Granite Construction Inc (GVA) 2005 Q3 法說會逐字稿

Good day and welcome to the Granite Construction third-quarter 2005 earnings results conference call and webcast. Today's call is being recorded. At this time, all lines are in a listen-only mode. A question-and-answer session will follow the presentation. At this time for opening remarks and introductions, I would like to turn the call over to Jacque Underdown. Please go ahead.

Good morning. Welcome to our call this morning. The earnings release that we will be referring to today is on our website located at GraniteConstruction.com. I would 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 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.

Factors that might cause or contribute to 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; an accurate or incomplete claims or change order submittals; comprised settlements and/or unfavorable decisions of claims or changed 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.

Here with me today is Bill Dorey, President and Chief Executive Officer; Mark Boitano, Executive Vice President and Chief Operating Officer; and Bill Barton, Senior Vice President and Chief Financial Officer. Also with us today by phone is Dave Watts, our Chairman of the Board and Mike Donnino, Senior Vice President and Manager of our Heavy Construction Division. And also present with us today is John Franich, our Branch Division Construction Manager.

With that, I will turn the call over to Bill.

Thanks, Jacque. Welcome and good morning everyone, and thank you for your interest in Granite Construction. As has been our practice, I will address the qualitative aspects of our business, our quarter and the year ahead. Bill Barton will share his insights into our financials. Dave Watts is on the phone, and he will be available to respond to questions regarding the politics that affect our business during the Q&A.

So let's start with a look at our overall business environment. Since our second-quarter call, Congress has passed the Transportation Bill. And while that may be old news at this point, it is important to the industry and to the long-term health of our business. The general bidding environment across the country remains very active, particularly in California, where we are beginning to see more transportation bidding opportunities. This is primarily being driven by the increase in Cal trans funding that has occurred in the last several months.

While we are excited about the near-term prospects for our California business, we realize that the increased Cal trans funding is subject to the political whims of California politics. There is a proposition on our November 8 ballet, Proposition 76, which if passed will ensure that the Prop 42 funding is used exclusively for transportation purposes. We are hopeful that Proposition 76 will pass, but there is certainly no guarantee.

And for those of you, who may not be familiar with Proposition 42, which is at stake in this election, that is the gasoline -- the sales tax on gasoline. It develops about $1 billion worth of revenue, which has been earmarked for transportation but has been diverted recently into the general fund.

From a general marketplace perspective, the housing market in the West remains strong. It is creating demand for our services both from a construction standpoint and also for our construction materials. The housing market is a critical element influencing our construction and construction materials businesses. It not only provides opportunities for granite, but it also gobbles up capacity in the general marketplace that would otherwise be active in the public works market.

So let's talk specifically about our branches. To begin with, I would like to congratulate all of our Branch Division people. In our third quarter, our Branch Division posted record results, and our 9-month branch financial performance was the best ever -- best that we have ever reported as well.

These results were achieved even after recognizing a $9 million judgment, resulting from a civil lawsuit in our second quarter. This judgment is under appeal, and I believe it should be characterized as a non-recurring event.

Arguably, our year-to-date operating results are even better than they appear. Both our construction activities and our construction materials businesses are performing well, driven by well-funded public works budgets in a strong housing market.

We are currently carrying $674 million in Branch Division backlog. This is also a third-quarter record, and we believe this backlog is very high quality. If we are correct in this assessment, our construction gross margin percentage is sustainable and may very well improve in 2006. In addition, my sense is that the rapidly escalating capital requirements necessary to sustain, expand and grow construction materials businesses will push material pricing higher. The only way to pay for the huge investments necessary to develop or purchase aggregate facilities today is to increase gross margins on materials. I think this pressure, along with the recognition that replacing aggregate reserves is very difficult and very expensive, will drive pricing higher.

All and all, we are very pleased with our Branch Division business and believe that our branches will have a strong finish in 2005 and that our prospects for 2006 are bright.

Moving to our Heavy Construction Division, as we said in our press release, we are disappointed with our HCD performance. The write-downs that we recognized in the third quarter were not anticipated. We believe that our forecasts at the end of the second quarter were achievable, and therefore all of the revenue recognized in the third quarter was expected to generate forecasted margin. However, that was not the case.

Of the six projects that experienced forecast changes greater than $1 million in the third quarter, one experienced a positive variance and that was the project in California. Three projects were written down in New York, and two other projects were written down from our national region. Of the six projects, one is forecasted -- only one is forecast to actually lose money.

