Nelson E. Rowe - KBR, Inc. Stuart J. B. Bradie - KBR, Inc. Mark W. Sopp - KBR, Inc..

Tahira Afzal - KeyBanc Capital Markets, Inc. Jamie L. Cook - Credit Suisse Brent Edward Thielman - D. A. Davidson & Co. Brian Ruttenbur - Drexel Hamilton LLC Robert F. Norfleet - Alembic Global Advisors LLC Chad Dillard - Deutsche Bank Securities, Inc. Michael S.

Dudas - Vertical Research Partners Steven Michael Fisher - UBS Securities LLC Alan Fleming - Citigroup Global Markets, Inc..

Good day and welcome to KBR's Third 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 prepared 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, sir..

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

Stuart and Mark will discuss KBR's financial and operational results, market outlook and 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. A press release announcing KBR's third quarter results and third 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 discussions 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 statement.

These risks are discussed in KBR's third quarter earnings press release, third quarter Form 10-Q for the period ending September 30, 2017 and current reports on Form 8-K. You can find all these documents on our website at kbr.com. Now, I will turn the call over to Stuart..

Thank you, Nelson. Good morning and thank you, all, for joining us. You can tell, I've become a little bit more Texan given how the Astros are performing at the moment. I will begin on slide 3 with an update on our safety performance.

I'm pleased to report that both our total recordable incident rate and days on which we achieved zero harm across KBR's global operations, our projects on the sites are at an industry-leading level. But that is not enough, as our commitment and vision is to achieve zero harm every day.

KBR is a people company and core to our culture is looking after one's self and those around us. Quite simply, good safety is also good business, which takes us onto slide 4, third quarter highlights.

Executing on strategy, together with both strategic and commercial discipline and a focus on priority areas, solid project execution, cash and winning the right work has delivered a fairly clean quarter.

Strong and predictable earnings and better cash performance; portfolio mix reducing risk profile; strong bookings, led by our Government Services business, KBRwyle; our higher margin business, Technology & Consulting. Together with strategic wins for E&C, including growth and a small project, OpEx-facing businesses was pleasing.

Directionally important, we're again raising guidance for the 2017 full year and more on that later. A few of the wins for KBR in the quarter are highlighted. For KBRwyle, Diego Garcia and Bahrain base operations contracts, both of these protests projects were resolved in our favor in the period, eight, plus five-year contracts respectfully.

We secured the eight-year Djibouti base operations contract, our final major re-compete for 2017. Our niche security solutions business secured a maintenance contract from FAA and our space vertical secured a seat on NASA's REMIS contract. Internationally, KBRwiley and the UK is performing well and continues to grow.

In addition, we announced the strategic acquisition of Sigma Bravo in Australia. Sigma Bravo takes KBRwiley into the highly differentiated classified arena for the Australian Ministry of Defense, and this is actually on the anniversary of the Wiley and HTSI acquisitions.

In Technology, following our strategy, we were awarded the revamp of an ammonia facility in Russia, originally built by KBR. In E&C, in conjunction with our Consulting business, Granherne, we pulled through ongoing pre-FEED work for BP's development in Mauritania and Senegal. E&C was also awarded an EPCM contract by JVGAS in Algeria.

This is a four-year contract for work on JVGAS's major gas developments, with work expected to grow through 2018. I will now handover to Mark, who will take you through the results in more detail, our cash position and the expectation of what we will see in Q4 including guidance..

Great. Thanks, Stuart. I'll start on slide 5 of the earnings presentation. As Stuart led with, we've continued to perform on or above our plan for 2017 and well above last year's performance, which included some large project charges.

Q3 this year was clean and highlighted with continued sequential growth in Government Services, growth in impressive margins in Technology & Consulting, and project performance in E&C, which drove favorable net adjustments and good attendant margins.

These factors contributed to a healthy adjusted EPS of $0.35 for the quarter, and forming the basis for upping our 2017 EPS guidance again. More on this in a little bit. General and administrative expenses continued to be at normative levels as the prior year included some transaction expenses associated with the Wyle and HTSI acquisitions.

Our effective tax rate in Q3 was 24% as expected compared to an income tax benefit in Q3 of 2016 due to the project losses we had last year. As I said, adjusted EPS was $0.35, GAAP basis was $0.32 for Q3. And finally, operating cash flow of $28 million was improved year-over-year and is on track with the plan we've set out for the year.

