Granite Construction Inc (GVA) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Granite Construction second quarter 2005 earnings conference call and Webcast. Today's conference is being recorded and there will be a playback of the call that can accessed either on the Company's website, or by calling 719-457-0820 and entering the passcode 3947976. Again, that phone number is 719-457-0820, with a passcode of 3947976. It will be available beginning at 2 p.m. Eastern Time today, running through midnight on Wednesday, August 3rd. [OPERATOR INSTRUCTIONS.] At this time for opening remarks, I would like to turn the call over to Ms. Jacque Underdown, Director of Investor Relations. Please go ahead.

Good morning. Welcome to our call this morning. The earnings release can be located on our website at graniteconstruction.com.

Before we get started, I'd like to remind all listeners 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 undo 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. Factors that might cause or contribute such differences include, but are not limited to -- the failure to complete projects in accordance with our estimates of the costs needed to complete projects, inaccurate or incomplete claims or changes, change order submittals, compromised settlements, and/or unfavorable decisions of claims or change orders. A more detailed description of these uncertainties and risk factors are provided in our most recent Form 10-K and 10-Q and other filings, with the Securities and Exchange Commission, which I encourage each of you to review.

So, here with me today is Dave Watts, our Chairman of the Board; Bill Dorey, President and CEO; Mark Boitano, Executive Vice President and Chief Operating Officer; Bill Barton, Senior Vice President and Chief Financial Officer; also, our Vice President, Assistant Manager of HCD, Darryl Goodson; and on the phone with us today is Mike Donnino, our Vice President and Manager of our HCD Division.

With that, I'll turn the call over to Bill Dorey. Bill?

Thanks, Jacque. Welcome, and good morning, everyone. And thank you for your interest in Granite Construction. On our call today, I will address the qualitative aspects of our business, our quarter, and the year ahead. Bill Barton will be sharing his insights into our financials, and Dave Watts will share his perspective regarding public funding and the political environments that affects our business. And, of course, we'll take questions.

So let's start with a look at our overall business environment. You will hear more about this from Dave, but I think we can safely say there is more good public funding news to report than we've seen in some time. We believe Congress is on the verge of finally passing transportation legislation, and that's good news for both of our operating divisions. In the state of California, our largest market, has committed three to four times the funding for transportation as we've seen in the last three years, and, of course, that's even better news. In addition, the private development market, particularly the housing market, continues to create demand for our construction services and for our construction materials. All this is very encouraging, and is -- and there is clearly a sense of excitement within the Company about our business, particularly our Branch Division business.

So let's talk a little bit about our Branches. Our markets in the West are strong, and more importantly, some could get even stronger. And I think that's both for our construction activities and our construction materials business as well. Our second quarter results clearly reflect the strength of the private development market in the West, and we have traditionally been a public works contractor, but through June of 2005, almost 30% of our Branch Division revenue resulted from work done for private customers. I'm very pleased with our efforts to shift our focus and take advantage of this strong housing market in the West.

Certainly, as we've said on prior calls, our materials business is also the beneficiary of the strong private marketplace, as it consumes crushed rock and concrete aggregates. Having said that, we've seen our asphalt concrete business tail off in the last few years, as the Caltrans and city and county overlays were not as plentiful, overlays being the repavement of highways and streets. We're hopeful that the dramatic increase in expected Caltrans activity will result in additional public works bidding opportunities and higher volumes of asphalt concrete through our hot plants in 2006. We believe the pieces are in place to grow our revenue and our gross margin percentage, and for our Branch Division to perform better than it did in 2004. And that would be after considering the $9 million legal accrual that we announced two weeks ago.

Let's talk a little bit about our Heavy Construction Division. Our HCD markets are continuing to provide plenty of bidding opportunities, and we are noticing that the larger projects seem to be more plentiful than ever before. I think this is generally good news. While larger projects are longer from start to finish and present more risks from the standpoint of timely resolution of project issues, there are generally fewer bidders and greater opportunity for higher margins on large, complex projects. Our backlog remains very high, and as we said in our first quarter call, we are not under pressure to book work right now. And as a result, we have the luxury of being patient and holding out for higher margins, and we are trying to do that.

We continue to work on the structure and the capability of our Heavy Construction Division to be able to consistently deliver better project performance. However, the HCD financial results haven't measured up to our expectations or the potential we believe this business has for us. We are making progress, however, and I continue to be encouraged with what I am seeing qualitatively, but as I said, we've not been able to translate those efforts into consistent bottom-line results through the first half of this year. Once again, our second quarter was impacted by changes in estimated cost to complete for 5 our 35 HCD projects, which reduced our second quarter gross margins from 26 million to 15 million. The 2005 HCD story will be told in the second half of this year. We believe our second half for this business will be much stronger than the first half.

Looking at the total Company and our prospects for the year, we are, of course, getting a lot of help from the market and from the economic forces that influence our business. In most of our business units, we expect we will capitalize on our opportunities, and we believe we will deliver an excellent year in 2005.

And I'd like to hand this call off to Bill Barton, who will provide more financial detail.

Thank you, Bill. And good morning to everyone. My focus is going to be on the second quarter 2005 compared with 2004. Starting with the revenue, the total Company revenue increased to 677 million from about [inaudible] million, a [inaudible] percent increase. Of the increase, construction composed 89% of that. The remainder is, as you would expect material sales.

