Granite Construction Inc (GVA) 2003 Q2 法說會逐字稿

Welcome to the Granite Construction second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS). At this time for opening remarks, I would like to turn the call over to the Manager of Investor Relations, Ms. Jackie Underdown. Please go ahead.

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; Executive Vice President and Manager of the Branch Division, Mark Boitano and Vice President and Assistant Manager of our Heavy Construction Division, Garry Higdem.

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 here 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 risks factors and actual results could differ materially from the Company's current expectation. For a list of these risk factors, please refer to Granite's Form 10-K filed for the year ended December 31, 2002.

Now, with that being said, I would like to turn the call over to Granite's Chairman and CEO, Dave Watts. Dave?

Thank you Jackie. Good afternoon everyone. Thanks for joining us on the call. Our agenda this afternoon will be this -- I will go over some of the key political issues affecting our business. Bill Barton will provide the financial overview for the quarter. Mark Boitano and Gary Higdem will discuss branch and heavy construction division operations and projects respectively and Bill Dorey will provide his review and summary of business operations and then we will open it up for your questions.

Let me talk about the political environment, which is laden with many significant things that are happening, affecting us. Underlying many of the state and local transportation projects are federal contributions from either the surface or aviation (ph) transportation budgets and appropriations. On a federal level, the landscape is currently dominated by the renewal or extension of T21 in the Congress. This is the situation as we know it; both the House and Senate committees are working towards a 6 year reauthorization. The administration is holding to a line of no increase in fees or taxes and time is running out as September 30, the expiration of the current T21, is almost here.

Close observers predict an extension of T21 either six months or two years rather than a renewal because that seems impossible with the time available. Our industry lobbyists are pushing for two years in order to give the states and other localities more planning room for their own projects. It's very important to note that both houses and both parties are interested in a renewal with significantly higher funding than the administration. But if renewal is not politically possible, then an extension is essential, otherwise at the end of September federal dollars would stop flowing. This would certainly be an unpalatable political scenario and unlikely to happen, however.

At the state level, which is certainly the other very important leg to transportation funding, almost all of the states are having budget problems but California certainly dominates the news and has the biggest impact to our business. This is the situation as we know it -- California finally has a budget. The Governor signed it the other day. On a cash-flow basis, the gas tax dollars can now resume their flow from their holding account into transportation accounts, so we anticipate being paid normally for the work we are currently doing. The budget is based on some cuts in spending, some internal borrowing, some increase in the vehicle license fees and then borrowing externally through bond measures to push really off to later years much of the deficit, the structural deficit, the ongoing deficit, the difference between revenues anticipated and expenditures was not solved.

What happens to transportation funding in all of this? We don't know exactly but qualitatively, gas taxes have been borrowed but they have to be repaid under prop 2 which is a constitutional requirement. However, one thing clouds this repayment in that if the gas tax monies are loaned from the transportation accounts, highway account to the transportation congestion relief account, which is different and then to the general fund, has the state gotten around this requirement? We do not know but we will see.

The second source of funds which is what we call prop $42 and that is the sales tax on fuel was in our favor not permanently suspended but loaned with interest to the general fund. Time will tell whether this is an academic point and will they be repaid and if they are, how many years will it be before they are repaid.

From the looks of it in summary for this fiscal year compared to the past which had an average annual spending of about 2.4 billion, it was cut in half through June 2004. What will happen in the next fiscal year starting July 1, 2004 is anyone's guess. In my view, unless the economy starts generating higher tax revenue, we will be facing these issues again next year. Then of course, there is the recall election and with that, I am going to pass the baton over to Mark Boitano to talk about branch operations. Oh, Bill Barton, you're going to take the -- sorry, Bill. I passed you there. You are going to take us through the recap of the numbers and what's in between the numbers.

I am kind of the opening act for Mark. Anyway, I will be focusing on the second quarter 2003. This will address what was attached to your press release, those two schedules, one on the earnings and the second one on the revenues and backlog by market sector and geographic area.

First, the total company revenue increased 2.3 percent to 469 million. It was led by HCD revenue which increased 26 percent to 190 million. Branch revenue decreased 9 percent to 280 million. However if you took Wilder out of that, the increase in Wilder of 20 million, branch division, remaining part of the branch division was down 48 million.

Another way to look at the branch decrease, California generated revenue is down 38.4 million or 20 percent. You can look and see that the shift geographically to the northeast and South, which is part of the HCD market and the two of those areas are up 44.2 million or 48 percent. Of the mix of HCD to branch as a percent of revenue is now 40 percent HCD, 60 percent branch compared to a year ago with one-third HCD to 2/3 branch which is reflective both of the growth in our HCD division, as well as the decrease that we are seeing in the branch revenue at the present time.

It also should be noted that Wilder was consolidated for the first time effective in the second quarter 2002, May 1. Only two out of the three months were included last year and the comparison is to a full quarter in 2003.

Secondly, one of the things we do share with you on the conference call is the plant information and if you have a pencil handy you can jot these down. The revenue for plants for 2003 is 66 (ph) million and 6000 (ph) or 66,006. Margin is 12 million 240. If you look at the comparisons for 2002 it's 518 (ph) to 684 revenue. Margin is 10 million 999.

Moving on to gross profit again focusing on the quarter, it is down 15.7 percent or 10.7 million. However, I will talk about the attribution to those when I get to operating income.

