Granite Construction Inc (GVA) 2002 Q1 法說會逐字稿

Please stand by. We're about to begin. Good day, and welcome everyone to the Granite Construction first quarter update call. At this time I would like the turn call over.

Good morning. I know we didn't give you much warning. With me this morning is Executive Vice President and Chief Operating Officer, Bill Dorey, Bill Barton, Senior Vice President and Chief Financial Officer, Patrick Costanzo and Mike Lawson. This morning's comments may include forward-looking statements and are subject to risk and uncertainties. For a list please refer to Granite form 10-k. Now I will turn the call over to Bill Dorey.

Good morning. I appreciate everyone dialing in. Yesterday we went out with a pre-announcement of our 1st quarter results. Because we will not be making the estimates that the analyst had made for us, we felt that it would be appropriate to give the folks that are following our stock a heads up and those that own our stock a little warning in that regard as the pre-announcement suggested. This inability to make the street's estimates boils down to two things. The first is our monorail project in Las Vegas. At the end of the quarter it was about 23.5% done so it failed to reach our 25% threshold where we could report the earnings associated with that project. And without getting into a lot of detail as it relates to the actual earnings on that project, I would tell that you if we had we been able to include those earnings in our 1st quarter, I think you all would be have been pleasantly surprised with the results and it would have changed the picture quite a bit as it relates to our first quarter. And the second is two projects in New York with the Granite/Halmar business. The estimates continued to grow and those projects we recognize had about $5 million loss between them as a result of that. And with the combination of not being able to include the earn IPs from Las Vegas and the loss recognition on the two jobs in New York caused us not to be able to not make the streets's estimates so we thought it would be appropriate to alert you to the fact that we won't be making those estimates and try to explain why. The good news as it relates to the work in New York is that the two jobs that are causing us difficulty really only have about $8 million between them to complete so from the standpoint of having our arms around those estimates at this point we feel confident that we have our arms around those two jobs in particular. And the other part of the good news is that if you divide our business up into, I'm going to characterize it as old business versus new business, the old business, being work and the part of business that was part of the old let's call it the old Granite and the new business, being acquisitions that we have made in the last 12 months, our old business is right on track. And the issue with our new business is really centered around two projects. And as I said both of those are pretty much complete. So we're real pleased with our business with the exception of, frankly, those two jobs in New York. In anticipation maybe you have some questions as it relates to the transition in New York. One of the things that I think Granite brings to the construction business, and certainly the way we operate, is discipline and certain tools. And we are bringing that to our business in Granite/Halmar The folks there have been absolutely terrific about 'em breaking the philosophy that we have towards the business, and the tools that we have from a cost control standpoint, have been implemented at folks in New York, and are beginning to learn how to use them and we expect -- we're not expecting these kinds of surprises going forward. We have made, as we subjected -- suggested in our announcement yesterday, we have made some field changes. A lot of this is precipitated by the people in New York. These are changes that they made by recognizing that they needed to make some changes as it related to some of their field control. The second piece of the press release yesterday, was that we said we intended to increase our management oversight of that business and I think we maybe owe you just a little more detail and color in that regard. Gary, who is our Assistant Manager of heavy construction, and really one of the best in the business from the standpoint of understanding how to do this work, how our systems work, is moving to Dallas. He will be relocating from the west coast to Dallas. This is really a product of a couple of things, and what we're finding in our heavy construction business, is that the center of gravity is no longer in the west. And we've been trying to manage this business from the west coast and Gary and others are getting on airplanes and going east on a regular -- regularly and what is happening, is that the personal wear and tear, and the productivity of those people that need to be near their work, is really been showing and Gary came to us recently and suggested that he would be better suited if we were located in the middle of the country. He will be relocating to Dallas probably in the next month or two and that will allow him to spend more time in New York. I think that will be good for Granite. I think it would be good for Granite/Halmar. So from the standpoint of introducing the tools that Granite has into Halmar is well, we're well on our way. The Halmar folks have made some field chances which we think are productive and I think Gary, being closer to the business is a good move as well. So we really feel like we do have our arms around that business. We remain very confident in the people that we have in New York. Our core business, our old business, really is right on track. But we did have this blip in our radar screen, and the fact that the Las Vegas job was only 23.5% complete at the end of the quarter, which I think as you all knew, was going to be a close call as to whether that got to be complete. We said 25% threshold or not. That job is, by the way, right on track. We're really pleased with the results. And I think you will be pleasantly surprised when we introduce that job into our earnings stream into the second quarter. From the standpoint of a kind of a introduction, that's what I had to offer so I will turn this back to Jackie for your questions.

