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KBR (NYSE:KBR)
Q3 2019 Earnings Call
Oct 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day and welcome to the KBR Inc. third-quarter 2019 earnings conference call. This call is being recorded. [Operator instructions] For opening remarks and introductions, I would like to turn the call over to Ms.

Alison Vasquez. Please go ahead.

Alison Vasquez -- Head of Investor Relations

Good morning, and thank you for attending KBR's third-quarter 2019 earnings call. Joining us today are Stuart Bradie, president and chief executive officer; and Mark Sopp, executive vice president and chief financial officer. Stuart and Mark will discuss highlights from the quarter, market outlook and our financial results. After these remarks, we will open the call for questions.

Today's earnings presentation is available on the investors section of our website at kbr.com. I would like to remind the audience that this discussion may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance, as outlined on Slide 2. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ significantly from our forward-looking statements. These risks are discussed in our most recent 10-K available on our website.

I will now turn the call over to Stuart.

Stuart Bradie -- President and Chief Executive Officer

Thank you, Allison. Good morning, and thank you for joining us. I will start on Slide 4. Another excellent quarter across the company on health, safety, security and environment.

We closed the quarter strongly by achieving 0 harm across all of KBR, including the subcontractors we manage. And that's on every day in the month of September. The third month, we have done so in recent times. This is an outstanding achievement driven and delivered by our committed and passionate 38,000 people.

As I've often said, good HSSE is quite simply good business, which takes us nicely on to Slide 5. In short, an absolutely stellar quarter, 11th in a row. The overall business grew 12% year on year. Each segment grew and thus contributed to the overall growth.

Execution was excellent, margins were in line, cash flow and new business bridging were strong, and I'll give more granularity on the latter in a moment. I'm also happy to report that we handed over the Ichthys LNG project in its entirety. To be clear, this includes the power station with all performance tests successfully completed. The trains are producing at or above nameplate capacity and are exporting LNG commercially.

The site has been demand with a small team for punch list and typical warranty support retained. The funding to complete the project is within our previous estimates. This, of course, derisks the business. And our focus now shifts to seeking recoveries from the counter parties.

You may also recall that we won an important award a number of years ago called army 2020, which is part of the Aspire project, which you know well. The objective of army 2020 was to bring the British soldiers and their families stationed in Germany back to the U.K. And in so doing, building and modernizing hundreds of structures across double Garrison's. I'm pleased to report the program has done really well.

And in cooperation with the U.K. MOD, all critical assets were delivered over the summer on schedule. This is a clear demonstration of our focus on execution. Onto Slide 6.

At KBR, we've been talking about winning the right work for some time. Strategic and commercial discipline being key things, combined with a focus on customers and execution underpinned, of course, by a strong team effort and a high performing culture. We thought it was once showing recent backlog performance to examine whether this approach was actually paying off and where we're delivering on our promises and commitments. I think the numbers speak for themselves and in fact, somewhat understated as we do not include the unexercised option units on longer-term government solutions contracts, which, as you're aware, are more than likely.

In May this year, at our Investor Day, we said that all segments would grow and we expected energy solutions having reset this business will outperform. With strong book-to-bill in 2019, and in Q3 alone, our book-to-bill of 3.6. We feel positive about continued growth into 2020 and beyond, especially as these numbers exclude Freeport LNG, which remains on track for FID in early 2020. Also, important to highlight, we have sustained our trailing 12-month book-to-bill at levels above one times for six straight quarters, delivering the backlog in each of our segments to underpin our growth.

This takes us nicely on to Slide 7. This slide hopefully gives you a good feel about the opportunity pipeline KBR has in front of us. Multiple sizable opportunities in all segments, but KBR continuing to benefit from our near-term LNG build cycle, new technology offerings and synergy and cash brought an expansion in government solutions. Attractive contract vehicles in our government solutions business continue to afford opportunities for technical experts to provide upper-end engineering and cyber expertise to a large number of defense platforms as the Department of Defense is looking to modernize and sustain its aging assets.

The graph on the right shows the progress we are making toward securing our future and reaching a double-digit CAGR target through 2022. The only certainty in today's world, as you're well aware, is uncertain. As such, we believe some time ago, it was a strategic imperative to position our segments and thus, KBR, an attractive, less volatile markets that deliver differentiated longer-term opportunities. Our book of business of 65% through 2022 is a clear demonstration of the success of this strategic shift, but again, this is also understated, it does not account for smaller, short duration projects that of course, unknown today.

