KBR's CEO Discusses Q4 2010 Results - Earnings Call Transcript

| About: KBR, Inc. (KBR)

KBR (NYSE:KBR)

Q4 2010 Earnings Call

February 24, 2011 9:00 am ET

Executives

William Utt - Chairman, Chief Executive Officer and President

Susan Carter - Chief Financial Officer and Senior Vice President

Rob Kukla - Director of Investor Relations

Analysts

Matt Tucker - KeyBanc Capital Markets Inc.

Robert Norfleet - BB&T Capital Markets

Andy Kaplowitz - Barclays Capital

Will Gabrielski - Gleacher & Company, Inc.

Joseph Ritchie - Goldman Sachs Group Inc.

Peter Chang - Credit Suisse

Steven Fisher - UBS Investment Bank

Operator

Good day, and welcome to the KBR Fourth Quarter 2010 Earnings Call hosted by KBR. [Operator Instructions] For opening remarks and introductions, I would now like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Rob Kukla

Thanks, Doris. Good morning, and welcome to KBR's Fourth Quarter 2010 Earnings Conference Call. Today's call is also being webcast, and a replay will be available on KBR's website for seven days. The press release announcing the fourth quarter results is also available on KBR's website. Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Sue Carter, Executive Vice President and Chief Financial Officer. In today's call, Bill will provide opening remarks and business outlook. Sue will address KBR's operating performance, financial positions, backlog and other financial items. We will welcome questions after we complete our prepared remarks.

Before turning the call over to Bill, I would like to remind our audience that today's comments 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 from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year ended December 31, 2010, which was filed yesterday evening, KBR's quarterly reports on Forms 10-Q and KBR's current reports on Forms 8-K. Now I'll turn the call over to Mr. Bill Utt. Bill?

William Utt

Thanks, Rob, and good morning, everyone. Overall, I'm very pleased with KBR's 2010 financial performance. KBR's 2010 net revenue was in line with our expectations, which declined primarily as a result of lower LogCAP volumes. However, operating income for the quarter and the full year was up 19% and 14%, respectively on a year-over-year basis. During 2010, we achieved record net income attributable to KBR of $327 million, up 13% compared to 2009. Earnings per diluted share of $2.07 was up 16% compared to the prior year.

KBR's job income backlog is also a positive story. During 2010, KBR's job income backlog was flat, resulting in a 140 basis point improvement in year-over-year margins. As KBR continues to work off the lower margin projects in our portfolio, principally the Escravos, LogCAP and Skikda projects, we have been successful in replacing this backlog with a series of higher margin projects. So even though revenue backlog declined during 2010, KBR was successful in keeping our job income backlog flat year-over-year.

Now let me move on to a discussion on KBR's discrete business units. For the Gas Monetization business unit, the Gorgon LNG, the Skikda LNG, the Escravos GTL and Pearl GTL projects, were all positive contributors of the quarter's results. The Inpex Ichthys FEED and Pluto FEED, as well as the Browse LNG basis of design projects, are all essentially complete. KBR was recently awarded a FEED contract through its KLH Australia-Browse joint venture for the Browse LNG project, and we continue to actively follow the Kitimat, Gorgon 4 and Arrow LNG projects, as well as expect final investment decisions for the Inpex and Pluto LNG project during the second half of 2011.

During January, KBR successfully negotiated the closeout of its participation in the Tangguh LNG project and signed agreements with our partner, JGC to transfer our interest in the project joint venture. This transaction allows JGC to take over 100% of the joint venture and concludes settlements of contractor claims and warranty work. As a result of this settlement, KBR will record an approximate $8 million pretax gain in the 2011 first quarter. This settlement, as well as the purchase of MWKL, successfully concluded a series of open items between KBR and JGC.

For our Oil and Gas business unit, I am extremely pleased with the business unit's year-over-year backlog growth during 2010, including a contract to execute the topsides detailed design for TOTAL, CLOV, FPSO project, which we announced in October. I am also pleased with the progress on our two Gulf of Mexico projects for Chevron. The topsides detailed engineering and design for the Big Foot project and the semi-submersible haul design for the Jack/St. Malo project. Additionally, during the fourth quarter, KBR received a series of additional work releases for the Kashagan project.

The Downstream business unit had a very strong 2010 as revenues increased 22% and job income almost doubled compared to the 2009 period. KBR's work on the Yanbu Export Refinery Project continues to ramp-up as the project now moves to the field. For Sonangol's Lobito Refinery project in Angola, the FEED has been completed, and we are now performing early-stage EPCM work, as well as value engineering on the project in preparation for the project's final investment decision in mid-2011. Finally, KBR's FEED work on the Ras Tanura Integrated Project continues to progress well, and we look forward to the project’s anticipated FID in late 2011 or early 2012.

