Granite Construction Inc (GVA) 2008 Q4 法說會逐字稿

Good morning. My name is Stephanie, and I will be your conference operator today. At this time I would like to welcome everyone to the Granite Construction fourth-quarter and full-year 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. I would now like to turn the call over to Jacque Fourchy, Director of Investor Relations. Ms. Fourchy, you may begin your conference.

Good morning and thank you for joining our fourth-quarter and year-end conference call. I am here today with Bill Dorey, President and Chief Executive Officer; LeAnne Stewart, Senior Vice President and Chief Financial Officer; Mark Boitano, Executive Vice President and Chief Operating Officer; Jim Roberts, Senior Vice President, Granite West Manager; Mike Donnino, Senior Vice President Granite, East Manager; and David Watts, our Chairman.

Today's call is being webcast live and recorded. The replay will be available on the Granite investor relations website immediately following the call, and will be posted until the close of business in February 2010. Following our prepared remarks this morning, we will as usual start the Q&A session. Please be aware that your questions along with our answers will be included in both our live transmission and any future use of the recording.

Before we get started, I would like to remind you that this conference call may contain forward-looking statements. They should be considered in conjunction with cautionary statements and our earnings release, and in the Company's most recently filed SEC reports. We do not intend to update any forward-looking statements made in this conference call.

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

Thank you, Jackie, and good morning, everyone. On today's call I will provide insight into our 2008 performance, as well as a perspective on our current market. I will then turn the call over to LeAnne to provide details of our fourth-quarter financial results.

As I have discussed before, an important element of our strategic plan is captured in the phrase "deliver the goods". This theme underscores our objective of constantly returning strong operating results while working toward our long-term vision to build a legacy in the construction industry. In our business this can be a challenge, especially during a difficult economic cycle like we are currently experiencing. However, I am pleased to report that we did deliver the goods in 2008.

Granite reported earnings per diluted share of $3.21 compared with the prior year's $2.71. Revenues were $2.7 billion, essentially flat compared with the prior year. However, gross profit as a percentage of revenue for the year was 18% compared to 15% in 2007, and operating income was $217 million compared with $175 million last year.

Despite economic headwinds, 2008 was the most profitable year in our company's history. We greatly improved bottom-line results on our large projects and capitalized on opportunities across the United States. Our best-ever performance was a product of excellent execution, geographic diversification, a diversified project portfolio, and the hard work of Granite employees throughout the country.

I tip my hat to all of our employees for their dedication and commitment. I am extremely proud of what we accomplished in 2008.

Now I would like to spend a few minutes discussing our current markets. In Granite West our teams are actively bidding projects from cities, counties, water districts, school districts, various other entities, as well as from some private owners. We have, however, recently experienced a slowdown in the number of projects out for bid from some state departments of transportation. This may have been because of funding issues, or perhaps it was because of a wait-and-see strategy in anticipation of potential federal stimulus money. Now that the stimulus money bill has passed, we expect these delayed projects will move forward.

In the West while there is public work to bid, it remains very competitive, and there is little activity from the private market. Although we expect President Obama's stimulus plan will increase demand for public sector work, it is too early to know to what degree it will help our business in 2009.

As part of our strategy in the West, we are leveraging the competitive advantage of our vertically-integrated business model whenever possible. We are also targeting a number of large project opportunities to complement our traditional smaller project focus. These projects are generally complex and require a strong balance sheet and extensive operational horsepower. These requirements tend to limit the number of bidders and often provide a greater opportunity for higher margins.

The outlook for our Granite East business continues to be encouraging, and our large project bid list remains robust. We are pursuing projects in each of Granite East's three regions, including highway reconstruction, transit, tunnel, marine, airport and bridge work. While the tight credit market and state budget issues have affected funding for some programs, we continue to have more large projects in our pipeline than we can bid.

Now I would like to discuss federal and state infrastructure spending in more detail. First, let's address the federal outlook. We applaud President Obama's commitment to increase infrastructure spending. Clearly, this is a need in our country -- there is a need in our country to increase investment in our aging infrastructure. There is also a need to build more capacity on our highways and to revitalize public transportation systems to provide a solid base for growing a globally competitive economy.

The recently passed federal stimulus bill contains about $140 billion in total construction spending, of which approximately $27 billion will be spent directly on highway-related projects. This bill requires governors to certify that federal stimulus money will be spent on transportation, and that it will be additive to revenues that have already been committed to projects.

In addition, the bill stipulates that states must commit 50% of their funds within 120 days, or risk having those funds redirected to other states. It is our belief that to commit money quickly, a lot of the money may be spent on smaller maintenance type projects that do not require extensive design or planning. If that occurs, it will create greater demand for local construction services and materials.

We estimate that the stimulus work will likely start in mid to late summer. Given that time frame, along with the normal seasonality of our business, we expect stimulus projects will begin to impact our business in late 2009 and into 2010.

While we are encouraged by the promise of infrastructure funding from the stimulus bill, our longer-term focus is on the reauthorization of the federal highway bill which expires in September. A substantial increase in the next highway bill is very important if we intend to confront our nation's critical transportation needs. Granted, along with other industry leaders and industry associations, we will actively encourage a vigorous national debate regarding a long-term strategy to substantially increase funding levels.

Turning to the state budget outlook, many states are facing severe fiscal challenges. This is particularly evident in California where the California legislature has been working to address a historic budget deficit. After months of debate and negotiation, the legislature reached a budget compromise last week which provides for an increase in revenue to the state and no reduction in funding for transportation. We are hopeful that the compromise will restore fiscal solvency and creditworthiness to allow California to sell Proposition 1B bonds and fund a full-scale Caltrans building program.

Now I will turn the call over to LeAnne to provide details of our 2008 fourth quarter.