As we have explained, operating cash flow this year has been adversely impacted by net working capital outflows associated with a higher proportion of projects nearing completion. In other words, we are now burning off advances that we received at project inception in prior years.

We expect to see more of this in Q4, but it should mostly be resolved this fiscal year. On to page 6, digging into the segments.

Government Services continued to grow year-over-year and sequentially due primarily to the HTSI acquisition, which happened at the end of Q3 last year, but also winning all significant re-compete so far this year in capturing a few new wins, plus experiencing growth on existing contracts.

We've seen particular strength in our logistics and mission support area where we have become the provider of choice for overseas-based operations, support for the U.S. Military, winning everything significant we have bid this year. These wins will provide revenue visibility and foundation for growth in the years ahead.

Gross profit and equity in earnings margin was just above 9% in Q3, aided by growth and equity in earnings from the ramp-up of the new United Kingdom military flight training school contract under our Affinity joint venture.

Technology & Consulting also grew year-over-year and sequentially with a particularly strong quarter in licensing, catalyst and consulting sales, which drove margins to about 25%. For E&C, we've had strong execution on the projects nearing completion, which contributed to margins of 9% for the quarter.

We had a number of small E&C services wins, as recently announced, and remain optimistic that larger project will eventually come from the pipeline of opportunities we have developed. Timing remains difficult to predict.

As we enter into the final stages of closing out our last remaining power project in our Non-strategic Business segment, we were able to reduce some costs associated with the close out of this project, and that's recorded some profit in Q3 as well. Over to slide 7. With respect to cash and debt, no major changes here in Q3.

Our cash position was modestly improved with a favorable net cash flows we experienced and the gross debt position remain the same for now. On to slide 8. With respect to guidance, with Q4 to go, we are upping adjusted EPS guidance to a range of $1.35 to $1.50 and upping EBITDA guidance to a range of $320 million to $350 million.

We are keeping operating cash flow at $120 million to $200 million. On to slide 9. Here's a little bit more color on what to expect in Q4. As a backdrop, the market conditions continue to be favorable for Government Services, Technology & Consulting and early stage project studies and life cycle services and E&C.

And while timing remains hard to predict for large E&C projects, the increased early-stage consulting projects we are seeing in T&C is a favorable leading indicator for large EPC projects to come. For Government Services, we expect revenues to downtick sequentially, primarily from a lower number of productive days due to holidays in Q4.

This is a normative trend for Government Services businesses. We also completed a short task order under LogCAP IV in Q3, so that'll have a modest negative impact to Q4 sequentially as well. For Technology & Consulting, more of the same, sequential and year-over-year growth.

And for E&C, we see continued sequential revenue declines due to ongoing project ramp-downs. And given where we are in the year, we do not expect any new wins in the fourth quarter to impact this fiscal year's revenue result.

For cash flow, while we benefited from some timing items in Q3, we expect Q4 net operating outflows in the $50 million to $100 million range as we wind down the projects in the E&C segment, as we've guided all year. The team looks forward to finishing the year at this higher level of performance and setting the stage for momentum in 2018.

We'll release Q4 in late February and we'll issue 2018 guidance at that time. Now, back to Stuart..

Thank you, Mark. On to slide 10, in summary. Overall, at the group level, a clean quarter and simply executing on our strategy. At the segment level, KBRwyle, working with our global government customers, is performing really well. It's realizing synergies and growing backlog.

In Technology & Consulting, our prospect pipeline leads us to expect further growth in Q4 and beyond with continued strong margins. As Mark alluded to, our Consulting business saw increased activity in Q3, which is a good leading indicator to future E&C project opportunities.

And E&C itself, good project execution, together with an increasing number of smaller and OpEx-facing projects, is delivering more predictable results. Our prospect pipeline remains attractive in the downstream market in the U.S. and in the Middle East as we move into 2018.

We're also currently engaged in a number of strategic opportunities in the offshore arena that we believe will move forward in late Q4 and early 2018. Overall, we have a high level of backlog and our earnings momentum with greater consistency and predictability has allowed us to again raise guidance.

I will now hand back to the operator, who will open the call up for questions. Thank you..

Thank you. We will go first to Tahira Afzal with KeyBanc Capital Markets..

Hi, folks. Congrats on a great quarter..

Thank you, Tahira..

I guess first question, and I know you guys are going to be giving out detailed guidance for 2018 later on. But, as you did introduce some headline numbers in a sense to think about back in your Investor Day, I would love to get a sense where your biases align.

