Granite Construction Inc (GVA) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the Granite Construction's first-quarter 2005 earnings conference call and webcast. Today's conference is being recorded and there will be a playback of the call that can be accessed either on the Company's website or by calling 719-457-0820 and entering passcode 2460042. (OPERATOR INSTRUCTIONS) It will be available beginning at 2 PM Eastern Time today running through midnight on Thursday, May 5. At this time all lines are in a listen-only mode; a question-and-answer session will follow the management's presentation. Now I would like to the call over to Ms. Jacque Underdown, Director of Investor Relations. Please go ahead.

Good morning, welcome to our first-quarter earnings conference call. Our release this morning that we will be referring to can be located on our website at graniteconstruction.com. I would like to remind all listeners that certain matters discussed in this call today 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 such forward-looking statements. A more detailed description of these uncertainties and risk factors are provided in our most recent Form 10-K and other filings with the Securities and Exchange Commission, which I encourage each of you to review.

Here with me today is our Chairman of the Board Dave Watts; President and CEO Bill Dorey; Executive Vice President and Chief Operating Officer Mark Boitano; Senior Vice President and Chief Financial Officer Bill Barton; Vice President and Assistant Heavy Construction Division Manager Darryl Goodson; and on the phone with us today is Mike Donnino, our Senior Vice President and Manager of our Heavy Construction Division. With that I will turn the call over to Bill Dorey. Bill?

Thanks, Jacque. Good morning and welcome, everyone. Thanks for your interest in Granite Construction. Our agenda today will follow our typical format. I will provide you with a qualitative perspective on our quarter, the business, and the year ahead. Bill Barton will provide you with insight into the details of our financials; and Dave Watts will discuss public funding and the politics that affect our business.

So let's start with the larger picture. The general economic climate for both of our divisions is strong. With the exception of Caltrans, our traditional public customers are providing us with plenty of bidding opportunities in both divisions. Our HCD primary locations are well funded, are located in well-funded parts of the country, Texas, Florida, North Carolina, New York. While our Western division is located in California, we are finding plenty of work to bid.

Our branches are also located in states where public funding seems to be robust -- Nevada, Utah, Arizona, Alaska. Once again, our branches in California are finding work to do at the local agency level.

The private market in the west really drives to some degree our branch business. It is providing terrific bidding opportunities. It is creating demand for our aggregate products, and it's also providing opportunities for our competitors and soaking up capacity in the marketplace. We think this private market will continue to stay strong.

So let's talk a little bit about our branches. Certainly we had a very good year in 2004 and we have very high expectations for our branches in 2005. Our branch first-quarter results were better than in 2004. Our revenue was up. Our gross margin was up in both contracting and materials. Our gross margin percentage was up in both contracting and materials. Operating come was up, and they are all very good signs. I might add that this was accomplished despite the unusually wet weather in our first quarter in California.

Our backlog is large which is, again, a very good sign, and we believe that many of our competitors are carrying large backlogs as well and that may even be a better sign. As we said in our press release, we believe the stage is set for our branches to perform at or above the 2004 level. The challenge as always is to plan and to execute and deliver the project performance and do what we say we can do.

It is way too early in our season to be commenting on specific guidance for our branches, but I hope these comments will give you a little insight into how we're feeling about the prospects for our branch business.

Let's talk about HCD. Our HCD business with highlighted by contrasting news. Let's start with the positive news. We have a large backlog that we believe contains more profit potential than in several years. We believe we have made significant progress in addressing the organizational and management changes that needed to occur for our larger HCD business to reach its potential.

We don't need a lot of new work, and we have the luxury of being selective in our bidding process. And there's lots of bidding opportunity. We are seeing states electing to entertain more creative project financing strategies, which we believe plays into our capability and strategy. We are far more together today than we were a year ago.

As in the branches, our HCD first-quarter metrics were better than a year as well. Revenue was up. Gross margin percentage was up. Gross margin was up $10.6 million compared to a year ago, and operating income was up $10 million compared with a year ago. We expected even better results. However, we decreased estimated profitability in excess of $1 dollars on five of our 45 HCD projects, and this reduced our profitability in the first quarter by about $11 million. I might add, though, and I don't want to overstate this, that we do believe we have entitlement to recover some of that $11 million; and only time will tell whether we prevail in that regard.