Thank you, Bill. Looking at the fourth quarter. In Granite West, revenue for the division was $463 million compared with $446 million a year ago. Gross profit as a percentage of revenue was 18% compared with 19% in the fourth quarter of 2007. Operating income increased to $50 million compared with $44 million a year ago.

Contract backlog in Granite West at the end of the fourth quarter was $789 million compared with $854 million last year, due primarily to a reduction in private-sector backlog. Notably, private-sector work accounted for 20% of Granite West's revenue in 2007. In 2008, it accounted for only 10%. This decrease is primarily attributable to a reduction in private-sector work in California, a state hit hard by the housing downturn.

Additionally, we continued to experience a decrease in demand from third-party customers for our aggregate. In the fourth quarter, material sales decreased to $70 million compared with $86 million in the fourth quarter last year. Gross profit as a percentage of material sales decreased from 17% in the fourth quarter of 2007, to 9% in the fourth quarter of 2008, driven by continuing weakness in the private-sector market, a mix shift to lower priced commercial products, and year-end inventory adjustments.

Turning to Granite East. Revenue for the division was $163 million compared with $183 million a year ago. Gross profit was 20% compared with 10% in 2007. Operating income was $26 million compared with $14 million last year, reflecting improved execution in our Granite East projects and the intercounty connector project in Maryland, reaching our profit recognition threshold in the fourth quarter.

Total contract backlog in Granite East at the end of the fourth quarter was $911 million compared with $1.2 billion at the end of 2007. The reduction in backlog is not indicative of the opportunities available to us. Over the past several years, we purposely slowed the growth in Granite East in order to focus on execution. Going forward, we expect the backlog in Granite East to increase as we continue to add high-quality work to our portfolio.

Turning to the balance sheet. We continue to maintain a strong balance sheet, which provides us the financial strength and flexibility to successfully navigate through today's difficult business climate. We are conservatively leveraged with debt to capital at 27%, and we had zero net debt at the end of the year.

Our liquidity position also remains solid. Cash and short-term marketable securities totaled $499 million at the end of 2008, an increase of $69 million from the prior period.

General and administrative expenses in the fourth quarter were $59 million compared with $63 million a year ago. Across the Company, we are striving to reduce expenses and improve efficiencies. In 2008, we implemented several cost containment and process improvement initiatives designed to reduce our cost structure. We will continue to pursue these as well as others in 2009 and beyond.

I will now turn the call back to Bill.

Thank you, LeAnne. I am extremely proud of the performance of our company and our people in 2008. In the short term, we believe the stimulus bill should provide needed relief for our industry and Granite in 2009 and 2010. Over the longer term, we are optimistic about the growing need for the services we provide. We are generally satisfied with the current level of bidding activity in the West, and we are excited about the clear progress we have made in the East and the prospects for that business in 2009 and beyond.

As always, our goal is to maximize profitability by operating effectively in any business cycle. I am confident that our teams will take full advantage of everything our markets have to offer in 2009.

I will now turn the call back to our moderator, and we will be happy to take your questions.

(Operator Instructions) Bob Labick, CJS Securities.

Good morning. Congratulations on a strong quarter and year.

Thanks, Bob.

First question I wanted to ask. You obviously did a very good job in '08, as it relates to finding other projects such as the border fence work and things, larger projects to support the West division. Bill, I think you alluded to seeking out more of those projects in 2009 and beyond. Is there anything in queue or that you are bidding on, or can you just discuss outside projects from the (technical difficulty) that you do that we should think about going forward?

Well, I don't think it would be appropriate for us to single out any particular project or program. But I will tell you -- and I think this is a product of having your normal market disrupted to some degree and having it not be as strong as it has been over the last several years. It triggers, I think, a need to get outside the box, do some things a little differently, expand our horizon. And we certainly did that in 2008, and I expect our expectation is that we will continue to do that in 2010.

I'm not here to tell you precisely where those nuggets will be found, but we are looking real hard right now for opportunities to replace that border work and some of the other work that we capitalized on in 2008.

Jim, do you want to add to that?

Maybe I can add a little bit here, Bob. One of the things we did in that realignment program of February of 2007 was create a large projects group in Granite West, and I'm happy to report that they are really making tremendous progress. And what it has been able to do is kind of take our Granite West normal branch type construction business and bring in our old heavy construction division type of mentality for large projects, and kind of open up the doors to new opportunities.

We are seeing design/build opportunities in the West. We can chat about that a little bit with some of the California legislative passings of design/build and public/private partnerships and alternative energy programs. We are looking into all of these things in the West now. And really prior to our realignment, we may not have been looking into these things. So that is part of the success we had last year, and we are really elevating that gain in '09 as well.

Okay, great. That's helpful. Then LeAnne mentioned on the material sales some sales to third parties have come down, obviously, given the economy and what is going on there. Is it safe to say that the lower volumes is what has pressured the margins, and when should we expect a recovery? What are you doing there to get margin recovery on a go-forward basis?

Bob, this is Jim again. That is a good question, and it is really evident when you look at our numbers that we reported. Certainly, the third-party sales of materials has been something that we have been struggling with probably for the last -- I would say the six months of '08. Our game plan is really simple. Our job is to become a low-cost producer in the marketplace. And we need to gear up and be as efficient as we possibly can be in the materials business, and really take a wait-and-see attitude relative to when the market is going to come back.

We also have the opportunity to sell materials to ourselves in some of these projects that we have got going on. And I think that we're going to really focus on selling to ourselves and creating an opportunity for our materials business through our internal construction business. But third-party sales are going to be indicative of when the economy comes back, and we are really just trying to be as efficient as we can and then wait and see and be able to really make things happen when the economy returns.

Okay, great. My last question and I will get back in queue. Obviously, you had very good cost control, which you mentioned as well. SG&A was down sequentially and it was a very strong quarter. Is this a good run rate for a kind of go-forward base of SG&A, or how should we think about the overall SG&A levels for 2009?