And that makes up about 50% of our typical annual revenue. Also and in keeping with our policy, LNG is excluded until it is a FID. I trust that gives you more insight and confidence on our continued growth. As I've said many times before, it is a great time to be part of KBR.

I will now hand over to Mark, who will take you through the financials in a bit more detail.

Mark Sopp -- Executive Vice President and Chief Financial Officer

Thank you, Stuart, and I will pick up on Slide 9. As Stuart has indicated, we're pleased to report another successive quarter in revenues and earnings growth, coupled with really strong cash flow and bookings improved. These together delivered a foundation for growth and value from continued focus and discipline in executing our strategy. Consistent with the expectations set back in our May investor conference, we're continuing to grow our government and technology businesses and are now seeing our energy solutions business, ES, contribute significantly to overall growth.

We are experiencing good market conditions in our focal areas within ES, were we are able to selectively bring in new business fits our risk profile. Yes, growth drivers for Q3 were all on a cost-reimbursable basis. Our increase in operating income reflects solid execution across the board, with margins for all three segments consistent with our long-term target. The variance in margins year over year, primarily comes from our energy solutions business, where margins benefited last year from write-offs, strong execution on project closeouts.

We continued this trend in 2019, Q3, successfully completing a project in our non-strategic business this quarter, recording a closeout benefit of about $7 million. Growth is being driven by new projects getting off the ground, and as Stuart highlighted, coming from all parts of our business. We have new projects ramping up in government solution, GS, including a new project for the Defense Health Agency, providing cyber and risk management services to protect the medical records of our war fighters and their families. Driving our growth in space and mission solutions, which incidentally is our fastest-growing part of GS right now are a couple of new contracts including the Launch Range Operations contract with NASA at the Wallops Flight Facility and our continued ramp-up of our POTFF contract where we now have about 500 white coat professionals providing holistic, human and psychological performance services for our elite or fighting forces.

We also have new projects ramping up in ES, including our greenfield methanol project in Louisiana, a refinery expansion project in Texas and a midstream expansion project in the Permian. Again, all reimbursable in all building momentum as we look forward into 2020. Continuing down the page. Non-operating items and taxes were as expected, altogether attributing to adjusted EPS of $0.45 for the quarter.

You'll see that we had an excellent quarter in operating cash flow. We're really pleased to see that, now at just about $200 million through the first three quarters. This reflects more focus on working capital management across the company. Our portfolio and our discipline enabled the company that continue to operate with negative working capital.

You'll see later that we are bumping up guidance based on the strong results we've seen so far. Now on to Slide 10. Our results by segment. Segment performance is trending as planned.

All three segments are producing attractive organic growth, margin direct targeted rates and more effective working capital management across the board. As Stuart mentioned, all segments exceeded a book-to-bill ratio of 1 in Q3, demonstrating that we are executing well on the projects we have in-house today, and we're seeling success in further building our book of business for future growth. Book-to-bill was an aggregate 2.1x for the company in Q3, truly excellent results and fueled by all business areas. For the government solutions segment, we are seeing ongoing growth in line with our long-term targets, but the Tyndall project completed in early Q3.

And OPTEMPO and logistics are little slower in the summer months. We've talked about the Tyndall projects since Q4 of last year after the hurricane. And here, we'd certainly like to tip our hats to the incredible team of over 3,000 people -- on the KBR team for their dedication and commitment to restoring and rebuilding Tyndall Air Force Base and its vital role in serving our national security interest. Government solutions EBITDA and margins were particularly strong with good execution across our entire contract base plus a favorable settlement on a previous claim to the government.

As you can see, EBITDA grew 17% over Q3 of last year. Certainly, a great result, which is also accelerating our deleveraging. GS segment improved its DSOs, a sales outstanding five days in the quarter, which, of course, contributed to the strong cash flow results I mentioned earlier. The technology segment posted another good quarter with organic growth of 19% as ahead of our target base and 26% margins right on target.

Q3 bookings were particularly robust for our ammonia technologies, it's certainly nice to see this rebound after a softer market we talked about earlier in the year. In our energy solutions, we are now seeing top-line growth in both our services and projects offerings, together up over 30% year over year, all organic. Since 2017 the services part of this business, which is about two-thirds of the segment has recorded impressive 14% compounded annual growth, primarily driven in the U.S., the U.K. and the Middle East with offering spending, project management, engineering and design services, debottlenecking studies, consulting and industrial services.