While we continue to believe that we are on the right path and we are addressing the right issues in our HCD business, we realize that we are dealing with a turnaround situation. As I have said before, we are working diligently to organize this business into five independent stand-alone profit centers, each with the capacity to handle an average of 100 million to 200 million in revenue and to be consistently profitable. I think we are making progress towards this goal, but it is taking longer to affect our performance than we expected. Our people in our HCD business are working their tails off to implement our plan, and I want them to know how much I appreciate their hard work and commitment. We are not under-reacting to our underperformance, and we will get it right.

We are not seeking revenue growth. We are focusing squarely on developing quality estimates, project planning and execution, and earlier recognition of project issues and prompt definitive action to resolve issues timely when they do occur. One of the aspects of our HCD business that we have talked about on prior calls is the subject of unresolved revenue. Because many of our HCD projects are of such long duration, the issue resolution process is slow. We have been working these issues very hard however to date. But to date, we have got little recovered income to report.

Resolving these issues is not a silver bullet. However, it will help. And we are optimistic over the next several quarters that we will resolve a number of these outstanding issues.

Let's talk a little bit about hurricane damage in the Gulf Coast and what that may or may not mean to our HCD business. Obviously, there has been incredible infrastructure damage, and significant amounts of money will be spent to address this situation. Certainly, one question that should be asked is whether that money will be new money or will come out of the transportation account. Well, we are not in a position to definitively provide the answer to the question. The best information we have is that it will likely be new money.

The next question is whether Granite will participate in that work. I think it is important to understand that whether we are successful on any work in the Gulf or not that the Gulf work will consume capacity, which is important to the health of our marketplace. Our first priority is to build the work we have as efficiently and effectively as we can.

We believe we have some additional capacity to pursue work in the Gulf Coast, and we will do that. But whether we participate directly in a big way or not, the money that will be spent to re-build Louisiana and Mississippi will positively affect our business.

From our Texas regional office, we have bid several smaller projects along the Gulf to date. We are happy to report we have been awarded a 6-mile long levy reconstruction project for the Corps of Engineers. The size of this project is roughly $14 million. It remains to be seen whether this is the beginning of something larger for Granite along the Gulf Coast or not.

To summarize our Heavy Construction Division business expectations, we anticipate that we will deliver a good fourth quarter in 2005 and our financial results in 2005 will be better than in 2004. We also expect 2006 to be better than 2005.

From a total Company prospective, our guidance for 2005 suggests we will have a strong fourth quarter in both our Branch Division and in HCD. Looking forward into 2006, the fundamentals are clearly in place to support a strong performance, and it will be up to us as always to operate effectively and capitalize on the opportunity.

One last thing -- like every other company in this country, we have been contending with the escalation of the price of petroleum and petroleum-related products. There is no doubt that these escalations have affected our profitability. However, we have been relatively successful in mitigating much of that impact. In particular, I would like to complement Bill Wagy and Dan Thompson and all of our employees charged with managing our equipment. They have quite effectively minimized the impact of fuel escalation on the profitability of our internal equipment despite rising fuel costs. So hats off to those people for a job well done.

Now, I would like to turn this call over to Bill Barton for his insights into our financials.

Thank you, Bill. Good morning, everybody. The focus today is going to be on the third quarter comparing 2005 to 2004. Most of the information is available on the press release and the accompanying table.

The total Company revenue increased to 864 million or by 164 million or 23.5% -- very strong increase for the quarter. Of that, the 90% of it was in the form of increased construction. Branch revenue increased by 108 million to 571 million, reflecting primarily increases in the private sector of state agencies as well as materials.

To compare the two divisions, approximately 56% of the total revenue is Branch-related for the quarter. This compares to on an annual basis where the branches are running about 60% versus 40% for heavy construction.

HCD increased 54 million to 291 million. And geographically, it's coming from California associated with one project. If you look at it by market sector, it's focused on local public agencies.

Gross profit, Branch Division gross profit is up 18.8 million to 95.8 million -- this gross profit margin increasing about 0.1% from 16.7% to 16.8%. HCD gross profit margin decreased from 7.9% to 3.6%. As Bill talked about in his comments, the increase is reflected in a lower gross profit of 10.3 million reduction of 8.3, and this was the result of the recognition of increased costs, our net costs of 10 million on primarily fixed projects. And this is compared to last year, where there was an increase in estimated costs of 4 million on two projects -- just to put it in perspective.