At the Technology business unit, we are pleased with the unit's 2010 financial performance, as technology posted a 34% revenue increase and a 31% year-over-year backlog increase. Recently, the KBR and Southern Company jointly owned TRIG gasifier technology achieved two notable milestones. In December 2010, KBR participated in groundbreaking ceremonies at Southern Company's IGCC plant using the TRIG gasifier technology in Kemper County, Mississippi. Also, recently, a TRIG pilot plant was successfully commissioned in Korea, marking the first application of the TRIG gasifier technology outside the United States.

To support the increased volume of work we executed during 2010, our operation's resource center headcount increased 22% or 1,269 people during the year. KBR is now back at our peak staffing levels last seen at the end of 2008. Also, during the year, KBR opened new offices in Luanda, Angla and Atyrau, Kazakhstan added hydrocarbons-based personnel to our Perth, Australia office, as well as formed a Saudi Arabia-based joint venture to pursue Aramco GES+ contracts.

On December 31, 2010, KBR completed the purchase of the 45% interest in M.W. Kellogg Ltd. owned by JGC. KBR intends to leverage the unique capabilities of MWKL with those present at our existing Leatherhead operations to service the company's London operating center, creating one of the largest engineering and construction capabilities in the UK. Additionally, KBR has also implemented many cost-related synergies between the two offices.

At our North American Government and Defense business unit, we experienced the anticipated drop in revenue in the fourth quarter, related to the reduction in troop levels in Iraq to the stated 50,000 troop level. In January, during our 2011 earnings guidance call, we indicated that we anticipate full year 2011 LogCAP revenues to be in the range of $1.6 billion to $1.8 billion. Our estimate assumes the 50,000 troop level continues until the back half of 2011, with a substantial ramp down in troop levels by the end of 2011.

Also, during last quarter's earnings call, we mentioned that the LogCAP Award Fee Board's met in October 2010 to evaluate our performance for the periods of March 2010 through August 2010. The results of the Award Fee Boards are expected to be received in the first quarter of 2011. The International Government and Defense business unit also had a solid year in 2010, based largely on an increasing volume of work for the U.K. Ministry of Defence in the U.K. and for the NATO troops in Afghanistan. 2010 revenue was up 28% and job income up 24% compared to 2009. The Allenby & Connaught project in the U.K. was a great contributor to year-over-year growth, resulting from increased volumes of construction activity, improved margins and efficiency gains on delivery methods.

For the Infrastructure and Minerals business unit, we saw a very positive upturn in the business unit’s backlog, up 167% from the prior year. We are seeing a solid recovery in our transportation markets as evidenced by KBR's recent Doha expressway award, as well as in our minerals markets with the recently announced Hope Downs 4 iron ore project ramping up and contributing nicely to the business unit's result.

In late December, we announced the acquisition of the Roberts & Schaefer Company. This acquisition which supplements our existing EPCM capabilities, provides a proven lump sum EPC capability in material handling, while bringing KBR a broader base of clients, as well an expanded geographic footprint. Roberts & Schaefer will also help our Power business grow in material handling for solid power generation and pollution control facilities, and its Soros business is also expected to enhance our port material handling capabilities.

During the fourth quarter, KBR's Power and Industrial business unit was awarded a contract by Scottish and Southern Energy in the U.K. to provide Project Management Services for its multi-billion dollar capital investment program over the next five years. This capital investment program includes new power generation, modification of existing power stations and construction of transmission assets at a wide range of locations across the U.K.

Domestically, 2010 was a challenging year in the Power business as the demand for new power-generating projects did not materialize as we expected. Similarly, the regulatory uncertainty surrounding the next generation of Boiler MACT Rules kept many utilities and industrials from undertaking environmental capital projects during 2010. On the bright side, our Industrial business has seen a marked pickup in the volume of pre-qualifications and proposals for projects, which we expect to turn into major capital projects over the next 12 to 18 months.

At the Services business unit, solid execution allowed the Services business unit to post a 3% increase in job income for the year, despite a 6% revenue decrease from the prior year. The increase in job income was driven by solid performance in the Industrial Services business from the multi-site DuPont project as well as increased turnaround work in Canada.

Recently, Services was awarded several new job order and task order contracts to provide repair and renovation construction services as well as program and construction management services for the Houston Airport system, the Houston Independent School District and the Dallas-Fort Worth International Airport.

KBR's Building Group also had a solid year of new awards and finished 2010 with two new awards. The first award was a $19 million contract for the construction of Medicago's new 90,000-square-foot Vaccine and Research Production and Greenhouse Facility in North Carolina. The second award was a $33 million contract from Washington DC-based Erkiletian and Jefferson Apartment Group for the construction of a mixed-use development in Alexandria, Virginia.

The Ventures group also had a successful year in 2010, generating $33 million in job income, a 74% increase over 2009. The increase in job income is primarily related to increased shipments and higher sales prices at the EBIC ammonia plant and the consolidation of our Heavy Equipment Transport business in the UK.

Now I'll turn the call over to the Sue. After Sue's comments, I will comment in more detail on the market outlook for our businesses before turning the call over to questions. Sue?