Clearly, to reach our performance goals we need to preserve our estimated project profitability. To paraphrase our press release, don't lose patience with us. The business for long-term projects is like a big ship; it turns a little slower than we would like, and we know we still have work to do, but the ship is turning and we're getting closer to where we need to be.

From the standpoint of guidance for the year, for the Company I would refer you to our annual report where we said for the Company as a whole to significantly improve financial performance both of our operating divisions must perform well at the same time. We believe that we have an opportunity for both of our operating divisions to deliver a solid performance in 2005. With that, I will turn this call over to Bill Barton, who will provide you with some more financial details.

Thank you, Bill. Good morning, all. I will do some financial comparison of the first quarter of 2005 to the same period in 2004, and will no doubt repeat some of the information that Bill has shared with you already. The total Company revenue increased to 421 million or by 84 million, a 25% increase. While branch revenue increased by 52 million to 219 million, this reflects primarily increases in local public agencies, the private sector, and materials, which I will come back to when I talk about the revenue by market sector.

Almost all the increase is outside California and the West; and California for the quarter represents about 53% of the branch revenue compared to 68% a year ago. HCD increased 32 million to 202 million, derived primarily from California, and the local agency public market sector is one that was most effective.

Looking at plant summary, which was not part of the press release tables, I will give you some sense of what the volume and margins were. For 2005, revenue was 46.2 million; 2004 39.7 million. Margins, 2005 6.6 million; 2004 4.8 million. Gross profit margin percent, 14.3% in '05; 12.1% in 2004.

Turning to gross profit, breaking it down between HCD and the branch, HCD's gross profit is $7.1 million in 2005 versus 3.5 million a year ago, a $10.6 million increase. The branch is 19.8 million in 2005; 14.2 million in 2004. Gross profit margin for the branch is 9%, versus 8.5% a year ago.

The branch division gross profit is up 5.6 million to 19.8. As I said with gross profit margin slightly higher, principally affected by the increases in volume of construction and increase in the selling price of materials. The increase in HCD gross profit margin was from -.2, .1% (sic) to 3.5 positive. Although HCD brand performance improved dramatically compared to a year ago, the quarter was negatively impacted as Bill has said by increased estimated cost to compete primarily on five jobs out of the total of 45.

Adjustments ranged from 1.1 million to 4 million, and were the result of a variety of factors. Among those were owner-directed added scope changes; site conditions that differed from our expectations; design issues on Design/Build contracts; changes in productivity expectations.

Moving to those deferred earnings due to the 25% completion threshold before profit begins to be recognized, just let me summarize by saying that revenue on jobs less than 25% in 2005 was 76.2 million, compared to 54.9 million a year ago. That is a 39% increase or 21.3 million. If you wish to quantify the deferred earnings and if you use a 10% gross profit margin, the deferred earnings is -- the increase in revenue associated with the deferred earnings is approximately 2.1 million in deferred profit.

G&A has increased 2.3 million or 6.4% from a year ago. It is essentially associated with a higher value between the two periods. As a percent of revenue it decreased from 10.8% to 9.2%. Major increases were in salaries, 1.2 million; and other cost increases associated with increases in revenue.

Turning to operating income, in total, you can see that in 2005 it is 11.9 million, versus 12.5 million. Somewhat similar, but one of the things that happened in 2004 that we didn't see repeated in 2005 was that we had the sale of our Utah Redi-Mix operations in the first quarter that accounted for $10 million worth of profit under gain on sales of property and equipment.

Looking at the breakout between HCD and branch, HCD had an operating loss of 1.3 million, versus 11.3 million a year ago, about $10 million improvement. Operating loss for the branch is about the same as HCD, about 1.1 million versus 5.6 million a year ago.

As we look at other income, you can see it is basically very similar to a year ago.

