Granite Construction Inc (GVA) 2006 Q1 法說會逐字稿

Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to the GVA Q1 Fiscal Year 2006 Financial Results Conference Call. [OPERATOR INSTRUCTIONS]

I will now turn today’s call over to Jacque Underdown, Director of Investor Relations. Please go ahead, ma’am.

Good morning, everyone and thank you for joining us today. This morning I’m joined by Bill Dorey, President and Chief Executive Officer, Mark Boitano, Executive Vice President and Chief Operating Officer, David Watts, our Chairman of the Board, Bill Barton, Senior Vice President and Chief Financial Officer, Mike Donnino, Senior Vice President and Manager of our Heavy Construction Division and Jim Roberts, Senior Vice President and Manager of our Branch Division.

You can find the earnings release and associated financials on the Investor Relations website at www.graniteconstruction.com. Today’s call will be recorded.

Please be aware that if you decide to ask a question, it will be included in both of our live transmission, as well as any future uses or recordings. As always, shareholders, analysts and employees can listen to a live web cast of today’s call at the Granite Investor Relations site.

We will be making statements during this call that are forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today’s earnings press release, as well as the comments made during this conference call and in the management discussion and analysis section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. We do not take any duty to update any forward-looking statements.

And with that, I will turn the call over to Bill Dorey. Bill?

Thanks, Jackie. Welcome and good morning and thanks for your interest in Granite construction.

On our call today, I will address our first quarter and the year ahead. Dave Watts will provide you with his insights into public funding and the politics that affect our business and Bill Barton is here with us today, as well and will respond to questions regarding our detailed financial information.

So, let’s review our first quarter performance. Our results suggest that we are off to a good start in 2006, and we are. Let’s start with our Branches.

Our Branch business continues to exhibit the same vitality that contributed to our record performance in 2005. The momentum that fueled our strong finish in 2005 has carried into 2006 and our Branches are off to their best start ever. This is very encouraging and very exciting. Our Branch Division awards are up almost 70% over the first quarter a year ago, a good indicator that our markets remain very strong.

Revenue was up 15%, despite very wet weather. Nevertheless, our Branch revenues increased; another good sign. Gross margins, which include approximately $7m from the resolution of two issues in Nevada, more than doubled compared to our 2005 first quarter and our gross margin percentage stood at 17% for the quarter, compared to 9% a year ago.

In addition, our first quarter construction material gross margins were up to almost $10m. That’s up from $2.8m last year. The improvement in this segment of our business is the result of both increased revenue and higher pricing. We are certainly hopeful that this trend will continue throughout the year.

All that produced record first quarter operating income of $18.8m, compared to a first quarter operating loss of approximately $1m in 2005. Life is good in our Branch system. Our markets remain strong and we are upbeat, enthusiastic and optimistic regarding our Branch Division prospects for 2006. Our expectations, assuming no significant down turn in our market conditions is that our Branch Division operating income will meet or exceed the record level reached in 2005.

A great start to the year in the Branch Division is contrasted, however, by a disappointing start in our Heavy Construction Division. While our first quarter revenue was up 21%, our gross margins deteriorated from $7m in the first quarter of 2005 to a loss of $3m in 2006. The bottom line is that operating income in our Heavy Construction Division was a loss of $12m for the quarter, compared to a loss of $1m a year ago. There were six projects in the quarter that experienced negative forecast changes, which impacts on the recognized margin of over $1m and three projects that experienced positive changes of over $1m.

As I’ve said in the past, we are committed to building an HCD business that will perform as we know it can. And we believe robust market conditions will support our strategy of higher bid day margins. We continue to focus on regional management structure, developing more talent at the project level, project execution, claim resolution and delivering the performance we expect. This will all take time and you should not expect dramatic improvement in our HCD business this year. We do, however, expect that HCD’s operating income in 2006 will improve compared to our 2005 performance.

I want to talk a little about increased crude prices. With the sudden increase in the price of crude, it is appropriate, I think, to give you some sense of how this might affect our business. Since our Branch work is typically of short duration, we have the luxury, if you will, of re-pricing our backlog every four to six month. In addition, we’ve been anticipating that crude oil could exceed $70 a barrel and we believe our fuel costs and related equipment costs bid into our projects are adequate to cover our actual cost to complete our backlog.

In our HCD environment, the long range nature of our projects leaves us more exposed. While we have price petroleum product escalation into our HCD projects, these escalation assumptions were not, in some cases, adequate to keep up with the price of today’s crude price increases.