Branch revenue increased by 62 million, to 400 million, and it reflects primarily increases in the private sector materials, local public agencies, partially offset by a reduction in federal agency funding. Increases also represent California and the rest of the West. California, at the present time, represents 53% of the Branch revenue for the quarter compared to 56% a year ago. Keep in mind, approximately 60% of the total revenue is Branch-related. Heavy Construction Division increased 56 million, to 276 million, and on a geographic basis, primarily in California. And if you look at it by market sector, you'll see that it's primarily local public agency increases.

Turning to something that's not in the press release information to bring into -- to your attention, material sales, third-party sales, revenues for the quarter of 2005, 84.6 million. A 2004 comparison, 71.0. Margin, 19.0 for 2005 second quarter. 15.1 million for the second quarter of 2004. Gross profit margin percentage 22.5% for 2005, versus 21.3%, a 1.2% increase in margin.

Turning to gross profit, on a quarter-to-date basis, for 2005, 76.7 million, an increase of sixteen -- or, actually, 17 million rounded, from 59.7 million a year ago. Looking at it by division, our Branch Division gross profit on that quarter-to-date basis is up 19.9 million to 61.7. That's gross profit margin increasing 3.1%, which is 12.3% growth, to 15.4% between the years, primarily from improvements in average construction gross profit margin. Heavy Construction Division gross profit margin decreased from 8.3% to 5.5%. The decrease has reflected a lower gross profit of 15.2 million, a reduction of three point million -- a reduction of 3.1 million as a result of reduction of -- of recognition of increased costs of 11 million, as compared to 5.4 million in the prior year, and as per changes in the cost to complete estimates.

The next category to talk about is how we're being affected by the amount of revenue on jobs less than 25%. To give you kind of a summary of that for the quarter, revenue on jobs less than 25% was 71.9 million in this quarter compared to 54.7 million a year ago. This is a 31.5% increase, or 17.2 million. If you wish to quantify the increase in deferred earnings, and if you use a 10% gross profit margin, the increase in deferred earnings is approximately 1.7 million.

Now, turned to G&A. G&A, excluding the provision for legal judgment, increased 13%, to 40.6 million, at a slower rate of growth than the growth in revenue between the two quarters. As a percent of revenue, it has decreased from 6.4% of revenue to 6% of revenue this year. In addition to the normal G&A, Granite accrued a 9.3 million provision for legal judgment during the quarter, as previously announced. Although we believe we will prevail in our legal appeal, under appropriate accounting guidelines, SFAS No. 5, for those who enjoy that type of stuff, we have accrued the cost.

Turning to operating income, we have, including gain on sales of property and equipment, $29 million in 2005 versus 24.9 million a year ago. The gain on sale of equipment is up from -- up to 2.2 million, versus 1.1 million a year ago. Operating income for HCD, 8 million in 2005 second quarter, versus 10.3 million in second quarter of 2004. Looking at the Branch, 30.5 million, which does include the loss prevention for the legal judgment, and 23.7 million a year ago, up almost $7 million.

Turning to other income, other income is up -- well, it's a negative number at 336 for 2005, versus a total of 2.2 million. The primary difference is that last year we had income from our investments that affected the quarter, and we didn't have anything of any -- of any significance in the second quarter of 2005. Looking at the bottom-line results, net income for 2005 for the second quarter is 15 million versus 13.8 million a year ago, converted that into diluted earnings per share, $0.36 versus $0.34 a year ago, and which is quite -- quite an improvement, especially considering that we've had this loss provision we had to accrue for during the period.

The effective tax rate is 28.7% versus 34% a year ago. What is driving the difference,? This is associated with an increase in our partner share of consolidated construction joint venture income. Generally our construction joint ventures are not subject to income taxes on a stand-alone basis. Addition of the effect with tax rate for the period reflects the estimated impact of deductions, based on income from qualified domestic production activities under the new American Jobs Creation Act of 2004. It also includes a discrete-period tax benefit of approximately 3.7 million for provision for legal judgment that I previously talked about. If you look at it and try to address it, it's what it should look like for the year. I think it's expected that the tax rate will be, on an average, 30% for 2005.

Now, turning to revenue backlog by market segment and geographic area for the quarter, it's part of the press release that you should have -- should have received. Just a couple of comments, it kind of ties back to my previous comment. Looking at revenue by market sector for the quarter, you can see that the local agencies are 40%, the private sector is up 64%, and materials is up 19%. Turning to backlog by just -- I should say backlog by market sector, the thing to notice here is that public sector remains strong, is up 23%, while the private sector has increased 18% to 249.5 million. And the one thing to look at is public sector continues to be about 90% of our overall backlog at the end of June 2005.

And with that, I think I'll turn the call over to Dave Watts, who will talk about politics affecting our business, including the public funding outlook, and be prepared to answer any questions you might have later.