It seems like Government Services, for instance, is turning out to be closer to the upper end of what you've laid out for 2018. So, any thoughts on how things are qualitatively shaping up versus those headline numbers would be helpful..

Good question, and not unexpected, Tahira. I'm sure there'll be lots of questions about 2018. Let me start first on E&C and quite a lot of debate around that. I mean, if you remember, in our Investor Day, our forecast was to keep revenues flat going into 2018, and that gave an EPS bump for us, because we were working off loss-making projects this year.

And that was really the way we're thinking about the market sort of picking up, and sort of feeds and things like that, as it sort of worked its way through the execution sort of spend profile through 2018. And given our prospect pipeline, we still feel good about that forecast. So, that's probably the first thing to get out there.

In terms of Technology, that continues to grow quarter-on-quarter and particularly around the margins and the gross profit line, which is really, really exciting for us, because there's a lot of recurring revenue and catalysts and things like that. So, we expect that to continue to grow.

And I think I said last quarter the prospects we have in that business are as good as we've seen for many, many years and that trend is continuing. But in terms of GS, you're right, we won over $1 billion of work in the quarter. I mean, that's quite seasonal, in fact.

I think the government budgets are such that you tend to do well in the third quarter. But I think directionally, you're correct, we're aiming at – we've got the opportunity to achieve the higher end of that growth spectrum..

Very helpful. Good. And I guess as a follow-up, you talked a bit about offshore. And even today, there was an article out on how you guys might be bidding on some work in West Africa that's on the FPSO side. And as you look over the last four, five months, I know people focus a lot on LNG for you and maybe a bit on petrochem.

But, it seems like the offshore RFPs have notably picked up maybe more than LNG, et cetera. I would love to get your thoughts on that and whether you feel incrementally more confident about that market into next year..

I think overall, that market is still challenged, the offshore arena. But I think we've been very considered in where we pointed our bid dollars and our effort. And that's been quite successful. We talked sometime ago about Johan Sverdrup and we're positioned well for that and won that work, and that's now moving into the next phases.

So, there are opportunities there. Our work with companies like BP in Azerbaijan and West Africa are well known, and that continues to go very well. And we're looking in places like Trinidad for opportunities where really the $50, $60 oil scenario is still attractive for those developments.

But, I think as long as we continue to be sensible and considerate, I think it comes with great opportunity and I think that's what we're seeing.

I mean, really on LNG itself, quite a bit of crash this quarter, which I'm sure you've all picked up on, with Exxon and others all coming to press, really talking about, I guess, the demand in China really going well above expectation, because of, I guess, coal – trying to replace coal and environmental pressures, et cetera.

The security of supply issue in Europe is still a big question mark, really around sort of Russian gas going into Europe and looking for alternatives, and I guess North America is a natural alternative for that.

And really, I think it all culminates what does that all mean? It all means that, I guess, people are zoning in on that, sort of 2023 supply-demand cross..

Right..

And if you walk that back, I guess our expectation is that you'll start to see some movement in LNG through 2018 and FIDs into early 2019..

Very helpful. Thanks a lot, folks. And congrats again..

Thank you..

And we'll go next to Jamie Cook with Credit Suisse..

Hi. Good morning. Nice quarter. Two questions, I guess. First, last quarter, Stuart or Mark, the unapproved change orders got quite a bit of attention. I mean, it looks like they went up again this quarter fairly materially.

So, if you could provide color, how much of that was (19:32) or how we think about that trending over the next couple of quarters a potential resolution and how concerned you are about that? And I guess, my second question, Stuart, it's more to you on a strategic level, given the interest that we're hearing on CEI's technology business, how do you think about your Technology business strategically over the longer term depending on depending on whatever multiple CBI gets, will that make you rethink that business, whether or not it should be core to you, or you could create greater shareholder value if someone else wanted it? Thanks..

Hi, Jamie. It's Mark. Yeah, most of the uptick in the unapproved change orders disclosed in the footnote is related to it, as we say in that footnote.

And that continues to be activity where under the cost reimbursable part of the job, we, or – and/or our subcontractors have requested for, and have received funding for additional work relative to the projects. And we have submitted change orders relative to those.

The clients through negotiations has almost entirely funded those change orders, but they remain in the unapproved status, because they have reserved their rights as is customary to later discuss those before they are finalized in an approved order sense. And so, it's really quite honestly more of the same that we've seen in recent quarters.

And we'll expect that to tamper down as the project concludes in 2018. But, we might see more increase in that in the next couple of quarters until we reach mid-2018 timeframe where we expect completion to occur..