It is, however, important to understand that the higher fuel prices have already been included in our current forecasts. And the effect of today’s prices are already reflected in those forecasts.

There is, however, a positive side to fuel and gasoline pricing. In California, our largest market, the sales tax on gasoline is directed to fund Cal Trans projects. Higher gasoline pricing should generate more Cal Trans funding and ironically this will likely help our California business.

Looking ahead, we are expecting a very busy year, driven by a strong market where the demand for our services in many of our markets will likely exceed the industry’s capability to satisfy that demand. This is a very exciting time to be in our business and in our markets. And it stands to reason that if both of our primary operating divisions improve on their 2005 performance, as we are suggesting they will, we will improve our overall Company performance, as well. While it’s far too early to be providing definitive guidance, I think it’s safe to say that we believe 2006 will be a good year for Granite Construction.

And with that, I’ll turn this call over to Dave Watts who will provide you with his insights into public funding and the political environment. Dave?

Thank you, Bill. Let me focus first on the federal situation. While you know that there’s been [inaudible] preauthorization of the Transportation Bill last year and those revenues are steadily coming in, there has been talk in recent days of suspending the gas tax. Politically, this is to supposedly equate for the high oil prices. We’re seeing the high gas prices at the pump, which would make very, very poor sense politically, public policy wise and we hope that reason will prevail. Obviously, our industry is lobbying hard against any such ideas.

Let’s focus on states. Most of our states are seeing increased revenues, but I’ll focus in on California, our largest market and certainly the largest transportation construction market in the country. It’s been a politically favorable environment for a good while, but nothing has really taken place. As I speak, the Legislature is knee deep trying to negotiate bond measures to appear on the November ballot and these would be for transportation, school construction, levee reconstruction and repair and possibly affordable housing.

We are more optimistic right now that some of these bond measures will surface and go on the November ballot. However, the industry has taken the bull by the horns on fixing Prop 42 permanently and is on the verge of qualifying an initiative. We have all the signatures we need. It will be turned in next week to place a Constitutional fix so that Prop 42 funds, as Bill indicated that’s the sales tax on gasoline, will be dedicated to transportation and restricted from use in other government general fund expenditures.

So, the November ballot is going to be a big one. We’re going to see this Prop 42 fix on it and we’ll see the bond measures likely on it and we’ll certainly see some county half cent sales tax measures placed by individual counties on it. And being an election year, obviously politicians use one of their favorite things to bring home, bacon to their constituents and that’s civil projects so the environment is good. We’re optimistic. The industry is gearing up for a heavy election campaign on many of these measures. So, we’re optimistic that California’s funding will continue to be strong and hopefully uninterrupted in the future years.

And that’s it for me, Bill.

Okay, Dave. I think with that we’ll turn it back to our moderate for q and a.

Thank you. [Operator Instructions] Your first question comes from Robert Labick with CJS Securities.

Good morning and congratulations on a great quarter. The first question. In your Branch Division, obviously a strong performance. Could you talk a little bit about capacity and ability to hire for demand? Obviously, being in one of the best environments as you speak to, the question is the ability to meet the demand as it comes on board.

Robert, this is Jim Roberts with the Branch Division. I thought maybe I would answer that for you. There is, obviously, tremendous opportunity in Branch Division work. We believe that we’re positioned, as well or better than almost anybody in the industry to handle that expanded capacity in the business. Our Branches have been hiring at the professional level, salary [inaudible], the craft people and the way we see it today is that we think we have the opportunity to increase our capacity and hire people at the same time to meet the needs of the industry.

So, would you be able to quantify what type of capacity utilization you’re at presently?

Well, it’s hard to say where we’re at presently. We certainly are bidding everyday, with increased opportunities and our expectation is that our business will grow significantly and we have the ability [inaudible].

Great. In looking at HCD, could we get a sense as to when those projects were bid and in what locations they are? Specifically, as we look -- were these contracts bid under new HCD management or were they older projects that we’re still working through?

Yeah, this is Mike Donnino and I can answer that for you. Of the six projects, location wise they were scattered. Two in the southwest, two in the national projects regions and two in the northeast. As far as when they were bid, one was an early job in 2001, three in 2003 and one each in 2004 and 2005. And [inaudible] three were design build and three were bid build.

And as we look at the write downs and the causes, are they due to the common factors that we’ve seen over the last few quarters? Or are there any new factors impacting this business?

