above the plans for all guidance metrics in both Q2 and also on a year-to-date basis. As Stuart indicated this coupled with our outlook for the second half the basis for bumping up 2017 guidance at this time. More on this in a bit.

For Q2 2017 itself revenues grew 8% to 1.1 billion, government services driving that results.

We saw a sequential growth of 5% in government services from Q1 with recovery from some contract administration related delays earlier in the year experienced in some of our Wyle contracts, an ongoing growth in both our overseas military support operations and in our UK and Asia Pacific government services businesses.

Top line in our technology and consulting business was down primarily on mix, strong margins offset this on the bottom line. Engineering and construction revenues declined as planned as we work down projects nearing completion.

The flux here is to continue strengthening our new business pipeline on a disciplined basis as we discussed with you in our Investor conference in May. For profitability, gross profit with equity and earnings came in at a 140 million for Q2 or just about 13% of revenues.

After adjusting out for non-recurring favorable items in Q2 from both this year and in the prior year quarter including Pemex, segment profitability was about 9% up over 1% from 2016 on an apple to apples basis with all three segments operating within the targeted profitability ranges that we have shared with you.

General and Administrative expenses were $38 million in Q2, that's about $4 million to $5 million above normative level at a number of one off items like severance and facilities costs, but we expect this to return to normative levels in the second half.

The effective tax rate was 22% in Q2 benefitting from a more favorable jurisdictional mix and a modest discreet pick up in the quarter. They are taking our expected effective tax rate lower for the rest of the year as the jurisdictional benefit is expected to continue.

Fully diluted earnings per share was $0.54 in Q2 and was $0.57 excluding legacy legal costs. As was indicated in the industrial conference in May, the Pemex benefit was a net $0.19 earnings per share benefit in Q2. Finally, operating cash flow was a healthy $325 million. Pemex contributed $344 million of that result.

As planned we have significant working capital outflows for projects nearing completion but these were nearly offset by cash earnings strong collections. Indicatively days sales outstanding improved to 75 days down sequentially from 79 in Q1 of this year and down from 77 in Q2 from last year.

Working capital management will remain a high priority to free up cash for other purposes. Slide six provides further details on the Q2 results by segment and I've already covered the major takeaways from the quarter and also how the segments contributed to our results.

Slide seven summarizes our cash flow generation, our cash position, our cash deployments in the quarter. $325 million operating cash flow result almost converted dollar for dollar to free cash flow with only a net $3 million of capital expenditures. Accordingly, free cash flow came in at $322 million in Q2.

We deployed much of this cash in a balanced way as Stuart said earlier. We reduced debt by $180 million, used $50 million to return capital to shareholders via open market stock repurchases and we paid $11 million in dividends. We increased our ending cash balance by $81 million and with all of this reduced our net debt to effectively zero.

Then we move onto slide eight in the presentation. As said earlier, with performance half way through the year and strong visibility into the second half, we're updating guidance a nudge for both EPS and operating cash flow.

The higher EPS reflects some improvement within our original EBITDA expected range and improvements to both our effective tax rate expectations and the lower share count from the buybacks we made in Q2.

For cash flow, we still expect net operating cash outflows for the second half, driven by working capital uses associated with projects nearing completion. However, we're comfortable raising the bottom of the guidance range to $120 million from net operating cash flows for the year and the top end at $200 million as always before.

In terms of timing, as we've indicated since the beginning of the year, we expect total revenue volume to reduce pace in the second half as we ramp down on ETC projects nearing completion. At the same time, some of those projects running at or near breakeven expect margins to rise in the second half as said before.

With that that covers the highlights of Q2 financially as well as the outlook and guidance update and now back to Stuart for finishing remarks..

Thank you, Mark, and now to slide nine, what to expect in the second half of the year that supports the guidance that Mark has articulated. We're committed to the guiding principles we laid out on Investor Day and these are shown on the left-hand side of the slide. Our focus on bottom line performance, underpinned by winning the right work.

We continue to trade and recruit for and deliver stronger business acumen across KBR with appropriate commercial discipline, and our commitment to developing our people is unwavering, as we continue to build upon our evolving high-performance culture. To the right side of the slide, performance expectations for the remainder of '17.

Growth in government services will continue as planned. We saw sequential growth in legacy Wyle, HDSI and KBR US government businesses from Q1. And the UK and Asia Pacific businesses performed well also. In P&C our strong prospects pipeline and margin performance should see this business grow in Q3 and in Q4.

