Granite Construction Inc (GVA) 2002 Q4 法說會逐字稿

Good day, and welcome everyone to Granite Construction’s fourth quarter and year end 2002 conference call. Today’s call is being recorded.

At this time, I’d like to turn the conference over to Ms. Jackie [Underdown] [ph], Investor Relations Manager. Ms. Underdown, please go ahead, ma’am.

Thank you, and good afternoon. With me on today’s call is Chairman and Chief Executive Officer Dave Watts, President and Chief Operating Officer Bill Dorey, Senior Vice President and Chief Financial Officer Bill Barton, and Vice President and Assistant Manager of our Heavy Construction Division [Gary Higdem] [ph].

It is important to note that statements made on this conference call may be considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. Statements made today that are not purely historical are forward-looking statements. Members of the Management Team present today may be making forward-looking statements in the course of this call. These include statements regarding the company’s or management’s expectations, beliefs, hopes, intentions, or strategies regarding the future.

Because such statements deal with future events they are subject to various risk factors, and actual results could differ materially from the company’s current expectations. For a list of these risk factors please refer to Granite’s Form 10-K filed for the year ended December 31st, 2001 or the 10-Q for the quarter ended September 30th, 2002.

With that being said, I would now like to turn the call over to Granite’s Chairman and Chief Executive Officer, Dave Watts. Dave.

Thank you, Jackie.

Well, we’re certainly very pleased to report the fourth quarter and the year’s results. Both exceeded our expectations, primarily due to better than anticipated Branch Division construction material revenues and associated margins right at the end of the year.

The Heavy Construction Division turned in an excellent year and made-up for the overall downturn, year’s downturn that we expected and did occur from the Branch Division.

I’d like to commend all our hard-working employees throughout our operating companies for producing what is a remarkable result in a year of increasing uncertainty.

The agenda for the call, I will just give little highlights of the year and the quarter, which I just did. Bill Barton will talk about the financials in a little more detail. Gary Higdem is going to cover some of the outlook and current operations for the Heavy Construction Division. Bill Dorey will talk about the Branch Division, and overall operations. He’ll come back to me to give you an update on the political outlook. And then, we’ll turn it over for questions-and-answers.

So, Bill, perhaps you could cover some of the financial overview for us.

Thank you, Dave. Good afternoon, everybody.

I am going to break this down into about four pieces. One, talk a little about the quarterly comparison. I will comment as to the comparison to Street guidance. We’ll look at the annual comparison. And then I have some miscellaneous information looking at revenue and backlog by market sector and geography, and a couple of other things that people generally ask for.

But starting with the quarterly comparison, as what was in the attachments to the press release, volume was up 25.9m or 6.1 percent. If you take [Wilder] [ph] out of that equation which was at 42m there was actual decrease in volume of $16m.

Gross profit margin remained the same at 12.5 percent, compared to a year ago. And gross profit itself is up 3.4m, essentially associated with the [aggregated] materials in the Branch Division.

G&A was offset -- offset the gross margin increase with an increase of 4.2m which can be attributed primarily to Wilder, which had a quarter worth of G&A of 4.3m.

Operating income for the Branch was down 1.8m, or eight percent. HCD was essentially flat, down 38,000.

Other income, interest income was principally was up. It was up associated with some deferred interest that we got affirmation as to its collectibility, and we added $1.2m for the quarter. After adjustment for Wilder, the minority interest, the net EPS was down two cents to 28 cents per share, on 40,700,000 shares.

What about Street guidance? Our diluted EPS of $1.21 for the year compared to a range that we gave November 6th of last year of $1.04 to $1.14, was the result of a couple of different issues to be more specific. The volume of revenue increased 70m over what we anticipated, but the major difference between actual and November expectations comes down to, again, the construction materials did much better than we had anticipated at the time. Other contributing factors then goes back to the interest income amount that we had talked about, as well as we had a sale of surplus land that closed in the quarter that we didn’t anticipate. And that makes up the difference between the range and the $1.21.

Turning to year-end, again, volumes up 14 percent or 216m. If you wanted to look at Wilder by itself which became consolidated on, as you know, May 1st when we finished acquiring greater than 50 percent of the ownership was 155.4 percent – not percent, dollars. And that was 72 percent of that increase. HCD was up, as well. Branch without Wilder was down 51.4m.

Gross profit is up 41m or 22 percent, reflecting the addition of Wilder which was consolidated for the first time. The improvement in the HCD contribution more than offsetting the reduced contribution from the Branches, excluding Wilder.

If we look at G&A, G&A is up 23 percent or $27m. Primarily reflects, again, a consolidation of Wilder, and the acquisition in Northern California, as well as a full year of Halmar, our New York region.