We have not tried, Bob, to provide a lot of detail around G&A. G&A bounces around a little bit as a product of how busy we get and how we move people in from the field when we are not busy, and charge them back out onto projects when we are. So it is a little bit of guesswork.

Having said that, what we have said publicly is that we do expect that the work that we have done in 2008 to try to position ourselves to become more effective and more efficient from an administrative standpoint should be reflected in our 2009 G&A number. So I would leave you with that.

Okay, thank you very much.

Rich Wesolowski, Sidoti & Co.

Thanks, good morning. Your West construction margins have remained at a peak level for a lot longer than I had expected them to. Am I mistaken in thinking that they will have to come down to maybe at least of still good midteens level as the recession wears on?

Rich, that is a great question. This is Jim. I ask the same question all the time. I think that -- I agree, the construction group in the West, I'm just so proud of them. They have done an amazing job over the last 12 months, and they are looking at projects. What they're trying to do is focus on opportunities that can maintain high margins. And certainly the smaller bread-and-butter work that we bid every day is very, very difficult today.

So our job here is to try to capture the higher-margin work, and if we can do that, we will continue to keep some good margins in place there. But if we are forced to just kind of play in the market that everybody else is playing in, that is going to be a difficult year out in front of us.

I know you can't rely on the atypically strong performance you got this year from some of your branch projects, but you do see even the opportunity for similar margins in the work you bid today?

Well, I would put it this way; I think there are similar opportunities in certain sectors of the work, and we are exploring kind of as Bill mentioned getting outside of our normal work to find different opportunities that can maintain reasonably high margins. And that is kind of the work that we are doing at our large projects group and certain other areas of our businesses. But on the average, the typical work that we do is very competitive and, literally speaking, margins have been reduced.

Okay. By my math, at least back-of-the-envelope math, the ICC project added a little bit less than $10 million in pretax profit. Is that reasonable?

That is probably directionally correct. Pretax preminority interest, the number was $17 million, Rich. And so then if you back out minority interest, you are in the right ballpark.

Is 15% still the best guess of East margins gross during the next couple of years?

Not like to be that specific. What we have said is midteens, and we will stay with that.

Okay. Then finally, your net overbillings actually shot up during the last couple of quarters. It was a good sign and surprising. Is this going to continue or is this going to unwind at some pace within the next year or two?

That, Rich, is really just a function of the particular jobs, when they start, how much retention is held. So I would call that a more challenging number to predict and ask Jim if he has any other perspectives on it. But it really does vary based on the timing and of various jobs.

One thing to add to that, both at Granite East and the guys in Granite West and the gals in Granite West, everybody focuses on trying to have all the billings, because it creates a cash flow issue and opportunities for the Company, and we will continue to strive to do that.

And LeAnne is absolutely correct, that if the contracts don't allow it, it is going to be a little more difficult. But our job is to try to get overbillings and keep the cash flow in Granite healthy at all times.

If you think about what is the practical metric that you can watch to try to anticipate that, the direction of that, is if we are booking new large projects, I think you can safely assume that if we are doing our job right, we've got some overbillings built into those first initial draws. So as we book new projects, new large projects in particular, it may be something you could anticipate.

Excellent, thank you.

Vance Edelson, Morgan Stanley.

Thanks a lot. You had just mentioned the competitive intensity. Would you say it is getting even more intense recently with some of the smaller players possibly on the ropes? And does that present any challenges in terms of keeping your people disciplined from a bidding perspective as you move through the year? Thanks.

This is Jim again. That is a very reasonable question, something we ask ourselves every day. Yes, I think that the smaller jobs are as competitive and even more competitive than they ever have been. And our job is to maintain that discipline, and our leaders at our operating group levels in the West and at our branch management levels in the West are really focusing on that discipline. And that may see a reduction in some of that small work bookings in the short-term.

But really the key here is to look for those projects that create the greater opportunities, and I do think that there are smaller companies that are struggling today and doing work just for work's sake and keeping people busy. But we tend to always find the proper jobs to keep our businesses going.

And I think with the stimulus packages and some of the things that we have seen recently, passing the California budget and other states releasing projects that are more in our wheelhouse, I think you're going to see the opportunities for us come at the right time. And it may be a little bit different mix as Bill mentioned, but we are not going to dive down into some unreasonable numbers with some of the smaller players.

Okay, thanks for that. As you move forward and you continue to look for ways to increase efficiency and trim costs, how do you balance that with the desire to be able to take advantage when the macro environment does improve? And do you feel that because of that, you are somewhat limited in what you can do to trim costs this year? Thanks.

Well, that is a balance that we need to always be aware of. Our primary effort here is to improve our process. We have been through, in 2008, some reduction in force. We did that with an opt-out program, with an early retirement program, and in certain places that we saw our business drop pretty dramatically. We did have some reduction in force.

So we are down -- for the most part down to where we think we need to be. And I think the next stage is really getting into the processes that we implement, particularly from an IT standpoint, to try to become more automated, to build more commonality into our systems so that we can be efficient and capture what I characterize as the economies of scale as we continue to grow. And that will help our G&A as it relates to our revenue. I hope that helps.

Yes, that does. Can you just remind us of your ability to move resources from the public to the private market, or from private to public, and from region to region? Is that something you are able to take advantage of right now?

It is and I think, for example, we were able to capitalize on as much of that border fence work as we did -- just precisely because we moved resources around our system. Moving from public to private and back and forth is not a very big problem, and typically, we can do that within a business unit. Certainly if we are moving geographically, it becomes a little bit more of a strain on our people to do that.

But the truth is these times are different; our people want to work. Our people want to work for Granite, and generally speaking, we can find people that will move and get our work done.

Okay, that is helpful. Thanks.

Todd Vencil, Davenport.