I will move on to looking at our net loss, with those different variables taking place, 8.3 million in 2005 versus 9.1 million, which translates on a diluted earnings per share $0.20 for 2005 and $0.23 in 2004. So 2005 slightly better than a year ago; but again just to remind you that in 2004 we did having a gain on sale of property and equipment. If you take that out of the equation, we have had a significant improvement of the year-over-year.

The effective tax rate as you can see is 31% versus 34% a year ago. This is primarily associated with an increase in our partner share of consolidated construction joint venture income. Just a reminder that generally our joint ventures are not subject to income taxes on a stand-alone basis; and therefore it has the tendency to reduce these (ph). As you have greater consolidation of your joint venture that effective rate will be lower.

Now looking to your revenue backlog, by market segment and geographic area for the quarter, this just kind of reiterates some of the information I have already talked about. If we look at revenue sector, revenue for the quarter, this table supports my previous comments that local agency were up 54% in revenue, private sector was 42%, with materials up 17%.

Now turning to backlog, by market sector. Again, (indiscernible) public sector remains strong, it is up 26%; while the private sector has increased 53% to 255.3 million which is about 10% of the backlog.

In total, looking at the backlog by divisions, HCD backlog is 2 billion compared to 1.6 billion, an increase of 30% year-over-year. Branch is up 22% as well, which is a good sign as we enter the second quarter of '05.

Lastly, before I turn it back to Dave Watts to talk about public and legislative affairs, awards. HCD had 357.1 million in 2005 versus 208.4 million a year ago. Branch is at 239.8 million for the period versus 189.2 million a year ago. Our total awards for the quarter, 596 point -- or actually 597 million rounded, compared to 398 million a year ago. With that, I would like to turn this over to Dave Watts who will continue the discussion.

Thank you, Bill. Good morning, everyone. Some fresh information. As you know, the federal legislation authorizing expenditures for transportation is the foundation building block for all of the state and local transportation budgets. That T21 has been extended now for over 1.5 years; its last extension I think expires at the end of May. So they either have to get the final new bill passed, or extend it again.

The house has passed the bill. The Senate committee has passed a bill, and then yesterday it actually started debate on the Senate floor. There is an amendment which is both promising but causes concern. Grassley and Baucus are trying to introduce an amendment to increase the funding levels; but the Bush administration is solidly on record that they will veto any bill that exceeds 284 billion in authorization. But at least it is out on the Senate floor now. It had been stymied in committee for some time. So debate begins, and we will see what happens over the next few weeks.

On the California state side, which is the other overhang politically on our business, I went up to Sacramento yesterday, spent the day talking to various officials, and started the day fairly discouraged about what was going to happen to funding for transportation in California. I came away somewhat encouraged.

You may know that in May, the middle of May, the Governor traditionally puts out his revised budget forecast, and it is on those numbers that the final fiscal budget is approved. That has to be done by the end of June. It is apparent, quite apparent from all the people there that the May revise is going to show revenues in the state considerably over what the original budget had anticipated. That's because the economy is going, income taxes and so forth are exceeding numbers, and obviously a sales tax on fuel at the current prices of fuel are bringing in lots more dollars than anticipated.

I also heard that the Governor is planning to put back into transportation some of the money which the original budget had taken out, probably to the tune of 700 million to $1 billion. So that was hopeful. We will see, and we will report to you just what happens on that level. That is my report. Bill Dorey, do you want to wrap up?

Other than maybe just to comment that 700 to $1 billion would be a huge increase compared to what Caltrans has been spending. So that is really good news. Dave, with that I think we will turn the call back to our moderator for questions. Thank you.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Related to the HCD projects which had a write-down in this quarter, how many of the five you alluded to are overlaps from before in the last quarter? Or are these new projects? And if so, how are the four written down last quarter faring since the write-down?

Mike, you want to handle that?

Let's see. One job was a carryover. One of the more major ones is a carryover. Another one was a nonsponsored JV; it was probably the second most significant one. I think the other three were ongoing jobs. Of the five I believe two are 95% complete or more; two are in the 90%; one is about 80%, I believe.

