Granite Construction Inc (GVA) 2007 Q4 法說會逐字稿

Good morning. My name is Michael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Granite Construction fourth quarter 2007 earnings conference call. (OPERATOR INSTRUCTIONS.)

I would now like to turn the call over to Ms. [Jackie Underdown]. Ma'am, you may begin.

Good morning. Thank you for joining us today. Today 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, Jim Roberts, Senior Vice President, Granite West Manager, Mike Donnino, Senior Vice President, Granite East Manager, and a new member of our Team, Leanne Stewart, Senior Vice President.

Today's call will be recorded. Please be aware that if you decide to ask a question it will be included in both our live transmission, as well as any future uses or recording. As always, shareholders, analysts, and employees can listen to a live webcast of the call on our website.

We will be making statements during this call that are forward-looking. 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 and the comments made during this conference call, and in the Management's discussion and analysis section of our Form 10-K and other reports and filings with the SEC. We do not undertake any duty to update any forward-looking statements.

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

Thanks, Jackie. Good morning, and thank you for joining us on Granite Construction's fourth quarter 2007 earnings call.

Yesterday afternoon we announced the best financial results in Granite's history. I'm very proud of that, and I'm very proud of the men and women at Granite who made these business results possible.

On our call today, I will address our record year, including our segment results and the outlook for Granite West and Granite East, our Land Company results, and the prospects for this business, as well. We will discuss G&A expense and, lastly, we will discuss our recent announcement regarding the upcoming succession of our Chief Financial Officer.

Let's start with Granite West. The resiliency of our Granite West business was very apparent in 2007. Granite West posted another terrific year, and we could not be happier with the continued excellent performance of this business. We believe this performance highlights the value of our vertically integrated business model and the wisdom of our geographic diversification strategy.

Most of our business units performed very well in 2007. Thanks to very dry weather in the fourth quarter we had a strong finish to our year and came within $20 million of our record 2006 consolidated operating income. This is well above our internal expectations for the year.

All our Granite West construction numbers were very strong. Gross margin and gross margin percentage were detailed in our press release, and both improved quarter over quarter and year over year. However, so we're clear from a comparative point of view, our 2006 realigned Granite West gross margin included a write-down of $20 million on the US-20 project for both the fourth quarter and for the year.

I would like to highlight our construction gross margin percentage, which was 19.2% for the quarter and 19% for the year. This is very impressive performance, and it is a product of quality estimating, terrific field execution, our ability to adjust to a variety of market opportunities available to us throughout the west.

An example of this ability is our participation in fire clean-up work in San Diego. Our branch in southern California has been working steadily to excavate and haul debris left in the wake of that devastating event. We are one of two prime contractors selected to do this work.

Our materials revenues and margin were affected by the slow-down in the residential construction. Quarterly revenue for third-party material sales fell from $106.6 million in 2006 to $86 million in 2007. For the quarter gross margins were also lower, $14.9 million or 17.3% in the fourth quarter, compared to $24.2 million or 22.7% in the fourth quarter of 2006. Specifically, demand for high quality concrete aggregates and other value driven products has declined.

We are beginning to feel the affects of the housing slow-down in the Central Valley of California and in northern Nevada, and that is challenging our ability to acquire backlog at the pace we have enjoyed over the last several years. It should come as no surprise that these are also locations where we operate large construction materials businesses.

Conversely, we have branches elsewhere in California and in other western states that continue to benefit from strong public markets. These branches posted record performances in 2007 and are looking forward to very promising, a very promising 2008.

We are confident that public funding in the west will provide a platform upon which we can deliver a respectable performance in 2008 and beyond. Proposition 1B transportation bonds in California will provide our industry with many large project opportunities. However, because of the broad influence of market conditions in the west we do not expect Granite West to deliver operating income near the level it has over the past two years.

Now, let's discuss Granite East. As expected, our revenues for both the quarter and for the year were down from 2006, partially due to our strategy to focus attention on home markets and size this business to match our ability to execute at the project level with confidence.

Gross margins improved considerably for the quarter, from a loss of $31.7 million in 2006 to a profit in 2007 of $17.3 million. For the year gross margin improved from a 2006 loss of $72.4 million to a profit of $25.8 million in 2007.

We are very pleased with the profit potential in our Granite East backlog today. The hard work done over the last several years to improve this business is paying off, and we are beginning to see the results in our project performance.

Fourth quarter we had three Granite East projects that had negative project forecast adjustments of over $1 million, but we had nine projects that had positive forecast adjustments of over $1 million. The net affect of those adjustments was an improvement in the Granite East project forecasts for the quarter of $22 million.

The key projects that we have been discussing on the last several calls, the World Trade Center, the ICC in Maryland, and the I-64 in St. Louis, are all progressing well, and we expect them all to contribute nicely to our 2008 bottom line.

Another important project you will likely be hearing a lot about is the Houston Metro. We are leading a team that has been selected to negotiate a contract to design and build that system, and we have been on the ground for the last year, engaged in design and in a price and scope negotiation. If we are successful in completing that negotiation it will provide stable backlog for our central region business for five to six years.

Generally the market for large projects, particularly mega projects, remains very active, and we believe there is ample opportunity to continue to acquire quality backlog in Granite East. I believe our realigned business structure provides Granite East with the foundation to be consistently profitable going forward.

Our guidance throughout last year was to break-even in Granite East at the operating income level prior to minority interest adjustments. I am pleased to report that we have achieved that performance goal, and I think it's worth emphasizing that this was achieved despite recognizing $34 million in consolidated losses on the SR-22. I can report to you that the SR-22 project is behind us.

Given the strength of our backlog, we expect Granite East to achieve low double-digit gross margins in 2008 on revenues near $700 million. This would be a significant achievement, however, our expectations are that Granite East should reach gross margins in the mid teens over time. However, it is the I-64, the ICC, and the Houston Metro, all of which are joint ventures, begin to contribute reportable earnings, you should anticipate an increase in minority interest.