We're leveraging our global relationships to partner with our clients as they diversify their portfolios and expand into new regions and territories. A good example of this is both Aramco and SABIC, bumping up their investing activities in the United States. For the new reimbursable EPC projects mentioned earlier, with some big ticket LNG opportunities on the near-term horizon. Margins for ES were as expected in the mid-single digits.

As said in our May investor conference, this is where we expect margins to be in the early stages of this up cycle. In summary, really good progress by all three lines of business. Particularly with respect to the balance, growth, margins on track, excellent cash flow and healthy booking to propel our future performance. That covers the P&L in the segments.

Now I'll move on to capital structure on Slide 11. As you'll see, our deleveraging story has continued this quarter with ongoing growth in EBITDA levels and modest debt reduction, we now have effectively reached our targeted gross leverage ratio of 2.75. As Stuart mentioned, we completed the delivery of Ichthys this quarter and have been able to achieve continual deleveraging, while we have used substantial free cash flow to meet that commitment. I think this complete free cash flow will now be available for other deployments with the priorities unchanged from what we communicated to you back in our May investor conference.

Also, about a week ago, you might have seen that our credit rating was upgraded by S&P to BB-, reflecting our ongoing growth in earnings, cash generation and disciplined risk management. And finally on the Slide 12. Building on the strong results through the first three quarters. We are bumping up our 2019 adjusted EPS guidance to $1.64 to $1.74, and also increasing our operating cash flow guidance to $200 million to $225 million for the full year.

That's the financial summary. Back now to Stuart.

Stuart Bradie -- President and Chief Executive Officer

Thank you, Mark. And on to Slide 13 to close today's presentation. KBR is a true growth and value story. Growth of 12% year on year, with all three segments contributing, absolutely terrific.

Consistent performance for almost three years now. New KBR is delivering. Derisking with Ichthys now complete and done so within our cash forecast. It's now all of about claims, arbitration, and hopefully close out negotiations.

But given the unpredictability of timing and quantum on rulings, et cetera, we will set our targets going forward, excluding exit markets. Our clear focus on cash is paying off, and we've reached our targeted leverage, and this opens the aperture on cash deployment opportunities as Mark presented earlier. Guidance has been raised on both EPS and cash. And as importantly, there is such positive momentum in KBR today are focused on tomorrow.

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

Questions & Answers:


Operator

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

Steven Fisher -- UBS -- Analyst

Thanks and good morning. Clearly, lots of good things happening here. Just maybe starting off with Ichthys, can you just give us what your latest expectations are on the potential resolutions from a customer and the subcontractors?

Stuart Bradie -- President and Chief Executive Officer

Yeah. I mean, the arbitration date on the power station is still holding. There was a recent ruling just to confirm that, and that's going ahead as planned in February 2020. And I think the expectation is still -- you never know, Steve, with the course, as I said, the timing of these rulings is unknown.

But typically, we would expect resolution of that next year. The main arbitrations with the customer of which -- but will progressively resolve themselves as we go forward, some in 2020, but not many, mostly in '21.

Steven Fisher -- UBS -- Analyst

OK. That...

Stuart Bradie -- President and Chief Executive Officer

That's assuming the court process proceeds. There is always the opportunity now the facilities are fully handed over. I mean, they are operating above the nameplate capacity, we're in different phase of relationship. So I think there's a great opportunity now to sit down where the customer move into early 2020, and try and avoid paying lots of money.

Steven Fisher -- UBS -- Analyst

OK, that makes sense. And then just a follow-up on cash flow, the implied operating cash flow in Q4. About $13 million versus the strong $118 million in Q3. So now that we are done on Ichthys and that related drag on cash flow.

Can you just talk about what some of the puts and takes of cash flow going forward, both really in Q4. And without getting into guidance on 2020, just kind of particular working capital tailwinds or headwinds and any upfront payments, etc.? And would capex need to start picking up as your revenues grow?

Stuart Bradie -- President and Chief Executive Officer

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

But in particular detail, I know Mark, probably your best answer.

Mark Sopp -- Executive Vice President and Chief Financial Officer

Yeah. Hey, Steve. Just to clarify Ichthys really does not have an impact to operating cash flow, the metric that we guide. So the funding of Ichthys heretofore, which will now stop well as an investing activity, not a operating activity, just to clarify that.

