Granite Construction Inc (GVA) 2003 Q3 法說會逐字稿

Good day and welcome everyone to the Granite Construction third quarter 2003 earnings conference call and webcast. Today's call is being recorded, and there will be a playback of the call that can be accessed either on the Company's web site or by calling 719-457-0820 and entering pass code 591121. Again that phone number is 719-457-0820 with a pass code of 591121. The playback will be available beginning at 5 PM Pacific time today through 5 PM Pacific time on Wednesday, November 19th.

(OPERATOR INSTRUCTIONS). At this time for opening remarks and introductions, I would like to turn the call over to Ms. Jackie Underdown, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon. Welcome to Granite Construction third quarter 2003 conference call. Joining me on the call today is Chairman and CEO, Dave Watts; President and COO, Bill Dorey; and Senior Vice President and Chief Financial Officer, Bill Barton. I trust you have had the opportunity to review this afternoon's earnings release, which provides detailed information on Granite's results.

Before I turn things over to Dave, I would like to caution all participants today that today's call may contain forward-looking statements reflecting management's beliefs and assumptions regarding future events, based on the best available information. Listeners are, therefore, cautioned not to put undue reliance on forward-looking statements as they are not a guarantee of future performance, and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from forecast. A more detailed description of these uncertainties and risk factors are provided in our most recent filings with the Securities and Exchange Commission, which encourage each of you to review.

With that, let me turn the call over to Dave Watts.

Thank you, Jackie. Well certainly the third quarter was a very pleasant surprise to us. It came out much stronger then we had anticipated, and that we had indicated to you a couple of months ago. And the strength of the Branch Division result was certainly the basis for that, which its very pleasant revenue was down and the gross margins were up, and that is always a nice trend.

However, the specific job results in HCD, the Heavy Construction Division, even though the reasons for their lower results than we had anticipated were very complex, nonetheless, the overall result was adversely disappointing. But the Company's results for the quarter was certainly strong and we were very pleased.

Bill Barton will give you some of the attributes to these numbers, and then Bill Dorey, as Jackie explained, will talk to you about the operating results. And then I'm going to follow up and talk about what is happening at the federal and state level of transportation funding. And then most importantly, get onto your questions.

So Bill Barton, if you could perhaps address the numbers and the attributes.

Thank you, Dave. Good afternoon everybody. My financial focus is going to be on the quarter. And I will be giving a combination of attributes, as well as some numbers, as I think our press release got out a little bit late and some of you may be without it. The total Company revenue decreased slightly 3.5 million to approximately 580 million. HCD revenue increased 20 percent, or 30 million to 183 million. The Branch revenue decreased approximately 34 million to 397 million, including Wilder. And if you look at the Wilder increase of 10 million, you can see the remaining part of the Branch Division is down approximately 44 million, or 12 percent.

As we move to gross profits for the quarter, it was 82 million versus 77 million a year ago, or a $5 million increase. Gross profit margins were 14.1 percent versus 13.2 percent, slightly higher. And in terms of the attributes, I will come back to this when I talk about the operating income discussion by market segment.

Turning to G&A, the G&A for the quarter was up $2.4 million, almost 6 percent. The increase is associated principally with two items. One, we had higher prebid cost this quarter versus a year ago. And then we also had higher variable compensation due to higher income in comparison to the period in 2002.

Looking at operating income by division, the Branch Division performed much better than expected, as I think Dave mentioned, and in a very difficult marketplace. And in terms of the operating income for the Branch, the 2003 quarter is $48 million approximately versus 42.8 million a year ago, an increase of about 5.2 million.

If you look at HCD, the operating profit is lower then a year ago based on lower profit forecasts on several Heavy Construction Division projects that have not performed at the level we had anticipated in the past. HCD operating income for the period is 4.9 million versus 6.7 million a year ago, a decrease of about 1.8 million. Bill Dorey will provide some additional comments later on the call.