Sure.

Thank you. Today's question and answer section will be conducted electronically. If you would like to ask a question press the star key followed by the digit one on your touchtone telephone. We'll pause for a moment to allow everyone the opportunity to signal. We'll take our first question from Paul Makrie.

Good morning. Could you just help us by naming the specific projects in New York that did cause this cost over run and a second question related to Halmar. Could you elaborate on the outlook of winning some contracts in that area?

We were not successful bidders on a couple recently. Yeah and I'm going to ask Pat to help me out. The two jobs in question are two approximately $85 million projects. At the JFK airport terminal four and terminal seven. With regard to looking forward you're right. We have only booked about $150 million of the business since we've been there. And that work will be completed over a series of years. So certainly to keep our volume in that 100 plus million dollar per year we're going the need more work. But I think we recognize that we had our hands full with the transition in New York and it wasn't just us that recognized it. The Halmar people recognized it and we were doing our best one, to try and get good work and two, not to try to get too much work because until we could work our way through some of the backlog, I think that we all realized that if we got too much work we could create a problem that could have been bigger than the one that we had, so we were trying to be prudent as it related to the work that we did get. We want to make sure that it was good work and we didn't want to get too much because I wasn't sure we could handle a lot of work and complete the transition at the same time. Pat with regard to the market and what we're doing going forward.

The market in New York is very strong. Granite/Halmar [INAUDIBLE] is a prime contractor and in New York, you have to prequalify to bid a lot of the projects and the bidding field is narrowed down to three or four bidders so we feel the outlook is really good. But we're keeping our margins up much higher than Halmar had in work previously and consequently we won't get a lot of work immediately. We feel the price eventually will come up in the marketplace and we'll get our share of it.

Thank you. The only other question is that when one considers where heavy construction and where branch offices have been in the past, they have tended to be in the west or in the south which is clearly a different labor climate than the metropolitan area. Have you any misgivings about dealing in the rougher climate that you have dealt with in the past?

That's reason we purchased a company back there. And then try to venture into the area as Granite along because we feel we have people [MONTH] under the manpower and the unions and their rules and regulations. But we don't have any qualms by the.

Thank you.

We'll take our next question from Tom Lloyd

Butler.

Good morning. I did want the ask you with respect to the Las Vegas monorail project, it doesn't sound like it but I just wanted the make sure that the fact that it didn't reach the 25% threshold this quarter was indicative of the fact that there is a delay or a problem of that sort on that job?

No. The job got off to a slow start with regard to some permitting issues as it related to some of the work that we were able to start several months back but the job is going very well now. There are no delays that I'm aware of going forward. Are there Pat?

No.

So we're pleased with our prospects there. We're very excited about that job. We can't wait for that to get into our earnings too.

One final question. The first quarter tended to be a difficult quarter with respect to weather. You [ indiscernible ] Was there any weather impact in the quarter that we should be aware of?

No. I don't think so. Nothing that I would characterize that would be out of the order of normal.

Okay. Thanks very much.

You're welcome.

We'll now go to Andy --.

John Riley for Andy. Could you quantify the negative impact from the Las Vegas monorail earnings in the first quarter?

We don't talk about margins but to give you an indication, it's $150 million to us and 25% of that would equal $35 million and $35 million at 10% that would give you a sense of what that would make.

And could you tell us how much potential backlog in Halmar could be mis-bid work?

Let me offer up a little more information on the backlog there. About -- we're currently if you consider -- if you look at our backlog today, it would be approximately $240 million there. Of that $340 million, about two-thirds of that's new work. That's work that we have booked since the acquisition. And about a third of that is old work. The old work consists of about about 11 projects. And besides the two airport jobs that we've been talking about, we think there is only one other project that will post a loss. And it's already in our forecast. Does that answer the question?