At this time, I will give you an idea of what the material sales summary at the gross profit level revenue for 2005 is $107.8 million versus $91 million a year ago, an increase of 16.7 million. The margin on that material sales is 24.5 million in 2005 versus 20.7 million a year ago, an increase of 2.8 million. Gross profit margin percentage in 2005 is 21.8% versus 22.8% a year ago.

Now what was the impact of deferred earnings due to our 25% completion threshold? Revenue on jobs less than 25% for the quarter was 81.6 million in 2005 compared to 71.5 million, a 14.2% increase or $10.2 million. If you wish to quantify the increase in deferred earnings and if you use a 10% gross profit margin, the increased in deferred earnings is approximately $1 million. So that gives you a little perspective on the effect of those jobs less than 25%.

General and administrative increased 14% to $50 million at a slower rate of growth than our growth in revenue. As a result, G&A as a percent of revenue has decreased from 6.3% of revenue to 5.8%. Major increases were in salaries, favorable compensation associated with increased profitability, season services -- most of these costs associated with the increase in revenue.

Operating income is I think quite well represented in the news release, and I have nothing more to add to that.

Looking at other income, we had one item or one area that was substantially up over last year, and that was interest income. This 1.3 million increase was really a combination of higher amount of marketable securities at higher interest rates. And we had a higher recognition of interests on other investments and asset sale.

Turning to net income, diluted earnings per share $0.98 compared to $0.80 a year ago, which is about a 23% increase. And if you looked at the effective tax rate, as you can see, it is 29.7% versus 31.5% a year ago. And this is associated with an increase in our partner share of consolidated construction joint ventures' income. Generally, our construction joint ventures are not subject to income taxes on a stand-alone basis.

Additionally, we have had this year the effective tax rate for the period, reflecting the estimated impact of the deductions based on income from qualified domestic production activities under the new American Jobs Creation Act of 2004 that also positively impacted the effective tax rate. As terms of what we think the overall effective tax rate is for this year, it should be running about 30% at this time.

And with that last comment, I will turn it back to Bill Dorey, and I will stand by for other questions later on.

Okay. Once again, we appreciate your interest in Granite, and we will turn this call back to the moderator for questions.

(OPERATOR INSTRUCTIONS). Jack Kasprzak, BB&T Capital Markets.

First of all, congratulations on a great quarter, solid results. My first question is, just is it possible to get an estimate of what you guys think corporate expense -- that corporate expense line might be for the year?

Corporate expense line, G&A?

Just in terms of the segment breakdown after the Branch and HCD operating profit, you typically report a corporate expense line.

I am sorry; I'm having -- looking for corporate (multiple speakers) G&A?

Correct, yes.

As opposed to -- I don't have that in front of me at the present time. Give me a couple of minutes.

Just what you think it might be for the full years -- if you can give us an estimate, that would be great.

Secondly, Bill, the three HCD projects you mentioned in New York, where there were write-downs, are those projects that you bid since buying Halmar?

Yes.

And just kind of thinking about HCD, obviously this has been an ongoing struggle -- I guess is a fair word just in terms of getting the margins up. You've detailed some of your thoughts here of course. But just trying to delve into a little bit -- do you think the problem is longer term or just some new geographies like New York, where you have not had experience and hopefully you can get up a learning curve? Is it more in terms of very volatile -- you mentioned energy costs and of course materials costs are up. Is there any way to maybe pinpoint a little better what is going on with the margins?

Well, that's a really good question Jack. I think we've had that question before. Our response has been that there is not a primary theme that runs through the difficulties that we've had on these projects, which may be good news or bad news, depending on what your perspective is on that.

Certainly -- and I would like Mike Donnino to chime in here but -- clearly the problems that we have had in New York are growing pains. It is a new market. We are not familiar with it. It is part of the integration of a new business into our business. It's not an unusual phenomenon to have difficulty initially in any new acquisition for us; I suspect for other companies as well. And we're having those difficulties related to that in our New York business. The difficulties we're having on other work around the country, I think is really -- if there's a common theme, I would think it is a product of just having grown that part of our business as fast as we did. And I have said that before, and I think that's -- if you're asking me to boil it down into one or two comments, that is probably it. Mike, you want to--?

Bill, I would agree with you. I think the root cause of many of those things is our rapid growth that really began in the jobs we booked in 2003 and maybe a little before that, which was simultaneous with the acquisition and the increase in backlog in New York. I think there's a couple of other things. We had -- in the Southeast in particular, that market is red hot. And an escalation of labor costs on top of some of the fuel increases, steel and cement have hit us there.