Thank you, Bill. Good morning, everyone. Well, we certainly have some great news here over the past month or so. Let me talk about the Federal Transportation Bill. Last night Congress approved the 11th extension on that bill, probably setting a record, which lasts only three days and expiring Saturday night, July 30th, because they go on their summer recess. But they are expected to vote today in the House to approve HR 3, called TEA-LU, even though they actually haven't filed the bill, they're going to vote on it anyway. And the Senate is expected to vote on it later today or tomorrow. And the extension giving the time for the President to sign it, assuming he will, which everybody thinks so because the number is the same figure that he said he would approve. So that's really good new.

The other good news is in California, where the budget was approved for '05, '06, containing a full funding from Prop. 42, which is about $1.2 billion, in addition, plus they're not borrowing from other gas taxes. So this amounts to about, in some way, a four-fold increase in transportation funding. The good news for Granite, even within all this great news, that is that shop budget, which is a maintenance account, which provides funds for these repaving projects that Bill referred to, overlays, is a big part of that, and that's right into -- feeds right into our strengths of being a very active asphalt paver.

So these are very good pieces of news. It gives some perspective on Caltrans's revenue and what it has meant for us in the past. Back in '01, '02 it reached to be over 20% of Branch Division revenue, and as of June 30th, it had dropped to a low of 9% of Branch Division revenue. So while we have expanded our revenue outside of California, which accounts for some of that dilution, there's no doubt that the Caltrans reached an all-time low. And if I could take the words from Will Kempton, the Caltrans Director, who said publicly the other day, we are back in business. So we hope to be back in business with them.

I'll turn that back over to Bill Dorey, who will wrap it up.

Okay. Thanks, Dave. Before we go to questions, I'd like to take this opportunity to thank our people for the commitment and sacrifice they make every day for Granite. Clearly, we're going to be faced with what we have characterized as a compressed work season. We're very busy. This summer will be a challenge for all of us, no doubt. But I know that our employees will dig deep and do what's necessary to deliver the performance that we're all expecting. And I want to thank our employees in advance for that and turn it back to the moderator for questions.

[OPERATOR INSTRUCTIONS.] We'll take the following question from the site of Bob Labick of CJS Securities.

Good morning.

Good morning, Bob.

Hi, I just wanted to -- first, congratulations on a great quarter, particularly in Branch.

Thank you.

I wanted to ask a question regarding HCD. You mentioned you expect an improvement in the second half and that things that have been put in place over the last, I guess, 12 to 18 months should begin to bear fruit. I was wondering if you could help expand upon that in terms of the projects bid and that are underway now, that, since the management change, I guess, a year or so ago, and the new bidding process and everything, could you quantify or at least tell us, are those projects running at higher margins? And -- so that we, in fact, believe that, really, these projects that have the cost overruns, et cetera, are really the old products and they, really, eventually will be out of production, they'll be done?

I wish the answer to that question was a simple one. I don't think it is, but I think, probably Mike Donnino could provide us with, maybe, the best insight into the second half of this year in HCD. So, Mike, can you take that?

Yes. And I think you're correct. The projects that we've gotten in the last -- in the last year or two are certainly bid with higher margins and, partially, because we think we can get them and partially because they come with a little more risk, especially in the large design build jobs. And we've come to know that with these large projects, the issues on them are large, and they tend to take a little more time to resolve. And we continue to see that on the projects, even on some of the newer ones. So to answer your question, the newer projects in the more recent couple of years are definitely bid with more margin in them, and we expect to get more margin out of them. And as we finish off the jobs that were bid three, four years ago, we certainly hope our gross margins and operating income to improve as well.

Okay. Thanks. And just to clarify, the projects that were at issue, I guess, in this quarter, were those -- have they had previous write offs as well, or were they new, sort of, writedowns, or -- and how close to completion are they?

Two of them -- actually, three of them are 90% to 100% complete, and two of those are issues with liquidated damages that are, I'll say, in negotiations with the owner. Two of the other ones are, one's about 75%, one about 40%, and I would put them in the category of productivity expectations. And the third one was a job that was completing and had issues with filing out some of our major subcontractors, things like that.

Okay. I'll get back in queue. Thank you.

Mike, if I could maybe just add something relative to the liquidated damages. As Mike mentioned, at two of these jobs, we had forecast writedowns as a result of recognizing liquidated damages that the agency has indicated they will assess. We are contending, in these instances, that the liquidated damages shouldn't be assessed, but because of our system, we immediately recognize -- until we get relief, written relief, in the form of a change order or some indication from the owner that we can, sort of, take to the bank, we will recognize those costs. And of the $11 million that we refer to in these writedowns, there's close to 5 million of that that is in that LD category. So we are hopeful that we will recover that at some point, but in our costs -- in our costs, we recognized those LD's at this point.

Great. And, then, actually, just if I could follow up with that. In the past, obviously, you've had some writedowns in the past few quarters. Where are you in terms of getting back some of the money from those in terms of change orders? Is it still realistic to expect that you are going after some of the previous writedowns and you could potentially get some money back from those? Or is that not a possibility?

Mike?

Yes. We've started to see some of the smaller ones get resolved as recently as this month, and some of the larger ones are much farther along. And we are hopeful that some of those will get resolved this year.

Great. Thank you, very much.

Bob, while you're still on the phone, this is Mark Boitano. There's one thing I should clarify. You mentioned new estimating systems in your initial comments, and I just want to make sure that you understand, we do not have a new estimating system. We've done some things within our current systems to provide us with some different looks at the projects, but we have not come up with, or developed entirely new estimating system.