As we move down to other income, just to talk to some of the differences. Interest income of 1 million 145 versus 2 million 122. This year we had a lack of a tax (indiscernible) look back interest credit that we had last year, so the interest was lower at this time. Interest expense is about at the same level. Gain of sale of 3 million versus 939,000 a year ago. We did have a property sale during the quarter that wasn't in last year.

Other net essentially is representing a lower equity income from investments. Some of it associated with our Granite Land Company and other types of investments. The total is 1 million 638 versus 1 million 652, essentially the same between the two quarters.

Now we're moving down to net income. This is where it gets a little bit more interesting, as this quarter, with the new pronouncement called SFAS 150. It is a new accounting principle that is effective for the third quarter for Granite. And what I will provide really is a Reader's Digest version of the rule. And 150 is titled, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, which sets the standards on how to account for this particular type of event.

And our impact is associated with our majority interest investment in Wilder Construction, which is consolidated with Granite. It is a result of where Wilder has an obligation to repurchase certain founder shares upon a termination event, such as disability and death. And so the amount of the obligation is transferred from equity to long-term other liabilities, and at that point is consolidated into Granite, so we would be showing it on our balance sheet in other liabilities as well.

And then you have a second event that takes place, and is one that shows up on the income statement, and that is the cumulative effect of the change in accounting principle, which is an after-tax impact, and that is the $5.1 million that is represented. And that really represents the increase -- our percentage of the increased value of the difference between what was paid for the stock and what the current value of the stock is. And that forms essentially what the value was as of 7/1/03. And that it is represented again by the 5.1 million, or what the cumulative effect for the whole period.

And after that period of time there is another cost impact that is shown in interest expense ongoing, which again shows the incremental value increase in those certain shares. And for those shares the minority interest would -- amount for these shares would do to zero. So you have several impacts to the basic financial statements. And if you are looking for a further discussion that might get into more in-depth characteristics of the accounting and the technique, I would suggest you might give me a call, and we can spend some time afterwards.

The impact of it for the quarter in terms of net income are diluted income before this cumulative of effect of 60 cents, which is 3 cents higher than a year ago. The cumulative effect of change in accounting principles were 13 cents, so the net income is at 47 cents. Again, the effective tax rate is running at 36.2 percent, as it has in the past quarters. And I reanticipate that tax rate to continue.

Now turning to the revenue and backlog analysis by market sector and geographic area that you should have received. The first comment I would like to make, which supports certainly the job well done by the Branch Division. Aggregate sales are up 13 percent or 8,244,000.

Secondly I think one of the interesting comparisons in terms of California -- although you can see that California is up $3 million in terms of its backlog, you can turn to the revenue and you can see us down 36 million. And it reflects the fact that the revenue is a better indicator of the downturn in business in California, and the importance of our turn business, both short-term work, as well as materials that aren't necessarily found in the backlog.

Moving down to backlog by market sector, the other question you might have is private is up from 142.8 million in 2002 to 178 million in 2003. And that really represents one contract, and that is Amtrak in New York. And that was booked in the first quarter. And the value of that award was 56 million.

And with that, I think I will turn back to -- or turn it over to Bill Dorey, who will carry on from here.

Thanks, Bill. Good afternoon. I will talk about both divisions and try to provide some perspective as well as a little color relative to what contributed to our third quarter results, and provide you with some insight into what we think are two very distinct businesses.

I'm going to start with HCD, our Heavy Construction Division. Looking back on 2003, I characterized this business earlier this year as very strong in building momentum. Certainly it has grown in size. It is almost doubled in size over the last several years, and it does continue to build momentum. However, we're not on track to achieve the operating income goals that we had expected early earlier in the year for various reasons.

The first is we did have some weather in North Carolina and Florida, certainly impacted by the hurricane that went through there recently. But what I think is really happening is we're building this -- as we build the size of that business certainly this last -- in the last six or eight months an increased volume of projects booked, some of which are not going to be recognized until next year.

But I think probably the most important element is that the number of jobs that we have that are underperforming are exceeding the number of jobs that are over performing. Now if you look at -- at any point in time if you look at our portfolio of projects, we going to have jobs that are doing better than we expect, and we going to have jobs that do not as well as we expect. And over these last few months, really this year, we have simply had more jobs underperforming than overperforming, and we haven't been able to make up for those underperforming projects with jobs that are doing better than we had expected. And we're disappointed with that.