I wouldn’t say there are any new factors. As these projects [inaudible] we continue to deal with major issues with owners and schedule delays. We also are dealing with some execution issues, as well as some of the things that were discussed earlier, escalations in labor and certain materials and subcontractor type issues.

Okay. Thank you.

Robert, I don’t want to [inaudible] this point, but I think it’s important for the investment community to appreciate that not all of these write downs that we experienced, do we and I’m going to use the word write-off and never expect that we’re going to be able to recover. And I wouldn’t want to speculate as to how much of the write downs we experienced in this first quarter are a product of issues where we believe we have recovery opportunities. But there is a fair amount of what we’re dealing with in all of these write downs where we believe that at some point we will be able to increase revenue through a Change Order or some resolution of the issue and recover some of that money. And as Mike had suggested, some of it’s just execution problems that well we don’t have recovery, but when there’s a debatable issue or a disputed issue, we will recognize the cost associated with that issue with no revenue until such time as we collect that. And so, I wouldn’t want to put too much emphasis on that, but at the same time I think it’s important that we don’t ignore it.

Great. Thank you. Your next question comes from Michael Dudas with Bear Stearns.

Good morning, Gentleman, Jackie. Relative to oil price, so opportunities you’re looking at today will have adequate pass-through or give back relative to certain indexes and what happens with oil prices? Is that fair to say?

This is Mark Boitano. I’m not sure that that’s maybe quantifies the issue. What we’re trying to do is look in that crystal ball and see on the long-term jobs where essentially the probability than the escalation is necessary to deal with the rising crude prices. And what we’ve seen in the past is that they’ve risen and that they have fallen. Now, whether that’s going to continue here going forward is speculative, at best. In our Branch business, however, we’ve got this term business and we do, we think, have that business covered with the kinds of duration that we deal with our Branch business, to handle the markets as they have been moving. So, as Bill, I think, tried to point out, we think we pretty well have it handled in our Branch business, for the most part. We’re a little bit more exposed in our Heavy Construction business. So, if there’s some model out there that can tell us where this is all going, we could certainly have it pegged. But obviously, we don’t have those models so we’re doing the best we can.

And I think that one of the points that I was hoping to make is that with the price of crude today, we have anticipated that increase in the forecasts that we did here at the end of this first quarter. If crude continues to escalate, then we’ll have to adjust for that as well in our HCD environment, as I think Mark rightly points out. In our Branch environment, we finish this work in four to six months and we re-price the next round so we get the opportunity to re-price more often so it’s not as big a problem for us in the Branches.

Thank you for the clarification. The second question is regarding very strong materials markets and could that maybe be an upside surprise for us as we move through 2006 into ’07, especially with some of the activity and what we’re seeing with some of the bigger, more national players talking up pretty good pricing?

Mike, this is Jim Roberts. The pricing on the materials end of the business in the west, which is where our materials business is located, it’s healthy. We do believe that it’s strong and will continue to stay strong. And the first quarter is a good indicator, I think, that national trends are existing in the west, as well. So, we’re very bullish on the materials part of our business and we believe the trends are going to continue.

Terrific. Thank you.

Your next question comes from John Rogers with D. A. Davidson.

Hi, good morning. Bill, back to your point about the recoveries. I was going to ask -- it’s hard to tell, but given the performance, especially in HCD over the last year or two, I would assume that the potential claims out there are quite large, relative to where they’ve been in the past. Is that true?

Yes. Well, I don’t want to mislead you that there’s any one big giant claim out there that’s going to solve our problems. But, relative to what we’ve seen in the past, we have more of them and in general, I would say they’re larger. But they range anywhere from the very small things to what I -- well, I wouldn’t want to put a number on it, but what I would characterize as larger, yes.

But, as you start finishing off work, when this build up really started in terms of revenue, then at some point we should at least get resolution one way or the other.

Yeah. I think --

Is that a three process or?