And in E&C as we previously reported we see revenue softening in second half as a legacy zero margin projects come to a close. This will in turn lead to better margin performance in this segment in the second half. And fortunately, the pipeline of opportunities gives optimism for backlog growth in Q4 and early 2018.

Please note however that our increasing portfolio of smaller projects, services, program management and maintenance contracts gives E&C a more solid foundation than in previous years. So, what does this mean to the bottom line? Continued underlying profitability improvement and more predictable earnings growth.

We do expect additional scope in change on the reimbursable components of an LNG project which would lead to timing dilution. Albeit this is good news. Know what, this has been taken into consideration in the EPS guidance Mark gave previously.

From a cash and liquidity perspective we're bumping up positive annual operating cash flow to $120 million to $200 million, with conversion rates improving giving our business mix and improving cash management.

In our key markets in all three segments we are well positioned with backlog growth opportunities and we stand by our growth projections presented at Investor Day. Onto Slide 10. In summary, our disciplined approach to executing on strategy has led to improved and predictable earnings momentum giving confidence to raise guidance.

Growth in high end and differentiated government services work, strong margin performance and technology and consulting with growth in the second half, solid execution which is the best business development on E&C business can do, a growing pipeline of opportunities with firm and growing foundation of smaller projects and recurring revenue OpEx relationships.

For KBR as a whole secured backlog, a secured backlog was maintained at a high level. And if option years are included from the multiyear government services contracts and book-to-bill of close to 1 was achieved. We have solid prospects across all three segments and then E&C where we've seen a marked improvement awards a forecast in Q4 and early 2018.

Resolution of legacy issues continues to - the corporation and we have a laser like focus on cash that has delivered the strong liquidity position giving confidence to deploy substantial capital reducing [ph] our debt position and via share repurchases returning capital to shareholders.

I will now hand over to the operator who will open the call up for questions..

Thank you. [Operator Instructions] And we will first go to Brent Thielman from D.A. Davidson. .

On the government services guide another quarter of solid bookings, moving into the second half of the year does the environment is looking as robust in terms of potential new opportunities out there you’ve seen here year-to-date?.

We discussed our pipeline in government services back on May 12, at our Investor conference, it's very robust. There is still lot of undecided items out there and while it's hard to predict any one quarter Q3 notoriously a strong quarter for bookings in the government services sector and then you just generally see a downtick in Q4.

We are expecting to see ongoing strength in not only our pipeline development but the unification of the pipeline and the recurring strong win rate. So, we are optimistic about ongoing strong bookings collectively over time and we were being at or above one 1.0 from the book-to-bill perspective.

It's hard to predict any quarter but we are optimistic about the second half..

Okay, thank you.

And then I guess on the guidance for this year I appreciate we are only midyear at this point, but the low end of about 25 looks pretty conservative based on what you've done here year-to-date is that mostly to handicap E&C and possible further customer delays beyond 4Q, maybe some timing of government contracts to consider?.

Brent, I think that’s a good question. Since my time at KBR this is the first time that we've increased guidance through the year. I think the important thing is the directional piece of this. We don’t want to over promise and under deliver, we are being cautious.

We still have some risk that exists in the business and but I think the importance we see here is the directional movement of the company. .

And we will now go to Tahira Afzal from KeyBanc Capital Markets..

I guess first question I mean government services is really for me the big highlight, really strong, good revenue growth sequentially and the equity income line was pretty strong.

Should we be looking at that $18 million sort of the benchmark going forward? Could you provide any color if there is a little bit of seasonality or if there were some one-time nuances in that?.

Tahira as you'll see in the 10-Q if you've got there yet, we did have a favorable prior period adjustment in equity and earnings for GS and so more normative level is in the 10 areas per quarter basis, that's still up year-over-year from growth in our [indiscernible] or Army 2020 work and the initiation on the early stages of our Military Flight Training School, PFI in the UK so that is growing.

So that area is growing, that's I think the highlight but we did have a favorable bump that you'll want to factor in going over..

Got it. Okay, that's very helpful..

I mean Tahira just on that for a second, I think that other piece to take into consideration in March that rise was one-off, but I think directionally we will peak in construction on Army 2020 through into 80 then into 90.

So, I think directionally that's the way that that moves and obviously the optic in MFTS, the earnings will also help and not areas that as more of the airplanes get delivered through the remainder of this year..