In addition to the above attributions of consolidation and expansion, and the impact associated with the increase of G&A, if you look at just the G&A as a percent of revenue we did grow from 7.7 percent to 8.3 percent. And that often is the result of where we have taken personnel who are normally charged direct to projects, sort of on the bench, who are performing overhead work such as project estimating, and waiting for work to be awarded and started. Which means that the time that it is, they’ll be transferred to the job and begin to charge directly to overhead. Being able to charge directly to the job or the project, instead of overhead.

And a good example to that is during the last year we had built-up a backlog in [Granite Halmar] with people both hired, as well as internal, anticipating, and with the increase of our backlog to almost 500m. Now you’re going to see that those people will be exiting overhead, going into the projects. And you’ll not only see a decrease in overhead, but you should see increase in volume which will have an impact of reducing the overall G&A as a percent of revenue.

Another example of that is Texas where we had a slow year in terms of the amount of work that is being performed. Those people came back to the office, and they essentially were bidding and estimating for new work. That work was awarded in the latter part of the year, and the first part of 2003, as Gary will talk about later. But, again, that has the ability of increasing volume and reducing overhead. And so that is one of the variables that impact G&A from time to time, and especially as a percent of revenue.

Operating income, HCD went from a 2.8m loss in 2001 to a profit of 19.3m in 2002, reflecting the backlog contribution during 2002 net of any operating losses that we previously reported in Granite Halmar.

Branch operating profit was down by 6.2m, or 5.8 percent. Without Wilder it was down 17.5 percent from the record 2001 year, and that’s compared to what we said we thought it would be, down as much as 20 percent. So they did a little bit better than we had anticipated.

Other income was down 12.5m, or 73 percent. It’s broken down essentially into two areas. One is the gain on sale of properties and developments, is down about 6.8m, and we just didn’t have as much activity in that area this year. Equipment was also lower as well, and it’s just more of a timing than anything else.

Other net is also down 4.7m, and again, with the consolidation of Wilder and the other shipment, TIC running below 20 percent, of which you would be providing an equity return in your other income. Both of those were no longer included in our results for 2002. So that also led to lower other income.

As a result net income share was $1.21 per diluted share, compared to $1.24 a year ago. Again, our tax rate has gone from 38 percent to 36.2 percent. And it’s really recasting through an analysis that we had higher permanent differences in depletion, as well as additional Federal and State tax credits.

Now, turning to another one of the attachments to the press release, is revenue and backlog. And I just wanted to point out a couple of things here that would be of interest. And, of course, I’ll answer what other questions you might have during the q-and-a.

Looking at, by geographic area, revenue, California represents 41.8 percent of the total revenue, compared to 46 percent. So you can see, there continues to be a trend, where California continues to a smaller component of that, although as you will see the volume itself has increased. The rest of the West is now making up 33.9 percent of the overall revenue, and this really reflects the addition of Wilder.

The other – turning to the backlog – component, looking up in contracts or by market sector, looking at local contracts, it’s very noticeable that we have an increase in local backlog of $398m. And in essence, that represents two jobs that stand-out. And one of those is the MTA Concourse job in New York. It’s $162m contract awarded on New Year’s Eve. And the Reno Retract of 170.7m. And that’s one of the reasons why that has been a substantial increase.

Looking it backlog, some things to note. California is making up 14.6 percent of the backlog at year end. And that’s compared to 21.3 percent. And again, one of the impacts to California in terms of adding additional work in different territories represents the work that we’ve added in New York, as well as Wilder in the Northwest. And the other comment is looking at the Northeast, 494m, 26.7 percent compared to a year ago, 225, 16.4 percent represents a substantial increase in our New York Granite Halmar business.

A couple of the other types of information that people request ,in terms has to do with those jobs, less than 25 percent. We’re looking at YTD revenue, and comparatively in 2002 we have jobs less than 25 percent at 99m, compared to a year ago at 70m. And that’s an increase of $28.8m. And so you can see we have a greater amount of work that’s less than 25 percent going into 2003.

Looking at capital expenditures, another general request. Additions to equipment for the year 2002 at 58.4m, compared to 65m a year ago. Depreciation and amortization for the year is 55.8m.

And with that, Dave, I’ll turn it back to you. And I am prepared to answer questions later on.

Thank you, Bill. Thank you.

Gary, could you give us an overview of HCD for the year, and what you’re looking at coming up.

Yes. Thanks, Dave. And good afternoon. I am going to touch on some of our highlights for 2002, and certainly the look ahead into 2003 and beyond.

Starting off with some of the highlights. We’ve added an area manager back in the Northeast, and that’s a key step in terms of the support that it takes for continued growth within HCD.

In addition to that we also added a western regional office out in Davis, California to concentrate on all of the West with one of our now regional managers and a team of estimators that we’re assembling there.

In terms of safety we’ve been doing some reorganization, adding some folks to really bolster our safety effort and improve what we’re -- and it’s a continuous improvement process in terms of what we’re doing, and how we look, and manage our safety throughout the Heavy Construction Division.

Another highlight is we feel we’ve clearly turned the corner there in New York, and we’re clearly excited about that market and what our guys are doing to improve our margins, and improve our operations there.

