Granite Construction Inc (GVA) 2004 Q3 法說會逐字稿

Welcome to this Granite Construction Third Quarter 2004 Earnings Results Conference Call and Web cast. Today's conference is being recorded. (OPERATOR INSTRUCTIONS). At this time for opening remarks and introduction, I would now like to turn the conference over to the Director of Investor Relations, Ms. Jacque Underdown. Please go ahead Ma'm.

Good morning. Before we begin today, let me remind you that certain matters discussed in this conference 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 my most recent filings with the Securities and Exchange Commission, which I encourage each of you to review. Okay, with that we will get started today. Here with me is our President and CEO, Bill Dorey, Our Chairman of the Board, Dave Watts, our CFO, Bill Barton. Also with us today is our COO, Mark Boitano and the Assistant Manager of our Heavy Construction Division, Darryl Goodson. With that, I'll turn the call over to Bill. Bill Dorey?

Welcome everyone and thank you for your interest in our third quarter conference call. We understand that President Bush is having a news conference at 8:05 and we are competing with him, so we really appreciate you all being here. Agenda for the call this morning will be as follows, I will provide general overview of the business, our current economic climate, and how we view the future. Bill Barton will follow and provide financial highlights, insight into our performance to date, and as best we can, we will provide you with some additional insight into our year-end guidance and then Dave Watts will offer his insight and opinion regarding public funding in politics, which affects us and our industry and of course we will all be available for questions at the conclusion of our remarks.

So let's start with our Branch division. You probably sensed that we have been more optimistic about our Branch business this year. Our revenue will increase this year for the first time since 2001 and we view this as a positive sign there, Branch business, which has been affected by State of California, budget issues, is improving. We have been the beneficiary of a private development market, which continues to be strong, and this private development market is driving our construction materials business and soaking up construction capacity in the market place. In addition, you probably noticed that we've compensated for the lack of our Caltrans work by increasing the amount of local agency projects we are doing. I believe we are clearly making the most out of the market, which is available to us. And to provide you with a little more color regarding how the reduced Caltrans funding has affected us over the last 3 years, you may be interested in the following statistics, and these statistics are for our Branch backlog excluding Wilder and we have a four- year history here.

In 2001, Caltrans amounted to 44 percent of our Branch division backlog excluding our Wilder business. In 2002, that fell to 38 percent and 2003, 23 percent and in September of this year, it currently stands at 13 percent. When we do that same analysis on revenue, Caltrans revenue in our branches excluding Wilder, 2001, amounted to 21 percent of our revenue 2002, 20 percent, 2003, 17 percent currently stands through in September 2004, 13 percent. So we view this as a sort of bad news/good news scenario. The bad news is that the Caltrans is currently not as large a part of our business as it has been in the past. The good news is that we've compensated for the loss of Caltrans work. We are a more diverse business today and not as dependent on that revenue stream. And the better news if we look forward is that we believe that finally there appears to be some relief inside regarding Caltrans transportation funding. With the gaming initiatives having been defeated, we are hopeful that we will see more work actually bid -- Caltrans work actually bid in 2005.

However, we want to be a little careful here. The gaming initiative requires a bond issue to be lapped and the best information that we have at this point is that we probably won't see that money transferred into the Caltrans' funding mechanism where that work can hit the street prior to about mid-2005. We are viewing our other Branch Division States. We see a stable or improving markets in Nevada and Arizona and Utah. And our Wilder business is performing well driven primarily by its Alaska division. The outlook for the fourth quarter in our branches is dependent on weather, it always is. Certainly, we had built tremendous momentum in this part of our business and we were hit with a substantial amount of rainfall early in mid-October in the West and it really brought an abrupt halt to most of our operations. In certain parts of California, for example, we received almost 25 percent of our annual rainfall, certainly, in Central California where we live and the in these key areas have opened. However, the weather has warmed back up and we are running again and we are hoping that we can work productively through November. And if we can, our branches should perform as expected for the year. Looking forward into next year in the branches, we expect to carry an adequate backlog into 2005, and expect a similar economic environment to drive the business. And if there is an upside, it will probably come from increased Caltrans activity.