I would like to recognize all of our Granite East employees throughout the country, who have stayed the course to work through the issues on our large projects. Their hard work and resilience, as well as their support for our realignment to Granite West and Granite East, has been important to the turnaround of our large project business.

Let's turn to our land development company. Our real estate development activities are a profit center which currently has $46 million, on an unconsolidated basis, invested in a real estate portfolio, which we believe has considerable up side value. We recognize profit in this business only when we sell a property, and in 2007 the Land Company recognized $12 million in consolidated operating income.

Included in the 2007 results is a $3 million write-down of the value of one of our investments in the Central Valley of California. The current value of this property has been affected by the reduced demand for new housing in this part of the State. Overall, our portfolio is geographically diverse and conservatively leveraged. While it is impossible to predict future short-term real estate values, we are confident our real estate portfolio will continue to contribute to long-term shareholder value.

Now, let's talk about overhead. G&A expense at Granite includes estimating project support and growth related expenses, in addition to what might be characterized as traditional administrative costs. G&A increased $14.5 million in the quarter and $42 million for the year, $12.4 million of which can be directly attributable to the administration and integration of our acquisition of the [Superior Group] in eastern Washington.

While G&A has increased considerably, we believe the increased investment will provide the infrastructure and oversight necessary to maximize the profitability of our work and execute our long-term growth strategy. Our expectation is that the pace of growth of our G&A costs will be much smaller, but you should anticipate a modest increase in G&A expense in 2008.

The last subject on my agenda to discuss with you today is Bill Barton's retirement and the introduction of Leanne Stewart as his successor. Bill has been with Granite for 28 years and has served as our CFO since 1990. He has been steady at the wheel and has provided Granite with solid financial leadership through our transition from a private company to a public company.

Our Management Team has grown-up together, and Bill has been an important contributor to our steady performance, and growth of not only our Company but to the growth of shareholder value for our investors. We will miss having him as a source of knowledge and experience, and we are grateful for his enormous contribution to Granite.

Leanne Stewart will succeed Bill as Senior Vice President and Chief Financial Officer on March 1st. After careful consideration, our Senior Management Team, as well as our Board, agree that Leanne's broad financial and operational experience make her the right candidate for this position. Most importantly, to all of us at Granite, she has the character and integrity we demand from all of our leaders. I want to welcome Leanne to the Granite family.

I'm also pleased to report that Bill will remain onboard with us through midyear to ensure this important transition goes smoothly. On behalf of all of us here at Granite, thank you, Bill, for your commitment to Granite over the last 28 years.

In summary, our Granite West business is exhibiting great resilience and we are optimistic that we will perform at a high level despite the influences of the broad economy. We are thankful for the very active public marketplace in the west, and we are poised to take full advantage of that opportunity.

We continue to invest in Granite West and believe these investments will build overall strength and stability and contribute to the growth of this business. We are very pleased with the current condition and trends in Granite East. We are excited about the quality of our backlog and the prospects for this business. Our markets are strong and our leadership is focused on delivering the financial goods.

I would like, once again, to acknowledge the hard work and dedication of our very special employees across this country. We realigned our Company this year, confronted some pretty challenging economic conditions in some of our markets, turned our large project business around. At the same time, we continued to grow our footprint of operations, and we delivered the best financial performance in our history.

I'm very proud of our recognition by Fortune magazine as one of the "top 100 great places to work," for the fifth straight year. I want to express my appreciation to all our employees for all they do to nurture our culture, which is so important to making Granite not only a great place to work but a great Company.

As this will be Bill Barton's last official earnings call, I would like to turn this call over to Bill for some comments before we take your questions. Bill?

Thank you, Bill. Thanks for the kind words. Certainly, as I transition into retirement over the next several months, the one thing that stands out is the opportunity to be part of a remarkable organization, driven by some remarkable people, and I'm certainly appreciative of that.

Also, though, I've also had the opportunity over the last 18 years that we have been a public Company to interact with the investment public, and that certainly has had it's challenges but it's also been an opportunity for learning, and it's certainly been a joy to work with the multitude of people with different ideas about what's a good investment. And, certainly, one of the learning's I had over that time was what is a good company and what is a good stock, and fortunately, for me, we're both.

And as I slide into retirement here over the near term from an active working employee of Granite and become an alumni, as well as an outside investor of Granite, I will continue to look forward to what I think will be a remarkable achievement that's the legacy from the past, that will continue for the future.

And, hopefully, over the next several months as this transition takes place, I have an opportunity to talk to each and every one of you and show my appreciation for being part of a remarkable story.

And, with that, I'll throw it out to the Moderator to begin the questions.

(OPERATOR INSTRUCTIONS.)

Your first question comes from Bob Labick with CJS Securities.

Good morning.

Good morning, Bob.

Good morning, Bob.

First, I wanted to say congratulations to Bill Barton. It's been a pleasure working with you and we really have enjoyed it and learned a lot from you, as well, so from everyone here at CJS, congratulations, and we're all a little jealous for you.

Thanks, Bob.

Just, you know, getting over to business, I'd like to ask about Granite East. Bill, you've mentioned for the last few months that there's been good visibility and outlook for 2008 gross profit. I was wondering if you could just give us a little more detail on that visibility? Is it because several projects are at the 60% complete and, therefore, that's when you usually have the best visibility? Or just give us a sense of your confidence in that gross profit outlook for 2008 on Granite East, please?

Hi, Bob. I'm going to -- I'll give you a brief answer, and then I think it might be appropriate to let Mike provide you with his insight, as well. I mean there's no question we've gone through a really bad patch with our large projects. It took longer to get it turned around I think than any of us believed it would, but we have done a lot of hard work at Granite, particularly from the people involved in those projects, to get our backlog in order, to work through the projects that were providing us with the grief, to get our forecasts in order so that we would not be faced with continued write downs.