I want to make sure that you leave this call recognizing that this is not a product of what is happening in New York, and it is not a trend of any kind. Our our enthusiasm for this business continues to be very high. But kind of looking back, I think, we were probably a year ahead of ourselves relative to achieving the results from this larger business that we had expected.

We believe right now that we are very well positioned for an earnings performance increase improvement in 2004. The large projects, our large projects that we are chasing remains robust. We continue to pursue a staggering list of sizable projects around the country.

I'm going to mention two recent awards. One is a transit project in Philadelphia. It was in our release -- mentioned in our release. It a septa (ph) project. It is a $96.4 million project. It is an important project for a couple of reasons. First off it is a big job. But number two, it does provide us with an opportunity, we think, to be able to spud in some in the Philadelphia area and pursue other work in that area.

The second was not mentioned in our release, our third quarter release, but it was mentioned in a release a couple weeks ago, and that is a second phase of the Las Vegas monorail. It is about a $200 million project. It is not part of our backlog at this point. The funding is not yet in place, but we remain pretty confident that that is just a matter of time. And that we do expected to begin work on that project in the second half of 2004.

So in summary, while we have made been a little bit ahead of ourselves in what we were expecting this year from HCD, we do expect that 2004 should be a better year for HCD. And we are looking forward to a significant contribution from that part of our business in 2004.

Our Branch Division, as I think most of you know, consists of 11 branches in the West. And most of those businesses are performing to date at a level that is down from last year. And it is clearly a result of n economic forces. It has pretty much impacted the whole system to some degree.

However, we have had good weather. We have had a reasonably active private marketplace. And frankly, not all of our businesses are being affected the same. We have some that are being affected quite a bit, and we have some that are being only slightly affected. And as a result, the system is frankly performing better than we had expected.

I'm going to give you some statistics here relative to our materials business and our construction business in the branches. In an effort to try to paint a picture that we seem to be -- well obviously we performed very well in the third quarter, and maybe this will help you understand a little bit of that.

In our materials business as a percent of revenue, not including Wilder, our revenues were up for the third quarter and for the year to date at approximately 12 percent. Gross margins were down 15 percent year to date, but only down 5 percent for the third quarter. And I think the picture I'm attempting to paint is that our materials business -- certainly the material going out the gate -- there's been a little pressure on our pricing structure, but it seems to getting better.

From a construction standpoint, our revenues were down 18 percent for the third quarter and for the year to date. Our construction gross margin was down 6 percent year to date, but up 22 percent for the third quarter. So while our revenues were down, as Dave alluded to earlier, the ability to extract margin from that smaller revenue, certainly in the third quarter, was quite a remarkable turnaround.

So clearly there is some improved performance developing in both our materials and branch division construction business in the third quarter. You know, what that means, I'm not really sure whether that is a trend that we expect to continue. I don't think that I put too much stock in that at this point, but it certainly is nice to be able to report that.

So how does that square with our year-end guidance? Our year-end guidance is $1.28 to $1.36 a share, and our year to date earnings is $1.12. That leaves 16 cents to 24 cents for the fourth quarter. It is always a difficult quarter for us to predict. We're certainly hopeful that our fourth quarter will be better than anticipated, but as you all know, I think it is very weather dependent, and we are predicting to have quite a storm rolling in the West Coast either Thursday night or Friday morning.

I think it merits maybe some explanation relative to what weather does to us in the West. Typically we get our wet weather in the winter in the West. It has a very different affect than rain for example in the summer in some of our other locations, because it is cold. The sun is very low on horizon, and it doesn't try out too quickly. In fact it doesn't dry out in the West in the winter time.

So in the summer in some locations we get rain, and it shuts us down for a day or two. But when we get a lot of rain in the West we're pretty well shutdown. So it is an element in the fourth quarter that is very difficult to predict.

