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Here’s the entire text of the Q&A from Halliburton’s (ticker: HAL) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you. Operator Instructions And we'll take our first question from Jim Crandell with Lehman Brothers.

Q - Jim Crandell

Good morning. A question for Andy. Andy, in the international oil service operations, your revenues in the Middle East and Asia were down in quarter to quarter and they were up only nominally in Europe/Africa, and in both areas margins were below the levels of the last quarter. Can you comment in more detail on the reasons for this?

A - Chris Gaut

Sure, Jim, good morning. Before we get to that question, let me clarify one of the numbers that I spoke about earlier. On the government and infrastructure segment, revenues for the third quarter of 2005 G&I revenue for Q3 was $1.9 billion of which 1.2 billion was associated with Iraq. Now, Jim, on your question regarding ESG, in the Middle East and Asia, yes, revenues were down about $20 million Q2 to Q3. Some of the factors there, we had lower direct sales, principally for logging tools in China and India. We had a completion of a project in Bangladesh, and of another project in the Timor Sea, Bangladesh, DFE, and a lot of Timor Sea and production optimization. So that was the reason for a lot of the change there in operating income, i'm sorry, the change there in revenue. In Europe, revenue was up, operating income in Europe was affected by lower completions activity in the UK. And Norway, we had some lower activity with Sperry, and some increased maintenance costs just for the quarter. But Russia activity was up in Europe. So those are some of the reasons why we had the revenue change, in Middle East and Asia, although Europe/Africa revenue was up, while the operating income was not up proportionally. Andy?

A - Andy Lane

Yes, Jim, just to add a little bit to what Chris covered, what you are seeing is a combination in the third quarter of some of the underperforming countries where you are taking the choices that if we can't get pricing up and improvement, we are exiting. So there is short-term costs associated with that. But we believe that strongly is going to position us for the future and we're going to put our resources where we can get the right pricing in today's market. So there's an offset there. The North Sea was weak compared to activity level that we have expected from both the UK 8 sector and the Norway sector. But there is some good price spots in Northern Africa and Nigeria improved. Saudi was strong. And we are making investment also in places like Saudi and like Caspian and like Russia where we are mobilizing additional capital equipment, we moved several logging trucks into Saudi, so there's an incremental increase in direct costs while we gear up these operations for the activity that's coming and you see some of that in the third quarter also.

Q - Jim Crandell

Okay. And my follow-up is that Andy, the price increases are pretty high in many areas. How long would you expect the timetable to be that you can realize the entirety of the price increases?

A - Andy Lane

Jim, we looked at these real closely and we feel like at our cost increases that we are getting from our supply chain, and the overall activity level and the cost of different divisions we have, that this is appropriate level for the market. We think this will work for the next six months and that's been our review and we'll review it at mid 2006 again. But we believe these are the right prices given our position in the market.

Q - Jim Crandell

Excuse me?

Operator

Our next question comes from James Wicklund with Banc of America.

A - Andy Lane

Jamie, do we have an open mic?

Operator

Question by Mr. Wicklund?

Q - James Wicklund

Yes.

Operator

Your line is open. Please go ahead.

Q - James Wicklund

Okay. It was the other people I was listening to. A little bit more on this, if I could, following up on Jim. I understand the lower direct sales of logging tools in India and China and ending a project in the Timor Sea but are there any other big projects that are going to end in this quarter? I mean, with the size of the Company, aren't projects starting and ending on a regular basis? I mean when you talk about, I understand mix, but broadening the customer base in North Africa, doesn't have a good sound to it? When do we quit gearing up and when do we start seeing flat out operations?

A - Andy Lane

Well, of course, Jim, as you know, our operating activities in the third quarter here are substantially higher than they were in the Middle East and Asia through the first quarter of this year. So the activity is up substantially from the run rates that it had prior to the second quarter. What we're talking about is trying, the question was, Comparing third quarter to the second quarter. There's no question we are operating at a much higher level than we were previously. Now, some of the areas where we are seeing increases in revenue in Asia would certainly include Saudi Arabia, other parts of the Persian Gulf, such as UAE, Kuwait. So yes, many areas are increasing and, but I think the, when you cut through it, we are, our activity levels, our revenues and our income levels are at a much better and higher level than they were earlier through Q1 of this year.

Q - James Wicklund

So the trend line is at a steeper slope but the second quarter was a little above that trend line and the third quarter was a little below that trend line?

A - Andy Lane

Well, Jim as I mentioned, I'm not sure what the question is. But the levels of activity in the Middle East and Asia is significantly higher than it was, previously. The reasons for the change versus the second quarter we just mentioned when we'd go through those again.