And all that has occurred after the last couple of years. It took some time, it took some I think really tough decisions on the part of a lot of people to get us where we are, but the fact is we don't have a lot of work in our backlog that we don't think is going to be profitable. We've shared some of those numbers with you in the past, relative to the amount of work that's forecast to break-even, and that number keeps going down. And the work that we have we think has the potential to deliver very strong profitability.

Mike, do you want to add to that?

Yes, I think you've touched on all the points, Bill. I think we're much more confident in our system, in our risk evaluation, the processes that we have in place now to execute on the projects, and I think we've, if you could say it this way, I think we've reaped the benefit of some of the painful lessons we've learned over the last three and four years and have turned them around to processes that really will help us in the future.

Terrific.

As Bill said, that probably the best news is, though, that the number of projects and the volume of our backlog that is that breakeven or lost jobs is continuing to go down.

Great. And then just if I could ask a quick follow-up, and I'll get back in queue? Given the forecast of low double-digit gross profit, could you give us a sense of the expected operating income range, because obviously this quarter has 9.5% gross profit but 7.7% op income range which is very small, you know, G&A -- what's the kind of -- well, what happened there and what's the appropriate expectations for that for 2008?

Bob, I think we've given you what we feel comfortable providing at this point. As we work through the year, if it becomes more clear, and we might step-up our guidance, but at this point I think you have what we want to give you.

Okay. I'll get back in queue. Thanks.

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

Good morning.

Good morning, Rich.

Good morning, Rich.

Bill, there seems to be a disconnect between the West gross profit, say in the second half, which is down mid single digits, and the operating income which is down more than 20%. I recognize you had the $12 million, you mentioned the Superior G&A type costs, but that still leaves a big increase. Can you help to maybe reconcile the timing of those investments with the steady decline in the backlog we've seen in that segment since mid '06?

Rich, this is Jim Roberts, maybe I can address that for you. I'm not sure I understand exactly what you're asking for, but I do believe that the discussion is that the gross margins have reduced somewhat, but the overall operating income has reduced greater. And I think that Bill mentioned in his discussion that the G&A, there is some substantial increases. One of those G&A increases was relative to the Superior Group acquisition, and there are others, as well.

We certainly have stepped up our growth program from a G&A perspective, as well, and continue to spend some pretty substantial funds in terms of our research and our work out there on geographic expansion. So that's certainly another opportunity that is out in front of us for the G&A side. So I think that's probably the biggest issue is that our G&A is going up as well, and I think Bill also said that we are looking for modest increases next year, but we did have a pretty sizable increase in Granite West in 2007, and probably will not see those kind of increases next year.

Okay. At the end of October you had stated, or someone on the Management Team had stated, that the meat of the Prop 1B would be let in '08 and '09, nice share in 2010, to fall-off in 2011, and subsequent to that. Is that still the expectation?

Yes, Rich, we do see -- Prop 1B funds are starting to hit the street now. I think in the last phone call we mentioned that we were looking at the actual bid lettings to start in the fourth quarter of '07 and start increasing through the first quarter of '08 and hopefully later on in the year. That is what's happening, the bid lists are starting to get full, and we do see some -- a lot more hitting the street now, and we think it will increase through the third and fourth quarter of '08.

Okay. And, finally, Jim, would you suspect that the dedicated program that it has in 1B and also with the funds kind of siphoned off in 1A, do you think that's going to give the State an excuse to make deeper than usual cuts in the portion of the budget that's dependent on the general fund?

That's a good question. What we've been told so far, we believe that hopefully this will be consistent going forward, is that the transportation budget, and we'll talk about 1A versus 1B. 1B certainly is dedicated from an overall position, and then you have the general fund that could attack 1A, but we've been told that that's not a very good alternative for funding the general fund because of certain payback methods that would be required in a very short-term basis. Basically, over the next three years they would have to repay that debt. So our belief today and we've been told is that will probably be one of the last programs that might be attacked from the general budget, but anything can happen, obviously. But we're pretty confident right now that those funding levels will stay where they're at.

Great. Thank you.

Your next question comes from Jeremy Pinchot with Monness, Crespi & Hardt.

Hey, thanks a lot for taking the questions. I've got a couple of them here. In terms of the G&A, I apologize, I'm still unclear as to what you guys are really saying. Is G&A going up modestly on an absolute dollar basis or is it [sort of] revenue?

Absolute dollar basis.

Okay. And that's a little surprising to me considering the top line isn't growing in either Divisions [presumably in 2008]; right?

You're surprised by that?

A little bit, yes.

Okay. Well --

I mean can you give a little bit more clarity on why?

Yes. I mean, as we suggested, clearly we have, you know, we have a strong public works program in California and strong public works programs throughout the western states. But we also, the reality is we're also facing the impacts of slow-down in residential construction, which releases and has released certain amounts of capacity into the public works marketplace, creating a competitive environment, which is different from what we've experienced in most of our markets. It's a lot different in the Central Valley, but in most of our markets we're feeling some affect of that, and that is impacting our ability to acquire work at the pace we have over the last couple years and with the same margins that we have over the same -- over the last couple of years.

In the east, it's more of a, I think a controlled environment that we're attempting to create, and we have chosen to size that business in the east down into that $700 million to $800 million range at this time, because that is the size that we feel that we can manage effectively and deliver appropriate margins at the same time.

Okay. I get -- I would understand some of that, I just don't understand why it's actually increasing, but I can get back to you on that.

In terms of margins in Granite West, have you guys given any color in the backlog in terms of how that looks?

I'll answer that. This is Jim. We believe our backlog, moving from 2007 and 2008 is good backlog, very good backlog. The real question is going to be what is the affect of the work, the "turn work" as we call it, that we will bid and build in 2008.

So what we are contemplating today is we believe that that work in '08 will probably have a lower gross margin attached to it than you've seen in the last couple of years, but the '08 work, or the '07 work, I'm sorry, the backlog from '07 is high quality backlog. So ultimately the mix will be really determinant of what the overall gross margin in the work for '08 will be. Does that make sense to you?

It does. Okay. Thank you. Appreciate it. And then just one last quick question, any plans for use of cash?