I would like to take a moment to speak to our employees and thank them all for contending with the varying challenges that we faced across the country. It is not quite the same everywhere and the challenges are different, but they are never easy. And once again, doing what was necessary to extract the most that is reasonably possible from our markets.

And with that, I will turn it back to you, Dave.

Okay, Bill thanks. Well on the transportation funding side there is not a lot that is changed since our last call with you. The Federal Act T221 expired on September 30th, and Congress extended it for five months until the end of February next year. And that does allow funding to continue from the federal government to the states. That is the good news. The bad news is that it is certainly short-term, and doesn't allow the states to really plan on a program. They don't know what will take the place of this extended act and whether it will be a two-year or a six-year legislative program next.

There are really two issues that are keeping this from being an -- active on a long-term basis. Certainly the size of the bill and how that relates to what is a very large federal deficit has got to be the crux of the matter. So the other issue is whether they will allow gas taxes to rise. The House of Representatives wants the largest bill, and they want to index the fuel tax to inflation. The Senate is more modest in their increase. The administration doesn't want any increase in taxes.

The other issue is one that is a little off the sideline, but very important, and that deals with the ethanol subsidy. As you know, some states, particularly California, have used MTBE, and that is phasing out because of the environmental problems they found with it, and ethanol is phasing in its place. Well, ethanol gets a significant subsidy. It is not taxed at the same rate as gasoline. And so that would be a significant reduction in gas tax revenues.

The solution they are trying to put into place is to take this subsidy and really credit the highway account with that amount, debiting the same amount to the general funds. So it really puts the subsidy being paid for by the federal general fund. This is a big difference between the House and the Senate in the energy bill debate. That is where it is right now.

There's some progress this week. You might look for it. It is called a Veetec, V. E. E. T. E. C. provision. Very critical to both the energy bill passing, as well as to future funding for the transportation bill.

Now at the state level, California dominates the headlines, particularly with a state tremendously in flux politically. The Governor elect has said all the right things. If you look up his web site during his campaign there were some very positive things said about the need to continue transportation investment. However, at some point he and the Legislature are still going to have to come to grips with what is a very large deficit in this state. So we're not optimistic that it is going to change very dramatically or very soon in increasing the amount of money that Caltrans (ph) has for leading work.

It is very interesting to see. We did the analysis of the last three years ending October 1 of the year, of the number of Caltrans bids that we made, and the total of those bids as estimated by Caltrans, not by us. Two years ago those were 212 bids totaling almost $1 billion. A year ago it was 181 bids, down to $800 million. And at the end of the first of October of this year, 196 bids. Note that the change -- not much change in the number of bids, but the total dollar value has gone down to about 574 million.

So there is a significant reduction in the amount of dollar volume that Caltrans -- we would be a very typical, in fact, a very good indicator of the Caltrans leadings on a month by month, year by year basis. So we're not optimistic that it nis going to change soon. We think the state is going to be in for a good year of sorting out its finances. And that is why we are indeed very pleased with the way the Branch has performed in view of this environment that they are bidding in.

And so with that, I would like to turn the program back to our moderator to handle your questions and our answers. (OPERATOR INSTRUCTIONS)

(OPERATOR INSTRUCTIONS) Bob Lavick (ph), CJS Securities.

A question on HCD. Could you please be more specific on what geographies are having issues? And then what is being done to fix the problems? How long should it take to get back to more normalized margins? Obviously margins really suffered in this quarter?

On the telephone call with us, by the way, we have Gary Higdem, Assistant Manager of our Heavy Construction Division and Mark Boitano, Division Manager in our branches. So they may chime in to help out here with some of these questions.

I don't think this is a geographic -- there is no particular project that stands out that I think merits any individual discussion, nor is it that particular geography. It is simply, as I said, maybe Gary could provide some color. It is simply the fact of our portfolio projects, we have had a deterioration in several projects. And we simply haven't had a project step up and offset that deterioration to the degree that it was necessary to keep us from slipping on our expectations. I don't think it is a trend. I don't think -- frankly I don't think it is anything that you all need to be too concerned with, other than the fact that we probably were a little premature in expecting what we thought we were going to get.