Okay. I mean, is there a maximum level? I mean, I'm just surprised, the total amount relative to your company is big. I mean, at what level could we see this unapproved change order get to over the next couple of quarters through mid-2018, just to know what your expectation is..

I think, Jamie, it's difficult to put a number on that, but what I would say is, – with the mechanism of the way this works is that, the costs associated with this are actually, in the main, not our costs, the subcontracted costs. It's all part of the reimbursable work ongoing in Australia to finish the trains.

And as we negotiate the closeout with the clients oversight and approval in terms of numbers, we take these into the unapproved change order, because at the end of the day, they're still sort of finalizing their overall accounts and having their rights around it. So, I think the important thing is two things.

One is in the reimbursable loan that go into the essentially subcontractors, and the second is, this being fully funded by the customer. I don't really have a ....

Okay. I'm sorry..

Yeah. As Mark said, it's more of the same and this job is sort of driving to conclusion, I think first train publicly access (22:40) at the end of the year, second train in the middle of next year. So, it will start to resolve itself as we go forward..

Okay.

And then, the Technology business?.

Yeah. Good question. I guess, again, at the end of the day, this is being spurred on by CB&I having to sell their business. And I think the main driver there is having to sell their business because of the current situation and that's unfortunate as that is. And they don't want to sell, as I understand it. They see a huge value in technology.

So, leading into opportunities in the E&C sector. I think we've said that all along. It's a key part of what we do, and of course, we've got Technology & Consulting in there and our Consulting sort of Granherne is doing very well, as Mark alluded to in his remarks.

And that really is sort of allowing us to go through work and sort of stuff we're doing for BP and et cetera. So, I do think it's a key strategic sort of column in the house, if you like, that CB&I have been post the settlement. And we'll make them less differentiated going forward..

Okay. Thanks. I'll get back in queue..

We'll take our next question from Brent Thielman with D.A. Davidson..

Hi. Thanks. Good morning. Great quarter..

Thank you..

Stuart, you talked before about good activity developing in the T&C business. Now, just curious, I mean, are you're seeing healthy opportunities developing in geographies and markets that the E&C business would want to leverage and participate? I mean, I know you don't want to be in China..

Yeah. I mean, it's a good question. And I think the way to look at it is that Technology for us is a global business, which means we could take it to markets where we wouldn't do lump sum EPC or construction, and – but also there are opportunities in markets where we would.

And in terms of Consulting itself, we're more than happy to do sort of pre-FEEDs in a consulting group and fill them into front-end designs and detailed designs and project management assignments. So, I think there's no black and white answer to that question.

I think that what it does is that both businesses are good businesses in their own right, but it allows you to be selective on the risk profile you want to take. But are there opportunities in places where we would like to leverage our E&C capability from T&C? The answer is yes. But, are we compelled to do so? The answer is no..

Okay.

And I guess, any thoughts or comments on M&A in areas you're looking at or interested in still focused in T&C and Government?.

Yeah. I think we're pretty consistent in the CIS. I mean, we did Sigma Bravo in the quarter, high-end, upped the food chain, differentiating Government Services and we'll continue to look for opportunities in that arena. We are continually looking in the Technology piece.

We did the polycarbonate deal earlier this year and have a couple of opportunities in that arena that if we are successful, we'll more than justify our positioning in that market. And certainly, the other place we've talked about before is the maintenance business globally.

Our Breton Ridge JV continues to do well, contributing positive results to the equity and earnings line as we go forward and us growing and our positioning overseas and maintenance is gaining momentum as well. So, I think those are the three core areas.

And they fit with really what we said all along is that we want longer term, predictable cash – good cash conversion type businesses, and all three of them fit our profile..

Okay. Great. Thank you..

And we'll go next to Brian Ruttenbur with Drexel Hamilton..

Yes. Thank you very much. One or two housekeeping and then a tough question. So, first housekeeping. D&A going forward, I think you're down to $11 million. I believe previous quarter was $14 million of D&A.

Is the $11 million the good number going forward or am I missing something?.

It's a clean number going forward. I target 40% to 45% on an annual basis..

And that's the backlog, Brian, off of the acquisitions in one year..

I'm sorry.

Can you repeat something about backlog?.

Hi, Brian. This is Nelson. That's the backlog that's running off for the – the backlog for the acquisitions, the purchase accounting. So, that write-off. So, the $11 million that you have now should be a good number going forward..