We've got -- I'll say this, we've got plenty of use of our capital. We've got a pretty aggressive growth program that we're working through in the west, and we've talked with you all about that, I think on prior calls. We've got numerous upgrades to our plants to build capacity in some instances, to increase our aggregate reserves in some of our legacy locations as well as in new geography. We've got plenty of use for that cash.

And we're really excited about the prospects of continuing to grow, not only our geographic footprint in the west, but also to build capacity in our -- organically in the business that we operate.

Share repurchases still on the table?

Still on the table. No timetable, no commitments, but it's on the table.

Okay. Thank you.

Your next question comes from Jack Kasprzak with BB&T.

Good morning, everyone.

Good morning.

Let me first offer Bill congratulations, as well. I've enjoyed working with him over the years. Appreciate his accessibility.

Thank you.

The comment with regard to the Granite West operating margin not being -- performance, I guess, this year for '08 not being what maybe we've seen over the last couple years, Bill, were you referring to gross operating margin percentage or dollars, in particular?

Both.

Both? And when I look back to the [2003] timeframe, you know, more of a downturn scenario in the west, you know, Granite West had an 8.5 ish, 8% to 8.5% operating margin, given Jim's comments about carryover, good carryover backlog, but the turn work is maybe a bit uncertain, is that the sort of level -- I mean that was a pretty tough time in California, do you see it going back to that sort of level, if you'd care to try to -- if you'd care to comment on that?

I don't think we want to get real specific, Jack. I think that what we want to do is direct you away, I think, from the expectation that 2005 and 2006 -- excuse me -- 2006, 2007 should be the expectation given the environment that we're in, and the environment has changed. You see it in no doubt lots of industries as a result of what's happening in a lot of the financial markets, and so forth. We're not immune from that, and we're simply trying to ensure that folks that follow our Company understand that some things have changed and the prospect of duplicating 2006, for example, is probably not in the cards.

Okay. Fair enough. Thank you. And I guess for Jim Roberts, specific to the west, again, you talked -- you mentioned, Jim, about Prop 1B money hitting the streets, and I guess that's good news, but we've also talked recently about the competitive environment. How would you characterize that right now?

Well, that's a good question, Jack. Certainly, it is very competitive in the marketplace today, no doubt about it, but typically this time of the year, in the first quarter of any given year it is the most competitive bidding environment throughout the entire year. So that's nothing really unusual, but we are seeing that migration of some of the private sector builders into the public sector, which we've been talking about now for several quarters, and so it is very competitive. We are getting a share of the work, probably not as high of a share as we would have liked to have seen, but there is a lot of good work now hitting the streets, very high quality work, and I think that we continue to target projects and really pay attention to what's coming out. So we're pretty comfortable about the market going forward, but it is very competitive.

Are those, Jim, still the types of projects that are medium and large in size where you still might have the idea that competition could be a little less intense and you could bid them with a decent margin?

Certainly those are some of the projects that we're looking at, absolutely. The projects, the smaller projects have got a significantly larger list of competitors.

Yes. Okay. Thanks very much.

Your next question comes from Richard Paget with Morgan Joseph.

Good morning, everyone.

Good morning.

There's been a lot of talk about California and the Prop 1B money, but I wondered if maybe you could talk about the broader environment for the DOTs? You know, I think everyone knows they're generally a conservative sort, and there's uncertainty out there, especially with state and local budgets. I mean how are you seeing the bidding environment recently out there? I mean have things gotten put on the back burner, at all?

Richard, this is Jim, again. Are you focusing on California or all the DOTs in the west?

I would say kind of outside of California, because you've already kind of touched on that.

Well, the other DOTs, and I kind of lump them, I'll probably get away from just saying DOTs, because the economic environment in the surrounding states in which we work, I look at them as really a melding pot of both private and public sector. There are certain states outside of California where actually we are seeing a fairly healthy private sector, as well.

And so we don't just focus on DOTs, but I would say about half of the other states in which we work have got very healthy DOT budgets and some of them are struggling with their DOT budgets. But outside of California, overall, we see the bidding environment fairly healthy. I'm fairly upbeat on what's going on outside of California.

Okay. And then on the aggregates, with the margins coming down, I mean how much of that is reflective of pricing coming down a little bit, and how much is volumes and not being able to carry your fixed cost as much?

Well, that's a good question, and what we saw in '07 was we did see across the board increases in pricing in all of our products, and we did see a reduction in volume, as you can imagine. And in the fourth quarter that reduction was becoming pretty apparent because of the residential market.

I think going forward our issue is going to be really from a volume standpoint on our materials business. We don't see a reduction in pricing, but we don't see the type of increases in pricing that we've seen in the past, as well, so a fairly static environment on pricing, and really the key driver for us will be that volume to see if we can amortize some of those fixed costs over a reasonable amount of volume.

Okay. Thanks. I'll get back in queue.

Thanks.

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

Hi, good morning, and, Bill, congratulations and thank you, as well.

Thanks, John.

A couple of questions. First of all, in terms of the Granite West, can you give us a sense that with the recent acquisitions how your capacity and your expansion in that market looks, compared to what you had in 2006 and 2007?

John, are you talking about capacity as what are we capable of building from a (inaudible) standpoint?

Yes.

Well, certainly it's definitely greater than it has been prior to the acquisitions.

Right.

And certainly the last acquisition that we completed last year with the Superior Group, that's a pretty sizable company. We certainly have a tremendous amount of volume, capable from that business. And even within our current businesses, we've been -- we've got a very strong team of people in all 15 of our businesses in the west. We have expansion capacity that's pretty significant above what we've been doing the last year or so.

You know, I think, John, that's a really good question, and I'd like to weigh-in here, because I think it helps to appreciate our G&A, the increase in G&A. And we're, I'd say, I suspect, not unlike a lot of businesses, but we have the capacity to do more work with the same amount of overhead. Until we reach a point where we begin to get up against that, and then we need to add additional overhead and G&A to support additional growth. We have a certain amount of elasticity, but at some point we reach that point where we really need to staff-up again, and we got to that point in 2006. We were running so hard to try to keep up with the growth that we were experiencing at that point, that it did prompt some of the G&A increase that you all are seeing now.