A trend looking forward, the amount of work available to bid continues to exceed our estimating capacity. And that’s a good sign, quite frankly. It means that the market is still strong in terms of the types of projects that we track.

In addition, we continue to improve and enhance our estimating staffs. And yet, that work continues to outpace what we’re able to add. And again, that’s a good, strong sign.

As far as new awards in the fourth quarter, about 265m with the work in New York was added on. And now, here in the first quarter a job in Lubbock, Texas, 51m. A job here in the Dallas area, the George Busch Turnpike, 75m. That totals 126m. We were recently low bidder on a project there on the Woodrow Wilson Bridge in the D.C. area, of 115m. And so, we’re off to I think a really strong start here in the first part of 2003, and that’s a real momentum builder for the Heavy Construction Division.

Our backlog as of January 1st was at 1.3b. With good, strong margins. We continue to push our effort with our teams to maintain high margins on this higher-risk, larger-sized projects. And we just continue to stress that message.

As Bill Barton alluded to the 25 percent number, we’ll still have numerous projects that will not hit the 25 percent until early 2004, as a number of these projects were awarded late in 2002, and even here early 2003.

Looking ahead, the public funding alone. A number of you are probably aware of what’s developing there in D.C. regarding the transportation. Whether the funding is going to be 29b to 32b – we’re hearing the 32b, which is encouraging. But in addition to that, the transit number is in that 7b to 8b range, and then the airport work is in the 6b to 9b range. And so, when you look at just that public sector market for the Heavy Division we’re looking at a $45b to $48b number. And so we continue to be excited about that.

Specifically, some bidding opportunities for us in the next six months, the [KD] [ph] Freeway Program right here in Texas. There’s three projects in the 450m to 500m range total, for the three. Our State Route 22 Project that we’ve been tracking in Southern California, $200m to $400m project, depending on the owner in terms of scope and what he includes. There’s several large projects in New York bidding in the next couple of months.

Another approach project at the Woodrow Wilson Bridge, bidding in two months, about $260m. The Seattle Sound Transit Light Rail Program. There’s a project in Philadelphia, bidding about $140m to $150m, that we’re going after. We were recently second bidder. This was in the last couple of weeks there, and so we showed we can be competitive there. The Hood Canal Bridge in Seattle. And we’re seeing actually quite a bit of work coming in the Northwest, if they can get their funding together. But there are a number of projects that are in the pipeline.

A little bit longer term we’re seeing a lot of activity in the light rail transit market. Charlotte, North Carolina, Phoenix, and Miami are all programs that are being funded, are approved, they’re getting their records of decision, they’re passing their environmental tests. And so, we’re really encouraged about those markets.

New York, the Governor just announced a $5b transportation package for New York. And that’s just hitting the wire. A couple of people mover projects that we’re involved in at airports, both Oakland and Miami. And we’re taking a look at those. And finally, specifically, in New York, again, there’s a cut-and-cover project, a treatment plant, or just the site work and some big concrete work. And so, we’re really excited about the opportunities here in 2003.

And with that, Dave, that concludes my remarks.

Okay. Thank you, Gary.

Bill Dorey, will perhaps cover some of the Branch Division’s overview, and then overall operations.

I’d be happy to do that, Dave.

As you may recall, our story relative to the Branch, the forecasted Branch performance in 2002, it’s pretty consistent throughout the year. We felt like the prospects were they would be off about 20 percent from the prior year. And as it turned out, as Bill had mentioned in his comments, we ended up without the Wilder business included, down 17.5 percent from the year 2001. And so, we were consistent with the guidance. I don’t think that surprised any of us, and hopefully didn’t surprise any of you either.

Clearly in – we had some very bright spots in our Branch system. We had some disappointments as well, from the standpoint of performance. I can, you know, speaking for myself, I think Mark Boitano, and Jim Roberts as well, I am pretty happy with the Branch performance. The environment that we are working in is not as robust as it was a year or two ago, but the team, and the people involved in that business really did come together. And I think delivered out of that market about as much as we could have expected.

From the standpoint of recognizing and really highlighting one of our bright spots I think we need to really probably talk a little bit about our materials business. The materials business in our branches has really become a very consistent performer. The contribution that we’re getting out of that business, I think Bill had mentioned, continues to grow. We had a record from the standpoint of gross margin out of our materials business this year. And I think, you may recall me on prior conversations really suggesting that that business in the West had fundamentally changed. And I don't expect it to go back. It’s really a product of the resources in the West becoming more valuable, becoming more scarce, becoming more difficult to replace. And quite honestly, the big national firms have moved into the market out here in the West, and we are the beneficiary of that.

And so, as a result, we are diligently working to grow that part of our business. We have several prospects from the standpoint of acquisition that we are chasing. We have numerous, really I just say numerous Greenfield operations that we’re investigating in one degree or another, or are pursuing. And I fully expect that part of our business to continue to grow. And I think that’s really a – I think that’s going to be a bigger part of our business looking forward, and I think really almost you can say it’s a legacy to the next generation of our company, because it’s just going to pay-off, those investments will pay-off.