Okay. No, I appreciate -- thank you. I think I was thinking more in terms of, I guess, getting everyone together, including Halmar and everyone onto the same system. And I believe that you may have changed some of their old practices into your practices over the past two years, if that's true?

This is Mike again. In an overall sense, that's correct. As far as processes and checkouts and following up after bids and things like that, that's correct. What Mark's saying is that we all use, and always have used the same actual estimating software.

Got it. Okay. Perfect. Yes, I was referring to processes, and I apologize for not being as clear. But I appreciate the clarity there. Now I understand it better.

All right. We'll move on, and we'll take the following question from the site of Rich Wesolowski of Sidoti. Please go ahead, your mic's open.

Thanks. Bill Dorey, starting kind of broad. I know building out the aggregates production capacity is one of your longer-term goals. How much cash do you expect to sink into that initiative, and over what time frame?

Well, there's probably two parts to that question. The first is to expand, sort of, our existing system, and that would entail expanding production at our existing facilities, some new facilities to replace some older facilities, which would, typically, build more capacity into our existing system, and to acquire aggregates to reinforce our existing system, to make sure that the business that we have is on a solid -- is on solid ground for the next 20 or 30 years. And we have quantified that in the neighborhood of -- Mark, help me out here a little bit. Probably in the $100 million range over the next, say, three years to accomplish that. It may take a little more depending on what aggregate resources we're actually able to acquire.

And, then, the second piece to that is to step out into new geographies and either acquire aggregates in the form of a business, for example, that we would acquire, existing business or to greenfield a new operation that would add capacity in a different geography. And, of course, that's more difficult to quantify, Rich, because we're not exactly sure what those opportunities might be. But, certainly, if the opportunity makes sense, we'd be prepared to step up and spend a fair amount of money to do that.

Okay. Taking the first part of your answer, just the expanding and upgrading the existing system, could you give us a ballpark estimate on how much that could increase the yearly output?

This is Mark. From the standpoint of increasing yearly output, I don't know that that's the most important part of the investment. The important part of the investment is securing the output that we currently have and providing a long-term view of our -- that materials business that we're upgrading in the existing system. As a result of the upgrade, we may have production efficiencies, we may expand our reserves to the point where we can supply something more to the marketplace, but we're not focusing on that as the sole reason for the upgrades.

Rich, I would think that, probably, the single most important element in increasing production would be getting our hot plant business, our asphalt concrete business, back up to and, probably, exceeding that which was it was at several years back, say two or three years back, before Caltrans started to tail off. And you would have to believe that with the funding that we're seeing Caltrans commit to, as Dave referred to the maintenance projects, that that work should be on the street beginning, probably now,. I suspect it probably won't impact our business until late in the year or early next year, but that should add to our hot plant business, and, of course, we supply aggregates for most of our hot plants, so it would impact our aggregate business as well.

Okay. Moving over to HCD, Mr. Dorey, I just want to clarify a comment you made earlier. The backlog was down, and that was by design with you guys?

No, I don't think I said that. What I was said that we have a lot of backlog in our HCD business right now. I think it's either at a record or near a record. And what that means to us is that we don't need another job right now. I mean, we'd take it, certainly, if we could get it, don't misunderstand me. But it's not as if we have to have work to keep our people busy. As a result, what it's providing us with is, really, a luxury that we don't see too often, where we can patient on bid day and we can hold out for higher margins. And, typically, if we're patient, we'll get our work. So it's really a nice position to be in.

Okay. Considering where your revenue in that segment is running , if you continue over the next one or two quarters to bid, approximately, the dollar amount of work that you did in the June quarter, how quickly do you think that would translate into a slower sales growth for the second half?

Slower. I'm not sure I understand the question. Slower sales growth?

I think I can answer that, Bill. Typically the work we bid in a given year doesn't really affect us until the next year. And at this late in -- even starting now in June, if we were bid to get a job, it probably wouldn't affect anything into 2007.

But, Mike, I think the -- what Rich is suggesting is that our revenues will -- if we are as patient as I'm suggesting, that our revenues will tail off, and I'm not -- we're not saying that. We're saying that we -- the pressure to get the next job just relieves us of having to be impatient, and my sense is that we will continue to keep our revenues at roughly where they are today, even if we -- if we exhibit that patience.

Okay. That answers it perfectly. And, finally, do you guys have a target level for SG&A, either absolute dollars or as a percentage of sales?

You're looking for a total G&A in terms of entire dollars or as a percent? Our target is as low as possible, which is not the question you asked. But we're probably -- you're probably looking at something, today, with the -- in the range -- it's going to be more a percent of revenue, as probably, it will run below 8%.

Okay. Thank you.

We'll move on and take the following question from the site of Mike Dudas of Bear, Stearns. Please go ahead, your mic is open.

Good morning, everybody, and Jacque.

Hi, Mike.

Follow up on Dave's comments. First, there's an interesting statistic about Caltrans and the percentage of the Branch revenues. How quickly can that flow through, and would you anticipate that being up -- I know the pie is, I'm assuming, bigger than it was four years ago, of getting close to 20% of those revenues going forward?