Thanks a lot. Good comments, good outcome there on the California budget last week. Prior to that, reaching that agreement, I guess, we heard a lot of noise about various state programs and state projects being shut down. Can you talk about the impact of that that you guys might have seen, and how that might impact the first quarter?

Todd, this is Jim again. Yes, I don't see first quarter being a big issue. Really what happened was when they -- and it wasn't just California, by the way -- I think Bill mentioned it in his initial remarks. When you saw a bunch of the states slow down in the letting process, looking for a federal stimulus package, and then you saw California in a budget issue, you saw really the bidding environment slow down.

And really we don't, if anything to bid -- and we were actually a low bidder on an award in the first quarter -- would most likely not affect our books in the first quarter, and probably not even the second quarter. So what we saw was kind of a pushing back of the jobs that we will be bidding in the state of California and some other states, and that could have an effect at the end of the year if obviously we aren't able to complete as much of those jobs as we would have been able to if they had been actually let in the month of January or February.

So the good part is the jobs will be out to bid. It looks like there is a full steam ahead to get the projects moving. The timing issue of a couple of months of a slowdown could cause a rolling of revenue and margin into '10 that might have been in '09 at the end of the year.

I think it is fair to say, Jim, we did not stop any of our work in California as a product of the noise around budget problems and so forth. We kept our projects going. In a couple of instances, we offered to carry those projects using our own working capital for a month or so.

We have seen this before. Typically, these events do not -- these impasses do not last more than about a week or two, and that is really the situation we experienced this year. And it is the cheapest thing we can do, is keep the project going rather than try to deal with the disruption of shutting it down and starting it back up. I think once again, it worked out in our favor.

I think just as sort of a contrary point of view around the stimulus package that you might consider, because -- and I think this is true -- I think we saw a number of states posture to some degree to try to get more of that stimulus money. And in doing so, they slowed stuff down which did affect the bidding process. So you could argue that the stimulus conversation probably hurt us for the last six or seven weeks, and now there is probably some pent-up demand. So we expect that this stimulus effort will show up loud and clear over the next several months.

Excellent, thanks for that. On the guidance or lack thereof this time, you guys had been in a habit, I guess, of providing ranges for the top line and for the margins and maybe for the minority interest, and haven't done so this time. Are you inclined to or are you sort of changing that practice?

Todd, this is LeAnne. As you will recall when we started providing the guidance that we did last year, the ranges that you speak of, we did that in conjunction with our first-quarter earnings release. It is still our intent to do that, although we will all certainly admit that there is a great deal more uncertainty this year in what 2009 is going to look like than we felt like we had in 2008. So I don't think we can promise that we will do that, but that is certainly our intent.

Okay, that makes sense. LeAnne, while I have got you, do you want to talk about whether there were any changes in accounting estimates for the East and the West that impacted the numbers this quarter, or should we wait for the K?

There were; there are every quarter. I don't think there probably will ever be a quarter where there aren't changes in estimates that impact a quarter. But honestly, trying to go through them without having the 10-K in your hand is probably more confusing than it is helpful. We intend to file the 10-K this afternoon, and so what I would suggest to all of you is when you get that, don't hesitate to call me or Jackie, and we will help you through any questions you may have.

That is great. Thanks a lot.

Avi Fisher, BMO Capital Markets.

Good morning, and thanks for taking my question. It is refreshing to see a lot of cash on someone's balance sheet, so that looks nice. Certainly not on mine. In her prepared comments, LeAnne mentioned something about the reduction in California awards which hit the bookings. But if I tally up Caltrans awards, this is a pretty -- 4Q was a pretty strong quarter for you guys. Now I know you have other ins and outs. Where was the weakness in California?

Wow, this is Jim, and I'm going to have to struggle with an answer on that one. I don't know if I have an answer relative to the bookings in California itself. We did have some nice large jobs that we did book in the fourth quarter, so I will just have to leave it up to maybe some more detailed information on a phone call or something with you.

But Caltrans was a pretty good quarter for you, right?

Well, I can think of just off the top of my head several large projects that were awarded, so from that perspective, the answer would be yes.

Okay. So there was weakness elsewhere outside of the Caltrans. How much fire -- I am sorry -- well, actually how much fire work did you do in the quarter? Was it material?

Fire work? In the fourth quarter, I don't know of anything in the fourth quarter.

Oh, was that a 3Q event?

Actually, most of our fire cleanup work was done in the first quarter of '08, and the fourth quarter of '07.

I have to check my calendar. Sorry about that. What about border fence work; what was the value of the border fence work in 4Q, and is there any holdover into 1Q?

I don't know if I have the total value of what was actually performed in the fourth quarter. I will tell you that there is some carryover into '09, Avi, and it is pretty good carryover for the amount of work that we've done in the border fence mostly in the California sector. And I don't have those numbers right off the top of my head.

In terms of the overall amount -- this is Mark. In terms of the overall amount, it is relatively minor.

The carryover. Absolutely, Mark is right.

Most of the work was done in 2008.

Got you, right. Are there any projects in 1Q that you expect to hit the 25% or 30% threshold, either in 1Q or during the year? And if so, what are they?

There are no large ones. As you know, in Granite West the profit recognition event occurs on a much more frequent basis, but there are no large projects we expect to be recognizing in the first quarter.

What about later in the year?

Maybe we should let Mike address that.

This is Mike. The five stations project in New York which started in November will possibly hit that level in the fourth quarter.

And that is underground work?

No, it is a rehab of a transit line, five stations, obviously.

Got you. That's the subway work, the New York City subway work.

Yes, but this is a surface station.

Got you. Actually, speaking of that, because I think that New York work was something you mentioned on the last quarter conference call. You mentioned that there were three projects in East and one in West, roughly $500 million that you expected to win. How did those go? Did you hit them all? What was your [hurt] rate on those?