Great, thanks. In relation to -- you said last quarter you're going to increase focus on recovering change orders; and you alluded to the 11.5 million, part of that could be recoverable. Where do you stand on recovering the money from last year, which was roughly 30 million or so? What are the odds of those timing (technical difficulty)?

Number one, I don't think we ever provided the investment community with a dollar amount of what the recovery could be.

I was just referring to what the write-offs were. Yes, a portion of that could be recovered. But those were a lot of the write-offs from last year.

Mike, you want to (multiple speakers)?

We have beefed up and put more focus on resolving these issues. But unfortunately, many of them are controlled by procedures that are in the contract; and the owner of course has a lot of input on how that process goes along. We generally try to handle these issues in what we call a partnering relationship, and working with the owners, and rely on legal remedies only as a last resort. We are just about there on several of these.

But again the schedules on how they get resolved, when they get resolved, are very slow-moving. They involve arbitration panels, in some cases mediation and things like that. So very difficult to pinpoint the end date.

But without putting a dollar amount, you would expect to get some recovery this year from that?

Yes.

Great, thank you very much.

John Rogers, D.A. Davidson.

I guess Bill, just a couple of financial questions. First of all, the receivables level looked like it increased on a relatively large amount this quarter. Anything to that?

Secondly, on tax rate, where do you expect that to come in this year?

The latter is always an interesting question, especially with some of the new rules that we have to apply on a quarter to quarter basis. To answer the effective tax rate, I think the 31% is as good as representation for this year as we have at this point.

In terms of receivables, it certainly is up. But certainly part of it comparatively is up as a result of increased revenue for the quarter. A certain part of it, though, is the reflection of -- we have significant increase in retentions, because we have at this point a large number of HCD projects that are nearing completion. Typically at the end -- once it has been accepted, then we will be receiving these retentions. So our receivables are a little bit higher than normal at this time as a result of those two things.

Okay. On sales of excess equipment, it was a fairly low number this quarter. I know you had an exceptionally large number a year ago. But you still expect that to run in the sort of levels that we have seen over the last couple of years on average? Where you are generating, I don't know, somewhere around 15, 20, a little over $20 million a year?

I would expect -- it's difficult to determine this level each year. Certainly if you just look at the equipment part of this, there certainly is ongoing sales. We just don't know what quarter it will take place. But to put a dollar amount on it is probably a little bit more challenging.

I think that 15 to $20 million number is not correct. Typically if we get a gain on used equipment it is in the 3 million, 2, 3 (multiple speakers) 2 to $4 million range, I'd guess.

I think he is putting additional gains on it beyond just the sales of equipment. It's property as well.

Yes, I was just looking at the combined number over the last couple of years. Okay, all right. Thank you.

Michael Dudas with Bear Stearns.

You mentioned in your prepared remarks about HCD and backlog; I think you indicated about the profitability opportunities out of that business is as best as it has been at granite. Could you give a little bit of more color on how much better, relative to what it had been in the past?

And how long is the backlog turn in that business, of the backlog? I think you mentioned in the HCD backlog relative to what your revenue flows. How much '06 and '07 business is in that backlog?

Okay. Let me put a little bit maybe a qualitative -- provide you with a little qualitative perspective. For those that who have been following the Company for some time, I think you know that we have been growing the business, our HCD business, rapidly. Clearly, and this is like no secret, when we acquired our business in New York we acquired a lot of backlog that came with that acquisition. It was in the neighborhood of $200 million in backlog.

An awful lot of that did not perform particularly well. It has taken us till just in the last year really or really until now to work through that backlog. So most of that hurt us over the last couple years. So as a result, we have worked through almost all of that. We have one project that is 95% done, yet to complete, that came with that acquisition. And that job, by the way, is one of those jobs has been hurting us certainly in the last year.

Because we have worked through that backlog, we don't believe that we're going to have that impact going forward. That isn't to say that we won't have problems of our own with work that we did as Granite Construction. But we won't have that legacy work to be a negative impact on our backlog. So for that reason, and certainly some others, but to a large degree for that reason, we believe that the condition of our backlog is a lot better today than it has been.