Well, I don't know. I can't -- I don't think I could predict how quickly we'd get to a particular percent of our business, but we're beginning to see this Caltrans work hitting the street now. It certainly appears as if are, at least. There is quite a few jobs bidding now with limited competition, which is very encouraging. If we continue to get that work at the pace we have in the last 30 days, we'll see a little of that hit our revenue stream this year, but it will be next year when the season starts you'll see it.

To give you a flavor of the CTC, which the California Transportation Commission, last meeting approved over 300 projects in the neighborhood of $1.3 or 4 billion, and those will be put out for bid over the next several months. And, then, of those, most of that work you will not see reflected in anybody's bottom line until the following year, so, just to give you a flavor of what just currently took place.

But what's interesting, and, really, the timing is just terrific for us. I don't want to sound like I'm too optimistic here, but, frankly, we don't need a lot of extra juice hitting our business right now, because there's plenty of private work out there and, frankly, we're pretty busy. So, I think from a timing standpoint, that the prospect of actually being able to bid this work now and building it -- and build it next year is just perfect.

But to add to that, Bill, I think the prospect of increasing our asphalt paving operations and production of asphalt, which has been slow, notwithstanding our Branch Division success, has a lot of prospect for us. And we can ramp that up pretty quickly, as those projects hit the street.

That's true.

And to follow up, again, on the comments regarding TEA-LU hopefully getting signed before Saturday, could you maybe refresh us on how that -- how that will play through in some of your -- as you start budgeting and planning your opportunities for '06 and '07 in some of your more important areas of the country, how that can be supportive, or is that more of a longer-term base, so the Departments of Transportation can start planning again?

I'll give you my opinion. And anybody else that wants to crime in certainly can. I think this is a long-term funding mechanism that, likely, will not have an immediate impact on our business. This is a mechanism that all the DOTs around the country to do long-term planning, fund large projects. Those larger projects get bid, and they hit our -- and they would be reflected in our business over the next couple of years, probably. So I wouldn't expect that we're going to get a big boost out of that, but, certainly, emotionally, it sure helps.

I think to add to Bill's comment, the -- it certainly allows the states to plan their projects on a longer-term basis, knowing that that authorization is there. And I'd like to remind everybody that the Transportation Bill is an authorization bill, and the first year of that bill actually is the current fiscal year that the Federal Government is in. And against that authorization each year, the money for the transportation budget has to be appropriated in the annual budget, which is which is an annual fight that goes on. But having that authorization out there for, now, another five years, certainly allows that -- those appropriations to be more readily forecasted and the states can do their planning and spend their money. And the fact that both the federal and state governments are bringing in a lot more revenues these days takes a lot of the pressure off of those individual yearly appropriations.

And the final -- I know it's a little early to look at all the details of the bill that might get signed this week, relative to say what the House was looking at last year. Is that change any better, worse for a Company like Granite? Is there some that -- did things get switch in either regional or different locations or mix of business that would be helpful or harmful or just neutral for Granite?

Well, the last, big hurdle that they had to overcome was the ratio -- the rate of return by the states, and the larger donor states like California were arguing for a better rate of return than what they've been getting. And that was the big hurdle which has just recent by been overcome. And they've got some agreements. So, perhaps, you could say that the population states that we're in, California, Texas, Florida, New York may end up a little better off than, perhaps, they had been before. I haven't seen the allocation figures by state yet, so I'm just speculating a bit on that.

That's fine. Thank you for your thoughts.

We'll take the following question from the site of Richard Rossi from Morgan Joseph.

Good morning, everybody.

Good morning, Rich.

A couple things. First, let's go back to these projects that cost you 11 million in the quarter. How many of those were Halmar jobs?

Two.

And how many were design build?

One.

You've had issues with design build jobs in the past, it's no great issue. But have you changed the way you look at bidding and how you assess the risks in the design build area?

Yes, Rich, we've -- in fact, we're doing it almost as we speak. We've refined the risk review process quite a bit by, not only our risk department, but also or regional management. And there's quite a rigorous list of things that we address on each bid now. It's just recently been standardized among the regions. Everything -- it's probably 300 line items that we look at and try to assess for each project.

Now I know you don't have any kind of answer to this, but if you had that process in place -- ?

Rich, we're having trouble hearing you.

I'm -- can you hear me now?

That's better.

I know that you probably don't have a definitive answer for this, but if you had that process in place today, would you have one less design build work to-date in all likelihood?

Would we have been gotten less work?

Yes. Would you have been -- would you have -- would your bids have been higher because of the risk assessment and maybe not being winning bids?

Actually, the bigger jobs generally don't boil down to 1 or 2%, although cost is very -- generally, cost is the main driver, even though, they're best value procurements. But at the end of the day, generally, they're not -- the costs are probably a bigger spread than you would see in our hard-bid work, although one of the big design builds we did get was very, very close, and if it -- within 1%. So, obviously that one we probably wouldn't have got. So, I'd say in general terms, probably no, but in actuality, it would have cost us one that I know of, for sure.

You had -- you've got a very good book of work, there's a lot of other work that's going to be out there, the new highway bill and California's budget will help. Where are we in terms of the tightness of people and equipment at this juncture? And are there cost increases ahead of us that force us to tighten?