Q - James Wicklund

Okay. My follow-up question, you, Andy talked about pricing improvements. On an international basis, can you talk about how long it will take some pricing improvements generally internationally for us to be seeing, with the idea of when will it start to show a boost to the operating margins?

A - Andy Lane

Well, we handle every project and every bid individually, and it takes, the contracts internationally are more than two to three years’ time frame. So it's going to take us awhile into 2006 to still push prices that were back from some of our previous contracts. So we continue to move those. If we can't get the prices up, we will move the equipment. So it's going to be into 2006 for some of the international locations. But I do want to add a comment about your North Africa question. The primary ramp up there is with Libya. We see Libya as the third tier of the North Africa. We see it as strong as Algeria and Egypt in the future. And we are going to invest in Libya over the next couple of quarters to ramp up activity like logging in there where we haven't had the business.

Q - James Wicklund

Okay, gentlemen. Thank you.

Operator

Our next question comes from James Stone with UBS.

Q - James Stone

Yes, could you just talk a little bit about KBR and what, as you look at the backlog on the energy and the chemical side, can you give us a sense of what is left in there that might surprise us like Algeria did this quarter? I mean, as you scrub your project backlog, is there anything that you are worried about going into the fourth quarter or going into 2006 that we ought to be on the lookout for?

A - Chris Gaut

Okay. If you look at the KBR backlog, most of last year, and we spent time cleaning up the offshore backlog from some of the legacy projects where we had fixed price in a lump sum offshore work. That's largely behind us with Barricuda-Caratinga 98% complete now and we are going through the final acceptance test there from the lenders. So, that along with the Belanak and several other offshore projects we really feel we put those behind us towards the end of last year. This is a legacy gas project we have from a bid back in '99, early 2000 and it has been a troubled project for us. And we are working our way through it. We have taken a cost in the their quarter of 23 million related to the gas plant that we believe is the cost that we need to finish the project through May. And we have a, so we're working through each of those and we feel very good about the backlog. It's much more heavily weighted towards reimbursable and LNG and GTL projects. We have a new ammonia plant project that's not in the backlog in Egypt that will close shortly. So we feel very good about the backlog, and we are disappointed about the losses in the third quarter in Algeria, but it was very much isolated to Algeria. The rest of the projects we have that we have been talking about for a couple of quarters performed very well.

A - Andy Lane

Jim, I would also note though it's the nature of E&C business that you don't have always a direct matchup in terms of timing of when you recognize costs and when you recognize revenue. When we recognize that cost of increase, of course we accrue that, and if the project is not a profitable one, we look through to the end of the project and recognize all the potential losses on that. Sometimes we make claims against our customer for those increase in costs. But we can't recognize the revenue until we satisfy some very specific criteria in terms of the probability of collections and so forth. So for instance, on Algeria on the joint venture and these infrastructure projects, a number of those are actually reimbursable projects. And our local partner, managing partner, he believes, personally, that the joint venture will collect on those reimbursable contracts, the cost overruns there. Until, if and when, we become satisfied of the probability of collection, we can't recognize that additional revenue and therefore we book the cost but not the revenue.

Q - James Stone

Okay.

A - Andy Lane

So there is that nature of E&C business.

Q - James Stone

Okay. And then just as a somewhat related follow-up, related to KBR, can you just update us on the status of the FCPA investigation and of the four remaining task orders to be negotiated, particularly the three fuel ones, are those three fuel ones related to the Kuwaiti fuel shipments, the stuff that was really preoccupied the press last year or are those the ones then among the ones that were settled?

A - Andy Lane

The first question regarding the investigation on the FCPA matter that investigation is ongoing. We are cooperating with the investigation. And since it is a matter under investigation, what we would suggest on that is we'll point you to the disclosure we have had and we'll provide any updates in our SEC disclosure in our 10-Q.

A - Dave Lesar

And then on the fuel issue this goes back to the Rio contract, $2.1 billion, $2.2 billion, $1.4 billion was related to fuel and primarily that is the fuel issue that you spoke of, the shipments from Kuwait, we have resolved the majority of that over 1 billion of the 1.4 in fuel. So that's largely behind us and we are just negotiating the remaining few past quarters that were separate that had some other activities also with them.

Operator

Our next question comes from Terry Darling with Goldman Sachs.

Q - Terry Darling

Thanks, good morning, everyone. Can you hear me okay, Chris.

A - Chris Gaut

Yes.