John Rogers, D.A. Davidson.

I guessed just to follow-up on that (technical difficulty). I know it is still on HCD, but I guess, Bill, in terms of your projects, I know it is not a trend, but we have had some disappointments for the last couple of quarters and a year or so. Do you think it is an issue, or Gary, with the bidding or on the execution side?

Gary, you want to handle that, or do you want me to give it a whirl?

I can address it. I don't think it is so much on the bidding side. Although occasionally maybe you can have an estimate that you get a little aggressive on, and now you have to go perform. That might be one project out of thirty. But clearly from execution standpoint, as Bill addressed, we have had tough weather up and down that East Coast. That has clearly impacted the third quarter. I said it on our last conference call.

And we're not the only contractor happening to have that problem. And it has clearly impacted us. But what are we doing about some of the costs where our execution is not quite as good, and how do we overcome some of the weather? And we are addressing the projects across the board that we see some deterioration. And we certainly aren't happy about it, and we address it.

I would have to get job to job in terms of what specific steps we might be taking, because each one is different. If we had an issue on a project in West Texas versus one in Florida, one might be a road job, one might be a bridge project. There is different ways to address the projects that aren't performing to our satisfaction. And then of course there are other projects that are performing well, but maybe they could have performed better. So we are constantly striving to improve what we do.

I think is it is important, maybe this is sort of an important -- not too much policy, but what happens when we recognize that a job is deteriorating, particularly as we near the end of the year, we really work hard when we recognize a job might be not performing quite as well as we had expected to make sure that we don't carry forward any further deterioration.

So as we enter 2004, we will look really look hard at any of this work that we think is suffering a little bit and try to recognize as much of that deterioration that we can come, particularly stately within a loss position. And frankly I don't think there's any that are in that situation. And try to make sure that we don't carry any problems forward. So it is one of the things that we do to try to recognize our problems as we see them, and communicate that quickly to our investors.

At the risk of a follow-up, are you comfortable that you are through that process for 2003?

We really do that at every month, frankly, but certainly at every quarter. And we think so.

Fred von Carp (ph), Sage Asset Management.

To follow on a similar topic on HCD stuff, is there some commonality amongst these project that we're talking about that are below expectations as to when they were bid?

No, and this is Gary again. Two specific projects that I have in mind that probably had the toughest results are totally unrelated in terms of type of project, and actually when they were bid. They were probably two years apart.

It seemed like for awhile that you guys were sort of having -- maybe it was a year ago or a year and a half ago, you guys were having a surprising dearth of wins in HCD. It seemed like Key Whitney's (ph) people were winning most of the work. And then you are not coming in low, and then you started to win work. You were coming in low again. After you guys increased your cost structure to grow the business, is it possible that you might have started to bid too low?

I certainly don't address that because we don't change our bidding practice. We don't bid to our competition. We don't bid to the market. We bid to project. We address what risk and contingencies should be on a job, and what margin we expect, and hope we have a good, strong estimate.

So the turnaround in the win rate that we saw -- whenever this was -- eighteen months ago or whatever it was, you guys didn't reevaluate the types of cost estimates you put into your bids then?

No. We have been doing this -- I know I have been around HCD now for close to 20 years, and I have seen the markets change. But more importantly, I've seen our hit ratio change. There have been periods we have gone eighteen months and not get a job. Now that has been some time ago, back when we were the division was quite a bit smaller. That is not how we view the work.

I think it is also fair to say, and correct me if I'm wrong, Gary, but the two jobs that Gary was referring to in most part pretty much complete by the end of year.

That is correct, Bill.

Walter Landauer (ph), Landauer Capital Management.

I wanted to find out what impact, negative or positive, perhaps the impact the impact is different as to time, would follow from the fires in Southern California? On one hand you might -- I wonder whether the need for construction might be a real positive. On the other hand, maybe it has increased the cost of some work you're doing?