One of the things we also talk about is unrecognized earnings due to 25 percent completion method or in other words this is the amount of revenue that has -- or I should say where revenue is equal to cost and the contracts are less than 25 percent complete. For the quarter 2003, there was $52,718,000 worth of contract less than 25 percent compared to 37 million 878 a year ago, a difference of 14.8 million.

Next, we talk just briefly about G&A, which is fairly flat, is up .9 million over the prior year of 2.4 percent and it really reflects the G&A associated with the consolidation of Wilder and the acquisition in northern California last year which equates out to $1.2 million difference from a year ago.

Now returning to operating income, first I will talk about branch. The branch operating income for 2003 for the quarter is 19 million 632 or 7 percent. Compared to 2002, it was 28 million 558 or 9.3 percent and that is a decrease from a revenue -- operating income standpoint of 8 million 936 and the gross profit margin is off 2.3 percent.

Essentially, that is the result of unseasonably wet weather as we discussed in the press release and in the West early in the quarter, producing a late start to the construction season and it's a continued slowdown of both public and private sector construction that I think Mark will talk about shortly.

As we turn to HCD, the story is that their operating income for 2003 is 7 million 173 compared to a year ago of 10 million 635 and they are down 3.5 million from a year ago. Again, this is the result of primarily lower profit expectations on several projects that we have talked about prior.

As mentioned in our press release, we thought it was important that you be kept advised on Granite's policy on revenue recognition when it comes to change orders and claims. Why now you ask because nothing has changed from our past practices. However what we are seeing with the increased volume and complexity of our HCD work, there is a greater number and amount of change order type work that is ongoing. To keep it simple at this point, it's a reminder that Granite does not recognize revenue until a final agreement has been reached with the owner. There is no downside, only upside in profit recognition.

Other income, the only real change between the two periods is in other net. We recognized 2 million 061 in the second quarter of this year compared to negative 395 the prior year. It essentially represents two components but the primary component is TIC (ph) gain on sale of investments. We did sell another chunk of stock back to TIC during this quarter. The gain to us was 1.9 million. We still have two additional tranches (ph) that will be sold in 2004, 2006 period if we so choose. Then we had some benefit for -- on an interest rate swap for the period.

Results from a net income statement on earnings per share, diluted earnings per share was 26 cents, at the higher end of the range that we had pre-announced and compared to 41 cents a year ago.

The next thing that I would like to talk about is awards for the quarter. It's very contrasting. I am going to break it down by division. HCD awards for the quarter, 241,355,000 versus 195,000 -- or 195 million 035 a year ago, up 46 million. The branch, 288,616,000 compared to a year ago of 512,727,000 which shows a whopping 224,111,000 decrease in awards for the quarter but I will have to qualify that by saying that also includes the backlog we picked up when we consolidated Wilder of $100 million so that difference without Wilder being in that mix is 114 or I should say 124 million versus the 224 that I just talked about.

Other information that typically is asked for and I will go ahead and provide it to you at this point, for the quarter we had additions to plant and equipment of 22 million 458. For the six months by the way, this gives us on a year-to-date basis 32 million 979. If we look at the year, we anticipate the capital budget is going to be 58 million 627 which is about 10 million down from the last time we had talked and we expect the depreciation for the year to be about 70 million.

With that, I will turn it over to Mark Boitano to talk about the branch.

Thanks Bill and good afternoon everyone. As I mentioned in our Q1 conference call, at about that time we experienced some pretty severe wet weather in the month of April that actually carried into somewhat May. Bill mentioned that but what this had done is created sort of a slow start up for our construction season in the branch division and our inability to really add what we may have added in the past in Q2. That rainfall in April was two to three times the norm in a number of our operating (inaudible).

The most significant issue I think has been the continued slowdown of transportation funding in the West. In particular as you are aware and as Dave discussed, the California budget crisis has had a direct effect on public spending. California remains the branch division's largest market area and in fiscal year '03, '04 the budget, while it's been finally signed, the long-term impact is really yet to be determined. Generally accepted assumption is there will be a further reduction in transportation spending in this current year and fiscal year '04, '05 could really experience more of the same.

When we learn what the specific impacts are going to be to the caltran's (ph) budget and contract lettings both this year and next, we will be better able to assess our market going forward. It's important to note that caltran's spending levels are a key driver to what's going on in our branch business.

At this point, we are anticipating holding to our 20 percent reduction that we talked about earlier from our results of last year. However, there are some indicators in the market that make us think this is going to be a challenge. As you have seen from some of the information that was released, the branch division's Q2 revenue and backlog were all down 20 percent.

The positive side, our aggregate sales seem to be holding at last year's levels and while we are experiencing softening in material prices, we are continuing to have some success in marketing our materials and in some cases, to jobs that we were the unsuccessful construction bidder on. We think it's a result of the quality control program we have in place and the way in which we provide services to other contractors, we being able to understand those contractor issues that are involved in supplying materials to projects and we think this gives us some special advantages over the pure material suppliers.

The economic downturn in transportation spending has continued to put pressure on our project pricing. We are resisting as best we can to bring the market down to any depth lower than we see them in some cases but overall, I think we have seen our margins decrease.