So the completion of that really doesn't have an impact on operating cash flow as reported and as expected. We are bumping up guidance, so we're pleased with that. So we're making good progress, as Stuart mentioned, but we are also a growing business, which does consume some capital. So we wanted to be cautious in the fourth quarter ahead, but still showed some improvement, reflecting everyone's hard efforts around the company.

And longer term, I think our cash conversion expectations are consistent with what we said in our May investor conference that we pretty much expect to convert net income on a one-to-one basis. Over time, any one quarter is tough. Sometimes we do better, sometimes not better. But over the course of the full year, that remains our expectation.

Operator

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

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Hi, team. Congrats on a job well done this quarter. First question for me is just given the better cash outlook here in '19, bumping up against that leverage target in the third quarter, just take your time to dig in on the capital allocation plans as we look into next year, could you just speak to the appetite for acquisitions versus buybacks at this point? And maybe relate that back to how the acquisition pipeline is looking like in terms of where you guys are focused on adding capacity?

Stuart Bradie -- President and Chief Executive Officer

Sean, Thanks. I mean, we talked about this many times, and I think we've been successful in our acquisitive pursuits and integrating them the way that has value over time. But we've done that very considered and very strategically. And we -- as I said, we've kissed a lot of frogs and we continue to do so.

So we're highly focused in two or three areas in terms of potential acquisitive moves, and we talked about things like overseas government. We talked about technology, obviously, and I believe it's the main two there, but ultimately, doing acquisitions is difficult. And we've been very clear that unless we can find something that's compelling and accretive and of course, is a cultural fit. And that's very, very important to us.

I think we've got a very strong and passionate culture, and we don't want to put it out of kilter in any way. So we'd be very considerate about that. But with no options in the acquisitive arena, as I said, the aperture is now open for us to look at cash deployment opportunities. And we've very clear that the buybacks are very much an opportunity as we go into 2020.

Sean Eastman -- KeyBanc Capital Markets -- Analyst

OK, great. And the government margins actually came in quite a bit better than I was forecasting in the third quarter. I'm just wondering if we can infer anything on the future here? Or whether there was some one-time type of elements, heading in the third quarter?

Stuart Bradie -- President and Chief Executive Officer

As I mentioned in the prepared remarks, Sean, we did have a favorable settlement in that sector in the third quarter. So that bumped it up to some degree. We've also seen really strong performance on Aspire. We mentioned that in our prepared remarks, the delivery of a lot of structures in the third quarter to be ready for the army's return from Germany was very successful and that program really has done very well for us.

I think the way to think about government margins is the targets we've set as the norm. And so upper single digits is what we would expect longer term. And occasionally, we have some favorable adjustments like Q3, which help us. But the mix of international continues to be very favorable to our margins and blended down by the domestic piece again together upper single digits is where you should be focused going forward on a sustaining basis.

Operator

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

Jamie Cook -- Credit Suisse -- Analyst

Hi, good morning. Congratulations on a nice quarter. I guess a couple of questions. One, Stuart, I would be interested in your sort of view on your broader portfolio, just some of -- given some of the dynamics that have happened in the industry, people acquiring government assets at pretty nice valuation.

The technology business now being back on the sale, whether that makes you think you could unlock further shareholder value by looking at the portfolio. I guess, my second question, again, back to the competitive dynamics, limited competition in the space and energy solution. So just order your view on how the terms and conditions change, whether we can move more toward a cost-plus environment, just given there's not a lot of you guys left and you have pricing power? And then sorry, my last question, Mark, did you quantify the closeout in government, just so we know how much that contributed to the quarter into the guidance? Thanks.

Stuart Bradie -- President and Chief Executive Officer

OK. So I think, Jamie, on your first question, we continue to look at our portfolio. And so we're pretty happy with it as it stands today. If you look at the growth vehicle going forward, particularly this quarter, as we've set out an Investor Day to the energy solutions side, but all the other businesses are contributing.

So I think it's a great balance. We've got this culture that allows us to sort of operate in the commercial world and in the government world, and we're seeing a lot of synergy, particularly in the digital side and robotics and things like that move from NASA and the government arena into the commercial space. So I think we probably have to give the market a little bit more on our progress on that and why that's compelling, but we said a bit of that out on the Investor Day. So we're pretty happy with the portfolio and the balance we have in the business, and Mark commented on that.

But we continually look at the value that options bring, but pretty happy on that today. In terms of where we are on the energy market, it is a very interesting time. If I went back, everyone is congratulating KBR on a nice quarter. It's actually nice 11 quarters.