Looking forward into the year 2003 it’s very, very early in the year for us to try to provide any real guidance that you could really count on. We go through this time of the year a very, very detailed budget process. We’re doing that currently, and Mark Boitano and Jim Roberts will be visiting with all of our branches. This is very detailed, you know, I consider it to be a very appropriate process that we go through. And we get a real good handle on where we’re going when we’re done with that. But we are not done with that process. That will occur over about the next six weeks.

However, if I could sort of step-out on a limb here, I am going to suggest that we do have several branches that will in this process forecast better performance than they had this year, this last year. We also have certainly several branches that are going to forecast performances that probably will be worse than they performed this year. And so, I am hopeful that we can perform in our branch system similarly to the way that we did in 2002.

My intuition, however, tells me that we will probably be off even further in 2003 than we were in 2000, and we were in 2002. But, once again, I want to stress that we have not completed this budget process, and it’s really a very good exercise. And when we’ve completed that we can provide you with, you know, certainly better guidance.

California does continue to struggle with its budget problems. As Bill indicated 41 percent of our business is still in California, and so it’s a big part of our business. And, however, we are still seeing about a normal amount of work to bid currently. Having said that, we’re also seeing a lot of bidders. Now, we experience this generally about this time every year, where we get, you know, we get a lot of bidders on our work, and we get a little discouraged looking forward. And so it could simply be the time of the year, you know, this time of the year that we’re seeing. But we are seeing a lot of bidders right now. And I think time will tell as to whether that persists throughout the year.

We are continuing to stay disciplined. We are continuing to get, to put money on the work on bid day. And I think our key, you know, for this year, if in fact the work does slow-down is to try to make-up that difference by focusing on our execution, and really doing better on the work that we perform even though it might be slightly less work that we will be performing.

I’d like to maybe kind of wrap this up by suggesting, I would say to you now what I suggested last year. About this time last year we said, I think, that we felt like our branch business would be off some. But we certainly felt like our Heavy Construction Division would make up the difference. And that’s literally what happened. I think it’s important to note that our Heavy Construction did that, even though we posted, you know, pretty significant losses in our New York marketplace in 2002. So it’s sort of a good news, bad news scenario. The bad news is we had the losses, but the good news is that even with that the business was able to perform at a level that we did, in fact, in our Heavy Construction Division make up for what we were unable to deliver out of our branches relative to 2001.

I think the story is really the same if not even maybe slightly better today. I fully expect that whatever, if in fact, we do slip a little bit in our Branch Division as a result of the economic climate I fully expect that our Heavy Construction Division will make that up, as well.

You know, we’ve grown our Heavy Construction Division from a business that in 1998 was about $280m. And last year in 2002 we ended up at $576m in revenue out of our Heavy Division. And we expect a significantly larger business in 2003 out of our HCD business.

And so, you know, we’ve been struggling a little bit with the growth. I mean certainly, you know, I think New York is a good example of how that – those growth pains can affect us. But the prospect of capturing the income, the appropriate level of performance out of all that business is right in front of us. And I – my prediction is that you will begin to see, we will begin to see that business performing at a significantly higher level than it has in the last two years.

And that’s very, very exciting to me. Because, one, it does give us some comfort that we can make-up the difference that we may experience from the downturn in the California and Western economy. But if, in fact, our business in the West is able to perform at even the level that we performed at in 2002, which was actually quite good, the increase in the Heavy business would really be reflected in some really nice earnings.

And so, it’s an important part of our business, and we’ve been growing like crazy. And it’s now time to reap the rewards from those growth efforts, and I think that’s right around the corner. If you look at our backlog, clearly that’s just growing. And that’s a really good sign. It’s a great opportunity. It’s a great opportunity for us.

As Gary, I think, pointed out some of this work because of its size and the fact that it’s starting now may not be reflected in our 2003 earnings, and so that’s just a, you know, maybe a little caveat that needs to be considered when modeling 2003. But if it’s not, if it doesn’t show-up in 2003 it’ll show-up in 2004. And we’ll really, I think, really setting 2004 up to be quite a good year for us.

So, I again, like Dave, would really like to complement all of our employees all through the company for really an outstanding effort. You know, I am constantly amazed at what people do on behalf of the company. And I certainly appreciate that effort.

Dave, I’ll turn it back to you.

Okay. Thank you, Bill.

You know, I always cover with you a view of the politics involved with public sector spending in our area because it’s vital to our success. As you know, the Federal level of spending is the foundation point, I guess you’d call it, to the States and local expenditures. And we’ve been watching very carefully two activities. One is the current appropriations bill against the last year of [T21] [ph]. That’s the 2003 Federal appropriations bill. It looks like the House and the Senate have both passed this 31.8b for transportation. This is for highways. And we expect that to go to the President for signature, and we’re not hearing any big opposition to it. And so, we’re optimistic that it will be signed.