But what that will do is position us to take advantage of that next growth spurt and certainly position us to be able to absorb additional geographic growth now, and so that's really our mission at this point, is to now that we have this infrastructure in place, to grow the top line of our business in the west so that there's balance between our G&A and our revenues. And we've got, really do have quite a program in place to try to make that happen through acquisition and geographic growth.

You know, another add to that, Bill, would be that we did not only have the realignment from HCD and the Branch Division, and the Granite West and Granite East, we also realigned our business inside of the Branch Division, which is now Granite West, to add additional oversight and capability to be able to handle long-term growth, so there was kind of a dual alignment that occurred in Granite West in 2007. So we are prepared, as Bill said, today with the G&A that we have to grow the business quite a bit more than we have in the past.

I know this is hard to define, I mean, you know, by people or equipment or whatever, but are you 25% bigger?

Well, what do you mean by 25%?

I mean in terms of your capacity to take on work?

Well, that's really hard to say. You know, it's interesting --

Well, Jim, so wait a minute. I mean I think, Jim, maybe what you could do is like with the infrastructure we have in place today, could we go out and build, say, $2.5 billion in the west and support it from an administrative standpoint?

I think it would depend where the work was and the type of work that it was. One of the things that we are capable of doing today, that we weren't a year ago on this last call, was to go bid and build successfully these large projects. And these large projects certainly can add some very quick top line and some high quality bottom line in the market today.

So to answer Bill's question, if we were to add volume with large projects, it certainly could increase at that 20%, 25% level, but to do the day-to-day work it takes a lot more supervision per revenue dollar than this large work does, and probably would be difficult to do it in all the small normal day-to-day work that we do in the business units.

Okay. And then the second question is in terms of Granite East, you talked about some of the big projects that are out there, the Houston [light rail] and other things. Do you expect those to start to flow into backlog this year for benefits out into 2009? I mean is that when we should start to see the top line growth, and just sort of how do you see that phasing in?

Yes. If we are -- John, this is Mike. If we are successful in negotiating this, it will -- construction will start next year, and so, yes, it will flow into backlog. It could be similar to the World Trade Center where sections or segments get booked as they get executed. And, by the way, the World Trade Center, we expect more of that to hit the books, as well, as we execute packages on that project, as well. So we do have those two projects, which we expect to add volume in 2008 and in the future.

Okay.

As far as the, you know, the opportunities that are out there, there's certainly, and I don't think this is a secret, there's certainly numerous opportunities in the northeast and in the central region, I would say there are, as well, but I'm saying there's 15 to 20 projects in each of those regions over the next 18 months that kind of are in our size range. The southeast is still a little bit slow, but there are a couple of major projects there we're looking at.

Okay. And what you said about the northeast, I mean that's a [marked] improvement from what you've seen over the past year-and-a-half in terms of just volume of potential work?

No, it's been pretty heavy for the last several years, really since 9-11 and all that rebuilding started.

Okay.

You know, some of that work was so big that we weren't interested, while we were still working and getting the World Trade Center project going, and other segments [work], just not our type of work, some of the [pier] tunneling projects, for example. But there's been a pretty healthy stream of projects in the northeast for a couple of years, and it looks like it's going to continue for awhile.

And just, lastly, if I could, in terms of Granite Land, the -- I mean with the decline in land values, especially in California and elsewhere, any risk there of you have to reduce carrying values on anything?

We don't think so, at least not in the short run. We've taken a really hard look at our portfolio. It did prompt the write-down of the one project in the Central Valley, just south of Fresno, which is one of the hardest hit areas of the state.

Our, as I suggested in the scripted remarks, our portfolio is very geographically diverse, and a lot of our real estate portfolio is not in California, some of it is certainly, but we don't think that we're going to have to face another write-down at least in the near future, but I suppose that's something I should not try to promise because we just don't have control over the economy, but we think not, at this point.

Okay. Great. Thank you very much, and maybe next time Bill can ask questions.

Your next question comes from Brian Rafn with Morgan Dempsey.

Hello, everybody. Can you give us a sense from the standpoint of what over the next few years the offset from the loss of the turn business relative to residential construction versus the availability of awards and some of these, you talked about [home] market with [Cal trans], these $50 million to $150 million projects, is that an offset in volume or is it too early to tell?

Brian, it's probably too early to tell. I think that the key here is us really targeting certain projects and seeing if we can bring those home. And so from a construction standpoint, we're not projecting overall in the west a reduction in volume. I think the key ingredient there has got to be the gross margins, not necessarily the volume, and certainly that residential market, we've seen that significant slow-down. And our big concern with that today is probably more in the materials part of the business than it is on the construction part of the business.

Okay, okay. Is there a difference in impact, Jim, in profitability or margins, be it a benefit or an impairment from in doing your turn business, where you're doing thousands and thousands of, you know, $1,000 jobs versus say dozens or hundreds of $10 million jobs for the state? Is there an efficiency productivity on one side, or is there much richer margins in doing some of that [short-term] business?

That's a good question. I think overall what our overall strategic plan has been over the years is to have a nice portfolio of both. We think that's the way to optimize our business and certainly when you're just focusing on large [tract] projects, it's not going to be quite as robust as it would be if you had the combination of both.

So, but we do see some of the opportunities on these very large projects to bring home similar returns that we see on the smaller projects, but I really believe it's too early to tell how it's going to affect us in '08 because it's really going to depend on the saturation of some capacity issues with our competitors. And so long term I don't think it's an issue of balancing the portfolio in one direction or another, but I do think in the short run it's just a matter of the level of competition.

Okay. What are you seeing on some of these jobs? Are you seeing some of these private contractors migrate, are you seeing jobs that may have had three or four bidders in the past that now have ten, or can you give us some numerical idea on that?

I think you're pretty much, you hit it on the head.