Yeah. I’m going to let Mike weigh in on this. But before he does, we had a, I think, a very interesting discussion yesterday as a management team in preparation for this call. And one of the things that became, I think, fairly clear and frankly prompted me to suggest that we would not see, and I use the word dramatic improvement in our HCD business in 2006, is that because we have experienced so many quarters where we’ve had write downs in our backlog, the older projects in our backlog, those that were bid in 2001, 2002 and 2003 in particular, they don’t carry -- unfortunately don’t carry a lot of margin on them because we have experienced these write down. And absent pretty significant recovery, we’re going to finish those off with limited profitability associated with those projects. And because we’re working on those projects today, it just doesn’t provide us with the revenue that has the associated profitability to offset the current issues that are developing. So, we probably got, we think, the balance of this year, at least I’m going to say, to work through that and get to the work that really carries the margins that I think we’ve been attempting to build into our backlog. And that’s just something we’re going to have to continue to work through, before we can begin to see this recovery. We know the recovery is out there. We’re convinced that this business will be good and we convinced that we can get it turned around and in the right direction. But we just have to get through this backlog from this older work.

And on some of those older projects, can you give us a sense of what portion of the work that you’re planned for this year, especially in the big projects, is at breakeven or low margin?

I’m sure I can break it out by margin, by year. But I can give you an indication of the blend of our backlog or our projected work for this year. For example, in 2006 let’s say 10% of the work was bid in 2002, 20% in 2003 and 30% in 2004. So, if you add those up, about 60% of the work we’re building this year was bid in 2004 or earlier.

Right.

And so, in our jobs -- let me go back and answer the question you asked a minute ago. I would say most of our issues on these projects get resolved either during the project or within 6 to 12 months after it completes. If there becomes a big issue, and we have a couple of them, then we come to an impasse and actually have to go the legal route, they could take two to three years. And we have a couple of those brewing, as well. Well, what that means is that a three year job, in order to get all the revenue out of it, is really a four year cycle. And that’s kind of what we’re seeing, I think a little bit of what Bill’s alluding to. So, I can also say that our work is, although it’s 60% bid in 2004 or earlier, I think we have been trying to increase our margins in every year and the work that is in our backlog for 2004, 2005 and 2006, the margins are higher each year.

And are you seeing those higher margins? I know a lot of those projects are just starting up. But are you seeing that?

Well, again with out history in the last several quarters, I would hesitate to predict if we get a hundred percent of that margin home at the end of the day, but we’re certainly starting out in a better position.

Okay. That helps. Thank you.

Your next question comes from Richard Paget with Morgan Joseph.

Good morning everybody. I wonder if you could comment on some sequential backlog trends? It looks like backlog in the private sector made a nice jump during the quarter, compared to the fourth quarter. And I know you had a project out in Reno for residential jobs. What else is driving that? Is it something different?

From the Branch Division perspective the public sector and the private sector are both fairly healthy right now. The private sector or what we’ve been doing on the private sector side is focusing on some very well established clientele that we’re working with on a day-to-day basis. And then on the public sector, we’re seeing the DOT work very healthy in all of our locations. So, a combination of both sides of that should continue and I think you’re seeing that in the backlog that we have today in the Branch Division.

Yeah. I think we have, you may remember, we have talked about the effort that we are making to really build out relationships and our capacity to do private, which is to some degree relationship driven. And as we begin to see, frankly our public works marketplace, particularly in California a couple years back, come under some pressure as the California public funding was impacted, we really focused on working on those relationships and we’ve been very successful in that effort throughout our system. Because as the private market became so important to sustaining performance in our Branches, and we do a pretty good job of that. And I think as Jim rightly points out, we’ve built those relationships. We continue to build that segment of our business, that private element of our business, but what we’re experiencing now is the public marketplace has come back, as well. And so, the stars are really lined up for our Branch business. We saw that in our performance a year ago. We’re seeing it in our start in the Branches in the first quarter, as well. And we’re pretty excited about the prospects for our Branches this year.

Yes and I may real quickly, that gives us the ability to really focus on the client, both public and private, that we have the strongest relationship with and the best opportunities with. And that’s what we’re focusing on today, is certain clients, both public and private that have created the most opportunities we’re granted and that we have the strongest relationships with.

Okay. And then on a regional basis, in terms of backlog trends, in the west and California, trended up. Obviously, the south had a pretty strong sequential quarterly growth. When do you think the Midwest and northeast you’ll finally start, after you work off the backlog there, you’ll start to be able to grow again?

This is Mike Donnino. The growth you see in the south was due to a major project, one large major project we booked in the first quarter. And because these projects are so large, the regional breakout of our backlog has a tendency to jump. We’re trying to build out business back up in the south. We had a big backlog a couple of years ago. It’s gone down a little bit and so we’re focused there. The west has quite a bit of work right now, as well as the national projects group. So, we’re really focused now on 2007 type projects in part of the southeast and Texas region.