Yeah. Can you take two further steps if you would? Can you remind us of any steps you may have taken to prevent this kind of mis-bidding to occur going forward? What steps have you taken to review the various contracts?

And keep in mind that there is only two jobs that we have booked and they are both large projects since we've been there that we were low bidder on. And -- the tools that we use in Granite are different than the Halmar folks were using in test estimating packages and cost control tools. They used the Granite tools at this point -- and the Halmar people are learning to use those tools. We think they are the right tools. That we've built our business around. Those have been introduced to the Halmar folks and as I've said today they have been absolutely terrific in embracing those tools and change is always difficult. We've got the Granite tools in place and I'm not trying to suggest that there is anything magic about them but we're comfortable with them. The second thing is discipline. And if there is nothing that we do at Granite, we are disciplined. By virtue of every successful contractor and that's evident on bid day in our heavy construction division. We bid big work. And you can't afford to make a mistake, or any mistakes, and frankly a mistake on large work because it stays with you for so long. Pat and Gary are very disciplined on bid day. They are very unemotional on bid day and generally speaking, we don't make mistakes on bid day, so we think we bring discipline and the tools to the table, and if we're patient and we stick to our guns, we shouldn't have what you characterized as mis-bidding. That doesn't mean we'll never make a mistake. Because if you do enough of this work, you will, but we don't make too many, and I don't think that you'll see too many errors going forward in New York.

The one negative that certain people are highlighting is that perhaps Halmar was a different animal and perhaps this is more challenging than your other acquisitions and you may not have built that in when you took it over.

I don't know if I would characterize it that way. Halmar consists of people and any time you do an acquisition you have a bit of a clash in culture. We're -- we've experienced that. They are all different. Because there are different people but we haven't done any deals where the people were more open to embracing what we bring to the table than we've seen in New York and think that's true. So I would say that yeah, Halmar is different because, it's different from any other deal that we've done but from the standpoint of the philosophies, I would say that Halmar is at the top of the list and it starts with Chris Larson, one of the owners that stayed to run that business for us and he has been very receptive to embracing the change that we're bringing to his business and we couldn't be happier with that.

Okay. My final question. You mentioned a couple of times that we'll be pleased when you bring in the monorail. I assume there is no reason it won't be included in Q2? So we should be building in it and should we imply that I know you again book margin very conservatively early on in the project but is this project in fact exceeding your expectations on margin enough that that will be the fact that will make us [INAUDIBLE].

I think what I was getting at, and I don't think it would be appropriate to get into too much detail as to the earnings but had we been able to include Las Vegas in our first quieter -- quarter we would have met the streets expectations.

Without this issue.

Yes.

Okay.

Our next question is from Richard Diamond.

Talking about or focusing on other parts of business, is it fair to assume that California branch activity in California in general is still healthy?

Yes. Yes. The branch business is right on chart.

Could you provide some color about highway spending throughout the rest of the country. I'd appreciate that. Thank you.

Highway spending throughout the rest of country.

After New York.

I'm sorry.

Well I think -- let me put it better this way and maybe Pat you can help me out here, but we're seeing, if you look at just the country in general, particularly as it relates to large projects that HCD is chasing, we cannot bid all of the work that's out there. That does not mean that the markets are easy and that we can book work any time we want to. That's not case at all but we can't keep up with the amount of work that's being advertised and bid by the various dot agencies.

That's true.

There is still a lot of work out there to bid. Especially in our properties market area. Texas is a little down. But we're venturing out from our Texas office into other areas where there is more work to bid.

Thank you very much.

Our next question is from Todd Vincel.

I was just wondering. You say that the two New York jobs would lose 7 cents per share. I wonder if you could address what the swing is from what you were expecting.

That's about it.

Breaking even?

What would they have been?

Sort of reconcile the difference between up 9 cents at the street consensus and down 3-5 cents for the quarter.

I'm not sure -- I'm not sure that you mean the swing on the jobs, Todd?

Right. I'm wondering what was the swing around around the budget? The question relates to whether the estimates on the street were very high to begin with.

Those [INAUDIBLE] included the monorail.