In our HCD business, we continue to struggle with inconsistent project performance. As you've seen in our press release, one of our large HCD projects is not expected to reach the 25 percent completion threshold this year. This was a key variable in our ability to improve our 2003 HCD performance. In addition, we've been unsuccessful in resolving several outstanding project issues. Certainly, the hurricanes in Florida in the Southeast did not help and it did negatively impact our third quarter results. However, the difficulties we experienced this year were not generally weather related. Looking at our overall portfolio, we simply did not build enough of our work for budget and therefore, we have not been able to adequately recover from the events of our first quarter. As a result, we are no longer forecasting our HCD operating income in 2004 which should be higher than 2003.

I acknowledge that I'm dissatisfied with this performance and I know our HCD management team is not satisfied either. We set much higher expectations for this business than we've seen this year. However, I'm not discouraged and I will tell you that I asked your HCD management team 4 years ago to grow their business and they did that. I believe, we are on the right road, but this road has not been free of bumps and we are getting in right people in the right places and making the changes that we believe are necessary to make this larger business work, and I'm confident that it will. And it's not to say that we won't experience any further growing pains, but we expect our overall HCD business performance to improve considerably looking forward. We believe we have the right size HCD business today, it's a revenue group, well it is not a current objective. Our focus is squarely on improved performance on the business that we have. We've been working very hard on our performance objective this year, particularly in the last 6 months. A business, which consists of a large multi-year projects is slow to change, but we are making progress.

Before I turn this over to Bill Barton, I'd like to comment on one other thing, maybe preemptive question. Certainly, we've witnessed fuel and asphalt prices increasing and while still these prices are escalating we are managing this escalation and they have not materially affected our performance to date. So, with that I'll turn this over to Bill Barton. Bill?

Good morning everybody. My focus today is to talk about the third quarter ending 09/30/04. First a reminder, as we had in the last two quarters and probably for one more, we had a change in accounting rule FIN 46, which is `Consolidation of Variable Interest Entities` was adopted and it is prospective, it doesn't affect 2003. So, we have been making comments to give you a sense of what those differences are. But anyway, there are certain joint ventures, really those in which we are consolidating our partners' interest and to total. And I'll refer to that from time to time. Net income has not impacted but there are some changes, such accounts as revenue and some balance sheet accounts. More information, I direct your attention to our 10-Q. It includes 30 million of this consolidation of partners' interest. Branch revenue increased by 66 million to 463 million, reflect increases in local public agency, private sector, and material sales, fueled by strong housing market. Partially offsetting, as Will has talked about, state government is down, demand remains weak. California continues to have some budget uncertainty, with an expected budget short fall this year, this fiscal year of 8 billion.

HCD has increased 54 million to 237 million. The FIN 46 adjustment for the consolidation is, primarily is from HCD of 30 million. So, it is up 24 million, once you adjust for that and is derived from a higher backlog that is beginning of the period, primarily, from the Northeast. Going to gross profit. Here I have some statistics to add to what in the press release, normally as looking at plans and material sales. Revenue is 91 million in 2004 compared to 2003 of 83.5 million, an increase of 7.5 million. Margin 20.7 million in 2004, 18.6 million in 2003, an increase little over 2 million. Gross profit margins very similar, 22.8 percent in 2004, 22.3 percent in 2003.

The other segment reporting, I shouldn't say other segment, but the segment reporting between HCD and Branch, I will provide you some numbers for that as well. Heavy Construction division 18.7 million 2004, 13.4 million 2003, an increase of 5.3 million. Gross profit 7.9 percent, I should say, gross profit margin as a percent of revenue, 7.9 percent in 2004, 7.3 percent in 2003. The Branch revenue is -- gross profit is 77.1 million in 2004 and 68.4 million in 2003. Gross profit margins as a percent of revenue 15.7 percent 2004, 17.2 percent 2003. The Branch division gross profit, as you can see, is up about 8.7 million, whereas gross profit margin slightly lower principally affected by an increase in job revenue for jobs less than 25 percent complete, which I will come back to in a minute. HCD, although gross profit as a percent of revenue increased year over year, the quarter was impacted negatively with increased cost forecast for several HCD projects, primarily, 2 projects impacted by delays and estimated rework associated with unusual severe wet weather in Florida and New Mexico.