A couple of pretty bright spots, the Alaska market has had and is experiencing strong infrastructure spending. In that particular state, they found a way to counter the problems that have been plaguing some of the other states here in the West and portions of our central valley, here in California, while they have been impacted, there are some that are not experiencing the same degree of downturn that we have seen in our more urban areas that we work in.

I previously mentioned that our branch business has continued to position itself to take advantage in the upturn and bidding when it will and should occur and of projects that will result from that but at the same time, we are aware we need to manage our business during this period of reduced opportunities so we are making every effort to do so.

Gary, I will turn it over to you.

Thanks Mark and good afternoon. For HCD, I would like to cover new awards, low bids and backlog during the second quarter, a summary of our second quarter performance and really wrap up with summaries by region of potential work.

As far as new awards, the Woodrow Wilson Bridge project in Washington D.C., the $115 million project which the Granite -- a joint venture, which the Granite portion is 91.2 million and another project in North Carolina as part of a series of projects that we've been successful on, the I85 corridor, that project hit 66 million.

As far as low bids during the second quarter, Lake Fork Smith dam, phase two, it's a project I had mentioned last quarter, one that we were going after. It's right with our phase one project, a $53 million job and then a project at Granite Halmar, the Tatonic (ph) State Parkway, a $62 million job. So we are really encouraged about our low bidding opportunities.

As far as backlog, our current backlog of 1.4 billion is up sequentially and is a 37 percent increase year-over-year second quarter performance. Talking about our second quarter performance for this year, although this impact of whether I don't sound like a broken record, the reality is wet weather during the past six months has severely impacted construction work for heavy civil contractors who operate really under the threats of mother nature, especially up and down the East Coast. In fact, I was on some projects today here in the East where the guys were talking, they have not seen whether like this for 50 or 60 years as far as the impact to contractors. So it's just not Granite but contractors as a whole on heavy civil. This impact includes reduced revenue for the period which will be realized later in the project but often there are increased costs.

Another factor impacting the second quarter, although it's a good problem, is with the buildup of backlog, comes the delayed income due to the 25 percent of cost rule that we exercise. Bill Barton alluded to it earlier. It seems like we talk about it at every conference call but I wanted to point out to you the projects that we booked revenue but no margin in this quarter included the Reno retrack job, the Apron (ph) job at DFW (ph), the George Bush turnpike project, the Woodrow Wilson project, Amtrak in New York, the Concourse B project, the McAlpine (ph) lock (ph), the East West Freeway, the Belt Parkway, the I4, I275 in Time Square so you can see a significant number of projects, big projects that we booked revenue but no margin, but we will certainly realize it later.

We're forecasting to be able to hit the 25 percent hurdle on 4 or 5 of these projects which leaves the balance hitting -- into 2003 but leaves the balance hitting the 25 percent mark in 2004.

While we are mildly disappointed with the actual second quarter earnings for the heavy division, it's important to note that our mix of business both in terms of size and complexity, will produce a constant mix of project changes such as change orders. As Bill Barton explained, it's our policy to book these costs consistently and collect the revenue as they are resolved with the agencies. This is not a concern nor should it be indicative of any sort of trend. Overall, HCD operating income is expected to be strong with Granite Halmar on track to provide a positive contribution to our 2003 results.

Now, I would like to shift gears to potential work. In spite of a lot of general comments we tend to hear through the media, the number of projects that HCD is tracking continues strong with new projects added every month. I'd like to highlight some of those by region. In the Southeast, we are tracking a large design build project near Miami. The Carolinas have an ambitious schedule with one billion planned to bid over the next year. There are several large highway projects in the Tampa area planned for the next 12 months so we are excited about the Southeast region.

The Texas region, where we happen to be bidding five projects this week with many more planned for the balance of the year in Austin, Dallas, Houston and West Texas. We are encouraged with that bidding opportunity with both the traditional (indiscernible) procurement as well as what they call exclusive development projects that are design build. Both are planned for short-term and long-term. Our teams have been second on several projects over the past several months. Though disheartening to the Granite folks, we rebound quickly and they are continuing to work hard down there.

In the Western region, even with the difficulty that Dave Watts alluded to with caltran's funding in California, actually there are several key projects that will bid within the next year that have alternative funding, the State Route 22 project, the MTA Eastside Line, the Oakland People Mover and a light rail project in Oceanside near San Diego.

Coupled with the Western region in California, the Oregon DOT has a significant 2.2 billion bridge repair and replacement program that just got signed by the Governor along with several large design build projects. Of course, the Seattle Monorail and Sound (ph) transit projects we mentioned in the last call are on our near-term radar screen and we just committed to a joint venture team to bid on a large project in Portland. Our Western region is also following a light rail program that will be kicked off in Phoenix here in the near-term.

As far as Granite Halmar, our northeast region, our team recently submitted a large proposal for a design build bus depot. The oral presentation is scheduled for next week. There is a large bridge retrofit project in our pipeline there and several major mega-transit projects in the pipeline. So we are excited about -- continue to be excited about the northeast market.

Finally, on the national level, the Minnesota DOT recently announced three to four design build projects which we are following and committed to bidding. We've also teamed with lane construction for a large Virginia DOT project on the I95 route 1 near the Woodrow Wilson project. Oh, and I don't want to fail to mention the extensions for the monorail in Las Vegas, which is in the final stages of negotiation and is still subject to financing but we are optimistic about that project.