In the northeast, our backlog in the [Kays] shows going down a little bit, but we announced, I believe last quarter, a 20% partner in the team building the World Trade Center project, which will be -- it’s estimated at $1.5b right now. Because of the type of that contract, that backlog is not booked yet and it will get booked incrementally as the work packages are put out. So, I guess what I’m saying is the northeast backlog is probably understated.

And then in the south, that one big project is that the Mississippi bridge?

That’s correct.

Okay. That’s it for me. Thanks.

Your next question comes from Richard Wesolowski with Sidoti & Company.

Speaking about the duration of the strength you’re seeing the Branch, a lot of the work, I imagine, is coming in the backlog and we expect to roll off into June and September and later quarters is coming from that large Cal Trans levee that we’ve been talking so much about. My question is how big would the F ’07 budget have to be in order for you guys to really drive or at least maintain the size of the Branch business, going out a year or two?

This is Jim Roberts again, Richard. That’s a reasonable question. What we are seeing is that the strength of the -- we’ll talk about California for a minute. The DT budgeting is strong and it is carrying forward through ’07, as well as what we saw in ’06. Also, we’re seeing some of the projects that we’re bidding are actually larger than we’ve been able to bid in the past. So, we’re going to see that backlog carry forward a little bit longer than what you suggest maybe in the June to September months. I believe that the health of the program is strong enough, but we don’t look out too far, because we don’t get funding abilities out too far. But I would say that 2007, we’re looking at a pretty healthy program carrying over to 2007, as well.

You know, Rich, I think so much of the public funding environment, probably anywhere frankly is to some degree politically driven. And over the last six months and I think what we’ll see all the way through November into this election cycle is infrastructure in California is probably the hottest statewide political issue out there right now. Governor Schwarzenegger is making this a real political campaign for him; rebuilding the levees, rebuilding the state’s infrastructure. And I think we mentioned this in the last call, both the Democrats and the Republicans have gotten behind this. I think they see this as an appealing election subject for the voters and both parties now are advocating for spending more money on infrastructure, both highways, transportation and the levees, as well.

So, we certainly can’t guarantee that these funding levels will continue, but I think the political environment would suggest that it’s probably not going down any time soon.

And on top of that environment, we just came through a winter season that caused hundreds of millions of dollars of damage to our transportation system, as well as to the levee system and all that did is fuel the fire that’s been built around this whole topic. So, we’re pretty encouraged about the direction that funding is heading.

And let me add, if I could, this is Jim again, the states that we work in outside of California, we believe that their mechanisms for funding DOT and other public sector environments is strong, as well. We’ve gotten feedback from our other states that they believe that 2006 will be healthy [inaudible] them as well.

Would you guys expect to see additional competition or lower margins on the work that you bid from here on out, with Cal Trans or other public entities in the west now that the housing and construction activity seems to be waning a little bit?

We haven’t seen that really yet at all and I don’t think we’re anticipating it, so.

Let me clarify that [technical difficulty]. Richard, the housing market waning in California, we’ve seen maybe it’s a leveling off of the housing market. But not necessarily a decrease in the housing market. And we do believe the public sector is strong, therefore the entire construction environment is strong. We don’t see pricing changing, from a detrimental affect for Granite at all.

Great. Thanks a lot.

[OPERATOR INSTRUCTIONS] Your next question comes from Brian Barnes with Morgan Dempsey Capital.

Good morning, guys. How are you doing? A question relative to the design build area. When you guys have talked about some of the profitability write downs and going back and talking about the HCD backlog and some of the bids prior to ’04, with some of these projects have had some negative profitability write down. Is there an issue or a predominance of those write downs in bid build work versus design build or can you give us some sense as to maybe a commonality? Is it subcontractor problems; is it change order issues? Is it weather? Is it geological problems that maybe were missed?

I think you hit on all of them. It’s not a common thing across the job. Like I said, three of those jobs are design build. Three of them were bid build. Three different regions. I guess four of them were 2003 or earlier. One in 2004 and one in 2005. Actually, the one in 2005 was a smaller project in Louisiana, which is almost complete at this time. So, I guess I could add that in the design build arena, in the last several years, we’ve done a lot of that work where we’re getting more experienced and better at analyzing the risk that is associated with those type jobs and we’re incorporating that into future proposals and bids. So again, that remains to be seen if those projects bid in 2004 and ’05, that we’ve covered them adequately. But I think, as I said earlier, we’re in a lot better shape than we were a couple of years ago.