Now turning to identifying the value of those revenues that are on jobs less than 25 percent complete. This would be before the adjustment for FIN 46 for the consolidation of our partners' interest. Total Branch division is 27.4 million in 2004 for the quarter versus 12.3 million a year ago, an increase of 15 million, which would have a significant impact in terms of having a lower percent of gross profit percent of revenue.

Heavy Construction division 35.9 million in 2004, 32.7 million in 2003, an increase of 3 million. The consolidation of partners' interest would add another 8.2 million in 2004. Again, that would have an impact of reducing the overall gross profit as a percent of revenue for the quarter. G&A has increased 3.5 percent to 44 million in line with higher volume between the 2 quarters. As a percent of revenue, it has decreased 1 percent to 6.3 percent; however if you are adjusting for the consolidation of those partners' interests, it will be 6.6 percent, so seven-tenth percent lower compared to a year ago and puts it on the same basis.

Turning to operating income. Looking at the 2 divisions, again, information that is in the press release is 9.9 million for HCD in 2004 versus 4.9 million a year ago, a $5 million increase. The affected consolidation of partners' interest is $2.8 million and you would adjust that from your operating income for 2004. The operating income for the branch was $56.6 million in 2004, $48.1 or $48 even for 2003. Operating income as a percent of revenue is 12.2 percent in 2004 and very similar in 2003, 12.1 percent. Other income is very similar quarter-to-quarter and I have no additional attributions for it. This brings this down to the bottom line.

For the quarter 2004, diluted earnings per share was 80 cents, an increase of 17 cents from a year ago that's a 27 percent increase and I must admit its an excellent quarter especially as we talk about some of the challenging events that took place during the quarter end, we had previously talked about. Our effective tax rate is 31.5 percent, significantly below last year of 36 percent and again the differences primarily reflect the impact of our consolidation of partnership interests -- of our partners' interest and generally our construction joint centers are not subject to income taxes on a stand-alone basis and as that number increases it will affect will affect our effective tax rate on a quarter-to-quarter basis.

Now let's just touch base on our revenue backlog by market segment and geographic area for the quarter. You can see the press release table for more details, but if you look at revenue by market sector and you just focus on -- let me put it this way. This particular tables supports my previous comments and bills about the local agencies are making up a larger part of our revenue, is up 34 percent from a year ago. State agencies have dropped 11 percent. And if you want to have additional evidence for that trend or that event has taken place, again backlog, if you look at those two particular sectors also if you would like to change or not, although not as quite as drastic. State agencies is down about two percent, while local agencies have decreased 46 percent year-over-year for the quarter.

Now looking at awards, generally this is the question that people have, we had a really outstanding quarter, there was $979.6 million worth of awards compared to $548.9 million a year ago. HCD was the largest $570.2 million versus $205.9 million a year ago. But of that 570, 230 is reflective of our partnership interest that's now being consolidated. Now, the other number I normally provide, our capital budget continues to be at $58 million for the year and our annual depreciation forecast is expected to be $63 million plus or minus.

We also are providing in our press release the balance sheet information, and again I would like to, just to bring into context, that one of the major increase in our assets and liabilities is really above those consolidations of our joint venture interests under FIN 46. And just to give you broad perspective, assets increased $93.4 million primarily associated with current assets or current liability to $76.4 million. As you look at the other major changes, accounts receivable is primarily the result again of this consolidation, of our partners' interest, higher revenue, and we do have a significant retention amount as a result of number of large HCD projects that are nearing completion.

Our another question that is normally asked is cash and I've included in this both long and short term total including our joint venture consolidation that is $259.5 , the amount that is associated with the consolidation is $68.3 million, so to give you a little bit perspective on how those numbers affect our balance sheet.