You talking about HCD or the Company as a whole?

The Company as a whole, really.

Well, why don't you answer it for HCD, Mike, and then we will try to answer it for the Company.

Okay. Well, we're certainly seeing increases for skilled labor in the open shop markets. For example, crane operators, motor graders, like, carpenter foreman. Those things have been happening in the last year. It's particularly hot now in Florida. Texas has settled down a little bit. But the supervision is at a premium, and those areas are going up for us. The superintendents, engineers, project managers, so that market is getting tougher. And we really value the guys that we do have, and are looking for more of them.

As far as escalation -- I'm not sure if this is part of your question, but I'll answer it anyway. Things like fuel, the price of steel, asphalt, and although we haven't seen any major things that we would call material on any job, it certainly has affected our long-term jobs, and we've absorbed that in our costs. Like, for example, fuel, we generally put an escalation at bid time on what we think fuel will do, but we certainly were short in the last couple of years, where it's almost doubled in price. So, those things we have been absorbing in our long-term projects. Steel, we had some of those affects as well. Most of the major ones we get firm prices, but some of the minor things trickle through and -- trickle through our costs and get absorbed.

Yes, Rich, this is Mark.

Yes.

In regards to the Branch Division, the other really large component of the total Company, I think we're experiencing a lot of same things that Mike has given some color to. The professional staff, I think we feel is our biggest challenge in terms of making sure we have the adequate number of project people and folks in our estimating side of our business and overall management to handle the increased volumes. But by the same token, the skilled craft workforce is a challenge for us, even in some of our union markets. We're seeing the union halls starting to have less availability of people.

You asked a question about equipment. We haven't seen -- that could a big problem at this time. There's longer lead times for a lot of the new equipment that we're buying. We see spot shortages of certain types of equipment that we need for our work, but Granite's one of the largest equipment owners, and we've got a fair-sized fleet that we have access to and the rental market has provided us with a safety net, at least to-date, that we have needed to staff a lot of this work.

In that regard, gain on equipment sale has always been a line item that is a real contributor to the Company's results. As equipment gets a bit tighter, even though it's not a major problem yet, is it likely that, and in the rest of '05 or in '06 that we might see less profit simply because you'll be selling less, even though you might be able to get better prices for what you're selling?

Rich, this is Bill. And what we're seeing is just exclusive of the demand for our services and demand for, obviously, equipment to fill those needs, that we just see that we're going to have lower sales this year than we have in the last self years in terms of gain -- in terms of -- if you want to put it in terms of gains on sales of equipment. But it's not -- I don't think it's tied to the market.

Okay.

We have a pretty disciplined equipment side of our business, and typically, we're not going to run a piece of equipment if it's ready to be sold. So I think your question is -- Do we run some equipment that typically we may have sold, just because we're out of -- ?

Right, right.

There may be a bit of that that happens, but typically when we get to that point, we're going to sell what needs to be sold and replace it with new equipment.

Rich, can I go back to this capacity issue and people? I agree with both Mike and Mark relative to the challenge that we face, but the -- another perspective maybe on that question is that we're one of the largest employers of construction people in the country, and we probably have a better opportunity to gear up and build capacity than anybody -- most people we compete with. Let's just leave it at that. As the opportunities present themselves, we will build capacity to try to meet that demand. It will be a challenge, as has been said, but I think that the other interesting, sort of, perspective on that question is, all of our competitors are in the same boat, and I would venture to guess that most of our competitors are going to have more difficulty with capacity than we will. And so what that does is it -- it really does create the market that we are experiencing right now. And so it's not entirely a bad thing to have a capacity restraint, because absent that capacity restraint, we would not be experiencing the market that we -- that we're seeing right now.

The other -- probably the other sort of nuance into this whole thing and Dave alluded to it a minute ago, is that we think that a large part, particularly in the West, a large part of this increased demand is going to come through our hot plants and through our asphalt paving business. And asphalt paving is a very expensive proposition, and it doesn't take a lot of people or, frankly, equipment to perform that work. And so what we will likely do is drive a fair amount of revenue without a lot of resources from the standpoint of people and equipment to support that. We already have the hot plants in place. We have capacity in those facilities that we talked about earlier that is unused. So we're really looking forward to that.

Okay. Moving on, while we're talking about the hot plants, have -- do you have data related to what your aggregate resource life is now versus any -- a past moment in time? Five years, three years ago? What your reserves are? Have they come town. Are they about equal?

I'd say they're probably pretty much the same. I mean, we've added resources this last year. I think we've talked about a quarry that we acquired in Reno that we've been leasing and our aggregate deal with Aerojet in Sacramento, which was added capacity in our -- from aggregate resource standpoint. We've also used up capacity through throughout the system, of course. We continually try to replace that which we use up. I would say that it ranges from 100 years in some places, Rich, to, certainly, less than 5 or 10 and others, and, certainly, those areas where we have less than 10 or less. I mean, we're working really hard to try to replace that. So we've got our challenges in front of us, but we -- I don't think, in general, it's changed much. What do you think, Mark?

Yes, I'd say that's pretty accurate. And our goal, obviously, is to increase those reserves, as was mentioned earlier in the call. So we're making -- we're giving it our best effort to get ahead of the curve as oppose to do just reacting where we've been.