This is Mark. There's no reality impact here. We're doing some small emergency jobs replacing a lot of the guardrail that was burned up in some of the events. The base impact will be the state's contribution in terms of their cost to fight the fire and that impact on their already strained budgets. So how it may impact their abilities to fund some other work downstream would be my concern as the biggest impact. From a current basis, work that we have in place and/or impacts to that work, there is no impact of any consequence at all.

I think you could argue that with houses as expensive as they are in this state, and 3500 of them getting burned up the biggest impact will be on the insurance industry. How that comes back to effect us, I don't know, if at all.

The home builders will certainly do well out of it down in Southern California.

(OPERATOR INSTRUCTIONS) Tripp Rogers from UBS Warburg.

Any projects in the quarter that didn't hit 25 percent that were expected to, and may not hit 25 percent in the fourth quarter?

I think those that were expected to hit 25 percent did. And there was no lag going into the fourth quarter.

I don’t think there's any surprises. Certainly we have some that are going to carry over, in fact we have a number of them, but I don't think any of them are surprises, Tripp.

Just real quick, have you guys seen October results already?

We have not.

Alan Madrone (ph) from Copper Beach Capital.

Could I just ask a question on the aggregate business? It looks like you had good performance in the aggregate business -- was there any segment of the country or anything? Maybe you can talk a bit about pricing with within aggregates. Maybe you can break it up within residential, nonresidential. Just give us some color on that if you can?

If I understand your question -- this is Mark again -- in regard to what we see from a standpoint of what has happened in the aggregate business, is that your question?

Yes, please, but also if you can talk about pricing versus volumes in terms of what is driving the year-over-year growth for you, and which regions of the country are doing stronger or weaker?

Our primary aggregate resources are here in the West. So what we see in that regard really is confined to our western state business. We haven't seen the same pressure on our aggregates pricing and our volumes as we have seen in some of our work. A lot of that has to do with the scarcity issue and the availability of aggregates in a lot of the markets that we work in.

We have seen, however, our asphalt business suffer as a result of the reduction in work. And when I say asphalt, I am talking about asphalt to concrete, which is a function of either our overlay projects, reconstruct projects, and general overall maintenance that takes place on a lot of roadways. So that back part of our business is off from where it was this time last year, whereas our aggregates business is holding its own.

Do you expect -- normally weather, I guess, in the fourth quarter sometimes impacts aggregates as well. Any sense as to have the aggregate business will do this coming quarter?

If you can tell me what is going to happen weather-wise for the fourth quarter, I could answer that. It is really hard to say. As Bill mentioned earlier, it is the hardest quarter for us to get our arms around as a result of what is going to happen. We currently are already moved into a wet pattern over the last week. So if this sustains itself, it will slow things down.

Also, just one or two financial questions. What was the cash and equivalents on your books as of the end of the quarter?

Cash and cash equivalents, or do you want short-term marketable securities as well?

All of them. Throw them all in. Anything that I would consider

Okay. The short-term part is 170 million. And you look at the long-term marketable securities that we have invested going up beyond a year, it is 43 million. So you are talking about 213 million combined.

Also what is the total debt? I saw 127 473 is the long-term. What is the total?

If you want to look at -- we're in the process of adding up, primarily because of FAS 150, other long-term liabilities, which I don't have a number in front of me. But I would be happy to get it here to you in the next day or so.

Also, with that being the case, you guys are in an enviable cash position. Can you give us some uses of cash? Are you looking for more aggregate properties? Are you looking for more construction properties? Are you guys buyers of your stock here, trading at sort of depressed multiples? Let us know what you're doing with all this cash?

The question, Bill, was what are we doing with all the cash?

First off, we need a fair amount of cash to satisfy the bonding requirements of our bonding company to pursue large projects. So yes, we probably have what you might want to characterize as excess cash. And we are in a position to make an acquisition if the right deal presented itself to us. And we continue to pursue growing the business through acquisition, particularly in the area of aggregates in our materials businesses. We are currently not -- we don't have anything eminent right in front of us. We have things that we are evaluating, but we don't have anything that we are about to announce, if that is the question?

What about share repurchases?

We currently are authorized to be able to do that. We continue to have a philosophy of doing that opportunistically. At the present time, we don't feel that there's an opportunity.

