Granite Construction Inc (GVA) 2009 Q1 法說會逐字稿

Good morning. My name is Molly, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2009 earnings conference call. (Operator Instructions). Thank you. Ms. Fourchy, you may begin your conference.

Good morning, and thank you for joining our first quarter earnings conference call. I am here today with Bill Dorey, our 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 and Granite West Manager, Mike Donnino, Senior Vice President and 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 on May 5th, 2010. Following our prepared remarks this morning, we will, as usual, start the Q&A session. Please be aware that your questions along with your answers will be included in both the 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. These should be considered in conjunction with cautionary statements in our earnings release, and in the Company's most recently filed SEC report. We do not intend to update any forward-looking statements made during this conference call.

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

Thank you, Jacque, and good morning, everyone. On today's call I will discuss our operating results for the first quarter of 2009 and provide some perspective on our markets and the outlook for our business. I will then turn the call over to LeAnne to review our segment results. Overall, I am extremely pleased with our first-quarter performance. Excellent execution on our diverse project portfolio drove solid performance despite today's economic challenges. First quarter net income per diluted share was $0.23, compared with the prior year's $0.34 per share. Revenue was $347 million compared with $455 in the first quarter of 2008. Gross profit as a percentage of revenue for the quarter was 20%, compared with 22% in 2008, and operating income was $17 million compared with $38 million last year.

In the West, our public works bidding environment is becoming very active. Compared with what we were experiencing just a few months ago, bidding activity is ramping up. While this is typical for the start of the construction season, we are also beginning to experience the effects of the stimulus money. Projects that did not have funding or that had only partial funding are now moving forward. This is very encouraging, particularly in the state of Utah, where the state's infrastructure program had been put on hold pending resolution of the stimulus bill, and in California, which had dramatically its bidding activity prior to a resolution of its budget and the subsequent bond sales.

While there is work to bid across our system in the West, a great deal of unused capacity remains in the marketplace, and the competitive (inaudible) continues to affect our hit ratio and margin expectations. This is particularly true in the traditional smaller branch projects and in our construction materials business. We believe that larger projects present the most encouraging opportunities for revenue and margin growth in the West. As a product of our realignment in 2007, we have built a very strong large-project group in the West that is now integrated into our existing branch network. We are pursuing a steady list of large-project opportunities that require significant operational horsepower and financial muscle. I am very optimistic that this segment of our business will be an important bridge to carry us to the point at which the general economy that supports our traditional business in the West recovers.

Over the longer term, I believe these larger projects will be additive to our traditional branch business. Turning to Granite East, I am delighted to announce that we have executed a contract with the Houston Metro to lead a construction team on the expansion of the city's light rail system. This is a significant project for the city of Houston and a very important one for Granite. It is valued at $1.3 billion, of which our portion is 34%. Mike Donnino and his Granite East team have worked diligently to bring this complex procurement process to a win-win conclusion, and we are very pleased to add this project to our portfolio.

I would also like to address the recent announcement we made regarding the World Trade Center project. Last month, we, along with our joint venture partners, mutually agreed with the port authority to modify the existing contract for the work on the transportation hub. This change will have little or no impact on our current backlog. Going forward, instead of negotiating for the work with one team, under the terms of the existing contract, the port authority will put work packages out for a public bid. We are honored to be part of this project and we look forward to bidding on future work.

Looking ahead, our bidding pipeline in the East remains full. We are tracking more than $4 billion worth of projects that are expected to bid between now and the end of 2009. This list includes a mix of highway, rail, airport, bridge and tunnel projects throughout our home markets in the East. We are excited about the opportunities to profitably grow this business by being highly selective regarding the work we bid, diligent in the way we evaluate risk, and efficient in executing on our projects.

Let's now talk briefly about federal transportation funding. As I mentioned, we are starting to see stimulus work coming out to bid. Between now and the end of the year, we will bid on many projects across the country which will be either fully or partially funded by the American Recovery and Reinvestment Act. In California, the state's treasurer has sold approximately $13 billion in general obligation bonds over the past two months in two offerings. Both sales exceeded the states' expectations and were positive events for California and for our industry. The proceeds for these sales, along with the stimulus funds, should provide the necessary funding to restart the Proposition 1B program and continue funding other public works projects throughout the state. Now, I will turn the call over to LeAnne to provide more detail regarding our first quarter.

Thank you, Bill, and good morning, everyone. As I'm sure you've noticed, our financial statements look a bit different this quarter. This was the result of adopting a new accounting standard that changes how minority interest is represented in the financial statement. The adoption of this standard results in no change to operating results, but rather modifies the presentation of minority interest, which is now referred to as non-controlling interest. If you would like further information on this change, don't hesitate to contact me after this call.

Looking at the first quarter, in Granite West, revenue for the division was $197 million, compared with $240 million a year ago. Gross profit as a percentage of revenue was unchanged at 17%. Operating income increased $2 million to $7 million, driven by a reduction in general and administrative expenses. Contract backlog in Granite West at the end of the first quarter was $743 million, compared with $869 million last year, due primarily to a reduction in private sector work and a competitive public works environment.