Susan Carter

Thanks, Bill. Good morning. Consolidated KBR revenue totaled $2.3 billion and was in line with our fourth quarter expectations. Revenue declined $622 million or 21% from the prior-year fourth quarter, which includes the expected decrease of $421 million for North American Government and Defense compared to prior-year fourth quarter, substantially related to the LogCAP project. In addition, the fourth quarter of 2009 included $183 million of revenue associated with the EPC-1 arbitration award from PEMEX. And as a note, the 2010 results do not include P&L impact from operations for Roberts & Schaeffer for the year.

Consolidated operating income was $148 million in the fourth quarter of 2010 up 19%, compared to the fourth quarter of 2009. The fourth quarter of 2010 operating income included significant positive contributions from the Gorgon LNG, Lobito Refinery and Allenby & Connaught projects. In 2009, the fourth quarter operating income included $183 million from the EPC-1 arbitration, partially offset by the reversal of LogCAP accrued award fees of $132 million and $32 million in arbitration losses and legal fees.

Net income attributable to KBR for the fourth quarter of 2010 was $0.51 per diluted share compared to $0.45 per diluted share for the prior-year fourth quarter. The share repurchase program in 2010 added approximately $0.03 per diluted share benefit in the fourth quarter of 2010 and a lower tax rate related to tax restructuring, had a $0.06 benefit in the fourth quarter of 2009. You can find further details of the year-over-year business unit operational comparisons in the earnings press issued yesterday evening. I will now review other financial items.

General and administrative expenses for the fourth quarter of 2010 were $55 million, down $5 million from the fourth quarter of 2009. G&A expenses declined in 2010 due to good cost controls in all administrative departments. Our ERP spending and slightly higher IT costs are reflected in 2010, and 2009 includes the write-off of our Westside Campus cost. For the full year 2011, our current estimates for corporate G&A expenses are in the $230 million range. The projected increase over the 2010 levels is primarily related to higher real estate costs as we transition more Houston operations to the KBR tower, increased IT spend related to our ERP system and general wage inflation.

Our effective tax rate in the fourth quarter of 2010 and the full year 2010 was 32% and 33%, respectively. This is lower than the statutory rate of 35% primarily related to favorable rate differentials on foreign earnings benefits associated with income from unincorporated joint ventures, several favorable discrete tax items and utilization of additional U.S. foreign tax credits. For the full year 2011, we anticipate the operating effective tax rate to be approximately 32%.

Net interest expense was $17 million for the full year 2010 compared to $1 million for the full year 2009. The components of net interest expense include interest income of approximately $6 million, interest expense of approximately $8 million and credit facility expenses of approximately $15 million. Interest expense is primarily the nonrecourse data Fastrax Limited which became a consolidated variable interest entity on January 1, 2010.

Credit facility expenses or revolver commitment fees paid and origination fees amortized during 2010. Credit facility expenses increased in 2010 as a result of higher market pricing associated with our three-year revolving credit facility executed in November of 2009. Labor cost absorption income was $12 million in 2010 compared to labor cost absorption expense of $11 million in 2009. Labor cost absorption income improved in 2010 primarily due to higher headcount in the labor resource pool and higher chargeability.

I'd like to discuss KBR's backlog in a bit more detail building on Bill's earlier comments. The revenue backlog as of December 31, 2010, was $12.0 billion down 15% from a year ago, and down 2% compared to the sequential quarter. Compared to the sequential quarter, the hydrocarbons backlog was down approximately $200 million, primarily related to gas monetization with the completion of the Tanggu and Yemen LNG project, as well as general project work off. Partially offsetting this decrease was improvement in the remaining Hydrocarbons group with the addition of the Big Foot project and additional work releases on the Kashagan and Ras Tanura projects. IGP's backlog was up $191 million led by added projects from the Roberts & Schaefer acquisition and Hope Downs 4 mining project in the Infrastructure and Minerals business unit.

North American Government and Defense had slight reductions related to the LogCAP project due to timing of the funding of task order extensions. However, in early January, the funding for task orders was received in the amount of $573 million. Services backlog was down $280 million, primarily related to general project work off. Overall, the backlog portfolio mix at the end of the fourth quarter was 79% cost reimbursable and 21% fixed price, the same mix as the third quarter of 2010.

Next, I will discuss our liquidity and balance sheet. Total cash provided by operating activities for the 12 months of 2010 was $549 million compared to $36 million used by operations in the year ended December 31, 2009, driven by overall strong earnings, active working capital management at the project and business unit levels, and the receipt of LogCAP award fees during 2010.

Looking specifically at the fourth quarter of 2010, total cash provided by operating activities was $8 million. Impacting the cash flow from operations in the fourth quarter of 2010 was the delayed timing of approximately $140 million in payment collections on a few of our large contracts. These payments were received in the first two weeks of January 2011. At the end of December 2010, our balance sheet remains strong with cash of approximately $786 million, which included $136 million associated with our consolidated joint ventures. The $786 million in cash reflects uses in the fourth quarter of 2010 of $289 million to acquire Roberts & Schaefer, $27 million in capital expenditures and approximately $16 million to complete the share repurchase program.