Okay, okay.

The smaller jobs mostly, and I would say that would be in the $5 million and less range, where you could have double-digit levels of competitors.

Okay, okay, okay. From the standpoint, you guys talked about bench strength, you probably are fairly stable relative to welders and masons and machinery operators?

Yes, the labor in the west is not an issue.

Okay, okay.

We have really a very, very strong labor pool in the west.

Okay, okay. Let me ask Bill Dorey, you guys talked and it has certainly been a problem, a [comf] problem on the heavy (inaudible), the Granite East side. As you become more competitive and you may have to allow a little more [decremental] discounting in the margins embedded in some of that turn business, and all these jobs are smaller in scope, shorter in duration and size, given what you had obviously embedding some of those risks in the longer duration stuff with the heavy construction side, how low are you willing to kind of go on some of those bids to capture volume but not on bid day give away the job?

Brian, this is Mark Boitano. Let me see if I can help you out here. First of all, that's not part of our game plan, and we've been talking about it over the last year or better. You know, we're looking at quality projects that we can achieve what we consider quality gross margin. So the market is not, as Mike just -- you heard Mike say, the market is pretty robust in most of the large project side of the business, and so that's not even a consideration at this point in time.

Okay, okay, okay. Can you detail to some degree, you have done a little, but how many -- in the backlog how many design build projects you have? And kind of the scope of other than the four that you mentioned what's across the U.S., some of the projects that you guys might be bidding on in '08?

Mike, you got --?

I don't have the exact numbers, but our -- what we classify as design build or fixed price is getting up in the 90% of our backlog range, I believe.

Yes, Mike, on a -- looking at a design build as a percent of revenue, for Granite East, for YTD, we're running about [52%] of the revenue is coming from design build.

Okay. But we also broke it out by fixed price versus --

Right. And the fixed price is up in the territory that you were talking about.

Yes, okay. Just projects in the central region and in the Dallas area, there's a significant toll road program coming up on the George Bush Turnpike, as well as State Highway 121, you know, about a dozen projects in the $100 million plus range. Of course, the Houston project is a huge project for us, and there's an additional phase of that in the future.

In the northeast it's a wide range of types of projects. There's station type projects coming out on the Second Avenue Subway. These are very large jobs that we would be looking to team on. There's another series of bridge replacements, anything from a very large Alexander Hamilton Bridge, down to some other smaller ones in the $100 million to $150 million range. There's quite a bit of work coming up on the other side of the river, in New Jersey, some bridge work and highway work.

Let me ask you guys, given the collapse of the Minneapolis Bridge, have you noticed any more bid activity or any more focus on that, you know, talking about bridges, or is it just about normal, and that was more of a media event?

I have seen some activity, I know in Missouri they had a program for replacement of 800 bridges that kind of died and suddenly got rejuvenated when that issue came up, so that's at least one place where I've seen that. Beyond that I think it's the background government talk that we hear about wanting to put more money into the infrastructure. I mean I think there's politicians on both sides of that argument, but there's certainly more discussion about that now, I think.

Okay. On the Granite Land Company, how many projects do you guys have open in your portfolio?

At the current time there's around 18 different projects in different stages of completion.

Okay. And then the Fresno project, guys, is that something that's just kind of mothballed for now, or is that something that was not even started? What -- where is that in what phase today?

It's in very early stages, and because of the demand for new housing in that area it is mothballed at this point. That prompts the write-down.

They're slowly going through the permitting stage, but it's ongoing.

Yes, so the prospect of actually selling that on schedule was delayed, and that's (inaudible).

(Inaudible.)

What --?

And there's value in that property, it's just out there a ways.

It's just out there, right. Relative to the allocation of free cash flow, are you seeing as in the Superior deal, are you seeing more availability of guys or operations looking to partner with you or is the M&A thing about the same, has there been any change in multiples of EBITDA kind of going -- as you go into '08?

It's really hard to respond to. I mean certainly our hope is that out of the economic downturn there's going to be some opportunities that will come our way, and there may be, but I don't think it's dramatic one way or the other.

I think the bigger thing for us is the fact that we have dedicated quite a bit of effort to this, the prospect of growing our business geographically at this point, and we have dedicated resources to make that happen, and that in itself I think will stimulate our activity.

Bill, is there any thought from your side, since people talk about rightsizing the business, is there any thought that you guys would maybe put the brakes on allowing business to roll-off on the heavy construction, or the Granite East side, is it something you're more comfortable with than 25% to 30% of the sales mix, or is that exogenous?

Well, I'm not sure I fully understand?

Well, if you go back to the mix of where the heavy construction was, you know, you had almost a 10% EBIT margin back in '99, and then you grew that business very rapidly, you're now looking at some of that roll-off and come back in.

Yes.

Is there a better sense of what that size of the business, the Granite East should be versus the total mix of Granite's portfolio?

Yes, I think that, you know, I don't know that we have set an absolute percentage relative to our overall portfolio, but what we I think can tell you is that over the next couple of years, two, three years, that we expect that business to be between $650 million and $700 million and $1 billion.

Okay, okay, okay, good. I would be remiss without saying thanks to Bill Barton for all the years. We went back and looked at our archives, we had 169 conversations with Bill since April 3rd of 1994, so your counsel, Bill, and your dialogue have really anchored our holding this position, so.

I'm more impressed than I thought I was.

I would say for us in the upper Midwest your exit for Granite shareholders will be rivaled by that only of Brett Farb leaving the Packers, so.

I don't know if I can live with that, wow!

Your next question comes from Todd Vencil with Davenport.

Hi. Thanks, guys. Most of my questions have been answered. Would you guys want to maybe provide a little bit of an outlook for where you think the minority interest is going to go, since you mentioned that in the prepared remarks?

Well, we said it would go up.

Yes.

You know, it's a little hard for us to try to predict that precisely because it's a function of the success we have, not only how much volume we're doing in a joint venture sort of arena but how much success we're having. The more success, obviously, the more minority interest we're going to have, as the profits go up on that work our partners are earnings profits, as well. So I think it's a good sign really that the expectation is that the minority interest will increase, but at this point I'd not like to try to speculate.