If that goes forward as we expect it opens the way for the real serious negotiations, dealing with the reauthorization, the new transportation bill as T21 expires near the end of this year. The initial version of that reauthorization bill is expected out next month. There’s a great deal of speculation as to the size and timing of the bill, whether it will be a two-year, a five-year, or a six-year bill. And we can’t really state right now.

Looking to the States there are, I think, 37 States that have serious out-of-budget problems. And California is getting the lion’s share of the publicity because it is by far the biggest. I attended briefings most of the day yesterday with the leadership, political leadership in Sacramento. And, indeed, that problem is huge. I am not optimistic at a near-term solution. We have Democrats not wanting to make the cuts. We have Republicans not wanting to make tax increases. We’ve got a Governor that’s on both sides of that issue, and pushing very hard to get the problem solved this year. We don’t know where it will go. It’s certainly looking like a great big standoff in the coming months. And not likely to be solved perhaps even by the June deadline.

It will affect transportation. I think we’re going to lose the sales tax on fuel which was part of the Governor’s congestion relief program. We think that’s gone for the current year. And the rest of this year or next year that’s probably $1.5b. The regular gas tax money, however, is not as easy to get into the general fund. And we are optimistic that that will remain intact, and so we’re kind of back to where we were before there was a congestion relief program.

We’ll continue to push. We, our industry, and we in particular are emphasizing to the policy makers that construction investment is an economic stimulus. By itself. It gives back to the economy on a multi-fold basis. And we’ll keep you posted as to how those political decisions continue to develop and evolve, and hopefully, reach a conclusion.

In summary, I think Bill covered it quite well. We’re very optimistic about 2003. We certainly look for our Heavy Construction Division to have an outstanding year, making up for our Branch Division which is impacted by the economy and by these State budget issues. And hopefully, it will be a year that we’ll be just as proud of this time next year as we are very proud of the year we just concluded in 2002.

So with that, I’ll open it up for the questions-and-answers, and our Moderator will give you the instructions as to how to file for a question.

Thank you. (Caller Instructions.)

We’ll take our first question from Jack Kasprzack with BB and T Capital Markets.

Well, thanks. Good afternoon, everyone.

Hey, Jack.

Hey, Jack.

First, I was hoping to just verify the numbers for HCD Branches excluding Wilder, and then Wilder’s fourth quarter sales for each, fourth quarter operating profit for each. If I could just get the actual numbers it would be great?

Fourth quarter?

Yes.

Okay, HCD for 2003, I presume?

Yes.

154.

154.

154.5m.

Okay.

Branch which includes Wilder 298.3. Wilder at 42m even.

Okay.

And you’re asking for operating income?

Yes.

Branch with Wilder 22.8. Wilder is 2.9. HCD for the quarter is 2.8.

2.8. And Wilder, Bill for the full year 2002 what were Wilder sales and operating profits?

The operating, well, let’s see now, the Wilder sales 155.4. Again, that’s just from April 1st on. Not April 1st, May 1st onward. So that’s just for part of every year. And then, the Wilder operating income for the year is 12.5m.

Okay. How about operating cash flow for the fourth quarter?

I don’t have that available to me at the moment.

Okay. And can you give us any guidance on capex for 2003?

Currently I think we have a budget of about $60m which is about similar to what we did in 2002.

Okay. Great. I guess that’s all I am allowed right now. Thank you.

You’re welcome.

We’ll take our next question from [Paul McCreigh] with Wellington Management Company.

Yes, good afternoon.

Hi, Paul.

Hi, Paul.

For Gary, if I could. Probably one of the subjects we were most interested in following on, during our visit with you in Reno, had to do with the ability to improve the margins in New York. I was encouraged by your words that you have ‘turned the corner.’ Would you elaborate a little on that to the degree that are you improving your margins as rapidly as you hoped back when we last met several months ago, or are you actually doing a little bit better? These are great big projects you’re winning. And I am just wondering how is the competitive environment and the discipline that you’re exhibiting up there/

Yeah, thanks, Paul. Oh, yes, and we’re maintaining the discipline without question.

In terms of how competitive the market is, again, on these larger projects two and three bidders is not unusual. And that’s certainly a lot better than six and seven, and eight bidders. And we’re also hope to find that our competition is seeing that we’ve got that discipline. Because we don’t get everything that we bid. Fortunately, that market does allow some negotiation. And that certainly helps our position.

In terms of your question is it coming around as fast, I would have to say we’re on-track. Clearly, the projects that have been negatively impacted are complete. So we’ve got a really good handle on that, and I know that gave a lot of consternation to six, eight, 10 months ago, from the market in terms of ‘well, how do you know you’re going to get done?’ And ‘where are you?’ Well, these projects are done, and we’re kicked-off on a number of the projects that we’ve been low on here in the last three, four months.