As you recall from our full year 2011 earnings guidance call in early January, the MWKL cash payment occurred on January 5, 2011, and is therefore not reflected in cash at December 31, 2010. However, the timing of payments I mentioned earlier in the first two weeks of January, substantially offset the cash paid in the MWKL transaction.

As of December 31, 2010, our EPC-1 arbitration receivable remains outstanding. We are making progress on collection of this receivable, however, PEMEX continues to pursue all legal options available to them. We will update you as collection efforts continue.

We continue to put our cash to good use. In 2010 and early 2011, KBR had a very balanced approach to uses of cash including $233 million in share repurchases, $32 million in stock dividends and approximately $484 million in acquisitions and licensing arrangements. As we've told you in the past, KBR's four major cash deployment strategies are acquisitions, share repurchases, dividends and reinvestment in the existing business.

Before turning the call over to Bill, I would like to remind you of KBR's 2011 earnings guidance. KBR's full year 2011 earnings per diluted share guidance is $2.05 to $2.30, which includes approximately $0.17 for Roberts & Schaeffer and MWKL. Looking out into 2011 for the LogCAP project in Iraq, KBR is assuming the 50,000 troop levels until the second half of 2011, with a substantial ramp down in troop levels by the end of 2011. From a revenue perspective, we anticipate the full year 2011 LogCAP revenues to be approximately $1.6 billion to $1.8 billion. This estimate is based on the current information we have from our customer today. We expect the operating effective tax rate to be 32%, with diluted shares outstanding to be approximately 150 million to 151 million shares. And now, I'll turn the call back over to Bill for his final remarks.

William Utt

Thanks, Sue. As we wrap up our prepared comments, I would like to provide KBR's outlook for our businesses. For KBR's Hydrocarbon businesses, we see strong markets internationally, particularly in Australia and the Middle East. We continue to follow several LNG projects in an active Australia LNG market, as well as in North America. We also continue to see strong demand for offshore oil and gas projects globally. We see refining, chemical and petrochemical projects moving forward, primarily in the Middle East. Finally, we are seeing further growth opportunities for our Technology business unit. While hydrocarbon market opportunities appear promising, we are also seeing high levels of competition, mostly on EPC projects and mostly in the Middle East.

We are also seeing a firming of pricing for equipment and materials in response to the awards over the past 12 to 18 months. While we have not seen to date, dramatic increases in commodity pricing, we remain focused on our supply chains. For our Military Support businesses, KBR believes our volume of work in the Middle East should be relatively stable through late 2011. We are working with our customer to better understand the transitions that are expected to take place at the end of 2011 as the U.S. mission in Iraq moves from a military mission to a diplomatic mission. We are also seeing some new opportunities with new customers including NATO and in the Middle East to support their respective missions and recent hardware purchases.

In our Infrastructure and Minerals business unit, we are seeing a resumption of capital spending in the mining industry globally. We are also seeing an increase in the level of bidding activity in the transportation and logistics sectors in Australia and in the Middle East. In Australia, the recent flooding has not impacted KBR's activities on the Hope Downs project to date, which is in Western Australia. We have seen some office and work-related disruptions at our Brisbane office in Queensland. Although very preliminary, we have seen reports suggesting a possible $10 billion of additional construction works over the next 30 months as a result of the terrible flooding. However, it is too early to estimate what specific opportunities await KBR.

In our Industrial business, KBR continues to see a strong volume of early studies and FEEDS, and believes many of these projects will move to final investment decisions during the next 12 to 18 months. In Power, we expect in 2011 to see a pickup in orders for construction of new gas power generation, as well as environmental control projects. In our North American Construction and Maintenance businesses, we see an increase in demand for capital and maintenance projects as our customers gain confidence in the economy and a return to predictable levels of profitability. We are also seeing a continued stable demand for education and healthcare facilities as well. The bidding activity has picked up across Canada, particularly in the oil sands and mining sectors. In general, we are expecting the sales environment for the Services business group to be much improved in 2011 compared to 2010.

Now, we'll take your questions. We ask that you please limit your comments to one question and one follow-up. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Joe Ritchie with Goldman Sachs.

Joseph Ritchie - Goldman Sachs Group Inc.

Can you talk a little bit about your opportunities, particularly on your Gas Monetization business as you progress through the year and your expectation for when we can start to see backlog grow in that particular business?