The above just touches the surface of projects we are bidding and tracking and really intended to give you an idea of the type of work available for Granite. I will be available to answer any questions later but I would like to now turn it over to Bill Dorey.

Thinks Gary. Good afternoon everyone. What I want to do is try to summarize what you've heard and put a little perspective to it possibly. Let's start with our branches in the West and clearly, our branch business in the West is challenged. It's generally a product of our state and local government transportation funding. And the difficulty that we have in providing you detailed guidance going forward is that we just simply don't know when this environment, this economic environment in the West is going to change or how long it's going to persist.

I would suggest though that there is another perspective to what's happening in the West and that is that while we may not be performing as we did during the boom times, we continue to perform pretty well, I think given the circumstances. Our branch system is really solid. It's very strong. I believe our people are squeezing the most out of this market and ultimately, the work that is being deferred will have to be done at some point that will be presented to us. Through this period, we continue to grow and expand our capabilities and certainly some of our geography in the areas in which we feel comfortable in campaigning and it is my opinion at least when this is over and this business cycle changes, we will come out roaring in similar fashion to what we did in the mid-90s when that business cycle changed.

Certainly our HCD business is in a completely different cycle and you probably hear that in Gary's presentation. We do have terrific bidding opportunities, besides that business continues to grow fast. Performance continues to improve and we expect that it will improve next year as well and that's very exciting. Our operating income, in looking in 2004 from HCD will grow as we harvest the economic crop associated with our larger business. As Gary said and I think a year ago, we were a little bit back on our heels relative to our New York business and we are really pleased to be able to report that that's tracking as we had expected and we do expect a positive contribution from that business in 2003 and hopefully, a significant positive contribution in 2004.

So kind of to wrap it up, it's a little difficult at this time to be able to tell you when our branch business will turn around but when it does, the Company's overall performance will step up to another level. Our HCD business has already done that. Once again, it's very difficult to try to look into 2004 at this time. Our 2004 expectation for HCD is that it will perform better than it is performing in 2003, which is very good and that we are hopeful that our branch business will hold relative to -- our 2004 performance will hold relative to our 2003 performance.

Let's talk a little bit about acquisitions. We continue to keep our ear to the ground and looking for opportunities that make economic sense particularly relative to our materials business. We are continuing to try to build a business that will be stronger tomorrow than it is today.

I want to mention one other thing and that is just the bonding environment we find ourselves in. That environment is really changing. It's difficult to get bonds on large work for a lot of people and if you want to get in the game in some of this large work you have to have a really strong balance sheet. We're very fortunate to be in a position that a lot of competitors are not relative to the strength of our balance sheet and financial strength of our company and that is one of the things that is really driving our ability to be in the game that we are in with this larger work. It's really become an asset, more of an asset today than ever before and we are really proud of that.

Lastly, I want to thank our employees for the commitment you make every day facing some difficult times in some of our markets and for doing the extraordinary things that keep Granite on the move, growing and strong. And I will turn it back to our moderator for questions.

(CALLER INSTRUCTIONS). Richard Rossi of Morgan Joseph.

Good afternoon everybody. Just one on a statistic, can you give us the tons of aggregates sold this quarter and what it was last year this quarter?

We don't have that information in front of us. We will be happy to --

I will get back to you on that.

--get back to Jackie and we will get that for you.

Rich, if the volumes are up -- if our dollar volumes are up a little bit, I would suggest that the revenue per ton is probably pretty similar to what it was a year ago, so that would indicate the tonnage is -- it may be up just a little bit.

All right, so you haven't -- so the second-quarter results really didn't see any impact from the price competition you referred to in your comments or not much. Let's put it this way, will there be more of an impact via pricing in the third quarter than there was in the second?

I do not know that we know Rich. That would be information that we would need a supercomputer to figure out.

(laughter) Alright.

I think what we are seeing from the numbers in a macro sense over all the various markets that we work in, the materials business seems to be holding its own relative to pricing. We are under pressure a little bit in a few places but generally speaking, we are reasonably pleased with that part of our business.

Alright. Could you give us a little and I know you are not going to give us the numbers, but could you give us a little direction as to the impact on earnings that the weather had versus HCD shortfall? Some guidance there? And again, I know I am not going to get a number.

I'm not even sure I know how to answer that question. This is more of a -- it's more of a sense that we know we had the weather. We know it's costing us money. We know it impacted our ability to get off in the West particularly to an early start, a start that we would normally get. And it impacted our ability to do work efficiently in the second quarter. To put a dollar value to that I think would just be a guess. I am sorry.

You also mentioned that the weather or it sounded like you were mentioning the weather here on the East Coast and certainly I am looking out my window and five minutes ago at least, it was pouring, is affecting the third quarter. Is that something that is just a recent occurrence or I don't really track the weather in the rest of the states as much as I do looking at the West, but has the East Coast or the Southern part of the East Coast suffered a lot in July weather-wise where we might have another impact in the third quarter, another delay?

Gary?

There has been a couple of projects Rich without question, that we continue to battle wet conditions. A good example is it's a smaller project down in Florida but we've been trying to build an embankment that feeds a bridge. Of course we can get the bridge built because structure work is not as --

Right, right.

However, earthwork is highly dependant on drying conditions, making (indiscernible) compaction and if you get rain every day, you end up fighting it. And a lot of times it's just a time impact or delays the job.

And it does cost something because maybe you have the men on the job.