Walter Landauer from Landauer Capital Management.

I wonder whether you are able to let us know any aggregate of the amount by which projects currently being done, and that are still yet to be completed? How much of what the aggregate of underperformance of your estimates would be. Do you have any aggregating of that?

Let me see if I understand the question first. I'm not sure. The question is of our portfolio of projects, what percent of our projects are underperforming, is that the question?

Not the percentage of projects, but the percentage -- the costs which you had estimated before versus the costs you have actually incurred. If you could give us some aggregate number or dollar or percentage?

I'm not sure.

That would take a bit of analysis.

If you don't keep those numbers handy the question is -- cannot be answered.

I will give you a statistic which is, I think, meant simply to provide you with maybe a little foundational information that probably is not unique to Granite. But we have about -- I'm going to guess about 15 percent of the work that we do that performs at a level less than what we -- significantly less -- more than just a little bit less than what we expected. But we also have an equivalent amount of about 15 percent of our work that does really really, really well and a lot better than what we expect.

And generally what we find is that over the course of our entire portfolio when you average it out it comes out darn close to what we estimated. Now you take any one particular job, and they bounce around a little bit. But over the portfolio, it is amazingly accurate relative to our estimated performance.

Walt, you have got to understand that we have built thousands of jobs a year, especially in the Branch Division, and anywhere from 50,000 to 50 million. So there thousands of these jobs that are going on at any point in time. And as Bill says, there's a certain percentage of those jobs that do really well that tend to be offset by a number of jobs that don't do as well as we expect. So maybe that helps you out.

Bob Lavick, CJS Securities.

You mentioned that some Southern California branches are experiencing positive results despite the difficult environment. Can you tell us what you're doing in the other branches to mitigate these negative results, or are you going to write out the storm?

We're constantly reviewing the situation that each individual brands finds itself in. And in some cases they made some adjustments to the size of their business to accommodate what is happening in their particular geography. And depending on the length of what we perceive as the length of the downturn and the issues at hand, we will look at each one really independently.

And in some cases, as Bill mentioned, we have a couple of branches that are doing pretty well in spite of what is going on. And we are sharing resources amongst our businesses as we find it prudent to do so. And actually that has helped us out in a couple of places this year. That is both from a manpower and equipment standpoint. So we have the ability to move those forces and materials and equipment around as needed to help in some areas, but take some of the load off in areas that don't have quite the same volume of business they may have had in the past.

John Rogers from D.A. Davidson.

I was just curious, looking at your backlog of $1.9 million or a billion dollars, I'm assuming most of that is HCD. And I was curious if you could give us some thoughts on the margin that is contained in that backlog, either the absolute number or some sense of whether the value of the backlog to you in terms of operating income has gone down from where we were at the second quarter on that same topline number? I guess I want to know is -- .

Let me take a stab at this, and then, Gary, if he thinks I am wrong, can chime in here. We're not going to give you an absolute number. I don't think that would be appropriate. But I would say this, and maybe it is just my optimistic nature that the quality of that backlog is better -- I know is better than it was two years ago. And I'm very confident that is better than it was at the beginning of 2003. So I think we have been fairly consistent in suggesting to you that this larger business that our people have built will begin to performance at a level that is more consistent with our history. And you all, I think, have some of that history, so I leave it at that.

And you captured my thoughts precisely, Bill. The backlog is still very healthy.

That concludes our question-and-answer session today. I would like to turn the call back over to our speakers for any additional or closing remarks.

I have no more closing remarks. Jackie has one announcement that she would like to make. And I'll just pass our thanks for joining us today, and your interest.

As many you on the East Coast will be happy to hear that beginning with our next quarterly conference call in February, we are going to be moving the time to 8 AM Pacific time, 11 AM Eastern time. And the earnings information will be distributed two hours prior to that time. So we hope that pleases many of you.

So with that, we thank you for your interest. And, of course, we're always available here for any additional questions. Thank you.

That does conclude today's conference call. We appreciate your participation. You may now disconnect.