Finally, I would like to leave you with our earnings expectations for the year, which is discussed in the press release. Our earnings per share is anticipated to be between the $1.50 and $1.20, defending on a range of possible outcomes based on the severity of the weather and the result and ability of our operations to perform the work and generate revenue during the period. With that I'll turn this over to Dave Watts.

I would like to comment on the election here a few days ago. Its one of the most significant elections that I can remember dealing with transportation funding. At the federal level, it is hard to say what that will mean with the Bush second term and some shift in the Congress. The reauthorization of T21 should happen next year. As you may know, it was extended for 8 months. The electioneer politics are out of the way but the budget deficit situation is still with us and that is undoubtly going to have an influence on what the level of authorization would be. A one positive feature of the tax bill that was signed recently by the President was the ethanol fix, which transfers the subsidy of ethanol's of cents per gallon, federal tax to the general fund and out of the transportation fund. So in effect the transportation fund gets the full gasoline equivalent or about $3 billion dollars a year increase. That's significant for a state such as California where a large part of our operations are located.

At the state level, the big deal was one of Bill Dorey referred to and that was the defeat of Proposition 68 and 70, which were major problems to the governors' or getting revenue from the Indian gaming tribes. If either one of these had passed those compacts would have been negated. These compacts still have some legal challenges. We don't anticipate that the revenue from a bond which would -- revenue bond which would be sold on the basis of these tax revenues that would hit us until probably mid year next year. So it is likely that it will have very little impact on our 2005 business and it could be however once it is in place somewhere between $900 million and $1.2 billion short almost in 1 year as we estimated. To give you an idea what that means of what the general fund in California owes to transportation fund. That debt is $3.3 billion at the moment. So a roughly a third of that would be repaid by this measure.

We also learnt yesterday of the appointment of a new Caltrans Director. The industry, I think was pretty unanimous that this man was Will Kempton was their choice, and we were lobbying administration for his appointment. We think he is one of the most knowledgeable people in transportation in the state, so that was good news. The really good news was at the county level where a number of asset sales tax measures were on the ballot. A total of 10 in California and 1 in Arizona. These are very difficult to pass in California because they were quarter at 2/3rd approval. Of the 10, 5 had passed. There were 3 failed and 2 were up in the air, they were too close and too close; I will give you an idea, in San Diego, right now with all the precincts counted but not all the absentee votes counted. Four is 66.68 percent and this is pretty close to 2/3rd. So we are not sure about that one or another county but hopefully one of both will pass too, and this amounts to billions of dollars over the next 20 to 30 years. The industry was quite worried as to all the county sales taxes with the exception of Los Angeles were sun setting over the next few years whether the voting public would reward us with the 2/3rd vote and it looks like they have said, we want to take control of our own destiny and our own counties and they have passed a number of these. And in Arizona, Maricopa County passed asset sales taxes as well. So that was good news. All in all, it was one of the most significant elections that I have seen in my time being an observer of this process and with that I will now turn it over to the moderator. I think we are up for questions.

My understandings is that we have little confusion regarding who was allowed on the call and a number of our employees were not able to get on early to hear our opening remarks. So Jacque is there a number that those people could call and hear a replay. The number is 888-203-1112, pass code 904044.

All right thank you Jacque and we apologize for that and we will now, moderator, go to questions and answer questions.

(OPERATOR INSTRUCTIONS) Richard Rossi, Morgan Joseph.

Couple of things. First, you made reference to outstanding issues at HCD that are still not resolved. I don't expect you to go into detail there individually but are these issues the contract items related or are they physical issues on the project sites or is it a mix?

Let me respond this way. We've talked about this in the past, particularly this year, and I don't want to, as you suggest get into a lot of all detail but what we are finding Rich is that the nature of the work that we are doing in our HCD business today particularly as we involve of ourselves in some of these larger more complex projects, what we find is that we have issues regarding increased revenue that may or may not come to us depending on how the issue is resolved. And in our system and we've said this numerous times this year, in our system we book the costs associated with the events that occur on the projects at the time those events occur. For example if we are directed to do additional work and we don't have a change order executed to compensate us for those activities we book the cost associated with doing that work and we book the revenue when and if a resolution can be reached regarding whether we are entitled to be paid for that work or not. And we have a number of those issues, certainly we have, you are clearly aware of the liquidated damage issues that we talked about in our first quarter and we've been unable to reach resolution on a number of those that we had anticipated that we would this year.