Yes, and you have to fight the rain conditions. Back here in DC on our Largo project with our joint venture, about 90 days impact over the last 6 months.

Right, right.

Yes, we would like to see -- and it is not in all projects. If there are heavy in structures, you don't see as much impact. It's more are the ones that are more earth, embankment and excavation.

Now, let's address the question, the obvious question where there are no answers and that's California. You are holding to the branches -- as of now at least, you are holding to the branch business being down 20 percent for the year. You did caution that that's going to be a tougher path than you may have thought originally. The budget cuts business, cuts spending overall in transportation 50 percent and you are going to get a half a year impact on that. Now, is the work that's being most affected by these budget cuts evenly distributed between what you would do versus what you normally don't do? Is there any mix here that either helps you or hurts you?

Let me see if I can help you a little bit there. Until the state gets their grip on what they are going to do with the money they do have, it's a little hard to answer this question but I can tell you typically what we've seen in the past and they will try to get a little more mileage out of their dollars by doing more maintenance related projects, pavement preservation type projects as opposed to say new alignments, new construction projects. That beats better into our system than if they went the other way around so we are hoping that that will take place with the amount of reduced monies that are available but short of -- that's my opinion and short of what really happens depends greatly on what the state decides their priorities are and what they're going to do with the dollars that are available to them.

At this juncture, is there much reason to be hopeful about '04's California business being no worse than '03's? It's seems to me if the budget resolution continues as it has, that's going to be -- it is going to be a horrendous year in '04 and you are going to have a full year impact of it where you only had half of a year or you are only going to get half a year this time?

I'm not sure I would agree we only got half a year. It's been pretty tough since the beginning of the year but we are hopeful that we can hold our own relative to 2003 and 2004 in branches. We don't know we can do that. That's our hope. Certainly, there could be some downside, Rich. But I just don't know that we know. I don't think we can sit here and try to predict that at this point. Rich, I don't mean to cut you off but we probably have to let somebody else --

Yes, I was just going to say thank you and I will get back in the queue.

Alright, thanks.

Michael Cristollido of Inwood Capital (ph).

Good afternoon gentleman. On the 52 million of revenues that are below the 25 percent completion threshold, can you give us a sense, is that 11 percent gross margin business or 13 percent?

We typically don't break that out. We use generally a reference of about 10 percent to give you a sense of what the dollar value is.

Okay. You indicated some of that is going to fall in the third quarter. Have you got a schedule over the next two or three quarters that you could give us guidance, when would that 52 fall into the over 25 percent threshold?

Gary, most of that is probably HCD stuff. Can you help him at all?

As far as the time frame, I looked at it last night. I guess I don't try and put it month by month. I would like to say a good share is going to hit yet by the end of 2003 but to give guidance as far as whether it's going to hit the third quarter or exactly hit the fourth quarter, I don't view it that way. We don't manage our business that way.

It may help if I could clarify exactly what that number is. First of all, I want to apologize because I said Chris and I meant Mike but that 52 million represents the amount of revenue that was recognized for work less than 25 percent during the quarter. So it's a period focus and it is comparison to a period in the prior year so it's not necessarily representing the total contract value of those jobs under 25 percent.

I understand.

So it's a relative measure as opposed to an actual.

Very good. On Halmar being profitable in '03 and more so in '04, is it still the expectation that that ought to be a double-digit gross margin business?

Double-digit --

Greater than 10 percent?

Gross margin percentage you mean?

Yes.

Gross.

Yes.

Very good. Thank you.

Steven Zeppelin of Bear Stearns.

Good evening everybody. A quick question, if you could help me just understand something. I realize that the weather affected the branch revenue and earnings this quarter. Why then the aggregate sales seem to be up fairly dramatically or a lot versus last year. Why are the aggregate sales up whereas the branch, the other component of the branch revenue is down? Given the wet weather.

Okay. The question Mark was given the wet weather, why is the materials business performing as it is if the balance of the business is not performing?

Typically, our materials businesses don't kick in, in the early part of the season. There is preparation work that's done when jobs began while it was delayed, we're still, I guess and again this is conjecture on my part, I'm assuming we are in a position to accept materials later on in the quarter and we are selling more materials outside this time of the year than we have in the past as opposed to our internal sales. The comment I made earlier is that we are having a pretty good success selling materials to our competitors even when we are bidding some of the same jobs they are bidding so I'm not sure if that answers all your questions but those are my thoughts.

Good answer, thank you. This is a question for Gary on the HCD side, you had mentioned a laundry list of projects last quarter which I appreciated. What of those projects, which ones are you currently chasing still and which ones have you won on a qualitative basis, not exact?

I mentioned the Lake Fork Smith job in the previous conference call, is that what you are referring --

Yes, the previous conference call, Q1.

Yes, we had picked up Lake Fork Smith, the Tatonic (ph) State Parkway. Some of the other projects that I mentioned during that call, obviously we're still chasing. Some of those are long-term. They take a year or so because I tend to hit a lot of the bigger ones that are design build but they take a long time to go through the process. So to say if I mentioned it then that we bid it in the second quarter not be accurate. So some of the ones in Texas I mentioned we are bidding, well yes, we are bidding them this week. The one in North Carolina I had mentioned. Well, we get that awarded.

Okay great. Thank you.