We’re excited about how the Granite Halmar employees are grasping our systems. They’re taking hold of them now. They’re understanding them. We’re getting actually more Granite folks into the projects, both directly and indirectly. And what I mean indirectly is a lot of influence from our guys that are in California, making trips out there, really helping, training them with our processes to get the guys on-board. And a lot of that, what I mentioned, does take time. But we’re encouraged by how the guys are responding.

Does that answer your question, Paul?

Very well. Thank you very much.

Thank you.

May I add something to that, as well, Paul. This is Bill Dorey. You know, we didn’t set the world on fire in New York in 2002. And, you know, really had it not been for that we would have had literally record performance out of HCD in 2002. And so that’s sort of a good news, bad news thing. We still did okay even with that impact. But, you know, from my perspective, you know, we’ve turned that business around. And I don’t mean we have, I mean really the Halmar people have turned that business around. You know, faster given where they were than we could have ever expected. And we’ve worked off that stuff that had issues. We’re carrying a little bit of the backlog that we inherited forward, but it’s forecasted at the end of the year in such a manner that it should not be a negative impact going forward.

And I fully expect that we’re going to get a positive contribution out of that business in 2003, and an absolutely terrific contribution out of that business in 2004. Now, you know, it’s really – and we tell this to the Halmar people when we talk to them. I mean it’s, you know, we’ve yet to prove that. And you know, we’ve yet to prove that to the investment community. But my sense is that we are developing an excellent team there. I am going to go-out on a limb here and say that’s the best darn team in New York City right now. And we’re going to make a mark there, and I think we’re going to prove the skeptics wrong.

We’ll take our next question from [Richard Rossi] [ph] with Morgan Joseph.

Good afternoon, everybody.

Hi, Rich.

Hi, Rich.

A couple of things. One, could you give us a little more color as to why the aggregates operations did as well? Or did better than you expected in the fourth quarter? I mean was it volume, price, both?

Both. Rich, that market, or that business continues – you know, it’s not strong everywhere. I don’t want to try to mislead you that every place that we have a rock plant, you know, we’re making lots of money. But we do have some, you know, a fairly significant part of our system that seems to be in areas where we as well as our competition are recognizing that this resource in the ground is not a renewable resource. It has value. And we’re not going to give it away. And as a result, the price structure over the last several years has changed pretty dramatically.

Right.

That’s the first thing. The second thing is that even with this downturn in the general economy, you know, our volumes are only off in the Branches $50m, which is, you know, it’s really almost nothing from a standpoint of being kind of a trend would indicate.

And so the, you know, our volumes in our plants particularly in those areas where our price structure is pretty good continue to stay up. I think, you know, I think frankly we continue to do a better job in operating that business. And, you know, I think it’d probably be a good time to maybe complement the people involved in that. I think we’ve just come a long way in the level of sophistication that we have as a company in that area of our business.

And so, the structural changes that you’ve been talking about for awhile evidently are really setting in place now in terms of improving profitability here?

Yeah, I think so. I think there’s some fundamental changes that have occurred in the West in the aggregates and general materials business. You know, and absent some just, you know, sort of economic disaster I don’t expect that to change.

Okay. On another subject, you know, oil prices have gone-up dramatically in the last weeks, months. I know that eventually you usually recoup it. What is the situation there regarding any lag that we might be seeing between the cost increases you’re seeing on the oil side and getting recoup?

Okay. Well, there’s really two areas where we have exposure to, you know, crude oil going up. And let’s take them one at a time.

The first is with liquid asphalt. And we buy, as you may know, probably in the neighborhood of 450,000 tons of liquid asphalt per year in our system in the West. And you know, as those, as that liquid asphalt commodity becomes more expensive there’s a certain part of our business that’s exposed, and there’s a certain part of our business that is protected. Certainly our day-to-day sales, retail and that sort of thing, we’re exposed. And if we don’t get those additional costs into our bids which, you know, generally speaking I am going to say, you know, we probably don’t have that covered in that part of our business, we’re exposed to that. And so, as that, as those prices go-up, you know, we’re probably going to get impacted.

But I think as you rightly pointed out they go-up and then they come-down. And what typically happens is that we, you know, take a little hit on the way up and we reap the benefit on the way down. Because by then we’ve, you know, we’ve compensated, and we’ve got them in those quotes, and then as it drifts back down we recapture that.

And so, I suspect, and I am certainly not a, you know, no way to have a crystal ball, but I suspect that whatever we're experiencing now will right itself before the end of the year. And so there’s probably going to be an up and down.

Now, relative to the public works jobs that we have there’s an awful lot of that work, that have an index in the contract, to where if liquid asphalt increases or decreases for that matter there’s an adjustment made to the contract price and the revenues that we receive. And so there’s a certain amount of insulation there.