'05 a likely year for resolution?

Well we are keeping our fingers crossed. It's one of the -- frankly it is the reason if we have our system and our accounting procedures in place the way we do because you can never guarantee that you are ever going to recover and as a result we take the most conservative view which is we book the costs and if we get paid we are happy to take the money.

You mentioned also the tax rate issues and lower tax rate in the quarter. Could you give us some guidance as to what kind of a tax rate we should be using for modeling purposes as we go out into '05?

Rich a good question. I was much more comfortable a year ago before FIN 46 kind of added additional variable to that calculation. But it's somewhat about the level of consolidation of these partners interest into the total, and the greater that number comps it could lower the rate and vice versa. Though right now we think 31.5 percent is a good rate. And we'll look at it again each quarter and I would anticipate that's what we have to work with today.

Alright so 31.5 percent is the rate we might as well use at this point.

At this point.

Alright and could you as you've done in the past give us a sketch of what the bids outstanding look like here that over a reasonable period of time, let's say the next 3 months?

Are you talking about the bids that we --

Bids that you are putting in, work that you are pursuing.

Well, I frankly don't have any numbers to share with you. I will tell you that we have a full bid schedule. I think as we have suggested over the last several years in our HCD environment in particular we chased literally hundreds of millions of dollars worth of projects. We have a long list that hasn't changed, so from sort of a pipeline of projects that we are pursuing, I don't think that I would probably anticipate any different economic environment than we have experienced in the past. In our branch business, I think we've suggested this year that we've seen probably more activity than we have in the prior 2 years to clean the public environment. It slowed down a little bit Rich in the last 2 months, I'm not quite sure what to read into that. You know, typically slows down this time of the year, and we generally get nervous when we see that, but then we have to remind our selves that it's, you know, that time of the year and we are hopeful it will all come back in the spring time like it usually does.

Am I right that the latest extension of key 21 puts a pretty significant increase in funds becoming available there, essentially I think we are using the $300 billion base as what to look out over 8 months and taking the 8 month portion of that annualized number?

Richard of course it's the appropriation for the given year that's important, there was some increase in the appropriation levels on a per month basis if you will - 8 months versus a year. But it certainly continued the fairly high level of appropriations from the last year of T-21s original term. Yes, it was positive and the fact that it was 8 months gives state and local governments a little more of a window to do some planning, capture some of those funds that does the ethanol fix, that's a small deal. We have ethanol fix pretty significant, in California I think it amounts to some 300 or $400 million a year. So, it's a healthy appropriation for that period. We hope it will continue.

Richard Wesolowski, Sidoti & Company.

Dave early in the year we had been talking about how the Cal trends was initiating a great number of small projects. And I think this summer rolled on and into the fall that kind of gained momentum into, you know, the California's economy was bottoming out and they are seeing a higher Cal trends budget for '04, '05 than we saw the prior year, but now that seems to have hit a wall. Was there anything that changed there or it just seems like that kind of reversed itself in the last 6 to 8 weeks?

Well, we did see what seemed to be a little flurry of Caltrans activity to the middle of summer and we've reported that, but if we look at this statistics that I shared with you, it continues that - fortune of our business continues to decline I think part of that is because other parts of our business have grown a little big too and so from a percentage standpoint it's affecting our Caltrans percentage, but it certainly does not appear at least this year that Carltrans made a big rebound. But by the end of the year when we reconcile the statistics, they continue to be an important customer for us now. I don't want discount that, in fact it may still be one of our largest if not our largest customer, but it continues -- it has continued to become less important over the last several years. But I think the good news and I tried to make that point in the opening remarks is that we managed to - and this a credit to our operating folks all through the system. We've managed to compensate for that and pursue other pieces of business. Certainly we've being helped by the strong private market place and our hope here is, frankly that we can continue to keep this other business when the Caltrans business comes back and it will be a net add to our system.