Let me add to answer an earlier question that Richard had as well as maybe a follow-on to one of the questions that was just asked, in terms of aggregate production only the numbers we just received here for the first six months, in '03 we sold 8.6 million tons of aggregates as compared to 8 million 250 in the prior year, so that variance of about 400,000 tons will give you an idea of year-over-year for the six months, what we've done in our materials business.

Fritz von Carp of Sage Asset Management (ph).

Good evening. Stepping back for a second, it seems to me if I look at the numbers and tell me if I'm wrong, a good amount of the backlog growth is coming in New York from Halmar where you bought -- made an acquisition and have been growing in one of the better markets. To do that, it seems like you've -- there are these change orders which are kind of I guess sort of normal issues and risks on this more complicated kind of work you are doing there. Should we expect that as you've sort of made this step up in growing the business that we are going to see more of this sort of bouncing around in the risks to the profitability going forward? Is this something, in other words, that we should expect now that you are in this, doing the underground construction and the signal work and being involved in those kinds of projects, subcontracting or whatever, that this will be a sort of something we should learn to expect?

Let me answer it and then Gary can correct me if I am wrong. I don't think so. I think that we had an unusual amount of that work that just came along, that seemed to have come along in the first part of this year. We felt it was worthy of mentioning because it did seem to be out of the ordinary given sort of our history. I do not think that because of what we are doing in New York, that this is going to change dramatically or even significantly this aspect of our business particularly. Gary you may have a different --

Yes, as far as your summary, of our 1.4 billion that New York market represents maybe 30 percent of that so it's not the majority by any means and actually of the change order impact, there is one project there that was maybe seven, 800,000 but actually it's change orders on some larger design build projects elsewhere.

The change orders are not in New York? Oh, okay.

That's correct. Like I made in my comments earlier, it's not necessarily a trend that you would expect. Often times these change orders are owner directed changes where the owner said you know, I want to add this to this project. And this is a good time to do it. I have the funding and this is a good opportunity to add this feature to the work that we did not think about before.

Right, right. Okay.

See you need to agree on a price and while in some instances it may be dispute work, in some instances it may be something different so you can agree on a price and execute a contract and we don't book that revenue. Some of this by the way, I wouldn't go so far as to say it's disputed but there is some disagreement as to what it's worth and that holds up the process.

Right, okay. And the outlook -- on a different topic, HCD has somewhat a better outlook relative to branch obviously that you are seeing in the heavy civil division. Is it right to think about this as basically we are starting to -- the impact of T21, the 98 bill is what we are seeing or have been seeing for maybe a year now or something like this is a larger -- these bigger projects that were designed sort of with the T21 money in mind, rolling out. Is that how we should think about what's happening in the big project market?

Yes, a lot of these projects have been -- they've been on the agency's books for some time. They got funded by earlier dollars. That's one of our advantages that these are projects we have been tracking for a year, two years and three years because they have been in that long-term pipeline. They take so long to come to fruition but the fortunate thing is they tend to balance out some of the up and down cycles of these funding issues.

I think there's no question that Gary is correct but it's also the fact we made the move to go into New York and expand the business as well, so we are now reaping the benefits or are in a position to reap the benefits from that move, as well.

Okay thank you.

Bob Lavick (ph) of CJS Securities.

Good afternoon. I don't know (inaudible) projects that were not involved with change orders, were they up or down this year?

I'm not sure we heard that. Could you speak up please?

I'm sorry. Margins for HCD projects that did not have a change order, were they up or down for the year just in general?

I don't think we really break it out that way so I cannot say we can answer that question in the form you've made it. BOB LAVICK: Okay. I'm just trying to get a general idea obviously but -- The next question would be in terms of the decline in California sales, was that more weather-related or was that also impacting the budget already?

I would say while the weather was a major computer I think as Bill mentioned earlier, I think we have been feeling the effect of what is going on from a budgetary standpoint before the entire year so there is a portion of that that's related to the budget issues here in the state.

Okay, thank you very much.

Paul McCrae (ph) of Wellington Management.

Good afternoon.

Hi Paul.

Can you help me? I may have missed the exact definition of what the large capital gain was in the quarter. You sold a security, what did you say?

We had had about 15 percent interest in TIC --

The TIC out of Steamboat Springs?

Out of Steamboat Springs and we sold one third of our stock that remained and we had a $1.8 million gain on that sale.

So that leaves you with 10 percent of working interest left?

Approximately. It will probably accrete because they continue to buy stock in from other shareholders.

Okay fine. Could you comment a little more on the minority interest situation where you had a shift from a charge in the first quarter, I believe to a credit suggesting that you had a minority interest in a business that I gather lost money? Is that correct?

Umm--

I believe my figures have you with 1,042,000 in (indiscernible) credit income for this year.

For the first quarter?

Second quarter.

Second quarter. Well, we have expanded the application to include additional entities that are beyond Wilder which includes developments that fall within our Granite (ph) land company and to get into the details at this point I would have to look into it.

I see. But in terms of modeling earnings, that was quite a shift from the first quarter to second quarter. Is there any way to give us any guidance as to what that might look like going forward?

We will attempt to do that but what is also happening is, I don't know if you're familiar with FASB 150?

Yes sir.

That is changing how we will be reporting minority interest when it comes to Wilder so any information or guidance we give you now it may change when that is implemented in the third quarter.

Okay.