And we’ve talked about this on prior calls. But it’s probably worth just reiterating the strategy. We grew this business pretty fast, this HCD business and I think we’ve come to realize in the last couple years that we can’t continue to grow it. That what we need to do is level it off; possibly even allow it to shrink a little bit. We wouldn’t do that on purpose, particularly. But our strategy is to really focus on bottom line performance. Give ourselves a chance to win on bid day by starting out with a project that’s got real potential for profitability. And in doing that, we’re taking a different view of frankly our mark up on bid day. And we’ve been doing that for about 12 months and we believed -- and I’d say we’ve been doing it in earnest for 12 months and possibly even if you think about it probably a little longer than that. But we believe the market will support this strategy and allow us to maintain a business about the same size as we have today. But as I said earlier, we need to continue to work through some of these older projects for that strategy to really begin to pay off and show up in our bottom line performance.

Now, the reason that we think this strategy will work is the market is pretty strong. I mean, there are lots and lots of opportunities and there are very, very large projects out there that frankly just not everybody can participate in. The jobs are too big for a large population of the contractors in this country. And so, we find ourselves in a unique situation that we think this strategy will work and it’s the right strategy and that’s what we’re trying to do.

Okay. You kind of led into my next question. When you look at how you bid and how you try to evolve that process in HCD, and you partially answered this, is there more work or more care put into, as you talked about, bid day estimations and the type of work you guys bid to? Or is it more important on the HCD side for these projects to have better execution and follow that bid day plan better? I’m trying to get a sense as to whether it’s managing through the process of the project or getting it right on bid day.

Well, again I think you hit on both. I mean, we’re not satisfied and we can never be satisfied with field work. We are always trying to improve that and inevitably in bids you get some things right and some things wrong and you try to minimize the ones you get wrong and you try to exploit the ones that you get right. To answer the other question, we are and have been working for the last couple of years to standardize estimating processes and review processes. Everything from risk analysis, clear up to our executive approval process. So, we have again standard procedures in our regions that have oversight by our Division administration staff and then at the larger level projects, we have a procedure for executive level approvement, up to and including our Board.

Brian Barnes. Just a follow on. Given the proximity that there’s been certainly a large delta change in the growth of these businesses. We got the highway bill passed. Given that perhaps you guys can be a little more selective on bid day and looking for higher gross margin projects, is there any aversion you have in either bid build or design build of projects or type of projects that you say we’re not going to do that again? Either geographically or type of project that you might walk away from?

We actually do have expectations along those lines that have to do with our experience in a given type of work; a particular owner. How we perceive that we get treated by certain owners. So, yeah, we are looking at that harder and we have kind of a checklist actually to go through those types of analyses.

Okay. A question for Dave. You’ve talked in the past, certainly spent a lot of time talking about the Highway Bill politics that come out of Washington. Given the focus and the dialogue that’s been placed on immigration, in your business when you guys are talking about building bench strength, in the immigration or the guest worker policies and all of the discussions about that, will that have an impact in your job area, if it were to turn more negative versus where it currently is?

This is Dave. I might ask Mike Donnino to answer that question.

Yeah. Dave, most of our projects have federal money and therefore we partake with all the rules and make sure that all of our employees are legal. But I think what would happen if that fails, the laws went the other way, is it would increase competition for the people that are in the country and that could have a detrimental affect.

Yeah. I actually think that we’ve really taken the high road in this hiring area and we did this probably six, seven years ago now. There’s the program that you can run on your payroll system that matches social security numbers or documents and it will highlight and point out the illegal workers. And we began running this program and found, frankly, that we had in one of our southern locations, quite a few illegal people on our payroll. And they’d been on our payroll for some time. And we had to terminate those people. It was very difficult. They were an important part of our workforce at that point; they’d been with us a long time.

They had even invested in our retirement plan.

Yeah. And it was pretty traumatic, frankly. And we struggled with what the right thing to do was. And we ultimately determined that the laws of the land are that you can’t have illegals on your payroll and we run this program everyday to try to find, not that we’re trying to be cops, but just to keep ourselves clean, really. To make sure that our workforce is entirely legal. And we found that two things happen. One is that if we do get an illegal worker on our payroll, we find out within a day or two and so we don’t have to deal with a long-term employee that becomes part of our family that we have to terminate. And the second thing is the word gets out that Granite, in fact, runs this program and we find that the illegal employees don’t show up at our door. I frankly think that if the government gets tough, it’s going to hurt our competition a whole lot more than it’s going to hurt us because we’ve taken the high road and so it’s not going to affect us and our current workforce.