Relative to diesel, you know, we’re exposed generally speaking. I mean almost in most instances if we don’t have it in our bid and it goes up, you know, we have to stand that. I will tell you that for some time we have been, our equipment rates have reflected diesel prices that we are experiencing now. And so if diesel doesn’t get any higher we’re probably okay. If it spikes up, you know, a lot we’re going to be exposed. But on the other hand, you know, we have the same situation, we’ll begin to price higher prices in and as it comes down we’ll reap that benefit.

To put some perspective on diesel, the last time I looked, and that was a few years back, we were burning about 12m gallons a year. So maybe it’s 15m gallons a year now. So, you know, you look into your crystal ball as to how much it’s going to go up, and how long it’s going to stay there, and try to figure-out, you know, what kind of exposure we have.

Okay. Thanks a lot. I’ll get back into the queue.

We’ll take our next question from [Alan Matrani] [ph] with Copper Beech Capital.

Hi. Thank you. Great job, it looks like you did for fourth quarter of ’02. So congratulations.

Thank you, Alan.

Could we just talk some things, back to some numbers for a second? What’s the cash on the balance sheet at the end of the quarter?

At the end of the quarter?

Or year, I guess?

I don’t have that right in front of me, and I don’t remember it. But give me a couple of minutes here, and I’ll sort of …

Okay, not a problem. Also, this past year it looks like interest – I just want to tie down some of the P&L lines. Interest income, I guess, benefited you about $1m if you net out the interest income and interest expense for the year. It looks like you’re still carrying a chunk of debt on your balance sheet, and interest rates have not gone up. Could we expect interest expense to be much higher this coming year? It looks like it should be.

The comment I would have on that is it should be somewhat similar to last year, because it represents private placements, which are both fixed rates.

What is the interest rate on the debt overall?

Five, let’s see, no, it’s 654 and 696. 696 on 75m and 654 on the 60m. And we paid down I think one or two traunches of that, and so it’s probably a balance of about 128m.

Okay, so roughly, lets say 128m. And let’s just use a round number of …

By the way, I am talking about Granite, not necessarily Wilder. But Wilder would be such a small part of that. And so don’t worry about it.

Fair enough. So let’s just use 130m, if we put a limit at 6.5 percent just to take the low end – that’s roughly about $8.5m of interest expense if you had, let’s say you cashed somewhere about 135, give or take, my question then is if you’re getting two percent on your cash like most companies are in money markets that’s only $2.7m in interest income. There seems to be a negative factor of about $6m that coming year.

We do have other things besides just cash on our balance sheet that’s working. We do a lot of the work we do that has retention. Retention allows most States and other municipalities allow you to substitute securities in lieu of retention, and so that money is also at work. And that’s – I don’t have the number here, but that’s a substantial amount of investments, in typically money market type instruments.

Okay.

And they are generally longer term in nature, and so, they’re probably benefiting from prior investments.

Okay. Also, it seems like you have many large projects that could hit 25 percent in the next 12 to 15 months, but it sounds like you’re unsure if it’s going to be that case in the next 10. Can you maybe run-through, and give us your opinion whether any of the big HCD projects that you’re working on or forecasted to hit the 25 percent threshold this coming year when you recognize profits?

Gary, do you have a better sense of that? That’s something that I haven’t reviewed here in the last week.

Oh, I am always cautious about giving that exact answer, because there’s so many things that influence, particularly weather. And third parties that can impact us. Some of the ones that are probably borderline. The George Busch Turnpike in terms of whether it would hit in 2003 versus into 2004. The Amtrak project is another one that would be borderline. Reno is certainly not, that looks like that’s going to be outside. And that 10-month window that you indicated, that one can slip into next year if I remember right, the he Reno [retract]?

Right.

And we’ll take our next question from John Rogers with DA Davidson.

Good afternoon.

Hi, John.

The – I am just curious, I guess on the HCD business, congratulations on the quarter. But the margins, as I calculate them, came to about 1.8 percent for the quarter, and 3.3 percent for the year. And I know you don’t want to give out specifics, but with what you have in backlog are the margins substantially improving there? Do you expect them to, based on the way you’re bidding the work?

Well, the one thing I would just keep in mind here is that amount of operating income reported for HCD includes a significant loss that was reported for New York. If we don’t repeat that you would expect substantial improvements by itself.

And Bill, could you give us any sense of just the magnitude of that?

Not at the moment.

Okay. And then just one follow-up if I could. On the Branch Division, do you have any sense that you pulled any work forward from ’03 into the last quarter of ’04, or was it just good [aggregates] business that should continue over the near-term?

Well, we did have some pretty good weather towards the end of the year. And so, I don’t know if I’d characterize it as pulling work in from one year to the next. But we did, I would say we had a little bit better weather than we typically experience in that time period. And so there was probably some work done, that, you know, traditionally would have fallen into the following year.

Okay, but nothing significant there, Bill?

I don’t think so. I mean it’s hard to know. From year-to-year they’re all different. And I wouldn’t call it significant, no.