Let me add one more piece, this is more quicker. The smaller jobs don't generally get into our backlog just because of the nature of those taxing jobs. Well, it is reflected obliviously in the revenue side but as the larger projects that were funded by another component of the state budget while those have fallen off and we have done more maintenance-related projects, it does not find its way into our backlog, because they are small in nature and are built at very short period of time. So, we are experiencing some of that, it does not show up as vividly in some of the statistics. So, you have to just keep that in mind.

Okay. You mentioned that the municipal work you are getting is growing as opposed to the state work which is kind of leveling off it seems. Is that more a function of, that is what the market is giving you or is the municipal work more of what you are going after now?

I would say that -- it is what the market is giving us today. It is just - those jobs are always on our radar screen and we have not changed our philosophical approach to what we are looking at in any particular part of that public works marketplace, but there just seems to be a fair amount of that work that's been available to us. It has filled the gap that was created with our lack of Cal Transport.

Is there a material difference --

(OPERATOR INSTRUCTIONS). Brian Raffin, Morgan Dumsing .

A question for you on the damage that we took in Florida with the 4 hurricanes. Has that sourced any business to repair bridges, roads, infrastructure-wise for you guys getting .

Brian, in response -- this is Darryl Goodson with the Heavy Division. It turns out the infrastructure portion in roads, water or transportation systems, they really weren't damaged to the same extent as vertical-type construction. We had the opportunity to give a proposal to the Florida DOT on every one project in the $15 million range, we were unsuccessful on that. But there really weren't opportunities for infrastructure reconstruction on a large scale that was very strong.

A question for you guys on the availability pricing on some of aggregate quarry assets that you guys have looked for talking acquisitions, kind of what's the scenario going in the end of the year?

Let's see if I understand your question. Are you asking what investments are we --

From an acquisition standpoint what you guys seeing, you guys are looking when you look at gravel pits in the asphalt plants, that type of thing, you have made selective acquisitions, what is kind of the availability of that as you see from an M&A standpoint here?

Well, we still have select opportunities that have come our way, we are -- have been in the process of proposing on some of those. We have not as of this point in time been successful. The pressure in the marketplace in regards to our new reserves is still fairly high and I think that is probably the flavor I can give you. I would add that we are and continue to look at what we call greenfield opportunities and those aren't opportunities that are in existence today, those are opportunities we create for ourselves. So, this is a serious thing that we have going on.

Okay and then can you just -- can you give us a little more color relative to the Branch Division you guys have talked about the strength in the private area. Can you kind of give us a source of where that is coming from, is it sub divisions, office parts. What are you guys seeing?

Well, we are seeing it primarily in the housing market and primarily in the Central Valley, California, and as long as that robustness is there, it does a couple of things that we have mentioned in the past that creates the opportunities for contractors to look at both segments of the marketplace, that being the public works area as well as the private works area and it soaks up capacity that without one or the other would concentrate competition in one particular area. But we see it that we do see some commercial activity that goes with. The housing side of the equation, and as always interest rates stay where they have been and those developers continue to bring product to the marketplace, and we see it continuing in the near term, at what we think are the levels that we have seen here this past year.

A question, Bill Barton, if your CapEx budget for this year, '04, do you have a number kind of for the year and then what you might look at for '05?

We are looking at $58 million for this year. Looking into next year, we are probably going to have another normal budget of about $60 million. However, we do have a lot of opportunities to acquire, first thing since we have been talking about materials, and our budget will be above that and we are in a process of brining together a package to present to the Board here in the next Board meeting in early December. So, it's a little premature to talk about the amount, but it will be significant.

What would you define the $58 million for this year on your budget as kind of maintenance CapEx, just kind of replacement repair type?

Yes, it mares our depreciation and if our business is stable, growing slightly, you can expect it in order to keep our fleet up we are going to need to spend something near our depreciation, and typically that is spent on replacement with a small amount of growth and generally we have a little aggregate acquisition, improving our reserve situation as well. So, that's generally what it consists of.