Got it. Thanks that is helpful. Just second question, if I was to flip through your Analyst Day slides, Bret Oil is trending today and what the outlook seems to be versus what you're assuming, while still conservative, does expect some bounce back.

How sensitive do you think your near-term pipeline of E&C projects is to where oil is in the near term?.

If you recall our Investor Day we were at great pains to show that less than 8% of our business is exposed to oil and but a correlation of a share price to the oil price was about 83%. Our business is very [indiscernible] I think where the E&C and the technology business are pointing is very much on the gas monetization side.

And again, I think that there will be priorities in CapEx spend as there always are but even more so now. And I think the little gas prices in the U.S.

is where many of the IOCs and particularly the chemical companies of course are focusing their attention and I think KBR is very well pleased there and in addition obviously the Middle East is the other area because of other factors that they following Arab Spring for employment and things like that they need to diversify their economies to create employment and again I think we're very placed there.

So, I think really that we believe that oil is lore [ph] for longer that we're positioned the company that way over the last few years. We do think gas is clearly the future and that's why our exposure to oil is quite minimal at this point..

And we'll now go to Brian Rotenberg [ph] [indiscernible] Hamilton [ph]..

Yes, thank you very much. Couple of questions, first of all to follow up on the backlogs.

It looks like your book to bill on government services was around 1.3, is that right on a book to bill basis in the quarter?.

Yes, Brian that's correct..

Okay. And then you expected to be even stronger in the third. I don't want that to be my follow up question..

And that was not my precise answer either, so I said that Q3 historically is strong but I would not make a prediction that’s going be stronger than 1.3, over time we seek to be above 1 and to do so to our long-term growth rate plus a little bit of cushion for the things that have actually dropped off..

Okay, and then my follow up question is about your cash balances and uses of cash, moving forward there seems to be some things out on the market and the government services side that I'm hearing about. Is that where you're going to deploy cash, I mean you've been obviously paying down debt as well as buying back your own stock.

Are you going to make more acquisitions on the government service side, i.e.

are you positioned and ready to do that?.

Yes, I mean at our Investor conference in May we were pretty clear about where we'd be looking from an acquisitive point of view and across key areas, one was technology, one was more in the sustaining capital area of E&C, and the other was government services, as long as it took us sort I guess up the food chain and in technical differentiation and our geographical coverage, and you know that continues to be the case.

You know as we all know you got to kiss a lot of frogs because you got to find the cultural, companies that do a good cultural affinity, you've got to get a good price and as I've said often, you know we're not going to acquire for cost synergies, so you got to find something that really sort of drives revenue synergy as you put the businesses together because as a people business you want people to be excited about the future and not worried about their jobs.

And so that's the way we looked at it and yes, we continue to look in the market, yes, we continue to look for opportunities but they have to be accretive on day one and they have to meet the criteria we laid out at our Investor Conference. .

And we'll now go to Rob Norfleet from Alembic Global Advisors..

Hi guys, congrats on nice quarter and thanks for taking our call this morning, this is actually Nick Chen for Rob. I was hoping you guys can just give a little more detail on the types of technology that companies are licensing from you and sort of what the [indiscernible] rate of this licenses has been in terms of resulting in an EPG contract..

I mean the activity in the technology spaces is interesting. We're seeing a lot of activity at the pick-up in ammonia and where we go through in the EPC a number of times. We're seeing more opportunities there in Greenfield than we've seen for a while.

We're seeing a lot of activity in the refining space as refiners are getting obviously cheaper crude and they're looking at how they can sort of particularly take the bottom of the barrel and add value from that, so we're seeing a lot of activities, about three or four technologies and a refining area, we're very-very busy.

Our polycarbonate technology is getting a lot of interest particular in China so that's also an exciting part of our future. We just acquired that a couple of quarters ago, and we're seeing some good momentum surrounding that technology.

So, I think really our technology business today is cost activity and the number of opportunities that are real and robust in the pipeline are probably at a level that it’s higher today than I've seen it in the last three years I've been with KBR and our win rates are actually you know pretty strong.

So, we feel really good about the future of technology I think that where we pull through into EPC is where that makes sense for us to do so. We are not going take go and build that EPC plants in China for example, the Chinese can do that as well as anyone in their own country so why would we go there and take that, that would start some risk.

So, we are only going to do in jurisdictions would it make sense but I think that the key point is that the technology and consulting business gives us really good optionality and not sense.