Lastly, the thing that Bill discussed earlier in the call is our unresolved revenue issues. And as our backlog and the size of our projects have increased, we have not been able to resolve issues and get that revenue booked as fast as we are encountering issues and having to book the forecasted costs for those issues.

And you had stated earlier in your question about three items, and I think they have all contributed. But those three are probably the biggest ones I've seen.

The things that over time have changed sort of structurally are -- versus say the last cycle -- are orientation towards design, Bill. And obviously that's been a big focus for you guys across the division and then the entree into New York. I guess we still think that we can work through the difficulties rather than are we at a position where maybe we need to retrench or backtrack of some of those initiatives because maybe they just don't have the profit potential you thought.

Well, I would not say that. We are still committed to those places that we are in. And it's a matter of -- in our business with the large jobs that we bid -- when you get several of them in a short period of time, the natural tendency is to gear up those jobs with more people, even taking some people out of estimating to help get them going, which reduces how much you can bid for a while. That's what is happening to us now.

If you look at our bids for the last year or so, they're down. And our hit rate is a little bit less than it was before. And so that's going to have the effect of -- over a period of time to reduce our topline growth.

Having said that, changes that we have made in our structure and the additional support we have had in the areas of everything from safety to equipment to HR -- all those types of things in the regions take time to have an effect. As you know, if we bid a job, it is -- first of all, the bid process sometimes takes 6 months. So you get a job and it could be generally the year after you get it that you start recognizing a margin on those projects. So it's unfortunately for us to see the effect of our changes; it does take time.

Jack, before you get off -- finishing my research, it's running about 2%.

Bob Labick, CJS Securities.

This is actually Greg Slater standing in for Bob. You answered most of the HCD questions just now. On a separate note, looking on the aggregates reserves, can you give an update on the life on your reserves and any of the new greenfield projects that are underway?

This is Mark Boitano. The reserve life that we have on our aggregates, we try to achieve a 25 to 30-year reserve average across our business. We've got reserves now that are in the 100-year range and are as little as 5 years. So it varies from location to location. We have not in the last quarter added anything substantial from a reserve standpoint to our portfolio; although we are -- it's one of our primary objectives to do that here going forward. And it will come in -- those kinds of reserve acquisitions will come in on a pretty lumpy basis as we find and/or acquire reserves.

What was the second part of your question?

The greenfield projects, specifically the GenCorp brand timing and reserves available there?

(multiple speakers) Aerojet.

The Aerojet General -- GenCorp -- however you want to refer to it is progressing. We hope to have some activity in that location in the next year to 1.5 year. We are investigating a number of different alternatives as to how to mine that as well as transport materials from that site. So we are progressing in that regard.

I will jump back into the queue here, and we look forward to seeing you at our January conference.

Brian Rafn, Morgan Dempsey.

A question for you on -- you mentioned -- you talked about the rebuilding in the Gulf Coast. Whether you get projects or not, what will be kind of your philosophy in how you bid the gross margin on these? Are you aggressively looking for things? Or you're reigning things in a little? Just kind of give us your philosophy.

That work down there, there's a lot of it. It is coming out, and it is coming out pretty fast. And we're certainly not being aggressive on it. It is an area we have not worked in in the past. So we are being cautious on getting into that area. The larger projects will be joint venturing with other people with experience in that region. We will be trying to deal -- we will be focusing on the ones with the Corps of Engineer-type projects. Because we've done work for the Corps for years and years in the major DoD-type projects.

For us non-civil engineers, can you talk to differences maybe in topography, whether there's more water or saturation there or more sand? What are some of the difficulties in doing those, whether it is design build or just large projects in the Gulf Coast versus something you might do out say in California?

Well most of the structure damage on the bridges that most people have seen on the news and so forth are going to have a significant marine component. There's either swamp or waterways that most of these bridges were either over or real close to, and that's why they got damaged. So as opposed to a job in Texas or California, you will have more of a marine component.

The earthwork down there, that is a silt-based material that has come out of the river for years and years and years. So in simplest terms, it is mud. And that's a little tougher to deal with than we would expect again in the other more dry climates like California and Texas, where you would be using drag lines and equipment that is more suitable for mud than for standard earthwork types things like scraper work and truck and loader.

On your growth on the materials -- the quarry site, aggregate site -- growth is about 18.39%. Can you guys break that out for the quarter in maybe volume versus price inflation?

Why don't you ask the question again?