Okay. Great. Next question is on the Sigma Bravo acquisition.

Can you talk about what that adds in terms of revenue? Was this significant or was it just a small add-on?.

It's a bolt-on. And I mean, it's – we've got in the disclosures. The value around that was about $10 million in acquisition prices. But I think what's far more important is, where it takes us strategically, it's in the classified arena for the Austrian Ministry of Defense. So, it's in the IT arena as well.

And so, that takes us into a completely different area of the Ministry of Defense in Australia and – which allowed us to take what we've got there and synergize going forward. So, it's more about the strategic direction than scale..

Okay. And then, some of the harder questions. In terms of Government Services, you're getting a lot of traction, a lot of bookings.

Can you talk about the profitability of those bookings? Are they going to be above average, average, below average? Just trying to understand the mix of business on that specific line item, kind of gross margins or whatever you want to talk about, either gross or operating for Government Services moving forward within the....

Yeah. I mean, that's a good question. I think it depends on – in each individual sort of booking. And I think the dynamic you have in things like long-term base operations sort of annual fixed price type deals is that you can actually work efficiencies through time as you get better and better at executing.

So, through time, the margins, you should do better. I think in the more reimbursable nature, it's average, just because that's the market you're bidding into. Does that – I mean, that's – so, overall, I think the margin profile is within our guidance, and we're feeling pretty good about that guidance..

Okay. So, we should have stable kind of Government Services margins overall moving forward or better.

Is that the right read on that?.

Well, we'll provide our guidance for 2018 in a few months. But generally speaking, the portfolio is moving along as we had targeted, and the logistics business tends to be lower than average.

The science and space and parts of the engineering can be slightly above and that all averages out to the targets we've set before considering the international business which is above both of those categories and doing very well and growing nicely.

And so, again, the portfolio is taking shape as we set forth, and we feel good with the numbers we provided back at the Investor Day for the longer term..

And we'll go next to Rob Norfleet with Alembic Global Advisors..

Good morning, guys. Just quickly in terms of the Government business, are there any significant rebids coming up in 2018? And kind of walk us through some specific large programs that maybe you're bidding on in 2018, just as it relates to the different end markets that you serve..

I mean, the major rebid that we're looking at is around LogCAP IV which moves to LogCAP V, unsurprisingly. But the configuration of that changes significantly. The way that the army is looking at sort of structuring that is to put it into regions rather than individual contracts.

So, for example, there will be a contractor for the Middle East, there will be a contractor for Africa, et cetera. So, I think the opportunity that that affords us is quite significant.

And particularly as it relates to places like the Middle East and Central Europe where we feel that we're performing well, and therefore have a good opportunity to prevail as that goes forward, and that would really expand that business, and it would lock it in for quite a number of years. So, we're feeling very excited about that.

That's probably the largest re-compete we have in 2018..

Clearly the largest. We have a pre-positioned stock bid or .....

Yes..

...a re-compete coming through; that's scheduled for 2018 as well. And so, that's another one amongst our top contracts, not as big as LogCAP IV to LogCAP V. As Stuart mentioned, that's by far the largest..

And could really have a significant upside for us. And in terms of – as Mark said, in terms of other bids that we have in front of us, we've got some significant bids with NASA going on. We tend not to call out the specific bids themselves just because of the competitive environment.

But, I think significant bids for NASA, a significant opportunity with pre-positioned stock, continual opportunities in the logistics side. Our niche security systems business is doing very well and growing. And we talked a little bit about a contract with FAA this quarter, and we're feeling pretty good about that.

We had the board down in Charleston, where that's headquartered, earlier this quarter, looking at that business, and everyone came away very positive. So, I think we're seeing opportunities across all three verticals, but also opportunities internationally as well.

The UK business continues to do well and I guess where they sit as a facilities integrator is a unique differentiated position that we're getting a lot of interest around.

So, I think all that, we're feeling quite buoyant about the opportunities in front of us in Government Services, and I think that the coming together of Wiley, HTSI and KBR, we've done a lot of effort to get the internals sorted out and I think the opportunity to look more externally going into 2018 will provide even greater opportunity.

So we're feeling quite good about that business..

Great. That's helpful. Thank you. And just quickly on E&C. Obviously, there's not a lot of fixed price EPC work currently in the portfolio.

If you look at the bid pipeline in terms of the projects that you feel pretty comfortable will get FID next year, what's kind of the breakout roughly of fixed price EPC work versus cost reimbursable, because obviously we've kind of gotten away from fixed price EPC.