William Utt

I'd say, Joe, that we are covering, as in my comments, a wide variety of projects. We have been successful in winning the FEED contracts in Pluto. We're doing some pre-FEED work on fourth Train at Gorgon. We've won the Browse FEED. We're still pursuing the Kitimat project aggressively. The timing for us for material additions to backlog will be with the final investment decisions on a number of projects. Pluto 2, we're still doing some post FEED studies on lean gas and pre-FID procurement, so we're still being busy there. But really the Inpex project that we see and Pluto 2 will be the two big impacts in Gas Monetization, and we think both of those will take place in the second half of 2011. Inpex is working on its schedule and then, we, with our partners on that project are in negotiations and expect that to take place in the second half. Pluto 2 is a little bit driven by the completion of Pluto 1. And so as that project progresses -- and we have given some resources to support Woodside in looking at that project, our expectation is that project remains a late 2011 FID as well.

Joseph Ritchie - Goldman Sachs Group Inc.

You've comment on -- obviously, you've had some nice recent FEED wins, can you comment on how that's going to be reflected into backlog as well? So obviously, the Browse FEED, the Jazan FEED and it also seems like on Lobito, you're continuing to book some early stage work. Is it going to be phased? Are all those projects going to be phased like Yanbu was phased or are we going to see some lump sum bookings for any of these projects as we continue to move forward through 2011?

William Utt

Joe, it will vary. The LNG FEEDs are conditionally lump sum and you’ll book the whole thing at award. So we'll book all of Browse in the next backlog reporting. The Jazan Refinery, it’s our expectation that will be much like Ras Tanura and Yanbu, where there are work releases that occur periodically. So you'll see small additions to backlog overtime, not a big addition, but we do believe that overtime, the Jazan Refinery could turn into a very large aggregate services contract for KBR, much like Yanbu has become and that Ras Tanura is becoming. So we're pleased with that. On Sonangol, we're getting work releases for value engineering and some early EPCM work. Those releases are not immaterial but they're not of the degree of scale that we would expect to see when the final investment decision has taken successfully on the overall refinery project.

Operator

And our next question comes from Andy Kaplowitz of Barclays Capital.

Andy Kaplowitz - Barclays Capital

Looking at Gas Monetization margins, I mean, they were okay. Not great, I'd say compared to what they could be. Maybe can you talk about how you're doing with Skikda? I know we’ve had some noise on the project overtime. Give us an update on Skikda and if there's anything else that besides Escravos and the usual stuff that's holding the margins down?

William Utt

On the Skikda project, Andy, we continue to look at that project. We expect in the next couple of months to be filing after discussions with our customer an extension of time frame, which we hope will allow us to reverse some of the provisions that we took last year. And so the project continues on and we've had, I think, fairly open and transparent discussions that gave rise to the issues contributing to the delay that caused us to book the provisions last year. And we believe that those reasons do give us the right to have an extension of time, and so we're preparing that claim as we speak. And if we're successful, we could reverse some of that in 2011. On the other margins, we continue to work off Escravos, Skikda's still got a lot of reimbursables flowing through our books. While I don't have the figures at hand, in our contract with Gorgon, there are incentive awards that are on top of a base fee that we receive and the timing of those incentive awards could have some influence over the profit margins in gas monetization, and I would offer that, just from the discussions we had, that we didn't see a lot of award fees maybe compared to prior quarters. The other thing to look at, too, is the FEED contracts that we completed on Inpex and Pluto, were completed prior to the fourth quarter. And I'm sure, just the nature how FEED contracts or price compare to the bigger contracts, we saw some margin deterioration as those passed through our books.

Andy Kaplowitz - Barclays Capital

And then just shifting gears, in mining and petrochemical, I know two unrelated end markets, but there's obviously a lot out there in mining, but do you think you could book large projects like Hope Downs this year? I mean, are there several prospects like that out there? And then besides Ras Tanura, which is now Jubail, are you seeing evidence of bigger petrochemical projects coming back to the market in 2011?

William Utt

With respect to the mining side, we think there are bigger opportunities out there and part of what our desire is, with respect to Roberts & Schaefer, is to take the underlying skill sets of that business, which we acquired based on the scale of that business. And then overtime, move this business into a platform where they can do the larger international EPC contracts that KBR is much better equipped to do. So we've got some work to do this year and that work has already started about looking on some larger projects and certainly the balance sheet that we bring and the international reach is already, at least from an anecdotal customer standpoint, given us opportunities to see more projects. One customer, we submitted a bid to in the last month, had several other projects and actually made the statement that, "Because you guys are part of KBR, we're going to have you bid on these other projects because we think you're big enough to do multiple projects for us." So anecdotally, the combination of the Roberts & Schaefer technical expertise and the KBR global international footprint and just the financial resources, that will happen, whether we get that driven this year or not. I'm hoping that we can accelerate that faster, but certainly, it's our plan that overtime this will enable us to do bigger projects and do them in a less serial fashion and more of a parallel fashion. To your second question on Ras Tanura, I think, you still see a lot of projects going forward in the Middle East as the producing areas want to ship increasingly refined products to markets as opposed to the crude products. And we've seen with the Jubail Refinery, the Yanbu Refinery, Ras Tanura and the integrated camp [ph] (55:15) refinery petrochemical plant that scale matters. And as companies like Aramco, in this case, look at their future, they're looking to create jobs for their people. And we've talked previously about some of the demographics and percentage of the population in Saudi Arabia that's under the age of 21, and so creating jobs and opportunities in those countries is important to them as well as doing good business. And certainly, shipping a refined product reduces your shipping cost per value delivered compared to shipping the crude. So we think we'll see continued activity as the producing areas increasingly move downstream into their markets. And not only in the Middle East but we're also seeing that in Angola, as well, in our discussions with Sonangol.