And that's technology, on the consulting side that's quite different because we really start advising very early on concepts and pre-feed type solutions and we're seeing a lot of pull through in that area and those are quite a [Indiscernible] of the sort of that cost in current projects where that's the case from what we're dealing with BP across multiple projects today, what was down with Chevron in the past, what we are doing in terms of looking with Shell in certain areas as well and also with the chemical companies and with people like Exxon.

So, it's a very strong project pipeline in the consulting area and the ability to pull through is substantial. .

Then as a quick follow-up.

Can you just talk a little bit about what current bid margins on recent contracts look like relative to the legacy backlog?.

There is much if we are talking about particular segment or overall in our business but I would say that in the government business as you have seen others say, there is a little bit less lower price technically acceptable pressure in the marketplace, as customers have realized that quality of delivery and capability and does performance really matters and so we and others are seeing relief there and so if anything that’s an uptick to confidence of bid margins improving albeit slightly in that area, not to mention our ongoing efforts to reduce cost to improve that result as well.

I think E&C as Stuart has mentioned in our Analyst Day is going to come down to us being selective by being involved very early and what he was just referring to in consulting on the early stages of a project and technology insertion which together is gives us an advantage and hopefully a good bid fee result that gives us a return commensurate what the risk there are, so what's really important to remember is to relative to the recent past to avoid lost contracts by being disciplined in selective and besides that I think the overall in fee margins once you get in are roughly the same as what we have seen in good projects..

And will now go to Chad Dillard from Deutsche Bank. .

Hey good morning guys. This is Eric Richard [ph], on for Chad.

Just was wondering, so if you would guess at 4Q exit rate implied by second half guide, it suggests that a $1 of annualized earnings as a starting point for 2018, how you've reached that figure with your 2018 guide of a $1 in a quarter? Or where do you see the growth coming from there?.

As we have said, we are expecting to see ongoing growth in our government services and technology and consulting business for 2017 into 2018 and beyond. And we expect to restore growth to our E&C business in the 2019-time frame.

If you'll recall we guided flat or 2017 to 2018 transition for E&C which means we still have to win quite a bit of work in late 2017 or early 2018 to achieve that results.

And those are the contributors to the topline growth and we don’t expect a wild change in margins year-over-year and we expect of course to rid ourselves of the margin dilution that we had particularly in the first half, but this year from the [indiscernible] of at or near zero profitability projects at E&C plus some dilution on projects like our LNG project in Australia.

So, the combination of a top line growth and the work through of low margin contracts in 2017 or a cleaner margin story in 2018 is what will be the driver..

Great, thank you.

And actually, I guess focusing on sort of the LNG earnings and the cadence from 2017 and 2018 when do you expect [indiscernible] to start contributing to earnings?.

I mean excess will carry on into 2018, the customer has gone to market to say the first time we are ready I think before year end and the second time by the middle of next year..

[Operator Instructions] We will now go to Michael Dudas from Vertical Research. .

[Indiscernible] from government services, when you talk about you don't have the project in the third quarter that's being in the focus right now footfall, are there any other useful projects that you might see flowing that's in category in the second half of the year? And talking about some of the new business you picked up on the margin front I assume that majority invested [indiscernible] was there any other request or opportunities from the client base for quick priced services or any other type of opportunities that could actually have [indiscernible]..

Okay, Michael the biggest item still under protest is the Diego Garcia opportunity in GS that's a 500 plus million wins that we originally announced at least three months ago.

And so that will, the protest period ends in August, so that's days away from knowing the outcome of that, but we'll keep you posted and that will be a Q3 bookings should that occur. There are no other major projects in protest at this time.

And I think you know of the major procurements we've talked about in our May 2012 dialogue there is nothing major new add to that.

Relative to your second question, we're deliberately looking for opportunities to create demand where a customer has a requirement that is not being met and to at least have the opportunity to deliver that on a fixed price basis in areas where we have the past performance and capabilities and so that's part of a longer term directional goal to improve our mix in our government services business which is dominantly cost reimbursable today but in a measured way find opportunities where fixed price is acceptable to the customer, acceptable to us and offer some opportunity for shared benefit with the customer and us.

Nothing particular to talk about this time but we are certainly thinking about the lifecycle approach where for example we're providing human science and performance work with NASA and we see opportunities in the military like special forces and things like that. And hopefully can do so on favorable contract terms in the future..