Well, we still have several projects that I've just put them in the pending category. The Western Way project in North Carolina has been conditionally awarded, but the owner is working on their funding.

The East Side access tunnel project is pending. The 9th St. Station project in New York is pending. Houston Metro, we continue to negotiate and work through contract terms there, but the main contract there is still pending. And the World Trade Center project that we have talked about for several quarters continues to move forward. And we are working on more major packages there, one of which -- at least one of which should book in maybe the second quarter.

As usual on the WTC project, you're only booking portions of that backlog, right?

We book portions, which are called work packages, as they are put under contract.

Got you. Finally, there was a big increase on the balance sheet, relatively big increase on the balance sheet and increases in real estate held for sale. I was wondering if you could provide a little color on that.

Sure, Avi. During the fourth quarter of this year, we consolidated one of the existing ventures in Oregon. All of these ventures are constantly assessed for whether we need to consolidate them within the accounting rules or not. And this project in Oregon reached a consolidation threshold in the fourth quarter, and that is what caused that balance to increase.

Okay. Any details -- I am sorry if you said it and I missed it -- on the available-for-sale securities and what those were and if we could expect more going forward? Obviously, you would have written it down already if you expected more, but --.

Yes, I would say it is fair to not expect more. The investments that we took out last time were somewhat unique to our general portfolio. They were specific for a certain type of retirement benefit, and so it was a fairly -- I wouldn't call it rare occurrence, but not something that you are going to see very often.

Well, I will read the 10-K when it comes out and follow up with you guys a little later. Thanks very much for taking my questions.

Joe Ritchie, Goldman Sachs.

Good morning, everyone. Thanks for taking my questions. Not to get into too much details on the adjustments that were potentially booked this quarter, but just one question. Did you guys book any claims this quarter that were reversed? For instance, last year you booked a pretty significant claims adjustment on the SR-22 project. I was wondering if there was anything that occurred like that this quarter.

I don't think so. I don't think there was anything that I would characterize as really material in the fourth quarter.

We had a number of small issues that were resolved during the quarter, but nothing of any major consequence.

Okay, great. I think one of my colleagues asked a question about the competition that you were seeing from contractors. In the past you have described competition from residential contractors increasing, given the downturn in the residential markets. We are starting to see a leg down in the non-res markets now. Are you starting to see any non-res contractors enter the space, and are they fighting for smaller projects as well?

Joe, this is Jim. They are coming from everywhere, so I don't know if it's residential or -- when you say non-res, I'm assuming you mean commercial industrial.

Yes.

They have been in the mix for the last 18 months as well. So really there hasn't been much of a change from that perspective.

Okay, great. I was wondering if you could also provide some color on the highway bill and what your expectation is there, with SAFETEA-LU coming up at the end of September? I think it took about two years for us to get SAFETEA-LU after TEA-LU expired, and I was just wondering what your thoughts are on what will happen in the interim as we look for a successor to SAFETEA-LU?

We carved out a few paragraphs in our prepared remarks, because we think this is a big deal. We also think there is a fair amount of political momentum and interest around this subject currently that we have not seen in the past. And we think there is an opportunity to possibly influence the outcome of this highway bill and get what is necessary to really deal with the problem.

And the problem is neglect and underfunding of our infrastructure in this country at a federal level, and frankly at a state level in almost every state as well.

There is conversation that is beginning. It's being led by the various industry associations, whether it is the Road Builders Association or the AGC or the National Stone, those major national organizations, most of which we are very active and are a member, to take the current level of funding and essentially double it or in that neighborhood. That is what is required to really deal with the problem.

You all watch CNN at night, and you're watching our new leadership there. And there certainly appears to me to be no fear when it comes to spending federal money on a problem if the problem rises to the level of being one that the Administration wants to take on.

So we're keeping our fingers crossed. We are going to put a lot of our own effort into trying to influence that decision as best we can through our associations for the most part. And we are hopeful that this year that we will see a highway bill that will have rather than a $230 billion bill over a six-year period -- and I'm not sure it's going to be a six-year bill, but let's just assume that it would be -- that we would see something in the neighborhood of $400 million to $500 million, which would be an enormous -- have an enormous effect on our business. And I really think a positive effect on the transportation systems and our ability to be competitive in this country over the long term.

Okay, great. Thanks for the color.

John Rogers, D.A. Davidson.

Bill, you mentioned -- talked about the stimulus program and how states might have been holding off on projects ahead of it. I am curious, there has been a lot of press on shovel ready, which I assume means generally (technical difficulty) but smaller projects. What is your sense of the larger project market and some of the things that have been hoped for to build? Are they out there? And I'm thinking about the implications for the West versus the East.

You know, it's interesting, it seems -- and I tried to allude to this in our remarks. It certainly seems, particularly in the East, that there is plenty of large projects, more large projects that we can bid. We cannot bid all of the plus $300 million or $400 million projects that are out there. We don't have the staff to do it and do it right, which is actually a good sign, because I suspect others are in that same boat.

In the West it may not be quite as evident, because I think the level of competition and the manner in which the collapse of the housing market has been a little more intense in the West, and probably released a little more capacity. But nevertheless, there is still a number of large projects in the pipeline.

If the stimulus bill would relieve the smaller projects, that would be a good sign. However, I do expect that the stimulus bill is going to stimulate some larger projects as well. And particular in California, one of the elements of the stimulus bill as we understand it is to authorize -- the opportunity for Caltrans to do 10 design/build projects.

And if those design/build projects have a financing element associated with them, they don't count towards the 10. So there is a window of opportunity here for California, which at least from the leaders' point of a view, they would like to do more design/build, typically design/build as larger projects.

So my expectation is while there will be a lot of small work in the stimulus bill which will be right over the plate for us and is perfect for us, there will also be enough innovation on the part of Caltrans to use some of this money and ideally leverage some of this money into some larger projects, ideally possibly using institutional money to do that.