Operator

And we'll go next to Matt Tucker with Keybanc Capital Markets.

Matt Tucker - KeyBanc Capital Markets Inc.

Could you talk a little bit about your expectations for the trajectory of backlog as 2011 progresses and to what extent will your view of your backlog growth for your overall backlog be dependent on booking Inpex and/or Pluto?

William Utt

I think as we look at our backlog and you can look at just the announcements that we had and maybe more importantly what we didn't have during 2010, and we still have a very good indigenous growth rate of our existing backlog largely on the work release projects, and we have talked about that on Ras Tanura, LogCAP, Kashagan and others. We do believe that we have several opportunities in 2011 to book material pieces of work in the LNG side and the Downstream side, but also see, relative to the size of the existing businesses, some pretty good opportunities in Power, Industrial, the International Government and Defense side and also in North American Government and Defense. So if we are able to get some success on these larger projects during 2011, I believe we could see a step up in our backlog above the levels that we certainly had in 2010. But even if these get delayed, I think our backlog and ability to generate work on the existing amount of projects we have and the configuration of the projects, we'll still be able to maintain a solid backlog. But we do have, as many of you all write out there, some catalysts out there that could be pretty good changes in the underlying level of our backlog.

Matt Tucker - KeyBanc Capital Markets Inc.

And then when you look at your guidance for 2011, could you just remind us kind of what the key variables are in terms of reaching the upper or lower end and then comment on how business has been tracking so far in 2011 versus your expectations?

Susan Carter

Well, what we did is we looked at the guidance range for earnings per share in particular is we wanted to include some optimism for the good things that can happen. And we talked about some of the projects that we're chasing and the work that we're doing. We also talked about, for instance, the Skikda project and the LDs that we had booked on that. So there’s, obviously, some things that we’re chasing that would add to that backlog number. So we wanted to give you a range that included the realm of possible and also where the base business was. In terms of the other pieces of guidance, as we look at effective tax rate, as we look at some of the share count, I mean, obviously, we have a sweeping program on the share count, which authorizes us to buy back to 150 million shares. So that's included in there. And our guidance for G&A expenses for the year, as I talked about included some things on our real estate and our ERP program. And just to be clear on the real estate, we're moving some more people into the KBR Tower in 2011 out of our campus facility and so you have a campus facility that is still there that will need to have some fixed up, cleanup type of work done before we can dispose of it. But we're moving the people into the tower and renting the additional space in 2011.

William Utt

I would add that we have a fairly disciplined budgeting process. And the one thing I would contrast 2010 actuals to our guidance for 2011 is that, we thought that 2010 was a very good operating year for KBR and that we just performed exceptionally well as a company. It was the best performing year we've had and you saw the manifestations of that performance cause us to lift our initial guidance for 2010 throughout the year, and ultimately land at the figures we had at year end. This year, we followed the same path. It's too early for us to assume we're going to monetize all the good news in a guidance sense, but we are certainly expecting a traditional good year. We haven't baked in a great performance year as we saw in '10 and we'll just have to see how our teams perform, but I think our teams know what the opportunity sets are. And I'll be interested to see how their progress progresses during the year and I'm sure that we'll keep you apprised of how that is going throughout the year.

Operator

And we'll go next to Steven Fisher with UBS.

Steven Fisher - UBS Investment Bank

Just one question on the power margins, I was wondering if we should expect this to be a one quarter kind of depressed margin or do you need to see some good order flow to get margins back in the upper single digits which might take a couple of quarters?

William Utt

I think it's a little bit of both. We completed several projects in 2010 that did not have the volume in the fourth quarter that was represented in the prior periods. The issue is on the one activated carbon project. We think we’ve got that identified and have that appropriately provisioned both with our internal views, as well as those of outsiders who we use to assess those matters. And from my standpoint, we do need to get some more volume in power. And as you recall my comments earlier, the financial issues we saw in 2008 and 2009 really took a haircut to electricity demand growth throughout the country. And we certainly did not see the opportunities to bid on new generation that we would typically expect to see in a normal year. We're optimistic that the market will be better this year, both for the new generation as well as pollution control facilities on existing solid power generation. So we've got some challenges for our power group domestically. I think the one thing that I would add is that the PMC contract we got with Scottish and Southern Energy was a big win for us. It's in the U.K. They've got a very vibrant capital program over the next three to five years and we think there’ll be good opportunities for KBR internationally to participate in the power market, and that will give us a little bit of pickup there. But we also have to do it in the U.S. as well, which is where our larger presence is.