So I am a little reluctant to do that but I would be glad to get back to you on it.

I will be out to see you soon anyway so we can get it out then.

Okay.

Thank you.

John Rogers of DA Davidson.

(No response)

Your line is open, please go ahead with your question.

I'm sorry, can you hear me?

Yes.

Good afternoon. Just relative to the margins on the heavy construction side, do you expect that you will continue to be running at about that $52 million of projects that aren't contributing margins for the rest of the year?

I think it will increase and as these jobs go over 25 percent as I think Gary has talked about, that four or five that will go over 25 percent before the end of the year, that will decrease that amount.

But Bill won't you have additional projects coming in?

Correct and I cannot say how exactly I think it will end up at the end of the third quarter in terms of when these things will add to or subtract from that number.

It's a little bit like a rubix cube you know. It is pretty hard to try to dial that one in but let me give you this from the standpoint of sort of a macro -- if the revenues in HCD continue to grow, that's a product -- the size of that business is growing and the number of jobs in that -- in their backlog growing and as long as the size of the business overall continues to grow, the number of jobs that are less than 25 percent will continue to grow, so you sort of have that disparity. Its sort of a product of growing the business but it's a good problem to have. Because at some point those kick in and kick over to 26 percent, we recognize that margin. If the business just ever stayed the same at some revenue level for two or three years, then you would see that level out.

Right. But in other words then, we can see some margin improvement but we aren't going to see margins gap up, especially -- it looks like that business is going to continue to grow at a pretty good clip.

We certainly hope so. My belief is that margins in that business will improve a little bit. I don't know how much but a little bit over what you've seen in the last say twelve months or certainly the last 2 years. There is a certain limit that the market is going to allow us. If you look back, I don't know if I should even provide you with this but if you look back over time let's say 10 years or so -- am I getting a single that (inaudible)

No, you're fine.

You are fine. You are fine.

These guys are giving me the (laughter)thumbs down or thumbs up here. If you look back over a ten year period, gross margin on revenue has been in excess of 11 percent pure and probably in the 12 percent range. Can we duplicate that with a larger business? We sure hope so. That's our goal.

Okay. And then just one other quick question I guess for Bill Barton, what was depreciation in the quarter?

Okay. In fact it'll give me a chance to correct something I said earlier. The depreciation for the quarter was 15 million 576 and when I gave you the CAPEX for the six months, I gave you actually depreciation for the six months which was 32 million 979 but that's depreciation. The actual CAPEX for the six months is 42 million 597.

42 597 and you expect that to be about $70 million for the year?

We expect the depreciation to end up about 70 million. We look at the CAPEX which includes in this case, both Wilder as well as Granite, it would be around 59 million.

Okay great. Thank you.

Todd Vencil of BB&T Capital Markets.

Ladies and gentlemen.

Hi Todd.

I want to dig in a little bit first of all you’ve said you expect to recognize (inaudible) the profit from the change orders when they occur. When ballpark, might they occur? Is this next quarter, next year?

They are not all the same kind of issues so certainly, some of them will get resolved in the next quarter no doubt and some of them it may take a year. I know that is kind of a waffle answer to your question --

But sometime between a quarter and four quarters probably?

Gary, I think I'm going to let you --

Well yeah that is as good as it gets that we can make and like Bill alluded to, it's a factor of the agency, it's a factor of the issue --

But not 8 quarters for instance?

Oh, no, no.

Can you guys -- I guess you told us the amount on the one that was in Halmar with 7 to $800,000 and you indicated that was a relatively small fraction of the total amount. I mean, could you just tell us what the estimated total amount of the change orders was?

I don't think we would like to do that.

Okay.

We shouldn't do that and the reason is we would be speculating relative to how much we are actually going to collect because some of those issues are in dispute. I just don't think we ought to go there.

Okay, alright. With regard to caltran's budget, you said you would have a better handle on it once they got their budget together and announced what their lettings are going to be. Do you have an indication as to when that's going to be?

The California transportation commission meets on a quarterly basis so I suspect we'll get, hopefully get some clarity at their next meeting which I believe is in September. But until that happens, or until we get guidance from caltran themselves, I can't definitively say what they are going to tell us.

Could be September though?

I would say at the earliest, yes.

Everything else has been asked and answered, so thanks a lot.

Thank you.

Richard Friere (ph) of Delphi Management.

Good afternoon. Just looking at the margin degradation, am I to understand I have been in and out of this call, but the margin degradation is all due to the booking rule where you book revenues right away and profits only get booked once you've got 25 percent completion?

I don't think it's quite that definitive.

Can you flush that out a little bit more for me?

All we're suggesting is that it was a piece of the puzzle and we always have issues that are unresolved or in dispute that fall into that category. We always have that. Some of them we resolve in the quarter and they come in and some of them become unresolvable in the quarter so it affects us that way. What we found when we were looking at this year, we just stepped back and looked at our issues we have outstanding and we said we have more of this stuff going on right now then we have seen in a while. It's worthy of just mentioning. I don't think -- I hope you don't make too much out of it. We just felt like we ought to mention it because we feel like it's a little out of the ordinary. The prior caller I think asked how long will it be before its resolved. Hopefully within 12 months or so that most of those issues would somehow reach some resolution.

Right. So in future quarters, your margin will look a little bit better once this is resolved?