We think the estimates were achievable. If we had booked at and I think the estimates probably anticipated Las Vegas. If we had that, you guys would have been right on target. To some degree, we've been beating this timing issue to death here in the last six months but really as it relates to this first quarter expectation versus actual results, you know, just -- we had another week or week and a half to Las Vegas and we would have made the expectations so it is to some degree a timing thing but we felt given the fact that we didn't meet the expectations, we felt we needed to provide a little color and that's why we're going into the detail as it relates to Halmar.

Okay. Thanks.

Our next question is from Tom [INAUDIBLE].

Good morning. I thought I understood you to say that now that Granite owns Halmar, they are bidding jobs to achieve a greater margin than historically Halmar has.

That's exactly true.

What is it to lead you to believe that Halmar can achieve a higher margin?

That is a good question. But you know we've booked a couple of jobs since we've been there and as long as our estimates are right and we can achieve the cost anticipated, the cost [INAUDIBLE] should be significantly higher than what Halmar -- Halmar has been able to do. We think the capacity is going to provide us with an opportunity book more good work. You know it's been our experience, quite honestly, that if you set your aspirations and expectations higher, generally you can get there. There is a lid no doubt that you can't ask for moon. But you know if you're disappointed in this business, generally you'll succeed.

I don't mean to be argumentive, but I wonder if that's a judgment that folks that have long experience in New York are better equipped to make than folks who don't.

Yep. Well I guess time will tell, Tom. We feel pretty certain that we're going to have a successful business there. To a large degree because there is just a whole lot of work to be done in that marketplace and I think for the reasons that I can't remember who asked the question, maybe it was Paul as it relates to the rough working environment and the unions and this and that, I think there is a natural barrier to entry from the outside into that marketplace. And once you're inside you're going to benefit from that natural barrier to entry because of those reasons. And I'm not going to say we're insiders necessarily, but I think we've snuck under that barrier and that I that strategy still will work.

Thanks a lot Bill.

Our final question is from Tom Lloyd Butler.

Just to clarify what you said about the Las Vegas job that you would have met the expectation, the estimate expectations, and taking that into consideration with the slight loss that you are reporting and the 7 cents loss that you've quantified from the GVA/Halmar New York business, the conclusion that I reach, I'm not thrilled about this problem but this job in Las Vegas seems to be enormously profitable. It would have related in, you know, basically -- four or five or probably about a 12 or 14 cent swing in earnings. But it sounds like to me its enormously profitable. Can you comment on what seems to be going on there?

It's a little too early to characterize any job that's 23% done how good or bad it may be. But we think it's a good job. I think it would be unfair to characterize it as enormously profitable but we do think it's a good job in our backlog and we're looking forward to it being part of our earnings stream.

A clarification would be helpful.

Because in some respects I think we would have been at the expectations if we hadn't had the two jobs in New York. That would have brought us up to 3-5 cents positive and then understand that the consensus is somewhere around 10 cents so those -- jo.

So you would have had them improve too. Okay. I just wanted to clarify that. Nice job.

I wish we could characterize it that way. It's a good job but we would be unfair to characterize it that way and wouldn't want to mislead the investment community in that way.

I'm glad that we clarified that. Thank you very much.

Gentlemen, there are no further questions at this time.

I think really the thing that we would like to leave you with is that, yeah, we didn't make the streets's expectation. I wish we had. And we did have the issue. I think we beat this to death in New York. We do have the Las Vegas job to look forward to and the next quarter we'll be happy to include that and maybe give you some more color in our 2nd quarter call but the main thing is that with the exception of those two discussion points here this morning, the wall of the -- balance of the business looks good and we're on track with where we were last year. You could argue that we're, absent those two issues, we would be ahead. So those are real positive events and we -- our hope and goal this morning was to just really give you enough information as it relates to details of the business that you could take these first quarter results and put them into perspective as it relates to last year and what we expect going forward. Hang on a second.

I'll go ahead. We just want to leave you a reminder we're still coming out with our quarter earnings next week. It will come out on Wednesday after the market closes and we'll have a conference call that will allow us to get into more of the details of the third quarter financial results. Until then, we look forward to talking to you again.

This concludes today's conference. We appreciate your participation. You may now disconnect.