Okay. I know you said that you haven't seen the final highway bill, but do you know whether the funds are shielded as they were in T21 from going into the general revenues?

Rich, this is Dave. Yes, I think the firewall that had been created in T21 has remained in the -- this new bill. I think it's called TEA-LU. So I think we can feel pretty comfortable that the funds, the revenues from the excised taxes, the Federal gas tax, in other words, gets dedicated to transportation and doesn't get taken. And of course they did solve the ethanol differential a little while ago in another bill.

Right. Well, that's good news.

Yes.

And one final thing. Unless I missed it, did I hear any guidance going forward?

No, other than we said that we would deliver an excellent year.

Well, I sure hope so. You've certainly got a good start on it.

We do too, Rich.

Thanks, very much.

All right. We'll take the following question from the site of Tom Butler of Thomas Butler. Please go ahead, your mic's open.

Hi, guys. We pretty got to my questions, which are surrounding the HCD division. So I'm going to go ahead and pass. And thank you, very much, for all your hard work.

Thank you, Tom.

All right. We will move on, and we'll take the following question from the site of John Rogers of D.A. Davidson. Please go ahead, your mic's open.

Hi. Good morning.

Good morning, John.

Bill, you talked a little bit about the number of projects that rolled over or were coming up on that 25% differential. And I was just curious was there a significant amount of work that hit, like a 26% level or greater that had unusual profits, from a timing point of view, drop in during the quarter?

The simple answer is no. We did have a couple that went over 25%, but I wouldn't consider them extraordinary.

Okay. Then you talked you a little bit about gains on equipment and how that would probably be less this year or not to the same levels. What about gains on real estate? Anything there that's coming up?

Those are a little bit more challenging in terms of determining when it will -- when those real estate deals will close. We certainly have some that we expect to be completed this year, but I -- it's difficult to determine which quarter that might happen. And it could slip into next year. But we anticipate we will have some.

And an amount? Can you help us with that?

That makes it -- no.

Okay. Okay. I thought. And, Bill Dorey, in your comments you mentioned the shortened construction season. Were you just talking about a later start to it? Or was there something else there?

Well, we're busy.

Yes.

And we -- in the West, in particular, we had a really wet winter and it lasted three to four weeks longer than, I think, normally, we would expect our winter to last, and as a result, we got off to a late start. And, which is -- on the one hand, we got off to late start. On the other hand, we seem to be performing better in our Western business to date than we did a year ago. So that's another encouraging sign that our business is pretty strong. But we have a lot of work to do between the time we did get started until a time that it starts raining again. And so, actually, our guys have coined a phrase, they call it the compressed work season, which just means that we're going to have the pedal to the metal all summer long.

Okay.

I think, frankly, I think our competitors are in the same boat, which is equally as important, I think, in, sort of, understanding the marketplace.

Right. Well, I guess we'll hope for an Indian summer and extend it.

Well, we're probably going to need it.

The -- and, then, I guess, the other thing, just, again, going back to that HCD margins, I think in the past you've said, or maybe I've just thought, that the margins in that business should be comparable or close to the Branch operations. But as you talk about the higher risk level that some of these larger projects incorporate, does that imply in some sense -- and I don't want to get too far ahead -- that that business should generate higher returns?

Well, let me take a shot at this and, then, Mike, you can chime in. Its a very interesting question. It's one that we debate here on a pretty -- on a regular basis. I think there's another element to this discussion, though, that needs to be considered. And it is that the investment that we have in our HCD business from a -- from equipment and the various things that we need to do our work, is significantly less than in the Branch environment. And it's primarily driven by the fact that we have large investments in our materials business in the Branches.

Right.

And it's really almost a 5- or 6-to-1 investment, aside from the cash side of this equation, that it takes to run these businesses. Just from an asset, hard asset standpoint, they're not even close. And so that would argue that you don't need as much return out of our HCD business for it to be viewed as a good business. We've chosen not to accept that argument because of the risk involved in the HCD projects and the large projects. And so our expectations and our goals are to get similar returns as we get out of our Branch construction activities. But I think you can't -- you cannot ignore the fact that the investment is quite a bit less.

Okay. Great. Thank you.

All right. [OPERATOR INSTRUCTIONS.] We'll take the following question from the site of Brian Raphine of Morgan Dempsey. Please go ahead, your mic's open.

Good morning, guys, hi, Jacque.

Good morning.

Question for you guys back about your -- you guys have talked in the past about bench strength. With the tightness in the market on labor, do you see any pressure on wage and salaries relative to either the retention of your bench strength or the recruitment of somebody else's bench strength?

The answer to that is, yes. Yes, we do see some pressure now. I mean, the market is pretty hot. And everybody is trying to build capacity. And we've got wonderful people that are really well-trained that know how to do this work. And, yes, there's pressure on our people. We're doing our best to react to that. It's a constant monitoring issue that we deal with every day.

And with that being said, I think we've tried to stay a head of that curve. We do a fair amount of analysis to make sure that we're doing what we think is the right thing for our employees so that we can not be putting ourselves in a position where we're constantly being hammered by our competition for our people. But all that being said, it still happens, and it happens more than we'd like it to.