And again, how should that potentially transfer the margin, meaning obviously the fixed price working higher margin, should we possibly see a little bit of boost in margin as some of that work does get booked if it is more fixed price work in 2018?.

I mean, I'm not sure if the fixed price is greater margin, particularly at the end of the job. But – I mean, what I would say is that we're doing better than the services arena at the moment and that tends to have a little bit less risk but the associated margins are actually typically a little bit better just because the volume is less.

In terms of the EPC, the fixed price ratio versus the rest of what we do, I mean, we're quite specific about that. I think historically, we don't set a target ratio.

The opportunities in front of us are really about can we manage the risks associated with that project, are we disciplined and we're approaching the commercial aspects of that opportunity, and are we feeling good about execution. And if the answer is yes, then we go after that opportunity as long as it wasn't five bids and a buy.

We really want to be in a more differentiated space. And if you follow that logic a little bit further down the track, if you are in a differentiated space, then typically your margins are better. If you're more commercially considered, then there's less volatility..

Great. Thanks, guys. And then, congrats on a good quarter..

Thank you very much..

Thanks, Rob..

We'll go next to Chad Dillard with Deutsche Bank..

Hi. Good morning, everyone..

Hi, Chad..

So, the implied 4Q earnings guidance suggest about $0.15 to $0.20, and that range seems pretty wide for it being the last quarter.

So, I was just curious to get your view on what are some of the big swing factors that get you to either into the range? And is the low end of that range too conservative?.

Go ahead..

So, overall, policy, as I think we've tried to articulate through the course of this year, is to be conservative in our forecasting and to run a responsible business, and our current guidance outlook reflects that same view. In the fourth quarter, there were a couple of things that we expect to come into the picture.

First, you'll always account for some degree of unknown when you're setting guidance or attribute some of it to that. We do have government seasonality that I mentioned earlier. And so, there is some associated profit and EPS that comes with that, but that is seasonal in nature. That is not indicative of the trend of the business.

And we are expecting a modest facilities charge in the fourth quarter just to lower our cost structure going forward, and that'll be a few cents of EPS, but that'll better position the business going forward.

On the other side of those things, we're expecting ongoing normality in our profit rates at our targets that we've mentioned before, and again, some general seasonality of that and conservatism that we baked in. So, we're just trying to continue the mode of providing solid performance.

We've upped our guidance twice this year and we think that's very positive..

Nice..

That's helpful..

I think the only other comment I'd add to that is, this is only the second time in my tenure that we've increased guidance. It just happens to be two quarters in a row, but that's okay as far as I'm concerned. And as Mark said, we don't want to get ahead of our skis in this. We want to be making sure that what we put forward is achievable.

And if we do better than that, then all to the good..

That's helpful.

And then, what drove the step down in the equity and earnings for Ichthys? And do you expect that to pick back up or are we on the downward slope of the construction curve here?.

I mean, I think we've said before, we've had some dilution in equity and earnings because of the adjustments. I think we've been quite clear about that and put the numbers in the disclosures and to the market. Obviously, as we move towards the conclusion of the project, any dilution historical or forward as the costs increase will be recovered.

I mean, that's the mass (38:57). So, I don't think you're seeing a downward cycle. It's just a timing issue for us..

And we may not see much of a change year-over-year when 2018 is done relative to 2017, because we have deferred, if you will, through dilution quite a bit with what we otherwise have planned this year. At the same time, we see other joint ventures improving. Stuart mentioned Brown & Root earlier. So, we think that's shaping for better things in 2018.

So, some things, I think, will go up. I think our contracts in the UK will continue to grow, particularly with the ramp up of military flight training school. And so, as some things will come down through their project life, this being one of them in the latter part of 2018, then others are coming up.

And so, we'll lay that all out in our guidance in terms of the overall view come late February..

We'll go next to Michael Dudas with Vertical Research..

Good morning, gentlemen. Good luck tonight or maybe tomorrow..

Yes. Thank you..

Thanks, Michael..

I'm surprised you got a voice lift after the last few games. My question is regarding two things. First, in your prepared remarks, you did talk about you had a great third quarter, bookings in KBRwyle.

What do you attribute this success towards? I know it's been some time now you own the asset and integrated, but what are you – there's been probably a lot better than people would have been anticipated, maybe the analysts and the competitors themselves.