Steven Fisher - UBS Investment Bank

And then Bill, you’ve talked about the return of $100 million-type projects and services, but we haven't seen it in bookings yet. So could you just clarify what kind of timing you're expecting there?

William Utt

We are working on projects today and we have actually submitted some bids on some projects in Canada that are north of the $100 million level. And then, Steve, what I'm trying to create a vision is that for the last year, certainly in the U.S. market, it's been small projects, small CapEx, maintenance capital. And as we look at the market as KBR, we're competing against a number of small players who don't bring the safety programs that KBR has, the ability to manage materials, schedule labor. And so we've been -- honestly, I think we've been participating in a market that hasn't been the best market for us to compete in. As the projects move up in scale and safety and materials management and labor management become more critical, and that typically takes place at the $100 million level, we are much more competitive. And I think we're seeing more of those now than there were a year ago, and that pickup has been going on, we saw the first signs of it in the fourth quarter, I think it will continue during 2011. And as those projects get larger, I think our win rate and ability to compete will also be improved as well.

Operator

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

Peter Chang - Credit Suisse

It's actually Peter Chang in for Jamie. Bill, you touched upon the competitive environment in your prepared remarks. How much of that -- has that improved since 2009, it sounds like it still a fairly competitive environment? And my other question is, the entire commodity costs that you haven't seen yet impacting projects, do you expect that to possibly impact those FIDS that you talked about and maybe push them over to the right? And then finally, given sort of those issues, do you expect margins on those prospects to be higher and more favorable to what you're burning through in your current backlog?

William Utt

In the competitive environment, we actually have seen, and then I think a lot of this, some of this is anecdotal, some of it’s factual is that the Korean contractors continue to be very aggressive on technology, non-differentiated projects in the Middle East that are bid EPC. And again, some of the anecdotal data suggests that they are still, maybe as much as 30% to 40% under the bids of the Western contractors, which is difficult for us to rationalize how we get from our pricing to their pricing. How long that will continue, I don't know. But it certainly is affecting the non-technology differentiated projects that we see out there. I think when you get into some of the more complex technologically differentiable projects or more complex projects, we haven't seen/won that many projects, and then those that we’ve seen, we haven't seen that kind of bidding behavior. But it is still competitive, and I honestly would have thought we would have seen a pickup in margins from those contractors who are winning the work now because their backlogs, I would gather, are more full than they were a year ago. In the commodity environment, yes, we're still seeing some stable pricing but the backlog timings of when you can get equipment and materials has returned to historical norms. It suggests to us that backlogs for our supplier base are being refilled. We haven't seen the transition from cost-based pricing to opportunity pricing that we saw in late 2007 through early 2009, but we're watching our supply chain. And some of the things that we're doing are working more closely with our suppliers on these major EPC awards, with we get you get kind of arrangements and not having open positions that we might have had in the past expecting a buy down from these procurements. But instead, getting them back to back and not taking the risk and forgoing the buy down opportunity, and we certainly saw how that could adversely affect contractors three or four years ago. In terms of margins, yes, I think the margins are still pretty competitive. We're winning our work. We're managing our costs really well. I think a key element of our success on the Jazan project was some of these cost savings that we generated by the combined administration of our MWKL and our Leatherhead operation. We reduced our cost that we had that MWKL by about 10% and I think that's going to make that office a lot more competitive for us, and really, we're able to run that as a KBR resource center in contrast to running it as a stand-alone business. So we're continuing to find ways to drive cost out of our business and we are certainly comfortable about our ability to make market in today's pricing environment and make good margins. And particularly as we work off the Escravos' and the LogCAPs and the Skikda projects that are below where we're seeing margins today.

Operator

And we'll go next to Will Gabrielski with Gleacher.

Will Gabrielski - Gleacher & Company, Inc.

I'm curious, when you look at your cost structure today and your ability to compete, and I guess on some of those projects in the Middle East and other areas where it's more competitive. I mean you said you're back at peak staffing levels. I'm wondering if there's a difference in where and how you're procuring that headcount and if that's helping or hurting you on a cost standpoint? And if you have any idea where you compare to the industry right now?