Can you guys talk about the materials area? What component of your stone and aggregate do you guys use internally and what component of volumes do you guys export for sale to other contractors:

This is Mark. It’s been running in the 50/50 range. Although in more recent times, we’ve actually been selling a larger percentage to the outside marketplace than we’ve been using internally. But you have to combine both the stone, as you call it the stone and aggregate component along with the hot mix component to come up with the full amount of aggregates that [inaudible] themselves either to third parties or into our own work.

Is there a dramatic difference, Mark, between stone and hot mix?

Well, we self-utilize the hot mix component at a higher percentage than we do just sand and gravel. But even that component, we’re seeing ending up in third party hands, much more than we did a number of years ago. So, overall we’re seeing the percentages move towards a majority of our product going towards third party sales.

And Mark, would you suggest that that’s also contributing to the improved financial performance in our materials business?

Certainly it is. Although we are trying to transfer close to market in our self-consumed projects so there’s a combination of a couple of things going on there.

And let me add to that. This is Jim Roberts. On the material side, when we saw a reduction in a lot of the DOT funding, we saw a lot of an internal opportunities starting to diminish in the last five years or so. Now that we’ve seen the opportunities and the DOT work increasing, we’re starting to see opportunities inside our construction business to utilize our asphalt mostly at a higher level than we have in the past. But we’re also seeing increased opportunities from the regional side. So, it’s kind of a win/win. We’re seeing more internal usage and as Mark mentioned, the internal transfer rates that we’re charging ourselves are at or near market. We’re also seeing increased opportunities on the retail side. So, as I said, both sides are increasing and overall we’re getting a littler higher percentage of retail increase as time progresses.

And then just one follow up. Can you guys give us a sense to maybe in the design build area or the larger bid build projects, nationally what some of the projects you are kind of bidding on right now?

The different projects?

Yeah. You guys used to in the past you kind of highlighted a number of projects you were doing or is the list so massive that --?

It’s a long list. I think we’re involved with several large projects that have privatization components to it. Or for example, in Texas there are three or four that are in different stages of procurement. There are still several large design builds across the country. There’s large projects in Saint Louis. There’s more work coming up on the Gulf Coast, hurricane related work. And of course, the New York market has again, several large programs, many of them, the funding isn’t quite set yet but they’re certainly out there.

So, the list is long and there are a lot of them there and frankly we’re having to be a little bit more selective, especially with our backlog where it is.

Okay. You also dovetail on the -- are you seeing an acceleration or reflation in what’s going on in the Gulf Coast area, relative to some of the hurricane damage? Is it accelerating relative to the project being bid out? There’s been some comments it’s been a little sluggish.

There have been some delays in the major projects. Of course, we got one of them the first part of the year. There’s another one re-bidding in June. I believe a large project that we didn’t participate in on I-10 bid last month. So, I think they’re being delayed a little bit. It’s just because of the design and the amount of work it takes to get these things put together and put out to bid.

Okay. Superb job, guys. Thanks again.

Your next question comes from R. Rossey with Ferris.

Good morning everybody. I was a little late coming in. I apologize if these are repetitive. But how much of your backlog is design build at this point?

I believe our Division is what we call -- well, we break it out by [technical difficulty] and design build is now about 70%.

The design build part of your backlog is 65%.

65%.

72% of the [inaudible].

And Rich, that’s in the Heavy Construction Division.

Right.

There’s about 40% of our overall business and Jim, I don’t think we have any design build work in the branches.

No, I realize that. And not to beat a dead horse on this, but have you found that just in the structure of the way the clients look at dealing with contractors and design build has developed to the point where there are some issues that lay the risk on you; that you simply can’t get around and can’t get the kind of comfort level that you’d like to have?

Yes. They’re getting more creative with putting risk in different places and there are some that we just walk away from. Many of these large projects though have long periods where they put out draft proposal and give the industry a chance to comment on them. And we put a lot of effort into that, along with the bonding companies and the insurance companies to try to get the risk in the proper areas. But having said that, there are some that we just don’t get there.

And in terms of, and I know there’s problem projects in design build, there are undoubtedly were a number of things that you’ve had to deal with. But in terms of dealing with the subcontractors -- your partners. Not the subcontractors, your partners. Is there anything there structurally that just inherent in the design build business that if you’re going to be in it, you have to take on these -- to the extent that you have to take on certain types of partners, it just does elevate the risk relative to what you might have thought a couple of years ago?