Fair enough. And then just looking at the east, I mean did you say the total net adjustment to project estimates was $22 million in the quarter?

Yes.

Okay. And that hits the gross profit line in the segment?

It's gross profit, operating (inaudible).

Yes, it follows right down.

Yes, but it comes in there, okay. So is the right way to think about this quarter, I mean correct me if I'm wrong, is my understanding would be you do your best every quarter to estimate these things and sometimes they go up and sometimes they go down, so maybe a reasonable way to look at this is to strip it out of this quarter and say, "Okay, you guys did an operating margin of something like, what is it, 4.9% in the quarter." Is that reasonable in that segment?

I don't think I'd look at it that way. I think I would -- I think I'd give the value, I think the increased forecasts deserve, and what I would suggest is that, and I said this in the prepared remarks, that there's been a lot of hard work done to put forecasts in a position where we believe we have our costs covered going forward.

Right.

And I think we've got that, and I'm hopeful that you will see as we move through this work that we have in our portfolio now, where we have contingencies set-up for events that we believe might occur on this work, but if we are in control and we're doing a really good job of executing on this work, there is the potential to harvest contingencies, and there's the potential to have forecasts improve, and that's my hope that we have our portfolio in order where we'll see more of that and less write downs and forecasts deterioration.

That's certainly fair enough. Is it also the case, and this is just from an accounting standpoint, that when you guys increase a project estimate does that also translate to sort of a higher anticipated run rate on that same project in the future as you recognize profit?

Yes, as a percent complete basis, yes.

Fair enough. Okay. And then a final question, you guys have done a good job, thanks for all the color on the budgetary situation, particularly in California. Just specifically as you look at the calendar, which you've said is beginning to sort of shape-up the way that you had expected, has there been any, you know, back in the -- I guess back in the fall you had talked about some sort of delaying of a lot of the projects on the calendar maybe due to the budget situation. Have you seen in the last, say, three months any movement one direction or another of the timing of planned projects or projects getting dropped off or anything like that?

Todd, this is Jim. Actually, I think that the DOTs have actually stuck to their schedules fairly well, and they continue to tell us they're going to continue to stick to their schedules, so we're pretty comfortable right now that we are seeing what we were told we were going to see.

That's great. Thanks very much. And, Bill, congratulations.

Thank you.

Your next question comes from [Avi Fisher] with BMO Capital Markets.

Good morning. Thanks for taking my questions. How much did the fire cleanup work in San Diego contribute to west revenues and profit in the quarter?

Well, very little in last year. That work was literally let and began in '07, so the majority of it is going to be probably in '08, but it's ongoing.

Yes, it's just an example of -- I think an example that we chose to use, in regards to moving our business around, being flexible in an economy that is what it is today.

That's a good point.

But that work will help revenues in the west in 1Q '08, is that the way to look at it?

It's not, I think, again --

So it's immaterial?

Yes, what Mark said and Bill said, it's an example.

Okay. The three negative adjustments greater than $1 million, can you give any color on what they were or how far along they are?

Yes, this is Mike. Let's see, one (inaudible) was the tail end of a non-sponsored joint venture in New York with some kind of closeout issues. One was an ongoing, and it's essentially complete, we hope to settle some issues with them there. The other one was also in -- the second one was in New York, it's a job we've talked about before with unforeseen ground conditions that we're working through. And the third one was a project in Philadelphia that's, I think it's about 80%, 85% complete.

So really just the second one you mentioned is still pretty early in the process?

Yes, that one will go on through the year. The other two should finish this year.

And since you mentioned ground conditions, I have to ask about the Oregon, is there any color on that, any updates from what you're hearing from the Oregon DOT or the project that's still frozen and (inaudible)?

Yes, I think Jim can answer that.

Yes, I sure can. The project is in a suspension timeframe right now, so we are working closely with ODOT to look at mitigation measures for those landslides and reprice the job, and we're basically in a suspension period, negotiating with them, as we speak.

Okay. Is it -- I want to ask you about it, but I don't think you can tell me much about it, is my guess, is -- but I'll ask anyway, is it your -- do you want to finish the work or try to reprice it in a way that you can do it on your own?

Well, I think that we do want to finish it. We want to --

Got you.

-- close it with ODOT and cooperatively finish the job for the benefit of everybody.

Got you.

We've agreed to that, actually, at this point.

Right.

We've executed a change order that [memorializes] the suspension and the obligation on -- for both parties to work together to find a solution, the cheapest solution to build this project, and there's some -- and the terms of the suspension are that we'll agree to some pricing and we'll -- if we can't agree to the responsibility for the slides, we'll put that to a third party.

But I think the important message here with US-20 is that both Granite and ODOT are working cooperatively to develop the best plan and best solution to a difficult problem for both parties.

Right.

And I think we're really pleased with the relationship that we have with ODOT, and I believe if you ask them they'd say the same thing.

My understanding is it's under some kind of arbitration with a panel. Any dates on when we can expect --?

No, literally, it's not under arbitration. I mean most of our projects we have what we call a "dispute review board." That are experts in the industry, that do come together to help resolve some issues between the owner and the contractor. We're not necessarily heading in that direction today, that is an alternative that if we can't come to some agreement on certain costing issues, we can certainly go to the DRV, but it's not imminent today.

Okay, so any date set on when you expect to have a resolution of how to go forward?

Well, no, both ODOT and Granite would love to have the project issues resolved and begin work again in '08. That is not necessarily, we're not totally confident that's going to happen, but even if we have design pricing issues relative to the landslide issues, we certainly have to get permits and go through the regulatory agencies to make sure that we've dotted all of our I's and crossed our T's, and that could be more time consuming than just the financial negotiations and the design negotiations.