And the reason for that is that we've been very disciplined about what we've taken on. And I think that's more prudent, and I'm not going to comment on others, but certainly, the way the market is shaping up, gives us a great opportunity in terms of building work that fits our risk profile and reducing the number of players on LNG projects, particularly in the U.S. And so I think that's why we're very upbeat about tomorrow. I think that's why we're talking about a very strong level of momentum that is continuing on.

So feeling pretty good about tomorrow, feeling pretty good about the competitive position and being pretty good against the backdrop, we can actually win work that sits on this profile, again, as Mark alluded to earlier. I'll hand to Mark on the government numbers.

Mark Sopp -- Executive Vice President and Chief Financial Officer

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

Operator

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

Unknown speaker

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

Stuart Bradie -- President and Chief Executive Officer

Good morning, Dan.

Unknown speaker

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

Stuart Bradie -- President and Chief Executive Officer

Yeah, good question. As you know it sort of moved out of the traditional sort of protest into the court arena. The date has been set for the ruling in early December. And certainly, there's been no -- absolute commitment to stick to that date by the army and the courts.

So we're expecting that to proceed as one, if you like, in December. Whether we book it to backlog in December or it flips over to Q1. It's not quite clear yet, but certainly, resolution is expected in that December time frame.

Unknown speaker

Got it. Thanks.

Operator

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

Michael Dudas -- Vertical Research -- Analyst

Good morning, gentlemen and Alison.

Alison Vasquez -- Head of Investor Relations

Good morning, Mike.

Stuart Bradie -- President and Chief Executive Officer

Michael, I was laughing. I was pointing to Alison because you're the only one who mentioned her. So thank you.

Michael Dudas -- Vertical Research -- Analyst

That's great. See, that's graet job. So first question, I think you mentioned in your remarks on government services, risk profile, and it's getting better or changing and what the opportunities for you there? Maybe could you elaborate a bit more on like, it's a risk with better margin or just better terms? Or is your customers in NASA, DOD or OCO are just asking for you to do more, and you can generate better growth and better fees from that? So just a little thought on that going into 2020.

Stuart Bradie -- President and Chief Executive Officer

Yeah, I think -- I don't think we really mentioned risk in the context of GS, Mike, and maybe refer to the energy side of the house. But certainly, in terms of the opportunity set, we're seeing in front of us, particularly in the areas where we're focused in government, you're quite right. We've got continued bundling. We've got some significant opportunities in the pipeline, multiple -- but multiple of those over $100 million, as we laid out in our prepared remarks.

So space is exciting, and that was the fastest-growing part of our business in Q3, which shows a great balance as well because last quarter, it was engineering. So we're seeing a lot of good balance in the business. And I think in between the business lines, the synergy is playing out, which is terrific.

Michael Dudas -- Vertical Research -- Analyst

And two other parts. Any thoughts on the continuing resolution issue, any near-term visibility or thoughts that could pick up for you guys at all?

Mark Sopp -- Executive Vice President and Chief Financial Officer

Yeah. Here we are again, right? So we're getting used to this for many years. And so what's good is that there's congressional consensus on what defense spending should be for the next couple of years, even through the election cycle. They just got to put pen to paper on it, and hopefully, that will happen.

So we're seeing normative CR activity as we start the government fiscal year here in October. And there's always risk of things like shutdowns, we've dealt with those in the past, we really haven't had a measurable impact to the business. And so it's helpful to be in mission-critical areas that we are that will allow that work to sustain through those periods. So not particularly worried.

We've been here before and we know how to navigate through it. And again, the better news is that the congressional consensus that happened in the spring and the summer, that hopefully will take way to the strong defense budget growth that we have articulated back in May and since then.

Stuart Bradie -- President and Chief Executive Officer

Yeah. I think that's right. And just to -- I mean, we went through this, of course, as you know, Mike, last year. And the impact to KBR, as Mark said, was minimal.

And really, I think the strategic focus on mission-critical activities played out. And again, if -- I mean, the expectation from everyone is, if that will not happen. But as you know, government is unpredictable. But I think the impact of KBR would be minimal, just given in the areas where we are focused.

Michael Dudas -- Vertical Research -- Analyst

I appreciate that. My final question is, on the technology front, let me chat about some of the opportunities you see? Is there a better pace to inquiries or opportunities for licensees? Are there still the strong areas that you guys are focused on, you're getting that type of interest in? And can you maybe reflect on, is there still -- despite the concerns about global economic growth and oil prices, there's still this appetite to go ahead with these types of investments and for future capex on that front?