William Utt

I wish I knew how to compare to the industry. I know that as we look at, just currencies, I'm kind of happy to have a dollar-denominated currency selling man hours into the Middle East compared to where the evolutions have been on competitors, we’d see in Canada, Australia or Japan. So the currency moves have helped us. We have been able to source good people. I think the interesting aspect for us is that 2010 and late 2009 was a time when we build up the front-end capability of our offices with large increases in Houston and London. And the challenge we're seeing is, as that work, and we can use Gorgon as an example, as that work moves to our production offices in Monterey, Mexico or Jakarta and other offices, we're expecting to see those offices grow in 2011. So the challenge for us is how do we maintain the size of the front-end capabilities in London and Houston by selling more work, new work while seeing the expansion in the back office engineering offices grow as they now work on the Gorgon projects and some of the other ones that we're being part of. We're also seeing opportunities to bid more work with our local offices. We have the office in Kazakhstan and we wanted to be able to build a higher percentage of the work out of those offices, out of Monterey, out of Jakarta into our customers both locally as well as in the Middle East as a way to lowering our average dollar per hour cost on the project. And so some of the investments that we've made in terms of the electronic connectivity of all of our offices, the common work practices, the common technical platforms, we're leveraging pretty well as our ability to reduce our delivered offering to our customers continues to improve.

Will Gabrielski - Gleacher & Company, Inc.

Are you getting any feedback from clients or from your satellite remote offices about how that’s stacking up, I mean, versus peers maybe that's one way to think about it? And I guess, are you able to execute more work, in your opinion, from lower cost centers than your peers, the Western peers not the Korean peers but the Western peers at this point? Or is that really impossible to quantify?

William Utt

Well, I think on your first question, Will, really the litmus test is, are we winning work or not. And I think we're winning the work. On the second point, I would offer that KBR was probably a little bit late to the party in terms of integrating some of these lower cost engineering centers into the initial designs. And from my perspective, and this is just my perspective, I think we're playing catch-up with a lot of folks and so we're closing the gap, if you will, on those who have been doing a better job of this longer than we have. So I think from a relative competitive position standpoint, we are improving our relative competitive position. But I think we're doing it in the context of catching up to what others have done with offices in India or in Southeast Asia.

Operator

And we'll go next to Rob Norfleet with BB&T Capital Markets.

Robert Norfleet - BB&T Capital Markets

It just seems if we back up maybe to December, November and look at where we are today, it would appear that projects are being released maybe at a quicker rate relative to what people are thinking. I think there's kind of a mentality of kind of more second half of 2011. And certainly there are some projects that go to FID from that prospective. But do you think that's the case? And I guess piggybacking off the question about raw material inflation, clearly we have not seen kind of that super spike in fuel prices we did before. But clearly with the other iron ore and commodity-related prices being elevated, I would certainly expect to see steel continue to creep up. Do you think that results in sponsors wanting to get projects released quicker or does it put them more on the sideline waiting for prices to come back in?

William Utt

In terms of projects being released, I do think there's been an uptick in activity. We saw the Wasit and Shaybah bids out of Aramco, Jazan. We're still seeing activity move forward in Australia on the LNG projects. So there does appear to be a pickup in activity. And we're pleased with some of the announcements that we've been able to share with you all that we do appear to be winning some pretty good projects as KBR. In terms of raw materials, I think we're all very wary of the underlying and inherent commodity risks in our business. I think we were largely able to avoid a lot of that in '07, '08 and we continue, at least as KBR, to be very prudent in what we're doing. And I think the comment I made earlier about not baking in buy downs on equipment and instead locking it down to take risk out of our offering is something that we're doing a more thorough and a more disciplined way even than what we did in '07 and '08. But I think it's the prudent way because we do see the iron ore contracts going up, we do see projects going forward and as those backlogs across the space become more full, I think the supply-demand balance changes and prices will firm or even increase for us in the deliveries that we expect to see in the coming years. Now whether that's causing a rush of projects or not, maybe a little bit because I think Aramco, as we saw on Yanbu, been very mindful of buying at the trough of the market, and they delayed Yanbu over a year to get to that point at a good financial reward for Aramco. And we may be seeing a little bit of that. But I think that just general global confidence in the financial system and the ability for the demand to continue to increase in some high-growth areas of India and China and other areas is making people more optimistic about expanding capacity to meet that new demand.

Robert Norfleet - BB&T Capital Markets

You just mentioned obviously seeing a pickup in gas power generation likely into 2011, and you've heard others say the same thing. I did want, from your perspective, to kind of understand timing of that. I mean, do you think this is a year in which we see potentially orders for two to three gas power generation facilities or is this more back-end loaded '11 kind of ramping into 2012 because of EPA regulations?

William Utt

Well, I think you'll see -- I mean, you said two or three, I think that's a low bar for us. You've got 900,000 megawatts of generation and three combined cycle projects at about 1,500. So I think you'll see several combined cycle projects go forward. I think you'll see some folks -- I think we'll see some forcing of the issue on the Boiler MACT Rules, Maximum Achievable Control Technologies that will have some work go forward, but I do think the market is better. I feel it's better than what we saw last year and I think you will see awards in the second half of '11 that represent a pickup in volume compared to what we saw in 2010.

Operator

And at this time, there are no further questions. I'll turn the call back over to our speakers.

Rob Kukla

Thank you for joining us today. We look forward to talking with you on the next quarter call. Thank you.

Operator

And ladies and gentlemen, that does conclude today's conference. We thank you for your participation.

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