Just recognizing something you talked about in May and some of the things going on in Washington. Any significant changes positive, negative from your business planning that’s for contract awards or opportunities say due first part of next year? Thanks..

We think the Washington environment is as we said in May 12 overall favorable from a policy perspective, I mentioned LPGA a moment ago as that's easing a little bit. We see increases to the defense and intelligence measures which overall is good for us in the US and we see some of that in the UK and Australia as well.

But no major changes to that theme since May 12 that our investor day and quite frankly we think that the demand environment from our military and [indiscernible] customers looks much better for the next several years than they have in the last five years..

And we'll now go to Jamie Cook from Credit Suisse..

Hey, this is Jamie Anderson on for Jamie Cook. Congrats on the quarter.

Just a quick question on FY '18 as we kind of look out, you know at the Analyst Day I know you guys said that you could grow off the 17 base ex-Pemex between 7 and 10%, I guess that would imply EPS between you know $1.14 and a $1.39 or $1.26 at the midpoint which is like a slightly below the street, is that kind of still the right way to think about EPS next year and then I've a follow up on execution..

We have no major change to our '18 the preliminary outlook at this time from what we've shared in May, so we are proceeding to execute as we envisioned then, we'll learn a lot more about '18 in the next six months in terms of the new contract wins and perhaps other developments, but right now there will be no change to that thesis and we'll keep you posted as we progress you know through Q3 and Q4..

Okay, great, thank you and then I was wondering if you could just provide an update on the remaining lumpsum legacy problem projects as well as the timing of recovery from the profit push out on [indiscernible], and how much those two projects are going to continue to kind of be operating cash flow headwinds, because I guess the guide implies negative operating cash flow, negative 15 million in the back half of the year.

It also looks like the unapproved change order position increased sequentially somewhat dramatically from 416 million to 570 million. So, I was just curious what's driving that.

And then finally you guys have decided among your cash flow statement called reserve for loss on uncompleted contracts which is I guess it's been a $35 million source of cash year-to-date.

Could you guys give more color on that item if that relates to the projects that are in the loss position where you have already seen the charges, where does that kind of signal potential for future profitability impacts in the future? Thanks..

There are lot of questions in one question.

So, I'll start-off with where we are on the lumpsum elements, on excess of staff, we are in majority of what we are doing now is in the reimbursable component of the project so the lumpsum risk there is really associated with the soft contract with the power station that we are completing which is just about 90% complete.

And in terms of the other lumpsum EPC project we've got one remaining in the U.S. I think we reported at Investor Day on in last quarter that was progressing ahead of plan and that continues to be the case that the execution performance and on that is actually very pleasing indeed.

In terms of the disclosures on approved change orders that we've now looked across the company and in terms of its unapproved change orders and vendor claims and subcontracted claims, it's for the whole of KBR.

I think a lot of that number is associated with excess itself and as it's just the disclosure event including those subcontractor and vendor claims as well as some unapproved change orders that have come up as we won that through the customers. In terms of the other piece on the35 million I'll let Mark answer that..

Yes, Jerry. So the operating cash flow you have it right relative to ballpark 50 million to the middle of the range of outflow in the second half.

It's really simple, we expect the cash earnings to be correlated to our EPS results in the second half but we expect to have working capital uses that more than offset that for the rest of the year as I think we've guided all year to pay for lost contracts that were accrued for in previous years and for just the timing of more than capital flows from EPC contracts that are nearing completion that are generally positive in the earlier stages and negative in the final stages.

The negative cash flow in the second half has no correlation to our earnings per share estimates for the second half, so the disconnect is the working capital usage what's we've been getting clear all along.

Relative to your question on the reserve for loss on uncompleted contracts I'm looking at the cash flow for the quarter and it was a use of 13 million and that's exactly what I would suspect and we would be working that reserve down via cash payments to vendors, employees as we complete those loss contracts and you'll see more of that over the second half as we work through the completion of those projects.

.

And we'll now go to Alan Fleming from Citi. .

Hi, good morning.

Stuart maybe you can talk a little bit more about the large project environment and kind of what you're seeing in terms of several of these larger prospects that you've been looking at? And in the context of some recent oil volatility, how would you characterize the movement on final investment decisions on these projects? Have you seen any movement to the right or do you still feel relatively good that these projects are kind of tracking on schedule as you've thought?.

Good question.