Stuart Bradie -- President and Chief Executive Officer

Yeah, we're not seeing any slowdown in the pipeline of opportunities in technology. I think that the beauty of technology, we just had board actually, in India last week, looking at our India technology center and really sort of examining that business in a bit more detail. And we've added -- we've kind of doubled the portfolio of technologies and are stable over the last few years. And it really has played out very well.

And we've talked a little bit at Investor Day, things like K-SAAT, our alkylation technology that's a disruptor and that's starting to get a lot of traction now that the first sort of commercial scale plant is up and running and performing really, really well. And from a safety perspective, it's terrific in terms of -- and we own the proprietary right for the catalyst. As Mark said, the ammonia market is coming back. And certainly, in the last few weeks, similarly our pricing has back up a little.

So -- and as you know, that's driven by GDP and sort of quick reduction and things like that. So we're seeing -- we're not seeing any slowdown in pipelines of opportunity. We've got some fantastic disruptive technologies that we feel will add huge value to KBR globally. We are not at the mercy of so much of ammonia cycle anymore because of our breadth of portfolio.

So yes, I think that business has -- if you look back over 10 years, it's got CAGRs at 13%. I think and we see that continuing. And certainly, the backlog that it has today, certainly lead you to conclude that that will continue.

Operator

Thank you. Our next question comes from Brent Thielman from D.A. Division -- DA Davidson, pardon me. Please go ahead. Your line is open.

Brent Thielman -- D.A. Davidson -- Analyst

Great. Thank you. Stuart, just a follow-up on technology. The pickup in ammonia that you talked about being slower this year.

Is there any good read through into the energy solutions business, where I think you've got some established capabilities there?

Stuart Bradie -- President and Chief Executive Officer

I mean, I think we do a lot in the revamp arena and things like that. But we've been very clear from the lump-sum turnkey perspective that we're not doing ammonia lump sum going forward. And so any pull-through is we'll be focusing on the licensing of the budget group and catalyst. In that arena, we've been very clear, our focus in lump sum is LNG and to some extent, ethylene, if it happens.

But certainly, the key focus area is LNG ammonia, typically, a new build goes lump sum EPC. And so we'll be focused again supporting others who want to build on the provision of that technology. And that quite frankly, if you look back historically, at KBR, that's where we make our money. That's where they're going to assure what shareholder value is.

Brent Thielman -- D.A. Davidson -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yeah. I mean, it varies from market to market. There's sort of a license market, if you like, you need to have what is called the GS Plus license, if you like, and so to -- maybe for example, to compete in this four competitors there. And -- a local work where we are probably the mainstay in Azerbaijan because of joint venture with the SOCAR there.

So I think it really depends. I think for the small or front-end designs, just the usual suspects, there's a lot of emphasis put on getting credible, technical and commercial solutions from the customers. So they're looking for really sort of smart concept and pre-FEED thinking around that. That's a lot of what we do in the early stages.

So it's the usual people know the, I guess, the Technip, and the Worley and Flour, etc., there. So not really much change there in that competitive environment. I think it's in the larger projects that we're seeing that significant shift.

Operator

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

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thank you. Could you elaborate on the opportunity for LOGCAP V in the Freeport LNG Train 4 awards since they're kind of not in your backlog?

Stuart Bradie -- President and Chief Executive Officer

I mean -- I think we laid out, Tobey, in the investors Day, really, the historical spend on LOGCAP V in Afghanistan and obviously, European Command and what we're doing in U.S. And so I tried to put that together in a way that gave some indication of the uptake there. I think it's about, $600 million to $1 billion, wasn't clear. There was quite a reasonable uptake, but there's no guarantee, of course, that that comes through.

So I think we'd have to go back and look at that when LOGCAP is officially awarded, and we'll try and guide you a bit more, but we start to get the formal task order sent through. But the best reference we've got is the one that we presented in May. And in terms of Freeport LNG, we have signed the EPC contract. The negotiations on financing seem to be well advanced.

So I don't think there's too much risk there. And it really comes down to off-takes, and I know the discussions with Tier 1 off-takers is going pretty well. So we do expect that to come through in Q1. And as a consequence of that, we'll be putting it into backlog then.

But we have not disclosed the number on the EPC contract yet, and that's in keepings with our -- really with our policy that we wouldn't do until FID. But there's lots of benchmarks out there. I think you can sort of get the zip code and we've said before that Train 3 of this was signed up by CB&I, and I have disclosed volume of $2.1 billion, and that's honestly the -- that's a number you can look at and probably given the difficulties that CB&I and McDermott's are facing is probably too little. So that's all I can say there.