Yes, I think that's what we are saying. We are going to get the positive impact if we can resolve these to our benefit, we will get the positive impact of this situation at some point. That's what Bill said, there's no downside to this policy. At this point, the only thing that can happen is we get the benefit of these resolutions when they occur.

Alright. It's just a little shocking to see your revenues up a few points and your operating income down 40 percent. I'm just trying to make heads or tails of that.

Hopefully, we've made people -- we've made people aware if you didn't already know, we are struggling out West with what's going on with our branches. We have been impacted by what's happening with these transportation budgets and we are just hopeful we can hold our own in the West going into 2004. It's sort of beyond our control frankly, and it's very frustrating because if we had been able to line both of these business’ up the same time they would really produce.

Alright but you are still confident in your business plan and comfortable with you how you do things?

Absolutely.

Okay thank you.

Jaime Stalbaum of UBS.

Yes hi. Actually most of my questions have been answered. I just have two things. On your last conference call, you had said that you expected HCD earnings to be double that of last year. Would that still be true, hold true now?

I think we in fact said we expected HCD earnings to be double?

At least double.

Yes, I think we said at least double and I don't think that's going to prove to be true. And interestingly enough, we had a job in the forecast that we now realize it will not (inaudible) large job we're starting. I'm not going to tell you which one it was. That would not be appropriate but when we pulled that one out, it made it to where we would be unable to double last year's operating income. It's not simply -- I don't want to leave you with the idea that it’s the product of bad performance, some of it is timing. In this instance, one of these larger projects just is not going to make the 25 percent and that's what's causing us for the most part, to not meet that.

Okay.

The other side of that equation is just like the prior caller suggested and that is that at some point that job gets to be 25 percent done and so we get the benefit of that probably in early '04.

All right, okay. All right thank you. And then on other side, the branch business with all the rain early in the quarter and I guess, assuming that let up a bit now, do you see pent-up demand flowing through in the third quarter or if you could talk about that?

I think we're trying to describe the picture that we find ourselves in in the branch operations in so far as yes, the work that did not get built in April and May will get built in a later point in time but we are not seeing the replacement for that work come in at the same rate that it has in prior years so while the short-term answer to that is yes, we get to build that at some point in time but our biggest problem is we are not seeing the replacement work.

Okay and then just one more question. Did you give the amount of earnings that was associated with Wilder in the quarter or the comparable versus year ago?

No, we haven't broken that out. We've broken out revenue and I think -- well, primarily just revenue.

Do you have that number or no?

We have it. You have to remember that the comparison is year-over-year is the same now except for it's two months versus three months and they are having a similar year.

Okay, thanks very much.

Richard Rossi of Morgan Joseph.

Can we go back to the 25 percent completion for a moment? You said you couldn't break out between third and fourth quarter what kind of flow you might get. Can you break out for the second half in '04 how many projects or what is the dollar value of revenues that you will have booked to date? Will profits be accumulated in the third plus the fourth quarter and how much of those revenues will end up registering in '04? I'm not making myself clear, I know.

You're asking I guess the fact we said there are four or five contracts over 25 percent in the heavy construction division, what the volume of that at 25 percent.

Exactly, very good. Thank you.

What the earnings are that are going to fall out from there.

Right.

Now that I paraphrase the question, I do not have an answer for you.

(laughing) I thank you for bailing me out on the question at least. Is that something we might be able to get later? In a follow-up call.

We certainly will look at that and see what we can do.

Okay and one other minor issue, I noticed interest costs were 2.5 million in the quarter. They were 2.1 million in the first quarter. That's up slightly I think 2 or 3 million. What accounts for the relatively high jump in interest costs? Is that short-term debt?

It's a combination. If you look at what's there today, we have Granite, which now has essentially private placement outstanding and the difference really in terms of the additional short-term or long-term is Wilder. That's kind of the formal differential we see from time to time. I don't think there's anything specific that that represents.

Alright. Okay, thanks a lot.

Fritz von Carp of Sage Asset Management.

Yes, I was thinking about federal funding. If we could just talk about that for a second. And sort of if we think about the trajectory of highway spending has been on the -- the state issue notwithstanding, has been on a -- in the late '90s and almost into the 2000s, was on a pretty steep trajectory as the Feds ramped up their support for highways. The designers, the big designers like Parsons Brinker Hoff (ph) and URS (ph) are going around saying they see -- that that trajectory is going to flatten out at least for the next sort of foreseeable several years and I was wondering -- you are enjoying after the normal delay that these things go through, you are enjoying the fruits of the 98 bill now in HCD. And I was just wondering how we can think about in general, the curve of highway spending looks over the next decade and are you of a mind with the big designers or do you have a different opinion?

I think we are on the same lines. I think the money appropriated in this last fiscal year was roughly the same as the prior year and unless they do something about the federal gas taxes, increase them, replace or increase the methanol portion of them, some other structural things like that, I can't see it increasing much. It will probably stay flat and probably at this stage, we would think that's a victory to get an extension of T21 at the same appropriated levels for the next two years.

Okay thank you.

It's a pretty good level.

Sure, sure it is. Thank you.

We have no further questions in queue at this time. I would like to turn the conference back over to Mr. Watts for some additional comments.

Okay, thank you all again for your very good questions, your attentiveness and interest. Certainly we will be available over the next hours and days for your individual questions and we appreciate the interest. Thanks again. Bye.

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