If you look at the growth just in the aggregate sales side, can you break that out, Bill, between the difference between growth and volume versus growth and just escalating price inflation?

No. I don't think we can do that.

I don't think we have that information.

No, we don't have that information at this point anyway.

Can you give us a sense over the last 2 years the difference maybe in your bidding process up in Halmar? Be it estimations, where you seen some of these write-downs today and experienced over the past 6 to 8 months. How are you more critically adept today at bidding that versus what you did maybe a few years ago?

Well, it was our intention from the beginning to install our estimating system and procedures. And frankly, in the first couple of years, I don't think we did a very good job of that. We've got our software and our system in place, and our procedures probably fell behind a little bit. In the last 6 months, we've made a complete and renewed effort to get that estimating group in line with the procedures that we used in other areas.

So I think there has been a big increase in that effectiveness recently. Unfortunately, we have not bid too many jobs in the last 6 months in that region just because they do have such a big backlog.

The follow-on with the passage of the Highway Bill. Do you get a sense that there's going to be a larger component of design build embedded into that or about the same that we have seen over the last few years?

Mike, you want to--?

Yes, I think you are seeing -- I think it will be a larger component certainly in dollars. I am not sure about the percentages. But you know, over time, more and more states are getting comfortable with the process. The process itself is changing. It's not the same in every state. And some of the newer states have their own twists on exactly how they do it. But as I said, I think more and more states are coming to grips with that for their key projects.

(OPERATOR INSTRUCTIONS). Donald Bisson, Evergreen Funds

My questions have been answered. Thank you.

Kalpesh Patel (ph), Bear Stearns.

My first question is regarding the hurricane work. Obviously, that is absorbing a lot of resources in general in the industry. Is this creating more opportunities outside that region for you? I guess this would specifically affect the HCD business but the Company in general?

Let me respond to that, and Mike you can chime in. I think generally speaking, any time there is a demand for service that spikes up that demand, it creates an opportunity. It creates a limit on resources of one kind or another, which creates a market, a market opportunity. We're seeing that for example in the West because of the housing market. We've been the beneficiary of that for the last couple of years. Standing back away from maybe the Gulf and just looking at it almost in an academic fashion, there is no question that it will consume capacity. It probably has not done that to a great degree at this point, but it will. Particularly when this larger work becomes real, it will consume capacity. It will create, in my opinion at least, a market opportunity.

One of the key elements to really is to how big an effect it might have on the market lies with whether or not that work is done with new money or whether it comes out of the transportation account. We tried to address that in our opening remarks.

Based on the research that we've done through our public affairs folks staying in tune with what they believe is happening in Washington, our best guess is that it will be new money. That's certainly not a guarantee that that is going to be the case, but that is what our intelligence tells us today. And all those are good signs for the market.

So does that mean that -- I guess a little more specific in that -- does that mean you are seeing fewer bidders out there for projects? And also, I guess this ties directly into labor and just not enough labor out there. So labor costs would go up. I know everybody is dealing with that. So what's your views on those two things?

Well once again, academically, I think that you would have to -- I would argue that over time that it will create -- I wouldn't call it shortages so much -- but pressure on certain resources -- labor and other things that will create the market. I will not tell you that we have seen that to date because that really has not started yet.

A little more on the HCD division, in some of your previous presentations, I heard the numbers 9 to 11% target margins for that division. Those are great numbers. And I'm just wondering when we can expect that stuff to hit the books. And I understand with the accounting that the percent of completion and also the claims contract resolution that you have not seen yet. So I'm thinking there is good to be a big jump in margins. Or they are going to be very volatile quarter to quarter. So I just kind of wanted to get your views on that.

I'm not sure which one of us wants to take that one. Mike, you want to try that?

Well, I don't think you're going to see any big jump because of the duration of our jobs is the number that we have now is larger than before. So the effect of any one job doesn't quite have the effect as it used to. It used to -- a big job could make a major impact on our returns. And as I said earlier, I think one of the things that affects that number is the ability to recognize and resolve and book the revenue for these items in dispute with the same size and magnitude of the ones that you are having to recognize before you can book the revenue. And that has been one of the problems we've had for the last 2 years or so.

As I said, I do not think you're going to see any big jump, though we are certainly expecting incremental improvement on our margins as we go forward each year.

I would like to maybe comment on this because that's a really good question. And it's I would say almost an impossible question for us to respond to in a definitive way. What I try to do in my opening remarks, and I think this is important. I think it is important for the investment community here to hear, and frankly I think it is important for the employees that are listening in to hear as well. You probably know that a great deal of our Company is owned by our employees, so they have not only an interest from that standpoint but a financial interest in the results and how we perform as well.