I don't really want to give specifics until such times as we are fighting.

Mark Sopp -- Executive Vice President and Chief Financial Officer

Tobey, Mark, just to clarify, on LOGCAP, if I could. Everything sort of sense, correct. But just more specifically, if you assume our incumbent positions go forward at the same pace like Eastern Europe, our European command, for example, and then you add in what the previous contractors did in NORTHCOM and the previous contractors did in Afghanistan, it would imply about a $300 million bump up in run rate, if you would resume the OPTEMPO more exactly the same as 2018, which is a risky assumption. So OPTEMPO go up and they go down.

And so we only have those data points, really, to be honest, that's why we provided them. But you see that our Afghanistan lease in 2018 was bigger than our Iraq activities, and we have that to go by. We've been cautious in our targets. Our longer-term targets and more conservative than those numbers suggest.

But nonetheless, we did expect an uptake because that our responsibility is bigger than our previous position.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

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

Operator

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

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Yes. Thanks for taking my question. KBR's disciplined strategy on LNG has certainly helped the company avoid missteps observed by competitors. I'm just wondering what the growth you're seeing in the energy solutions, the service offering, the backlog growth, it doesn't even include Freeport? Does it make you strategically think about pulling -- even pulling back on some of the LNG opportunities based on the risk reward framework there since you're seeing such momentum in ES?

Stuart Bradie -- President and Chief Executive Officer

I mean, I think we're being very considered. I think that's probably the best way to describe it. We've got a good -- we've got a good portfolio of opportunities, all of which are either negotiated or a two-horse race. And with customers that we feel will behave properly.

And then against competitors, now that we feel won't do anything silly. And so -- I think from that basis, we feel pretty good about our opportunity set where we win them all, probably not. But if we win -- I mean, our long-range targets are between zero and one in terms of LNGs, and we've won one assuming the FID happens on Freeport, so we feel pretty good about that. And we've got opportunities over and above that with our risk profile and our margin profile.

But I know this may sound a strange contact, but we're actually going into them, thinking that we're going to make money and that we can deliver on the promise in terms of schedule and things like that. So I do think it's an interesting competitive market today that's in our favor. And as I said many times, sometimes it's not good to win the first one or the second one, but it's OK to win one later than the pipe when other have either filled the shopper stop the toll, and hopefully, that proves out to be correct.

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yeah, I mean, Aramco have said -- I mean, obviously, they're moving toward IPO acquired quite a significant portion of SABIC. So there have been in the chemicals arena. Also, if you think about it in that context, so they're making a number of -- between the two of them, strategic investments in the U.S., in Motiva, and you know we're looking at a very launch of ethylene complex, etc., in the U.S. alone, as well as one that continues to be ongoing topic on Exxon on the Gulf Coast ventures.

So pretty good opportunities there. We also did quite a bit of work in-country for both in terms of supporting their ongoing developments in Saudi Arabia itself. And more we're seeing them looking for help as they start to branch out investments in places like China and other placed. So I think they've got a very large capital budget that they are looking to deploy over the course of the next five years.

They are probably doing a little bit of prioritization today is moving toward IPO, I think that would be a sensible thing, and I think we're seeing that. So a lot of these projects go at the same pace, probably not. But I do think that the opportunity in the relationships. And at the end of the day, frankly, doing a good job is the best business development you can do.

And I think we -- our delivery record over the past three, four years is certainly helping us be positioned for those opportunities.

Operator

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

Chad Dillard -- Deutsche Bank -- Analyst

Hi, good morning guys.

Stuart Bradie -- President and Chief Executive Officer

Good morning, Chad.

Chad Dillard -- Deutsche Bank -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yeah, Chad. It's a good question. I think we're just beginning. So I would say the peak run rate on those projects is well into late next year and even it's a year after.

And if you layer in sort of the uptake in things like Freeport and other LNGs that will come through during the period. We really do think that 20% to 30% targets we set are certainly well achievable, and probably that's the best way to say that. And we're feeling pretty optimistic about the future of that business and the growth within the risk profile that we've set out. So I think, again, we're getting some of kind of a lot of repeat awards and interest because of the work that we're doing and the discipline we're employing in our execution.