What's been driving some of the successes that you're having in those wins? And my second question would be, I anticipate we're going to see a lot greater or faster international defense spending growth relative to the U.S.

Is that something that you're seeing as well and it'll be positioned to generate better growth internationally than what we're seeing domestically? Thanks..

I mean, the first question, it's just focus. As you know, we said all along the first thing that we would do around integration was get the sales folks together, really look at how we can leverage the historical past performance and really get our P (41:20) win rates up and position for success and I think the team has done well there.

And although perhaps the market and some analysts didn't think we could achieve the synergies we set forth, we certainly were committed to achieving those targets and the team has done a fantastic job and absolutely really, really focused in what they're doing and spending their bid dollars in an appropriate way.

Mark, any more on that?.

Well, one thing I see is our legacy KBR Government business has not had a lot of new capability into the mix for a long time and introduced Wyle and HTSI over the past 12 months and there's a tremendous amount of new capability and energy that our heritage legacy folks have really tapped into to help the mission support and logistics business, provide differentiators there.

And we've had a tremendous win rate and run in that business. Similarly, our traditional business can help those folks as well. And so, they're teaming well together, plus they're making sure they're staying focused on what they do every day and serving their customers.

Customers are clearly pleased with what we're delivering and the re-compete win rate is extraordinarily high. And so, a combination of focus, but also excitement with all the new capability that we have to bring to the market..

And the international....

International, we feel the same. We think the bigger market relative to us, the UK, is a place for possibly robust growth, and that's been the case for the last one, two years here. We really benefited from the PFIs, but it's much more than that.

There's a very interesting pipeline that the group has put together there to hit not only defense, but all forms of government in that region. And so, we're optimistic there. And in terms of relative growth rates, I would say Australia might be even more interesting, but smaller in the absolute.

And that underscores the importance of adding capability like Sigma Bravo. Our growth rates there are very, very healthy double digits, and we see a tremendous not reset, but aggregate increases in investment in the Australian Defense budgets very significantly over the next 10 years. It's very exquisite and we intend to capitalize on that..

Well go next to Steven Fisher with UBS..

Thanks. Good morning..

Good morning, Steve..

Morning.

Just want to come back to the unapproved change orders, because you sounded more certain this quarter compared to last quarter, Stuart, when you raised the possibility that this could ultimately end up going to court So, has something changed to give you more clarity on where that responsibility falls, or how we should think about the risk of cost responsibility on the project?.

As I said before that the nature of these change orders are very much with subcontractors the reimbursable part of the scope of what that we're doing. And the customer, the way that mechanism works is that you've got to agree the number with the customers as you go forward and they fund that portion of it.

But under our system, we certainly never take anything in until it's all fully signed up. And if they reserve their rights in any way we're very, very conservative in what we put into the revenue and I think that's appropriate.

And as ever with these large projects, Steve, we will end up in a negotiation that concludes the commercial outcome and it's all driving towards that as the project moves to the end..

Okay. That's helpful. And Stuart, can you just give us a little more color on your E&C prospects from a size perspective, because I know going back to the Investor Day, you were talking about an expectation of small-to-medium size projects, having a good pipeline there. I think it was around $500 million, $1.5 billion was your kind of sweet spot.

Today you're talking about the potential for large project.

How are you thinking about what the prospect looks like from a size perspective?.

Yeah. I think that the outlook is still the same as we presented at Investor Day that really the portfolio that excites us, and the opportunity to going forward of course, in that sweet spot range that you mentioned – I mean it's easier for people to make decisions around that in terms of FIDs than the sort of $12 billion-type opportunities.

Everyone knows that we're bidding Canada LNG, that's a significant opportunity, but the FID question around that will come well into 2018. I think to go back to what I've said before, the market we're seeing, we're seeing quite a bit of focused activity in offshore, where we're putting our bid dollars and some good opportunities there.

And the project opportunities there are only (46:32) around the numbers reported. And the downstream petrochem sector in the U.S., again, similarly, the portfolio we have there is in those ranges. And certainly in the Middle East, the sort of early work will again be in those sorts of project ranges.

So, I think we stand by our sort of statements in Investor Day. I think where the team have focused their effort, I think the projects that are in front of us will go ahead. And I think we'll find out whether we've been successful or not successful as we move into early 2018.

So, as I said before, we're still feeling pretty good about what we presented at Investor Day around E&C in terms of that revenue flat profile..

And we'll go next to Alan Fleming with Citi..