So if all that comes together, they can take the stimulus money and use it to do more work than if they just did it in a traditional fashion.

Thank you. That helps.

Rich Wesolowski, Sidoti & Co.

Along the same lines of the political help, it looks like the effort to increase the gas tax in California was stymied. Can you give us your overview of that drive across the rest of the country?

Well, I think on the first flush we were disappointed to see the $0.12 gasoline tax not be a part of the budget resolution here in California. But after stepping away from that and understanding what it would have looked like had it passed, I am not sure we are that disappointed. And the reason is that that $0.12 was really earmarked for the general fund for several years. And you know how politics goes; once it got pointed in that direction, it might have been hard to get it back to use it for transportation.

So I think the challenge for the industry and really for Caltrans in California and other DOTs is to take these types of gasoline taxes to the public. And there is a beginning of a grassroots effort to consider doing that, to try to put an initiative on the California budget to do precisely that. Of course, if that happens, we will be fully engaged to try to make that happen.

Interestingly enough, and I will editorialize here for just a little bit, the increase in the gasoline tax is about the greenest tax you could possibly implement, because it does change people's driving habits and it does influence the choices that we all make relative to big cars versus little cars if the price of gasoline is going up. And then if that tax then is spent directly on improving infrastructure, including public transportation, there is a lot of social benefit I think that could be had, and at the same time address all of the capacity issues that we are dealing with all across the country.

Okay. We like it in New York because we don't drive cars at all. Lastly, how much joint venture cash was on the balance sheet at 4Q?

About $120 million.

Thanks a lot.

Fritz von Carp, Sage Asset Management.

I was just wondering if you could circle back and discuss the California budget situation again? And I think you were talking about bond authority to offset some of the lack of state funds? Could you just hit those issues, and would you mind?

Yes, I'm not precisely sure what you are asking for. What caused Caltrans their initial problem, and it affected us directly on two projects where we have two Proposition 1B projects. And Caltrans sells bonds in a -- there is a central agency that does this, and I am not able to tell you that name of that agency; I can't remember it. But they do that and they sell bonds for the whole state. They sell bonds for Caltrans as well.

And when California got into their $40 billion budget deficit with no solution situation, at least no solution on the horizon, and our legislature battling in Sacramento, that bond market dried up. And that agency, that state agency, was not able to successfully sell bonds into the marketplace. Therefore, Caltrans did not have a revenue stream to fund the 15 or 18 or 20 1B projects that they had around the state, so we were not the only contractor affected by this.

Caltrans then approached the contracting community that had those projects and said, we have got one of two choices. We can either shut these projects down around the end of February -- January/February. We can shut these projects down and start them back up, and we will pay you to do that. Or you can continue to pursue these projects on your own nickel, and we will reimburse you when we resolve our bond selling issue. And we will pay you an interest, and I believe the interest was 10%.

So if you look at our balance sheet, we are clearly capable of running two projects for a couple of months without impacting (multiple speakers) and the truth is 10% looked pretty good to us, so we elected to move forward.

Okay, thank you. That is helpful, that clarifies. But just on the broader topic if in California, I don't know, about half of the funding is local and maybe a quarter or a third is from the state itself. Overall, the public budget, taking all of that into account in California '09 versus '08, do you have a forecast or a guesstimate as to what the percentage change would be?

Maybe a better way to look at that is the fact that we don't see any changes going forward based on the budget dilemma that we were up against. In fact, interestingly enough, it should be even a little bit better. We had a $0.01 increase in the sales tax, of which there should be several hundred million reapplied back to transportation industry.

So whether it was Prop 42 funds, and you've got to get into the California political scene to understand all of the different issues that we are faced with. But the bottom line is that really we see no negative effect due to the budget dilemma in California in our industry, and we are very proud of the fact that --.

You think the total market available to the public highway type stuff, the locals, the state, the federal part of it, you are saying that will be about flat more or less year-over-year.

Well, I think it's going to be -- you've got the stimulus money coming in as well, so it is definitely going to go up.

Okay. I mean it just seems like we read every day about California cities near bankruptcy or going bankrupt, the huge hole in the overall state budget left by the housing crisis, the recession, the pension problems. How is it that they are able to insulate the infrastructure type spending from these severe problems?

That is one of the things that you have to understand, the California environment over a period of time. We have some really firewalls put in place that allow the revenue stream to stay associated solely with the transportation industry, and it doesn't allow it to be brought back into the general fund unless it is borrowed with interest. And that is the last place our local government wants to go. So that stuff is pretty much firewalled in place.

But aren't those revenue streams cyclical too? I mean there will be less gallons pumped because there will be less people living in California and driving to work there year-over-year.

Certainly, that will come into play over a period of time.

It is interesting, there's a couple things going on. And it is the Prop 42 money is sales tax on the price of gasoline. So certainly, people are driving less and there is no getting around that, and that has impacted revenue streams to all states and the federal government as well. But Prop 42 based on the price of gasoline, when gasoline goes up to $4, that sales tax revenue actually goes up quite a bit to the state of California.

So it is sort of an interesting dynamic. They get more money if the price of the fuel goes up. I think the other thing that is worthy of mentioning is in the local cities, counties -- primarily counties -- I don't know what percentage of their work is funded this way, but a large percentage of that work is funded through sales tax increases that have been voted by the general public.

And they are regularly voted in, half-cent sales taxes, and we see them all over the state and really all over the West because people are concerned with the state and the federal government having, I think, the fortitude to deal with their local issues. So we do rely on that quite a bit, and we don't see that changing.

Now a fair amount of the highway spending in California, at least a few years ago, was not ring fenced because they were taking additional monies out of the general fund for highways. Has that still been the case like last year and will it be forward?