I think the important thing is for people to understand is that we have a plan. We are working the plan diligently. The people in our Heavy Construction Division are probably working as hard or harder than anybody in the Company because it is always the case that when things are not going as well, you end up putting in lots of extra hours and time and frustration and so on to get it right, and that is exactly what is happening.

All through that division today, we are working our tails off to pursue this plan. And that plan is, as we suggested, to work the estimates really hard, get quality estimates, not take unreasonable chances in our bidding process, and plan to work and work the plan.

We do expect that our results will improve. I think I agree with Mike that there probably won't be a day in which things change overnight. I think it will be an incremental process. But as we said in our opening remarks, we expect our results for 2005 to be better than 2004. We expect our 2006 HCD financial performance to be better than 2005.

Having said that, the question is, how much better -- I am not sure we can respond to that -- and how quickly you are going to see that day in which we look back on this experience as being old news.

As an added note, the 9 to 11% you mentioned in your question, if you are talking gross margins, that would be a very minimum expectation. That's not nearly what our expectations are. So I caution you as to what that 9 to 11 is that you are referring to. But if it is on a gross margin basis at HCD, that is below our minimum expectations.

You said there were six adjustments. Six out of how many total HCD projects?

We have 71 projects. Probably 45 of those are active, and 15 or so are finishing up or are done.

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

A lot of my questions have been answered. But there was a couple of data points that I just wanted to clear. Could you just give us with the revenue was for the materials?

The materials for the quarter?

Yes, please.

It was 107.8 million.

Versus 91 last year?

Correct.

And what was the gross profit on that, please?

The gross profit margin on it was 24.5 million in 2005 versus 20.7 million a year ago.

And just one more thing, what was the percentage (multiple speakers) I'm sorry?

2.5.

And what was the percentage of revenue less the amount of revenue on projects less than 25% complete?

Repeat the question just once more (multiple speakers).

What was the percent of revenues--?

No, what was the revenue on projects that are less than 25% --

For the quarter?

Yes, please.

81.6 million. And that's essentially 10 million higher than it was a year ago.

Jack Kasprzak, BB&T Capital Markets.

On the subject of this Prop 76 that you mentioned, Bill, just want to make sure I understand what is at stake or not at stake. The Cal trans budget we know was bumped to 4.1 billion for fiscal '06. Is there a potential that that is scaled back, and we need this to pass to keep that in tact or is this a separate situation?

This is very much a moving target, which frankly prompted me to suggest that California politics are always interesting. What is at stake, Proposition 76 is a -- if it is passed would become a constitutional amendment, which would limit the spending in the state. And I'm not going to tell you I'm an expert on this proposition, but it would put certain limits on spending in the state and it would give the legislature and the governor more involvement in actually directing the budget than they currently have.

One of the things that Proposition 76 does is it guarantees that the Prop 42 money, which is the sales tax on gasoline, will be used exclusively for transportation. Currently when it passed, it was to be used exclusively for transportation purposes except in the time of an emergency. And the governor and legislature over the last several years have diverted that money because of the "emergency situation" we have experienced in the state.

So Prop 76 among other things guarantees that money will be spent on transportation. And it sets in motion a timetable to repay into the transportation fund, the money that has been diverted over I believe it is a 15-year period.

I might add, Jack, in this fiscal year, the Prop 42 funds were restored to transportation for this year, and that is what has created a portion of that upswing in the budget for Cal trans that we are experiencing currently.

Jack, this is Dave Watts. If it does not pass this coming year budget, they will have to wrestle that out as to whether Prop 42 funds will stay protected for the next year's budget or get diverted in whole or in part. If it does not pass, there will have to be other constitutional amendment initiatives to protect it going in the future.

At this time, there are no further questions in the queue. I will turn it back to our hosts for any additional or closing comments.

Thank you very much. Once again, we appreciate the interest that you all have in our Company. We will be around this afternoon, this morning and this afternoon to respond to additional questions if you have them. But once again, as we sign off, I would like to once again communicate to all of our employees how much we appreciate and how much I appreciate the effort and commitment that they bring to their work every day. We certainly could never do what we are doing all across the country without that commitment, and we appreciate it. So thank you very much.

That does conclude today's call. Again, thanks everybody for your participation. At this time, you may disconnect. Have a great afternoon.