Our materials business continues to feel the impact of the decrease in demand, particularly from third-party customers. In the first quarter, material sales decreased to $30 million, compared with $52 million in the first quarter of last year. Gross loss on material sales was $2 million in the first quarter of 2009, compared to a gross profit of $3 million in the first quarter of 2008.

Turning to Granite East, revenue for the division was $150 million, compared with $214 million in 2008. Gross profit was 23%, compared with 27% a year ago. Operating income was $28 million, compared with $52 million last year. Granite East results in both the first quarter of 2008 and the first quarter of 2009 were positively affected by the recognition of settlements related to outstanding issues on two separate projects. As you know, these settlements can add variability to our performance, but they are a normal part of our large-project business.

Total contract backlog in Granite East at the end of the first quarter was $827 million, compared with $1.1 billion at the end of the first quarter lat year. Not included in first quarter backlog is our approximately $430 million share of the $1.3 billion Houston Metro light rail contract. We will book this award into backlog as we receive notices to proceed. We expect to receive the first notice in the second quarter.

Turning to the balance sheet, our financial condition remains very strong. Cash and short-term marketable securities totaled $413 million at the end of the first quarter, compared with $346 million at March 31st, 2008. We are intentionally being more conservative with our cash as a result of the current environment, and we anticipate continuing with this strategy until the volatility in today's capital market subsides.

We continue to focus on reducing expenses and improving operational efficiency throughout the Company. General and Administrative expenses during the first quarter were $54 million, compared with $61 million a year ago.

Last year, turning to-- lastly, turning to guidance, we currently expect Granite West's 2009 revenue to be in the range of $1.6 billion to $1.9 billion, with a corresponding growth profit percentage in the range of 14% to 17%. In Granite East, we expect revenues in the range of $675 million to $775 million, with a corresponding gross profit margin percentage in the range of 13% to 15% in 2009. We expect non-controlling interests for the total company to be in the range of $25 million to $35 million for the year. I will now turn the call back to Bill.

Thank you, LeAnne. Before I turn the call over to our moderator for questions, I would like to talk a little more about our guidance for 2009, and more importantly, our outlook for 2010. In terms of our guidance, it is essential to understand that it is still very early in our construction season, particularly in the West. A big portion of our Granite West-- work that Granite West billed this year is just now coming up to bid, which is later in the year than normal. Additionally, we are optimistic that we will book several large projects in the West. They will not contribute to profitability this year. The bottom line is that although we anticipate 2009 to be a challenging year for both our construction and construction materials businesses in the West, we are very optimistic about the opportunities we are targeting and the potential that work could have on our 2010 operating results.

I believe it is the larger projects that present the most encouraging opportunities for revenue and margin growth during this business cycle. Now, I will turn the call back to our moderator, and we will take your questions.

(Operator Instructions). Your first question comes from the line of Rich Wesolowski.

Morning, how's it going?

Hey, Rich.

One question. You caught me off-guard on that. The West construction margin appears to me that the quarter resembled those of 2008 in that you reported a good base of profitability, and then on top of that, you benefited from re-estimations of jobs going better than planned. Can you discuss that phenomenon? Is it just one or two that are helping, or is it more widespread, and maybe to whatever extent that performance is assumed by the guidance?

Hey, Rich, this is Jim. Good morning. The comment about the adjustment in the project and the construction results, it's a pretty typical issue for our construction work, and you're seeing a table, literally, in the 10Q that shows the differential in increase in gross profits, so what you're seeing is pretty much what we would consider to be standard adjustments. When we look at our forecast, the work that we built in the first quarter, we're building it better than anticipated, and the work that we did at the end of last year we're building better than anticipated, so that's why you see the adjustment, and you will continue to see those adjustments every quarter, positive or negative, as we continue to build the work. So, I would just call it pretty much standard operating changes.

The margin guidance that you had given for 2009, I assume, requires only that you reach your anticipated margin and not the extra that you have been getting recently?

Well, the guidance is a combination of what we anticipate with the backlog we have and with the ongoing work that we call our term business going forward, so it is as anticipated, and that guidance is in alignment with our actual forecast, yes.

Excellent. Thanks a lot.

Your next question comes from the line of [Katherine Thomson].

Hi, great, thank you. First question, on the World Trade Center project, I know you changed the contract a bit, but I was understanding that there were certain cost overruns with the four partners that were included in this project. How do you not-- how do you intend to change your bidding activities-- your bids for projects with the World Trade Center, and if you can get any more color on the commentary about cost overruns in the project specifically, that would be very helpful.

Hi, Katherine, this is Mike Donnino, I'll try to answer your question. The World Trade Center project is essentially a design build project and since we started the project, the scope of the project has changed quite a bit with respect to the different stakeholders on the site, as well as the overall-- we've gone through at least one surge in construction material prices which has since gone backwards a little bit.