Q - Terry Darling

I'm wondering if on the Gulf hurricane impact, Chris, you can share with us, even in approximate terms what the revenue impact was? Trying to dial back into how the sequential incremental margins in your North America geomarkets stacked up there? And to what extent? We're seeing the impact of earlier price increases versus, still waiting for that to come through.

A - Chris Gaut

Yes, on the revenue side for ESG, just under $50 million in revenue there against the 28 in operating income impact, on the KBR side, those were essentially costs that we incurred that we couldn't bill. So no revenue but we did incur the costs.

Q - Terry Darling

Okay. And so let's translate in there that your sequential incrementals might have been down a little bit but still at very high, very positive levels. Just in terms of thinking, about you know--.

A - Chris Gaut

Yes, I think the sequential incrementals would have been up. But, yes, go ahead.

Q - Terry Darling

It looks like 47.5 versus 55. But we can debate that offline. I guess where I'm really trying to go is to what extent are we really seeing the impact of the price realizations? Do we expect to see incremental margins moving higher as we progress into 2006, based on the new round of increases? Can you help us understand the fight that you are waging against raw material cost inflation, particularly in the fluids and the cementing business? Where we'd see that headed.

A - Chris Gaut

Yes, we are seeing cost increases, annual run rate on materials costs in the upper single digits, personnel side, I don't think we would argue too much with the 10% range overall on labor costs. Andy, maybe you can address discussion of customers.

A - Andy Lane

Yes, so on the pricing side, Terry, we see this will carry us into 2006, again, through, We saw a 2 to 3% in pump and services this quarter, in pricing improvements, and it's a constant battle, like Chris said, managing the cost increases from our suppliers, keeping up with the personnel demands and increased costs there, and then getting the price increases through on our contracts.

Q - Terry Darling

Andy, did that 2 to 3% sequential improvement reflect the totality of the May 1 price increase or are we still going to see some people rolling onto that higher May price book as we go into Q4?

A - Chris Gaut

You will see some roll onto the May price increase as their other contracts come out and we'll certainly try to move them to the October 15, price increase as fast as possible. But that was the totality of all the previous price increases, the impact in the third quarter.

Operator

Our next question comes from Michael Lamotte with JP Morgan.

Q - Michael Lamotte

Thank you. Andy, I want to, I don't mean to make too much of this export sale issue but I was going through the second quarter transcript, and the sales to China was described as 5 million and I calculate a 27 million in logging alone. Were there other countries that had big exports? I mean I know just about every quarter there is going to be something in there. But Q2 just was unusually large and it seemed like there were, I guess, a lot of different countries that piled in there.

A - Andy Lane

Yes. The earnings impact, the operating income impact last quarter of the sales there was about $5 million. And we in addition to that had sales into India.

A - Dave Lesar

In India, Vietnam, and China, Michael, and so we saw a drop sequentially in the third quarter from the second quarter, of around 11 million revenue and around 4 million profit from the drop-off of the direct sales.

Q - Michael Lamotte

Okay.

A - Dave Lesar

But those three countries primarily.

Q - Michael Lamotte

Okay. And then can you perhaps, quantify some of the cost absorption issues in terms of, maybe what that hurt you in margin, in ECA as well as MEA? I mean, is that 100 basis points?

A - Andy Lane

Well, it's a bigger impact in Europe and Africa, that's where we are concentrating more than the Middle East and Asia as part of the fix it or exit strategy. And so it's, I don't want to quote a number across the whole region but it did have an impact in the quarter, and, but primarily in Europe and Africa region.

Q - Michael Lamotte

Okay. And is it fair to assume that assets moving out of that region are moving into the Middle East?

A - Andy Lane

Yes.

Q - Michael Lamotte

Okay. Great. That's it for me. Thanks.

Operator

Geoff Kieburtz with Citigroup has our next question.

Q - Geoff Kieburtz

A question for Andy. Can you give us a sense of sort of what percentage of the ESG business is being looked at with a fix or exit sort of analysis?

A - Andy Lane

Yes, we review this every month in our performance reviews and it's really signaling the bottom 5, the bottom 10% of the performing countries by product lines that we are looking at either improving or getting out of, but it's, that magnitude, the biggest geographic area is Central Africa, and we've made a lot of progress, though. I want to give credit for this, this is one of the big areas of improvement, when you look year-on-year over the nine months, we have either renegotiated contracts or exited countries where we're not getting fair returns and so it is very successful for us, and we're just going to continue down this path, and the issues are it takes a couple of quarters to see the full results of that, that we have short-term costs and improvement initiatives but then you are going to see the gain once the equipment is remobilized and deployed and on new contracts. So it's the right strategy, and we'll have a stronger operation and we'll take out the bottom 10% performing operations that don't improve.