John Kasprzak, BB&T.

Thanks. Good morning everyone. My first question is on the HCD side. Given that you guys have bid on more longer life projects in recent years, is it going to be harder to improve the margins? Are you seeing or still be suggesting that there is, you know, you can improve the performance and maybe improve the margins? But isn't that going to be hard over the coming year or 2 because of the longer life nature of these projects, in other words you are going to be living with these projects longer. How much better can the margins get if they are not already where you want it to be?

Well that's a really good question. I am not going to answer maybe as directly as you would like. I will suggest that the work that we have been doing in the last couple of years has been generally a little larger. It's been different from the standpoint that if we depart it a little bit from the standard State Highway business that if you look back over time, has been sort of our meat and potatoes part of our business. And yes, we have experienced deterioration in our margins over the last several years that have been a real concern to us. I would suggest to you that if I were to try to identify what has caused that market deterioration, I would suggest that part of it may be because the work has been a little different, but I would suggest that most of it is because we have grown so quickly. And we recognize that, we've attempted to make the changes from the standpoint of beefing up the people we have in the various regions, the management that we have in the various regions, and do the things that we need to manage this larger business, I believe that we are making progress as I said in my opening remarks.

And our expectation is that looking forward if we will see better margins on the work that we are doing and the work that we will do, I will tell you absolutely that in the last 12 months we have been cautious in the work that we are bidding, we've been more careful from a standpoint of how we assess risk, and our anticipated margin on bid has gone up in the last 12 months compared to what it was in the prior 2 or 3 years. We really went from a gross, from a cost -- from a cautious effort to grow the size of that business and we've transitioned to some degree into a conscious effort, try to maintain the size business that we have and get out of that business what we need to, frankly. And, as in a say that if the work comes to us we won't continue to grow. We talked about this all day yesterday in our preparation for this call. Certainly after the works there, we will take it, but we will take it only if we believe that we can earn traditional margins except for margins under work.

Okay, fair enough. Secondly, with regard to, I guess this is for Dave, with regard to the reauthorization. What implications in your opinion would there be if a 6-year bill is not reauthorized, but we continue under this structure of continuing funding appropriations -- temporary funding appropriations, and may be Converse just decides to do it 1 year at a time albeit at a higher funding rate which we're now enjoying, which you guys mentioned. Does that necessarily change the outlook if we go to an annual funding sort of structure by that a higher level of funding versus a 6-year bill?

I think it could affect the long-term planning, long-term meaning states planning jobs that are multiple years in their duration, and requiring multiple years of funding, strength to finance them. Most states cannot even let a job unless the funding is really in place for its entire project life, the federal government camp or the states camp. So, I think it could have an impact the size of the projects left. It could turn states into looking at more short-term projects which may not hurt us because we do a lot of business with fairly short-term fixed-type projects, repay them for instance. So, I think that's what happened. I think that's unlikely. I think everybody in the Congress and the administration wants a long-term bill, are just coming up with a number that the Congress will pass and the President will sign. And I think we were very close this past summer, but being an election here everybody's eyes were starting to focus elsewhere.

Bob Labick, CJS Securities.

I wanted to ask, regarding the Caltrans work, the percent of revenue from Caltrans. What's the typical lag to revenues to you from the California Transportation budget? And the reason I'm asking is that I believe 2 or 3 California Transportation budget is around 2 billion, '03, '04 was a billion 2, and '04, '05 pretty back close with a $2 billion, so wouldn't we presumably see Caltrans work pick up again, just trying to understand the lag there?

First of all, that last two billion dollar number, while that was kicked around, we're not sure that the CTC has got nonboard with allowing those expenditures into the marketplace. But, maybe to get to your question on lag time, when the money becomes available, they have a number of jobs sitting on the shop today that they can get the market fairly quickly. So, if they have the money, they have the projects that are waiting to be advertised, and then awarded in a pretty backup fashion. So, I think maybe that might help answering your question.

And when should we know more about -- the CTC letting that 2 billion through or what the actual number would be?