This is Jim, Fritz. I don't see that happening, especially with the general fund situation that they have today. Again, it is basically two separate pots they are drawing from. The highway fund, transportation fund, is a separate fund today.

In the past, it was heavily augmented with general fund revenues, though, no?

They were commingled and that's what has happened over the last four or five years. They have been redistributed back to individual pots.

I don't want to beat this subject to death, but this is sort of a qualitative response. But Governor Schwarzenegger has really built his second term around transportation, and he has held pretty firm to that, and he has not retreated from that at all, particularly in this last go-round. So we are a big fan of his right now.

Okay. Thanks, guys.

Jack Kasprzak, BB&T.

Bill, with regard to the next federal highway bill if the stimulus package is successful in creating one million jobs, which I think is more or less the estimate over an 18-month period, and the federal highway bill isn't increased by $30 billion or so, don't the Democrats risk losing those million jobs right before the 2010 election if they don't pass a big highway bill?

I think the answer is yes. Clearly, the other piece of that equation would be housing and development coming back at some point, because that is really what has released all of the capacity into the marketplace that is creating, if you want to call it, hysteria in the market. And the best of both worlds would be yes, let's get a highway bill that addresses the needs of the country.

And I don't know that I would even view that as a job creation bill. I would view it more as an investment into the kinds of things that government should be investing into and clearly, there is jobs that would follow. But then also if we got any kind of light at the end of the tunnel, and around that same period with real estate development, you would really have quite a good story at that point.

Okay. With regard to margins, I know you guys didn't give 2009 guidance per se in terms of earnings, but just wanted to ask about margin expectations. In the East, I think, you guys have said more normalized operating margin might be in the high-single digits, the 8% range. And obviously, the East had a very good fourth quarter. Any reason to think that that previous expectation for the East should be any different going forward?

What we have said, and I will just take this call and Mike can modify it if he feels he needs to. What we have said for more than 12 months now is that we expect that our long range go-forward gross margin goal for Granite East will be in the mid-teens. And certainly there is claims that come in and out of our system and jobs that reach the 25% threshold for profit recognition that may influence that from one quarter to the next up or down. But that is our -- what we've been saying. I don't think there is anything that we see into the future at least that would cause us to change that at this point, so we would like to stay with that.

Thanks for that. On the West where, obviously, you said you are seeing a lot of competition. Margins -- operating margins are closer to I guess 10% or so, but historically during downturns, that margin has been in the mid-single digits. This downturn looks pretty bad, at least for the time being. Would you think there is risk to that level in the mid-single digits?

It is pretty early to tell in '09 still. There is a lot of good stuff happening out there, so I think that that would be pretty interesting if we got to that level. But I am going to say that it is way too early to really suggest that anything like that would happen. And again, we will give you better guidance as LeAnne suggested at the end of the first quarter, hopefully, if we can do that. But way too early to tell right now.

Okay.

We sit around here and anticipate those kinds of questions. And the truth of the matter is we were sitting around here feeling -- not knowing how our year would come together in 2008, about this time a year ago. And we had a lot of the same, I think, concerns and doubts that you may all have, and look what happened. So these years come together; they all build up a personality. But typically, that personality isn't real clear this time of the year.

I think it is just helpful to remind everyone that work in the West is being bid and built -- most of it is being built, been built in the year in which we are operating. So that is why when Jim says it is a little early to tell, it is, in fact, too early to tell.

It is an interesting situation, and along the lines of what Fritz was just asking before I got on, the headlines about California look dismal in terms of the state budget situation and would, I think, make any reasonable person very concerned about almost perhaps any company operating in California, much less one with 40% of their business. And yet, as you say, Bill, you had a very good year and your Granite Construction business has held up very well. I guess that is a struggle with the macro concerns versus good execution on your part.

One thing just to add to that, Jack, I think it was LeAnne who mentioned in the scripted remarks earlier, was that only 10% of our business is actually in the private sector. And if you look at what just happened with the California budget passing, the transportation -- the public transportation sector is strong. And then you add back in the federal stimulus monies, no doubt the private sector is going to drag things down.

We have migrated away from the private sector over the last 24 months because there hasn't been work there. So the public sector, we believe there is a healthy public sector in the state of California.

Jack, what you are saying was maybe true 30 days ago, 40 days ago, when things were sort of up in the air. But I think since they have come together, the California legislature has got a game plan in place now, and I think we're ready to hit the ball. So game's on.

Fair enough. Thanks very much for that.

Brian Rafn, Morgan Dempsey Capital.

Good morning, everybody. Superb job as always. A question for you, Bill. You talked about, I think, about SAFETEA-LU a little. It was quite an onerous process the last time around. Would it be your preference at Granite to have a quicker resolution to the size of the bill, get it funded, or would you rather allow it to drag out if you could get a higher dollar facility?

Well, I mean it's almost like a trick question. I guess it depends on how much more you could get and how long you had to wait for it. I think our preference would be to have a vigorous debate and get a sizable increase above the current bill and get it done quickly. I think it would coincide quite nicely then with the stimulus bill, and we would see a higher level of work out for bid for the next five or six years, which the industry needs. And I think the state agencies in particular that are planning this work, they really need some visibility relative to funding to do it right. So the lack of a gap in between those two, the stimulus bill and the highway bill, I think is important.

Okay. If you look at -- I think the American Society of Civil Engineers just came out with their infrastructure report card, Army Corps of Engineers. They define this US infrastructure degradation problem about $1.6 trillion, $2.2 trillion. If you have a $27 billion facility from the stimulus and another $300 million bill, that is only about 16% of that projection from the American Society of Civil Engineers.

What are your thoughts about having an infrastructure bank or getting an ongoing facility like a Fannie Mae or Freddie Mac to address this business? Because the government -- I mean this is an entity that finances a $5 billion Nimitz class aircraft carrier in four years, and it's kind of fits and starts. So what are your thoughts are an infrastructure bank?