Okay. Can you guys kind of put a magnitude on it? And I know you guys, you're all over the board with -- you talked about superintendents and projects managers and engineers, down to the guy who is the crane operator. Is the overall, maybe, at the lower level, just the standard labor on the ground in your project, is the overall magnitude of the wage and salary inflation -- in most instances we talked to companies it's low-single-digits. Would you describe that magnitude as creeping above to, maybe, mid- to upper-single-digits in wage and salary pressure?

Yes. I don't know that you could quantify it, really. I think it varies by the type of person we're talking about. So I'd be reluctant to try to put a number to it

Put a number on it. Okay. Relative to -- you guys talked about training. Is there a weakness in the forward pipeline of some of these trade jobs, either from journeyman programs or an exodus of people out of unions? And I'm trying to get a sense. Is it a tech school issue? And if it is, does that transfer more of that learning curve and that skill-set creation to you guys on the job versus getting somebody who is a trained laborer?

Well, yes, I think you're right. It does and it has. And we've got -- we've put some processes in place over the last four, five years to try to make sure that we are training the people that we need. And it gets a little tricky. Because when you get to that hourly craft worker, we can train him today and he can be gone tomorrow. And it doesn't happen so readily from a salary side. So we're -- we're constantly trying to weigh the benefits of our training programs. We have training programs in place, and it's something that we continue to emphasize.

Okay.

But maybe before we leave this, this is a good opportunity to maybe talk a little bit about an initiative that we began, put in place, about four years ago and maybe step back even further. As you -- I think most of you know we had an association with TIC. We still have that to a lesser degree today. And the TIC Company, we learned a lot, actually, from those -- from that company, particularly in the area of training. They have one of the best training programs of any company in the United States, in my opinion, for their craft people.

And to some degree, based on what they were doing, we developed and began a program inside Granite about four years ago. We call it our employee develop initiative -- development initiative. It's a process and a program that we are spending, really, 4, 5 million bucks a year in simply accelerating the capacity of our people, both the professional -- our professional staff and our craft people as well, all through the Company to try to build the capacity of the Company and the capacity of our people. And I think we are way, way ahead of the majority of our competitors in this regard, and we have a really, really good program. It'd be too long to -- take too much time to try describe it in detail on this call, but if any of you are interested in that, we'd be happy to share it with you.

We have some information on our website, also, Bill.

Okay.

Okay. Sounds good. Question for you, Bill. Relative to the capacity of design build, have you noticed any more encroachment of other -- let's call them competent road builders coming into the design build? I think in the past you've said it's, nationally, it's a half dozen or so. Do you see that increasing as the number of record projects and HCD and the funding with the TEA-Lu comes on? And then the second question would be, you talked about the risk control in the design build area. And I'm wondering, are you a bit more demanding now as you're being more selective on the actual gross margin contribution from that side in a sense?

Let me take the second question. I'd like to throw the first question back to Mike. I'm not trying to avoid it, but I think he's in a better position to respond than me. But from a standpoint of demanding, and I don't know if demanding is the right word, demanding on bid day higher margins and setting expectations for performance, the answer to that is, yes. Collectively, as a management team here, it's not just me, but it's our management team here. We have determined and made, I think, just a conscious decision that we're going to be more patient. We are going to bid this work, particularly, this large work with higher margins. And we've set expectations and publicly talked about those expectations with our people and the folks that are in a position to deliver on those expectations all through the Company. So I don't know if demanding is the right word, but we've set our expectations up higher than, I think, we have in the past.

And, Mike, you want to tackle that first question?

Yes. If I can remember exactly what it was. But I think there's -- design build is kind of going in both directions. It's also being used on smaller projects -- 50 million to 100 million. And in those areas there's other people, traditional bid build people that are trying to get into that business. We're seeing, I think, a little bit more competition in that area. As far as the bigger projects, say, 300 million-plus, I think you generally have the same players. Recent trends of concessions and alternative financing methods and things like that have brought in more foreign equity-type players into the market. And that -- generally, they're not -- some of them bring contracting legs with them. Some of them already have them here in the States, such as Skanska, and others are coming just for the investment part of these type of contracts.

Okay. Just one final question. The transact -- I may have the name wrong. The TransCorridor project down in Texas, where they're -- they've shown some graphic presentations of what that looks like, where they align and kind of coordinate roads with rail and power lines and pipelines and that, is that the wave of the future, kind of, consolidating or bundling all those utility resources with transportation? Or is that something that's geographic to Texas?

Well, that takes a lot of right-of-way to do that. And most of Texas has that available to them. As you get closer to the cites, that gets tougher and tougher to do. So I wouldn't say that's a trend of the future, although, I'm sure it's on -- it's, kind of, on people's lists of things to look at, because I think it is efficient to do that if you can economically. But, as I said, when you get closer to the cites, and it's way more expensive and harder to do that.

Right. Okay. Superb job, guys, as always. Thanks.

Thank you.

All right. At this time it appears as though we have no further questions, so I'll go ahead and turn the call back over to Bill Dorey for any final comments.

Okay. Well, we certainly appreciate you all calling in this morning and appreciate your interest in Granite Construction. We will be around this afternoon and this morning. If any of you have other questions, feel free to call. Thank you, very much.