We haven’t seen much problem with our partners. In fact, most of our partners we’re very happy with.

In fact, that’s probably the one area we haven’t seen issues develop.

Right. Although with bonding tightening up as it has, we do have to be selective on who our partners are because on these larger projects, our bonding companies look to us to carry the load on some of them. So, we have to weigh that against what we think that partner brings to the table, such as local experience or labor ties or material sources, things like that.

Moving on. As we go out to your accounting issue of booking profits only after 25% of the job is completed. Is there any bulk of that coming up over the next three quarters, that we should be conscious of, in terms of the way it might have an unusual effect on quarterly earnings?

We’ve got several jobs that we started in the last quarter and the first quarter. Some of those will be closed at the end of the year. I wouldn’t say it would be substantial though. I mean, we’ve built our backlog now and have a pretty good portfolio to where the effect of those advances isn’t quite what it used to be.

Okay.

But if we did have something that would stand out, we certainly would pass that information on.

Okay. And finally and again you may have commented on this, but as far as equipment sales and land sales are concerned going forward, I’m just going to presume that the first quarter was unusually large. Have you any projections or any sense of guidance of what we might see for the rest of this year?

Well, Rich, this is Bill and looking at the components made up of real estate, which we had a closing this quarter in which we were an investor in of about $3m. Another had to do with equipment and my expectation going forward, it’s going to be somewhat -- first of all it’s lumpy. But be consistent with prior years.

Okay. All right. That’s it. Thank you.

Your final question is a follow up question from Richard Paget with Morgan Joseph.

Yes. Just a quick follow up on the rate. If you could comment on what was going on in the first quarter with the tax rate and then what should we expect for the balance of the year?

Richard, good question. Somewhat the tax rate is a reflection of the fact it had a very low loss for the quarter.

Right.

And what it was was about a $400,000 adjustment as we looked at our reserves and booked benefits to the Company to bring it in line with our current feelings on our reserves. And if you want to look at it for 2006, our expectation it’s going to be approximately 31%, plus or minus.

Great. Thanks. That’s it.

You have one more question from John Rogers with D. A. Davidson.

Hi, thanks. Just with your cash position where it is now and it sounds like not growing the HCD business [inaudible]. Is your priority now to expand the Branch type operations [inaudible] and are there opportunities out there for that?

Well, that’s a very good question, John and I’m glad you asked it. Obviously, we believe that our Branch business has earned the right to invest capital into that business to grow it. It’s proven over the last five to seven years that it’s very resilient. It’s very dependable. Our aggregate strategy is to build our reserves; to build more capacity in our aggregate business. To process more material; get more material to the market. And we’re doing that within the system that we currently own. We’re also looking beyond that system in the west to expand that system through acquisition or green field and we have an effort, a very significant effort frankly in both areas, to take this business and grow it geographically, claim your territory for this business and certainly that’s going to require capital. We think we’re in a position to satisfy that need. So, that’s where we’re going to spend our money.

John, this is Jim Roberts, [inaudible] minute. In addition to having [inaudible] take place, we literally have dedicated staff now that are focused on market analysis, geographic expansion and understanding where the opportunities are. And actually, helping us cultivate opportunities and helping complete transactions, as well. So, we’ve got a dedicated group that’s off and running and it’s nice to report that they’re making significant progress in the first quarter of ’06, which actually is a little bit ahead of our overall plan. So, we’re pretty encouraged with where we’re headed with that.

Well, I know those types of transactions are impossible to predict. But I mean, is it something that we would see some tangible evidence of that growth this year?

We would certainly hope so. We anticipate some opportunities being completed in ’06.

Okay.

Thank you. At this time, I would like to turn the conference back over to Bill Dorey for a closing remark.

Okay. Well, once again we certainly appreciate the interest that you all are showing in our Company. We’re really pleased to be able to report what we think is a good start to our 2006 year. And before we sign off, I would like to take this opportunity once again to thank all of our employees for what they do to make all this happen for us. We’re going to be really, really busy this summer and it’s going to require an incredible effort on the part of all of our people to get through this season and to build the work that we have in our backlog. So, I want to thank them in advance for what they’re going to be doing for us this year. With that, we’ll be around for the rest of the day, this management team here. So, if you have further questions, feel free to give us a call. Thanks once again for your interest.

Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.