I'm not sure I -- I've got to tell you I'm not sure I'm smart enough to know precisely what it is that you are proposing or how to do it. I will tell you this, that we are seeing work, active work, that we are bidding, that we are pursuing, that we are having discussions on, and with various agencies where private money, not so much infrastructure bank money, but private money is a product of that discussion. I think we will see more of that, and I think more of the agencies are interested in this concept because they are trying to find ways to leverage the money they have to try to address the problems that they believe that they have an obligation to deal with.

And no matter how you cut it, there isn't enough money to deal with all of those problems. I guess on the one hand, that is a good thing because there is plenty of demand for the things that we provide. And one of the challenges that the agencies have, and I think the industry has as well, is to try to work together to figure out how to leverage the public money that is in the equation with other money to try to get more work done.

On that comment, you talked I think about you said Granite doesn't have the total capacity estimators to chase all of those $300 million to $400 million, whether some of them might be design/build projects. Do you get a sense if we get a doubling in financing to what you guys wanted, a $400 billion or $500 billion with, I think, your comments in the past of saying that there are really only a half a dozen or so qualified design/build road builders in the United States, is there enough supply you think on the industry side, Granite plus everyone else, to service those needs in the infrastructure?

Let me make sure I am not making it clear here, so that when our competitors listen to this, they won't be insulted. There is a handful of design/build contractors in the country who are in a position to lead a team on a mega project. A handful being, I don't know, let's say less than 10. But there is plenty of design/build regional contractors that can participate on a team and add great value when they are on a team. So I want to be careful there that I am recognizing others that do this work.

If we get increased funding, it won't all come out as mega projects. There will be just lots and lots of smaller projects that will soak up plenty of capacity, no doubt improve markets all through the range of value projects from very large to very small.

And the answer is with regard to will there be enough capacity? Yes, the industry will build the capacity over time. But in that building process, during that building process, generally speaking, there is an opportunity to get top margins until that capacity does build to match the demand.

So there's that window where it obviously gets pretty good. And then when demand slows down, there's that window where it gets pretty awful, and we are experiencing some of that right now where capacity has to shrink too.

In your discussions, Bill, when you guys talked about, and I think Jim talked about, looking at other projects, not necessarily just design/build; are you doing anything -- and I think you guys use the word wheelhouse -- are you doing anything out of your core transportation side? You mentioned something in marinas. Are you doing anything with dams or canals that are maybe at the edge of what you historically have done?

Well, sure. We have traditionally had a dam under construction generally. I'm not sure we have one under construction this minute, but typically if you look through our history, we have got a major dam somewhere in the portfolio. Canal work is not something that we would not do. In fact, we do some small canal work, ditch-lining work down in Southern California probably every day.

Yes, we have the capability to step in to pretty much anything that sounds or looks like general engineering contracting. We have got a wide variety of talent in the organization, and we can bring that talent to bear on most any project that is closely related to what we generally do.

Okay, I think that's fair. In the past you guys have talked you're vertically integrated in the West. As the markets have turned on, obviously, infrastructure certainly is one of the bright spots. Is there any capacity to add vertical integration with aggregates in the East with assets being available, given that permitting and those types of issues take a long time?

I am sorry, could you repeat that question?

Sure. In Granite West, you guys are vertically integrated with asphalt plants and aggregate gravel pits and that type of thing. You don't see that as much in the East. With the markets being down, with multiples of EBITDA and companies available for sale being depressed, is there a greater opportunity for you to find those aggregate assets in the East to vertically integrate some of your Granite East operations? Because you had talked in the past of maybe someday we would start to look at that. I guess my question is, has that been accelerated at all, given the markets?

Well, we do not have any target identified at this moment. It is possible that this environment would bring us an opportunity, and I think we are in a position to entertain for the most part almost anything. I think our balance sheet is strong. We have not capacity to grow if we choose to do that.

We will -- believe me when I tell you we will not sacrifice our balance sheet to stretch to do almost anything at this point, because our first priority is to stay strong, I think, in this environment. But we do think there will be opportunities around the system, both in the East and in the West, and we have got our ear to the ground.

Okay, fair. You've talked, Bill, in the past about bench strength, and you've talked I think in the last couple of conferences about cost containment, and you mentioned I think early retirement. If we get a doubling in financing and this infrastructure takes off and the neglect is repaired, does that pressure your bench strength? Does it force you to begin reflating that, or do you start losing people, trade skills, and estimators and that type of thing? Does that put pressure on maybe competitive people hiring your people away?

Well, I suppose you could paint that scenario. It is a problem I suppose we would love to have. We have got bench strength. We've got teams that we are holding together in anticipation of some effect of the stimulus bill. We are not out hiring people in anticipation of the stimulus bill. We are waiting to see what that brings us, but we will build the capacity.

We are a company that people want to work for. So if the work is out there, we are an employer that -- we are the employer of choice in a lot of areas. We put the word out that we have got work, and people come.

With that, we are going to go back to the operator for closing remarks. Sorry, we have got another call to get on with our employees. Thanks, Brian.

Okay.

At this time, we have reached the allotted time for questions. I would now like to turn the call over to Bill Dorey for closing remarks.

All right. Thank you, and thank you for your questions. Let me summarize. We are very pleased with our 2008 best-ever performance. We do have work to bid, but our markets remain competitive. We believe the stimulus bill should be a positive event for Granite and our industry, but it's too soon to attempt to quantify its impact.

We expect to grow our large project backlog in both Granite East and Granite West in 2009. And I am confident that our teams will take full advantage of everything our markets have to offer.

As always, we appreciate your interest in Granite Construction. Thank you for joining us this morning. If you have any additional questions, don't hesitate to get in touch with us. We will be in Watsonville for most of the day. Thank you again, and have a great day.

Thank you. This concludes today's conference call. You may now disconnect.