So I think it will be as well for 2020 and going forward. So I think you'll see continued growth. I think you'll see continued excitement around that sector for us. And yeah, we'll -- we continue.

Chad Dillard -- Deutsche Bank -- Analyst

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

Stuart Bradie -- President and Chief Executive Officer

Yeah. I mean, certainly, the prime market for us in the next little while that we've talked about is the U.S. market and the Gulf Coast that we know very well. So I think from a knowledge base and an execution understanding arena, that's really good for us from a management and risk perspective.

We certainly see, obviously, some of our competitors either filling up or struggling to some extent. And as a consequence of that, the competitor set and the appetite to do work in the Gulf Coast and the way that we would do it has reduced significantly. And so I think that all comes down to at least to two conclusions. The first of which is that the companies that are left competing in that arena will not sign up distributor terms and conditions.

And so the transfer of risk and the balance of transfer of risk will start to balance out as a shoot up many years ago, but that's where it will end up. And so I think that's the first thing. And then the second thing is that it's just the laws of economics and competitive world, if competition reduces the margins should be a little bit nicer. And we certainly wouldn't be thinking about that as we go forward.

And I'm sure our competitor is also. So again, I think the market dynamics there are very much -- there's a fair wind helping us, and I think we need to think about it in those terms. However, that opportunity set will manifest itself, I'm sure. But again, I'd like to reiterate that we will be -- we're not going to go or a ski recognizing profit on these big jobs because they are risky and you end up getting to the construction phase.

So as Mark said, we're sticking by our single-digit margins for the next little while. And as those jobs get to the end, then hopefully, we can release some contingency and some sort of provision against potential liability and things back into profit. So I think that it is a growth story of a lot of EPS upside of these LNG projects proceed, but we will be very prudent in how we manage our -- how they come through in the numbers.

Operator

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

Andy Lee -- Citi -- Analyst

Hi, guys. This is Andy Lee on for Andrew Kaplowitz. So congrats on the quarter -- on 11 quarters of solid results. I just have a one quick question about the recompetes and the overall project win rate.

Can you just give a little bit color on that in the quarter? And how do you think about going to 2020? Thanks.

Stuart Bradie -- President and Chief Executive Officer

I mean, our recompete win rate is absolutely fab since it's -- I mean -- I'm at pain not to say this, but I believe since you asked it, our recompete win rate is 98% as it stands today. And I think, typically, you would be seeing that around 95%. So I think we're doing well. I think we're really, really strong in that arena and very focused in on it.

So -- well may that continue, but it comes down to delivery again. You know you've got to be performing well and you've got to rehab the relationship with your customer that understands the value you bring. So I think our team does very well in that area. And really, the recompetes in the next little while are quite -- that we've got no biggies and coming through until the end of the year.

So I think the big ones that we had this year in Jacksonville and with LOGCAP V are behind us successfully. So we feel pretty good about that.

Mark Sopp -- Executive Vice President and Chief Financial Officer

And our overall win rate is above 50%. And across all businesses. In the government piece, which people often ask about is well above that. We thank them all that, including new business and recompetes.

So we're really pleased with the performance of the business development teams across the whole company on the recompetes, but also the new business has been quite strong, and that's why you've seen, I think, above-market growth for all sectors.

Andy Lee -- Citi -- Analyst

OK. Great. Thank you.

Operator

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

Stuart Bradie -- President and Chief Executive Officer

Just the usual thank yous. Thank you for your interest. It's been a terrific time at KBR. We're not perfect.

And we've still got lots to do and lots of opportunity to get more efficient and move the company forward. But the momentum we have to do is very, very exciting. And I think it's -- we're set up for that to continue. So thank you again for your interest.

Obviously, we'll talk to many of you one-on-one over the course of the next little while. And yes, have a great day. Thank you.

Operator

[Operator signoff]

Duration: 57 minutes

Call participants:

Alison Vasquez -- Head of Investor Relations

Stuart Bradie -- President and Chief Executive Officer

Mark Sopp -- Executive Vice President and Chief Financial Officer

Steven Fisher -- UBS -- Analyst

Sean Eastman -- KeyBanc Capital Markets -- Analyst

Jamie Cook -- Credit Suisse -- Analyst

Unknown speaker

Michael Dudas -- Vertical Research -- Analyst

Brent Thielman -- D.A. Davidson -- Analyst

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Michael Feniger -- Bank of America Merrill Lynch -- Analyst

Chad Dillard -- Deutsche Bank -- Analyst

Andy Lee -- Citi -- Analyst

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