Okay, great. Thank you.

We’ll take our next question from Steve Zeflin with Bear Stearns.

Hey, good afternoon, everybody. How are you?

Hi, Steve.

Sorry, I am calling from an airplane, and so if you can’t hear me I apologize. But …

Actually, it’s actually pretty clear.

Good! On your bid success ratios, given the fact that there’s probably a lot more competition in the Branch level business, what have those ratios been like lately, and what can you do to improve those aside from lowering your costs?

I am not sure I understand the question. Say that again.

Your bid success ratios in the Branch Division, or your bid success rates, I guess?

Well, in the last, you know, it comes and goes through the year. I mean typically this time of the year our hit ratio is not as good as it is, you know, to the middle of the season and certainly into the fall. But, you know, you raise an interesting question, and that is, you know, if there’s less volume to bid if that is, in fact, what occurs – I am not suggesting we’re seeing that quite yet. But if that is what occurs, you know, we might be forced to change our bid strategy relative to margin, although, you know, we’re going to do that very reluctantly. Because it seems like every time we do that we end up just giving the money to the customer.

Right.

So that would be sort of a last resort for us, I can tell you.

Okay, good. And on the HCD Division, sort of the same question. Have you been bidding more out there, and is the bid success rate better or worse than last year? How does that compare?

Well, actually relative to 2001 our hit ratio on a percentage basis was actually less. But we bid a lot more work as we do have more estimators now. We have increased our bidding volume. And yeah, we track that number in terms of that hit ratio, both in terms of numbers of project hit and dollars bid and hit. We do track that, but it’s a poor information, and we certainly don’t adjust our bidding practice just because of our hit ratio. It’s just to look at it from a year-in and year-out basis to see how we’re tracking.

Okay, thank you.

And we do have a follow-up question from Jack Kasprzak with BB and T Capital Markets.

Thanks. What percentage of the HCD backlog, which I guess is 1.37b do you think you’ll recognize as revenue in ’03?

Jack, at this point it would be a guesstimate. We’re just in the process of completing that part of the analysis for our 10-K. And so I, it’s fairly long-term work. Some, you know, from three years up. But outside of that type of anecdotal discussion, let me get back to you on it.

Okay. And my recollection is that number has quite often been in the mid 60 percent range, say 65 or so percent, going back the last one, or two, or three years. Is there a reason to think that couldn't be attainable again this year?

I certainly wouldn’t think that’s it’s not attainable. I do think that it’s been lengthened. When you look at the makeup. If you’re just focusing on HCD you figure that it’s more than doubled its backlog here in the last few years. So that the content of it may have changed slightly.

And the timeline on the design build contracts changes the equation somewhat in that you have a longer lead-in period to actual construction work, where the percentage of completion, and therefore, the backlog rate of burnoff starts to increase.

Okay. The other thing I was just going to ask in a broad-brush sort of view of 2003, specific to Bill Dorey’s comments. You know, if the Branches are off a little but HCD can makeup for any sort of shortfall, however modest it may be in 2003, and if Halmar can break-even, and my recollection was the last report was you guys had lost 12 cents a share in Halmar in ’02. That would imply an earnings number of say $1.30 to $1.35 for ’03. Is that something that’s, again, broad-brush reasonable, jumping off point do you think?

I think it’s just a little too early to tell yet, right now. As Bill mentioned, are going through these very detailed budget reviews of our Branch system. And that’s a big number that we have to get our arms around before we can give you better guidance on that.

This time of the year it’s very murky, especially for our turn business which, again, is represented by the Branches.

Right, okay. Fair enough. Thank you.

And we have a follow-up question from Alan Matrani with Copper Beech Capital.

Just one quick question. The estimates out there for this coming year seem to be about $1.25. Are you comfortable with the FirstCall estimates?

Really, at this stage of the game we’re really not commenting to it. But I think you can summarize, you can, I guess from a qualitative standpoint come to your own conclusion from what Bill Dorey has talked about.

Will we get further guidance after the first quarter?

I think we’ll be in better position to do that then, after we’ve gone through this review process, as well as seen a little bit more clarity in what’s going to take place, both the Federal, State area, or Federal and State. And not to mention, you know, there is some expectation the economy is going to begin to improve going into the second and the third quarter. And so if that would all have a bearing as to what we thought about the year.

Okay.

And Alan, is Fisher on the phone?

Uh-hum.

The amounts that really are associated with marketable securities, there is a long-term securities in this number. There's about 181m.

$181m, thank you.

Mr. Watts, there appears to be no further questions at this time. I’ll turn the call back over to you for any closing comments.

Okay. Well, thank you very much all of you for joining us today. Again, we’re just extremely pleased about the results we’ve been reporting to you. And we’re, despite the uncertainties the economy brings us, the politics give us worry about, we remain optimistic about the coming year. And we look forward to talking to you about that as the year unfolds. Thanks again, have a good evening.