Hi. Good morning. Stuart, I want to follow up on a comment you made in your prepared remarks that I think you said you were seeing growth in small-to-midsize OpEx-facing businesses within E&C. I thought that was interesting. And maybe you can just kind of expand on that a little bit.

Had the trends in the shorter-cycle businesses improved through the year? And if so, do you think that's tied to this more recent stability in oil prices? And kind of what markets are you seeing growth there?.

Yeah. Good question. I think the answer to that is different in each geography. And in the Australian market, we've grown that business and got it profitable over the last couple of years. It's doing very, very well and it's across a number of sectors, in infrastructure, in oil and gas.

And we recently announced the project mines, the first project mines that went (48:14) in the mining business, which is starting to get a bit more attention at the moment.

In terms of places like Saudi Arabia, there are a lot of services work going on there supporting Aramco locally both in the offshore side, but also in supporting work going on the onshore side, but predominantly just services, engineering-type work.

In the UK, we diversified our client base and our geographical reach from our UK business, and that's performing really, really well with work from Russia to Algeria, to the Middle East to obviously Azerbaijan and et cetera, as well as the UK North Sea and the Norwegian North Sea sector.

So, really, upstream, downstream, and the nature of that work is, again, predominantly in the Services side. We talked earlier about our maintenance business. Brown & Root, we've got a joint venture in the U.S., and that's grown significantly and we've got full spread of capability.

And we're able to leverage that capability globally and we've got opportunities in the Middle East to build on our existing business in Saudi. We're also in Poland and Russia, and we're in Indonesia. So, really – and that's really OpEx-facing, where they have to spend the money, because we got to keep the assets going.

And our niche there is being able to combine the white collar and the blue collar, and you get lots of companies that could do one or the other. I think we've got a proposition where you can get the smarts, but you can get the execution in an efficient way at the same time, and we're taking that model globally and it's doing very well..

I appreciate that. And as a follow up, I do want to come back to Ichthys because I see in your Q that the consortium on the fixed price scope of the Ichthys power plant filed a request for arbitration. And it looks like I guess the next step is for the JV to file a response I guess here in the next few weeks.

So, Stuart, can you kind of talk about your confidence here in being able to successfully prevail in an arbitration on the fixed price portion of the project? And can you give us an update on where the power plant stands today in terms of percent complete?.

Yeah. So, again, good question. I went down to Ichthys myself in the quarter to look at the project and meet the team and just to understand where it was heading. I think the first thing on the power plant is that we've agreed that there's temporary power solutions that will not slow down the execution of getting this facility started up.

So, that's the first thing to say. The second is that in terms of where we are on the power plant and in terms of progress, the team is still heading – there's been a number of rework issues that have been associated with that which we're working through; in terms of the percent complete it's still somewhere in the numbers we quoted historically.

In terms of our ability to recover, I mean, everyone on this call knows how U.S. GAAP works and the level of support from third-parties and law firms and legal opinions and things one needs to stake a position, and that's where we stand today with the support of our auditors, et cetera. So, I mean, this consortium walked off the job.

One of the three partners clearly didn't want to walk off the job, because they're still on it and that's GE doing what they need to do around the equipment and the technical authority that sits behind that. In terms of the other two partners.

We feel they completely breached the contract and walked off the job, because they saw the cost escalating to a point that we're unsustainable for them and one of those companies has been sold in the process as we all know. So, clearly they were struggling.

And so we feel pretty good about our opportunity to recover and certainly the legal opinions would support that..

And with that, we feel good that their case against us will not prevail, and we will succeed there in that arbitration against us. We think the rights point in our favor that as Stuart mentioned they repudiated the contract and the cost we incur to complete their work will be recovered from them over time..

Now, we'll conclude our question-and-answer session. I'd like to turn the call over to Stuart Bradie for any additional or closing remarks..

Thank you. Thank you for taking the time. As I said before, it's a clean quarter, but as expected most of the questions related to 2018. And hopefully we've given some color. I think the business is in good shape.

We've got some fantastic people doing some great work and I think as we move forward into guidance time at the end of – well, in February will obviously give absolute clarity around what we expect in the business.

But I think the main takeaway from today is that the overall 2018 is -E&Cs is meeting our expectation and T&C is growing and Government Services is performing very well. So, we're feeling pretty good about that and pretty good about the fact that we've won quite a bit of work in the quarter. So, thank you very much for taking the time.

Obviously, we'll be available for calls later on today. Thank you..

That does conclude today's conference. We thank you for your participation. You may now disconnect..