From the standpoint of how much of our backlog will provide revenues in 2005 and 2006, I think at the end of the year we actually suggested that most of the revenue in 2005 would be coming out of our backlog. In fact, we felt like we had enough backlog at that time to provide us with about 60% or thereabouts of our revenues for 2006.

That is what prompts the remark or the comment that we don't need a lot of new work right now. We are really pretty well set up to be selective over the next six to eight months. Now there is going to come some point, if we don't land some other work -- and I am sure we will and have been, frankly -- where we would be in a position where we would need to become a little more aggressive. But that won't occur for some time.

That's helpful. Thank you.

(OPERATOR INSTRUCTIONS) Chris Bamin (ph), Morgan Joseph.

Just a couple of quick points. Did you say that the revenue from projects less than 25% complete was 76.2 million?

I think the number was 76.2; yes.

How much of that is in HCD:

A good part of it, 54 (ph) million.

Would you also have the operating profit for the aggregate group?

The aggregate group report at the top level, at the gross profit level. It is not -- it is integrated within the Branch Division for operating profit purposes.

What was that number?

At the gross profit level?

Yes.

Just a second. The margin on plant, 6.6 million for 2005; versus 4.8 million a year ago. Did you want the revenue as well?

Revenue we have; the revenue was like 42 point --

46.2.

46.2, right. Okay. Just with regard to the branch network, how much of that business was related to the private sector, i.e., housing?

If I can remember out of our Q, I think it was 33%. I would not say it all was all housing, but it is private sector.

We can't (multiple speakers) we don't break it out. (multiple speakers) Certainly a key ingredient though of our private sector for the branches.

Hang on a sec, Bill. That may not be correct.

That 33% might not be correct?

It is total Company.

I don't know; we had some other private work.

Let's come back to that answer once -- at the last part of the call.

Two quick other questions. Other income was nominal in the quarter. We are using 2 million for the year. Is that in line?

You're saying you are using 2 million?

Right.

That is one that has some variability in it. Certainly some investments that as they come to maturity -- I'm talking about -- are they Granite Land Company type of investments? That could be higher.

If you are just looking at other income, I guess I should ask the kind of (indiscernible). You're looking at in total other income I presume.

Exactly. Yes.

Yes. So although that could be a baseline, it could be higher.

Just with gain on sales, we have about 4.5 million for the full year. Is that still a reasonable assumption or estimate?

It is as good a number as any at this point. Again I will make the same caveat. We're going to be generating some income; it depends on again Granite Land Companies is the key ingredient of that, that could show up in that category, that we are not aware of at this time. Or it may be just a question of timing.

Terrific, thank you very much.

While you're there, the private sector for the branch, it is about 29.5% on the revenue, or $54 million of a total of 219.

How much? What was the number?

54.5 million.

Thank you very much.

Brian Rafn, Morgan Dempsey Capital Management.

Question for you on your process. You guys talked about some of the legacy contracts that, when you purchased Halmar up in New York and you had to assume those, what is the difference in the Granite Construction process -- whether it is engineering, whether it's caution on the bid and quote, the fact that you're vertically integrated with your quarry operations -- how is your process different when you bid these contracts -- be it design, build, or just your average business, primarily in HCD, not the branch business -- from some of these companies that you purchased?

Mike, do you want to tackle that one?

Well, we have really only purchased the one, Halmar. We have had other acquisitions, a smaller one in Texas, but we pretty much put our people in place there immediately. The other one was in the Southeast, and that one we kind of transitioned their people into ours. That is pretty much fully integrated into Granite now.

I would say as this point, we are pretty much doing everything the same in all the regions as far as the estimating discipline, the review process, the oversight process, certainly the forecasting process. The project controls are all the same, so at this point we are pretty much fully integrated.

Okay, but not relative to the integration of where you are geographically within Granite, the difference between Granite -- your culture, so to speak, of the bidding process -- versus somebody like Halmar that you purchased. Are there differentiations between what you guys assume when you get in and look at their backlog, their legacy backlog versus what the quality of yours?