Got you. Okay. I have a few other questions. You said there was $12 million in operating income in the land development, and that's kind of a big percentage of the total. Is there any chance you can kind of break-out, you mentioned there are 18 projects in various stages, are they all residential or are some of them commercial?

No, they're -- it's a variety of types of investments. We do have a pretty significant amount that is residential, but I think the important maybe point is that a lot of those projects are in other states like, for example, Texas, the State of Washington, where the impact of the residential slow-down has not been felt, certainly not to the degree that we've experienced in California.

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

Oh, thanks. Do you have that stat on how much of the east backlog is expected to break-even?

10% in Granite East, is that right, Bill?

That's approximately correct. I don't have our [case still in process].

Okay. In the positive changes that you had in the east projects, are those estimate changes on ongoing jobs, you know, like release and contingency, or is it change order negotiations on ones you've already completed?

It's a little bit of everything. There's ten of them, of course, so the project in Mississippi, essentially finished up, so we're able to recognize some of the contingency we had there for a late completion, that kind of thing. Others are just strictly doing better on the work. A couple in the southeast were, as you say, finalizing kind of job completion, change order type of issues.

Uh-huh.

So it was a wide range.

So out of the -- out of all the money, just maybe a blanket statement, can you give us a broad overview of how much money you've collected in the change order negotiation process relative to what you're going after? I mean is it still early in the game or is it -- most of those are already completed?

There's still a big number out there, but I can't tell you a percentage, I mean because it's just kind of a living thing. I mean as you, you know, as they go from a claim or a dispute into a change order, it just becomes part of our backlog, so --

Right.

-- that's really difficult to put a percentage on that.

Okay. Thanks, again.

Your next question comes from Richard Paget with Morgan Joseph.

Just a quick housekeeping, how should we think about the tax rate going forward?

I'm sorry, the tax rate? Oh, tax rate, I've been waiting for this question all morning. The tax rate, we're anticipating based on our forward-looking process, that it's going to be about 28.5% for next year, and that's a significant decrease, so I think it warrants comment.

Where are the changes? Well, one, we had an additional tax rate that was added on because of the [Wilder] acquisition expense. That doesn't have -- it's not tax deductible, therefore, it affected by about 1.5% in terms of the tax rate in 2006, so that won't be there in 2007.

But, more importantly, what's really decreasing the overall book effective tax rate is the minority interest in (inaudible) is growing and, in fact, we're looking to see if that isn't a [bearable] that we can use to give you a sense of the size of the minority interest for the forecasted year of 2008. But that began, underlines what Bill was saying earlier about minority interest growth. So those are the two major differences. There are some other minor things that happened as far as the effective tax rate.

Okay, yes, that's a pretty good drop-off there. All right. Thanks.

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

Hi, just a follow-up, in terms of the first quarter we're in now, how's it been from a seasonal perspective?

Then the west, primarily in California, but also some of our other regions, so we haven't seen a winter like this for several years.

Quite a few years, yes.

Yes.

Okay. Great. Thank you.

Your next question comes from Avi Fisher with BMO Capital Markets.

Yes, I just got cut-off. I've got two or three more questions. You mentioned the G&A increased $14.5 million over the quarter, roughly $12.5 million came from the Wilder acquisition. Should we then look at that $2 million as a sort of dollar run rate to look at on the quarter to quarter basis?

No, the $12.4 million was spread over three quarters.

And it was Superior, not Wilder.

It was Superior, yes.

I'm sorry, Superior. Okay, but if we take that out, I mean should we look at -- it's such a significant jump, I mean $10 million or $9 million on a quarter over quarter, on a year over year basis, for the quarters?

As I suggested, we have stepped up to try to ensure ourselves that we control the business that we're building. Some of that is to ensure that we can continue to grow, and, as I suggested in the scripted remarks, we expect it to continue to grow [at a modest rate].

Are you, can you sort of quantify how many new branches you would want to add this year?

I think that would be highly speculative. I mean certainly we'd like to continue to acquire geographic -- businesses that provide us with geographic expansion, but I think it would be speculative to suggest the timeframe upon which we'd do it.

Got you. I have just two more questions. I appreciate your patience. What -- when someone asked earlier about looking at the '02, '03 margins, I wondered does this feel like it felt in 2002 and 2003, does the market sort of look that way at all to you, or is there more public work out there than there was back then?

Is it actually -- I mean this is Jim Roberts -- it's just the opposite almost. Back in the early 2000s we had a private sector market that was fairly strong and a really, really poor public sector market in the west. Now, we've got a healthy, very healthy public sector and, obviously, not a very health private sector.

So it's different, so I don't consider it to be the same and I don't consider ourselves moving back to the early 2000 numbers, but certainly there'll be some reduction from what you've seen in the last couple of years.

And when you talk about the healthy public, and I know you've talked earlier about the term and the turn projects and the large projects, when you look at the large size, what's kind of -- what are the size projects that you're going after or that you can go after with the added capacity? Are we talking the $20 million to $50 million range, the $50 million to $100 million range?

Well, we've always had the capacity or the capability in the west to probably build work under $50 million.

Right.

But now we certainly have more capacity to build work under $50 million, and the larger size work could be probably up to the $150 million, $200 million range. So the added capacity with the realignment really is focused on the $50 million to the $200 million work.

And is there -- is that work included in 1B? Is there $50 million to $200 million size projects in 1B or is that mostly all the $50 million, zero to $50 million?

Oh, there is quite a bit of the $50 million to $200 million work in the 1B funds.

Okay. All right. Well, I just want to wrap-up. Thanks, Bill, for the time you've spent on the phone with me, and good luck with your golf game.

Thanks, I'll need it!

There are no further questions at this time. I will now turn the call back over to Bill Dorey.

Well, thank you, all, for joining us this morning. It's been a great dialogue. We appreciate the interest in our Company. Mark Boitano and I are leaving the office. We will not be here for questions, but Bill and Jackie and Jim will be, and if you have further questions, feel free to contact us in Watsonville. Thank you.

Ladies and gentlemen, thank you so much for dialing in for today's conference call. You may now disconnect.