I think there has been quite a bit of press recently from various sectors really sort of talking but the CapEx model changing little bit within the IOCs and etcetera, but what I guess what we're experiencing is that our project pipeline is now made up of multiple what I would call sort of $500 million to $1.5 billion type range projects rather than the $20 billion mega projects and there is a number of those in our pipeline and they're across some sort of mid-scale LNG.

But more predominantly in the downstream arena whether that's in polypropylene or a specialty chemicals et cetera. So, very much in the U.S. and if you sort of specialize pockets in Azerbaijan and the Middle East also.

We're seeing those projects progress as planned, I think the fact that the scale is so large and I guess the sort of stability of the gas market itself rather than the oil market is helping with that in terms of investment decisions.

And we've said all along that we felt that the backlog in E&C would be backend loaded this year and in sort of late Q4 into early 2018 we said that from the beginning of the year and I think that's playing itself out.

So, with the one I guess mega project that we are chasing at the moment is the LNG project for shale which people are well aware of and the investment decision associated with that will depend on the pricing that comes out of the EPC bidding exercise.

But that's an outlier in some sense, I think the key for us is actually the multitude of opportunities and the sort of I guess the normative project range of $500 million to $1.5 billion..

Yeah, that's helpful. And then may be just a follow up on some of these scope changes that you're seeing on [indiscernible].

I guess may be a little bit more color on what's driving these still changes and how comfortable are you that ultimately this is more just a timing issue and that you will get paid by the customer and this won't result in eventual disagreement with the customer? How do you get comfortable with that and how can you help up get comfortable with that?.

I think the first thing is that the changes that we've sort of identified have been funded by the customer to date. The additional changes that we're sort of signaling if you like is already included in our EPS guidance to the best of our estimates are in the reinvestable positions.

I think that's really just the environment in Australia that people are -- it's this productivity challenges there that’s the reimbursable element that the sub-contractors are coming through with additional needs to complete the project and as we walk those through there will be part of that reimbursable scope opposite the customer.

So, we feel very comfortable in that area.

In terms of will there be an arm wrestle and a potential dispute down the line, I think in these big jobs there's always a little bit of an arm wrestle at the end, but we're trying to keep a very commercial focus on with our partners where we are heading and stay very aligned opposite the customer and keep relationships and communications open at the end of the day, it’s in everyone's interest to come out, the conclusion of this with a sensible outcome, and it will end up in court possibly, possibly not, I mean you can never guarantee one way or the other, but we'll work very hard to make sure, there's an amicable resolution to this without commercial downside, I mean that's our ultimate aim..

I'll add there [ph] Allan, is we try to better clarify in our disclosure, when you read on an unapproved change orders, you might construe that we are out that much cash, that's not the case, we as Stuart has said, negotiated a funding mechanism for the funding of a substantial portion of those unaccrued change orders to the joint venture to fund those activities whilst we work through the ultimate settlement of responsibility and so forth.

So, the cash flow situation is much better than what you might construe from just looking at that schedule. And we provide more clarity on that in the text that follows in the [indiscernible] JV footnote..

And we'll now go to Steven Fisher from UBS..

Hey guys, good morning this is Cleve Rickard on for Steve, thanks for taking our question. Most of my questions have been answered but just a follow up on the cash, can you give us a sense of how much a drag the legacy projects are on free cash flow or cash from operations for the year in '17.

And then when, I don’t know if you can give a firm estimate of when they all complete. I know some of it is next year, but that'll be helpful..

Sure, and I'll take you back to Investor Day and even before that the answer has been the case all year, the drag and I'll define that as the funding of lost contracts recognized in '16 that are well known plus the timing of working capital from the late stage EPC projects where you're net negative at the end, your net positive at the beginning of the life cycle of those projects.

Those two categories collectively would be a cash outflow of $300 million to $400 million 2016 combined -- 2017 sorry, fiscal 2017 a year or in $300 million to $400 million of working capital outflow for those two categories of things offset by cash earnings, plus favorable items like the Pemex settlement.

All of that rolled into one yields the cash flow guidance for the year of 120 to 200..

So that hasn't changed and do you have a sense of when the legacy projects are going to be completed?.

The lion's share -- go ahead Stuart..

Yes, I know, I was going to say that the one remaining legacy project in the US we're aiming for mechanical completion by Christmas time, and in terms of XS I think I answered that early in the call-in terms of the first team before year end and the second team by the middle of next year..