Well, there is a meeting in December that I understand will bring some color to exactly what that all means. So I think that will be the next opportunity to maybe get some information in that regard.

Maybe I can also, maybe just a little more perspective on what Mark was talking about. We have actually been suggesting and I think it's in, or we know it's in the budget that -- you're right; they did budget back to $2 billion for transportation. And at the same time this was occurring, we were seeing more Caltrans work to bid than we've seen in some time. So our assumption was that would continue, and as I mentioned a few minutes ago, what we've seen in the last couple of months is we've seen a slow down again. So, what we've learned, once again this is little bit of a -- there is a lot of misinformation, it seems like around what Caltrans is doing and what they hope to do from a funding standpoint. But what we've learned is that the CTC which is the California Transportation Commission, which is like the Board of Directors for Caltrans has been only allowing of this $2 billion budget allocation, only allowing about a 100 may be up to 125 and some $100 million dollars a month to be bid. So I suppose you could speculate at some point they are going to bid the rest of that 2 billion out, and if that occurs next year, it should make more per months available in 2005 than we've seen. What we're really speculating at this point is to what -- you know, how they are going to spend, frankly, if they are going to spend it.

There is a huge cloud over this whole funding issue, and that is the Western suspension's span of the San Francisco-Oakland Bay Bridge, and they let the one bid go and they are now reviewing the design to see if they come up with the less expensive design and go up for bids again, hopefully, they will attract more than one bid. But that is hanging over the state transportation funding picture right now. Nobody knows how that is going to happen.

Great, that was very helpful. And I should think, going to the HCD, assuming the 25 percent -- you're expecting 25 percent completion on the project that could have been Q1, some where along those lines. If you -- from your previous guidance to be roughly just around number say 20 million in operating profits for HCD this year. You had $25 million -- $20 million so, yes $25 million in charges in the first 2 quarters, are you expecting additional larger charges next year, or is it reasonable to assume you could double your HCD operating profit just by eliminating those charges?

Okay. Let me respond this way. The job that, obviously, we are not anticipating to reach 25 percent this year. We will reach 25 percent next year, likely in the first quarter of next year, and as long as that forecast holds, which we expect it well at this point and we will see the earnings the income from that project flop into our first quarter and that will clearly help us early in the year. Our HCD business is dependant on making our budgets, on our projects. Earnings gross margins in the traditional 10 to 12 percent range. We have been saying for the last couple of months, I suppose, that we expect that we will return to it.

And our final question for today's conference will come from Richard Rossi.

Just one issue, unless my numbers are wrong. Gains on sales keep on creeping up, there were couple of million in '02, almost 5 million in '03 and you are running at 7 million through 9 months, I think, in '04. Where do we go from here? That is beginning become a big slug of earnings, and an extremely difficult one to forecast for an analyst?

The gain on sale... this is Bill, the other Bill. There is a couple of things, one, this year we did have CPC result which was a part of our business, business in Utah, and that certainly affected it. We do have this company that has contributed on an on-going basis, and that is something changed here in the last couple of years. And we would anticipate that they will continue to be a contributor. Some of that ends up in gain on sales, some of it will end up in other income.

Okay. And with the strong market out there, is it reasonable for one to expect that those contributions in '05 would at least match '04's levels?

It is hard to expect, early at this point.

And Mr.Dorey, I will turn the conference back over to you for any final, closing remarks

Thank you all very much for listening in this morning. We certainly appreciate your interest in our Company. We once again apologize to our employees who may not have been able to get on earlier and we will have an email out to all of you, giving you the telephone numbers as well if you choose to listen in on replay. And I would like to take this opportunity to once again speak to all the employees who maybe listening here or will listen, this has been a really interesting year; we have had ups and downs and lots of challenges. Everyone pulled together, I appreciate very much the commitment and dedication that you all bring to work everyday. We could never achieve what we do without that commitment and we appreciate it very much. So, with that we will turn it back to the moderator.

Thank you. That does concludes today's teleconference and thank you all for your participation. At this time, you may disconnect.