Q - Geoff Kieburtz

Is this a continuous improvement type of process, where you are always going to be attacking the bottom 10%, or is there a point at which you say, we've now fixed or exited everything and we're now going forward with what we've got?

A - Andy Lane

It's a continuous improvement and it is the way we want to run things and in a tight market with assets as valuable as they are and a shortage of personnel that we have, we are going to continue to look at our bottom 10% performing and underperforming areas, and improve them.

Operator

Scott Gill with Simmons & Co. has our next question.

Q - Scott Gill

I guess this is for you, Andy. Looking at the energy and chemical component of KBR, if we were to add back the $70 million of losses associated with Algeria, that would indicate kind of 11 to 12% operating margins at the energy and chemical section. I guess my first question is, am I looking at that correctly? And if you could give some color as to why those margins would look so high? And then my follow-up would be, help us to kind of reset our models here for the fourth quarter in '06 with respect to margins for that part of your KBR business as you get rid of these legacy contracts.

A - Andy Lane

Yes, Scott, the performance in the E&C away from Algeria as we mentioned in the prepared remarks was quite good in the third quarter, led by the LNG projects, as well as the oil and gas production facilities projects we do on a reimbursement basis now. And it, our performance is always reflective of the mix of the projects that we have. And our guidance is that we look for the E&C business to perform at least at a 5% margin is our target there, 5% or better operating margin, away from Algeria, it was quite good. Once you include Algeria and look to the whole thing, obviously we underperformed significantly the target in the quarter.

Q - Scott Gill

Chris, were there any one-time benefits in the quarter, through some of these other contracts that made that number look so good absent Algeria?

A - Chris Gaut

The only one that was kind of a cleanup was the conclusion as we completed our work scope on the Belanak project which was in the $7 million range.

Operator

Dan Pickering, with Pickering Energy Partners has the next question.

Q - Dan Pickering

Chris, you mentioned some other ship stakes and the toll road being won. Is in the same toll road that last year, as you did your cleanup I think you had written down 11 million on a toll road project last year, is it the same one? And then how many other ownership stakes do you have and where are you in terms of that monetization process?

A - Andy Lane

It's Andy. It was not the project we took a loss on last year in the cleanup. That was the U.K highway project.

Q - Dan Pickering

Okay.

A - Andy Lane

There's two of them. We have some equity in Irish highways, UK highways and also the railroad in Australia.

A - Chris Gaut

So there are a number of these and, you know, it's, when they get to a certain point of maturity, as this one has, then we look to harvest them. So don't have any heat up for the near term, but as they reach the right level, and somebody hits our bid, we'll take the gain. We'll take what, one more question, Evelyn.

A - Evelyn Angelle

Yes, one more.

Operator

And our final question will come from Ken Sill with Credit Suisse First Boston.

Q - Ken Sill

Yes, good morning. And I hope Dave is right that this is an ordinary business environment going forward. My last question is landmark, I mean, not landmark, I guess digital and consulting solutions. You had the 15 million recovery in margins but this was a great quarter from a margin basis. Is there anything unusual in there and do you expect to be able to sustain these kind of 20% gross margins going forward or maybe even improve them given the price increase projected for January?

A - Chris Gaut

Yes, let me take that one. Landmarks, this was a record third quarter for the business. As you know, historically our best quarter and it will be this year again is the fourth quarter. So we expect a big quarter out of landmark coming up. It's was a very strong quarter. We grew the service base in the U.S. We had good software sales outside the U.S. It was, we have also our project management business, which performed much better. We did not have any losses in Mexico in this segment, in the DTS segment and also the small equity we have in oil and gas that falls in that segment also performed very well in the quarter. So all that together was good news in that division and we expect even better things from landmark next quarter.

Q - Ken Sill

And Schlumberger had mentioned they might see a little bit of, not quite as good a fourth quarter because the E&C companies are preoccupied with the recovery in the Gulf of Mexico. Do you guys see any slowdown or slippage into Q1 maybe of revenues at landmark?

A - Chris Gaut

No, we see a very strong fourth quarter. We do not see it impacted by the Gulf of Mexico. Okay. Thank you very much.

Evelyn Angelle, VP, IR

Thank you, everyone, for calling. I realize we didn't have time to get to everyone who's been waiting to ask a question. Feel free to call me here in the office today and we'll take care of your questions. Thanks, again, everyone. This concludes our call this morning.

Operator

That does conclude today's conference call. We thank you for your participation and have a nice day.

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