Okay, I just wanted to clarify that and then I guess Stuart thinking more broadly and I know it’s been a topic of discussion for a while but in terms of the 3 to 5% revenue growth next year and then we talked about the breakout potential, how should we be thinking about those revenue targets in terms relative to backlog.

I mean do you need to see substantial backlog growth to achieve those numbers or is the market changing and developing in such a way that the smaller projects could be booked and burned and see maybe backlog burn accelerating going forward. I just wondered how that context have changed. .

Yes, it has changed quite a bit.

I think we still want to see projects coming to fruition in late Q4 early 2018 to help us with that growth story and I guess the E&C sector but as I said in my, in the presentation that the I guess the level that sort of, the quality of the foundation that fits with any E&C in the reimbursable smaller project management engineering services type contracts as well and maintenance give us a far stronger foundation and less reliance on this sort of the major project backlog to predict our future.

So, I think it's a combination of both, I think we've de-risked the future somewhat but at the same time we still like to see some bookings in the Q4 early '18 and these sorts of down streaming sort of specialty chemicals are there I was talking about earlier..

On the government side play, the cycle for funding has at least in our experience shortened and so for example the backlog at our largest project [indiscernible] is much less than one year's revenue and it is funded more frequently than smaller vibes [ph] and that funded through OCO primarily and so it's backlog is less correlated to future revenues than it used to be as a result off-shorter funding cycles in government at least in our customers and so it's still an important forward leading indicator but it's still quite possible to grow in a healthy manner that backlog changes might not necessarily predict as well it used to.

.

And will now go to Jerry Revich from Goldman Sachs..

Hi everyone. This is Ben Burud on for Jerry. You guys had nice performance in government services in the quarter and looks like the organic growth for the legacy business in the segment is around 2%.

Can you please talk about how you see organic growth shaping up over the next couple of quarters given some of these wins you guys have already outlined?.

The major new start for us would be Diego Garcia assuming we prevail through the test [ph] period and so we expect assuming we prevail that will start contributing more towards growth in the second half probably more Q4 than Q3, if that proceeds as planned, plus whatever we were win coming out of the large pipelines both in aggregate but also the outstanding bids.

So, we generally have guided to 5% of recurring annual revenue growth in the foreseeable period coming out of our May 12, dialogue so we are going to count on the pipeline growth that we have built and a strong win rate and things like our ongoing strength that our military will receive support to continue the growth pace there. .

And I think the book to bill of 1.3 in the quarter supports that..

Got it.

And then, and turning to E&C can you guys give us an idea when you see some growth actually turning positive based on the visibility you have in your backlog especially with your comments about year end?.

Yeah, I think at our Investor Day we sort of laid out how that sort of plays itself out, if there were timing holds that you think it will and sort of you start to get these awards coming through at the end of the year and into 2018.

The first part of those projects is engineering which is by the revenue ramp in 2018 that we predicted was single digit and you get the engineering and as you when after several months of engineering you get into the procurement and the construction cycles which is where the majority of spend is and that's when you see the growth coming though in 2019 at a much higher rate..

And we'll now go to Scott [indiscernible] Capital. .

Hi, quick question on the balance sheet. I know last year you guys had talked about terming out some of the debt, obviously the charges in the third and fourth quarter I think may have prevented that now you've had two profitable quarters no charges and you're suggesting you don't see any significant charges on the horizon.

So, can you talk about your debt plans and terming that out and getting a longer-term structure and putting in some permanent capital on the balance sheet? Please, thank you..

Great, Scott.

We still intend to refinance our revolver with longer term debt as you've summarized and as we've said based on our discussions with our advisors we did feel as you've also said that getting a couple of quarters under our belt in our new model if you will and demonstrating the greater stability and predictability of our business would help us towards that end.

We've also seen some market activity in the E&C space of the credit side that's been a little disruptive there and our performance -- the more we can separate our performance from that the better off we would be. And so, I think we're in a much better place after the first half of the year to proceed and that's still our short-term goal..

And now are no further questions. I'll turn the conference back over to you Mr. Bradie for any additional or closing remarks..

Thank you. I think thank you all for taking the time. A strong quarter falling on from an original sort of good start to the year. I have a feeling pretty good about our business for the second half of the year, obviously available for questions after this myself, Mark or Nelson. So, thank you again..

This concludes today's presentation. Thank you for your participation..