As you are installing these processes in, be it engineering or forecasting or whatever, is there a point of demarcation that differentiates Granite in the quality of that process versus someone like Halmar?

I can maybe take a swing at this. Yes, I think there is a lot of difference, frankly. A lot of it goes just back to the financial condition of the Company. Granite is a really solid Company. We have I think for someone who is in the large, heavy engineering construction business, we are very, very unique. Part of that uniqueness is the fact that we have this branch network that is to a large degree a steady-Eddy business.

It takes a lot of investment, frankly. It's taken a lot of investment to build that network. And a lot of that investment, frankly, has come out of cash generated years and years ago from our Heavy Construction Division's work. But it is that network that provides a financial baseline for the organization. What it does is it allows our Heavy Construction Division -- and has allowed it I think for some time, frankly -- to not be in a position where they have to get a job to keep the Company afloat.

That is one of the primary differences that you'll see over a long period of time from Granite and so many people in this business, is that we are not, generally never, forced into a position where we need work so badly that we're going to go after it so hard. Because we don't need to. We have got the branches sitting there churning out cash flow and generating enough income that we can pay our bills, literally, without any work out of HCD for long periods of time.

We have gone in some cases, you back within the last 10 years, we have gone almost a whole year without getting a job. And we never felt like that was a problem, a serious problem for us, because of the structure of our business.

I think that separates us from frankly most people that are out pursuing the kind of work that our heavy group is doing. Certainly it was a distinction in the Halmar business. Halmar business was a stand-alone business without the kind of financial support that we have Granite. So they were doing what a lot of people in this business do, is probably bidding some work cheaper than they should have. And we had to work that off.

I think the other distinction is, and this is just a personal observation on my part -- Mike, you can provide I think probably better insight into this than I can -- but just culturally, we spend I think at Granite as much or more time estimating our work in that process, from a bid review, from a detailed orientation, just analysis standpoint than anyone in the business.

Frankly, based on personal experience that we have hired people to come into our organization and they frankly just think we are real anal about it. We take that as a compliment.

Okay. Just a follow-on from that, does that, from your experience with Halmar, does your acquisitions going forward make you a little more gun shy in evaluating some of the backlogs that you buy when you buy these companies?

Let's put it this way, we learned something and we don't intend to forget it.

Good enough. Thanks, guys.

Bob Labick, CJS Securities.

I just wanted to get a few more details from you on the thoughts on the mid May review of the California budget. If the potential boost of 700 million to a billion in Caltrans funding is off a base of what? And when would that be put into works? When would you see the effect of that, if it were to be increased?

That would be really a provision for using Prop 42 funds, the sales tax on fuels, in transportation. That is producing probably, at these prices of fuel, 1.5 billion a year. So let's just be a little conservative and say half of that would stay in transportation, half would go to the General Fund in the '05-'06 California budget.

Great. And right now is -- ?

Which would start July 1.

Got it. It is off a base of -- the current budget is around 1 billion, 1.5 billion; so it would be 50% increased or what?

The current budget appears to be in the 800 to $1 billion range.

So it could potentially almost double it, I guess, where you are going, which is obviously significant. That's great.

Yes.

Switching gears, could you give us an update on -- one of your other goals is to increase your aggregate production in greenfields and things like that. Could you give us just an update on where that stands? On findings, availability of new sites, and things like that?

We currently have an aggregates committee that is involved in pursuing and developing strategies around greenfielding. Greenfielding, as you know you may or may not know, is a fairly lengthy process. We are developing the expertise to be more aggressive in that arena. Short of that, there is really not a lot else I can tell you insofar as where activities. Other than it is going to continue to be a focus of our aggregates business.

Okay, thanks very much.

There appear to be no further questions that this time. I would like to turn the call back to Mr. Bill Dorey for any additional or closing comments.

We appreciate you all calling in this morning. We appreciate your interest in the Company, and we will be around the rest of the day if there's further questions. So give us a call, and we would love to talk to you. Thanks for tuning in, and thanks for your interest in Granite.

That does include conclude today's conference call. Thank you for participation. You may disconnect this time.