So, I can't really comment on the cost overruns because we have been estimating and submitting prices and negotiating work packages as they become design and as we're asked to do so. In the future, I think the port authority hopes to benefit from a more competitive market now, with much of the commercial work slowing down, and they choose to-- the design is either complete or nearly complete, and so they can break that up into what logical packages that they think they can get competitive bids on.

We're anxious and looking forward to bidding on that work, and we think we understand the work well, so we're hopeful that we will get a share of that.

Essentially, to some extent, the port authority is taking advantage of current market conditions?

That's correct.

Is the-- exploring that a little bit further, in terms of aggressive bidding trends at (inaudible) across the US, is this accounted for the guidance that you have provided today?

Well, in our Granite East business and, I would say, in our large project business in general, we don't really look at short-term market trends as far as margins. We try to evaluate each job based on the scope of the work and the risks that are involved, and, as you know, they can be a wide range of risks from construction risk to contract risk and things like that, so, we don't tend to react very much to short-term changes in what we think the margins are on the large-project work.

Hey, Katherine, it's Bill Dorey. As I understand your question, you are asking if our guidance reflected the current market climate, and the answer is yes.

Okay. Yes, and that-- I totally understand that-- I'm not asking necessarily a quarter-to-quarter question, it's more like you have an environment that has a longer-term impact on a project, and that reality is a more aggressive bidding environment. Also, and this will be my last question and I will hop back in the queue, could you also give any additional color about regional trends in bidding activity, so, in other words, is California the most aggressive, are you seeing any change in trends out East? Any type of color about bidding trends that you have seen across the US would be appreciated. Thank you.

Katherine, this is Jim Roberts. I can help you a little bit in the West, and one of the things-- or, maybe I can't help you. The individual regions are all different, and literally, inside of a region itself, we've got 14 business units in the West, and from business unit to business unit it's vastly different. So, we try to lump it up and give guidance relative to the overall marketplace, and any one of the individual business units has different bidding environments, and you would be surprised, going down the road 300, 400 miles, you can have a totally different market, so it would be kind of different to define the individual regions for you.

Yes, I think if you wanted to just maybe put a bow around that question, places that have-- that are dependent on a lot of real estate development have been affected-- the competitive climate has been affected more there than probably places where real estate development is not quite as big a part of the marketplace.

Okay, great. That's fine. I will just get back in the queue. Thank you very much.

Your next question comes from the line of Bob Labick.

Hi, this is Jason Ursaner calling in for Bob. You spoke about the California municipal bonds recently selling. Has there been any other project in other key states such as North Carolina on bond sales to fund transportation projects?

Mike?

Well, as you may recall, we were conditionally awarded a project for the North Carolina toll road authority, and they initially had problems with their bond sales. Our recent conversations with them is they're-- they believe they have worked through those issues and have-- and are working on a plan and are hopeful to make that bond sale in the near future, and if they do, then they will give us a notice to proceed on that project. There's-- that is actually for the entire Western wake project, which is more than just our contract. I think there are two major ones and another one coming.

So, I think the answer to your question is that I think the bond market is getting a little bit better, and owners are trying to figure out how to move forward on their sales.

Okay, and G&A seems very low. How shall we think about a full-year range for total G&A?

I think what we've said is, we expect G&A to be lower relative to last year from an absolute dollar standpoint, and I think we would like to leave it at that.

Okay. Thanks a lot.

Your next question comes from the line of Richard Paget.

Good morning, everyone.

Morning.

Good morning.

You talked about-- you guys were tracking roughly $4 billion potential projects. Could you put that in perspective on how that would compare to, maybe, six months ago or a year go? And what's your confidence in terms of the DOTs being able to process the volumes of work coming through in a timely fashion?

Richard, this is Mike Donnino. I believe-- we have been tracking-- we have a list of tracking that is in excess of $30 billion of projects, and over the last three to five years, we have bid on anywhere from $3 billion to $6 billion a year in Granite East, and so I don't see that changing much this year. The-- there is several owners that are providing a lot of that work now. The transit agencies are busy trying to bid work, as you probably know, the-- there is a huge program in New Orleans for flood walls, pumping stations, levees, things like that. In the Northeast, the need for their infrastructure repair and new systems like Eastside access and the tunnel project are still there. They still have funding issues they're trying to work through, but those programs are still there, and I believe that as soon as the owners can figure out ways to get their funding in place, they will move forward.

So, once the funding is in place, do you think they can pretty quickly release this, or is there going to be a little of a bottleneck, given what their capacity to get these contracts outs?

Well, I think on the large jobs, they are prepared to move forward, in most cases, when they get the funding. And maybe Jim could answer on the smaller jobs, particularly in the West. My guess is, though, that most of these DOTs are ready to go if they get the money.

Yes, Mike, you're right on, Mike. What I see, Richard, is that in the West, the DOTs have a significant demand out in front of them. They have been waiting for funding, and I think they are ready, willing and able to move forward just as quickly as the contractors are, so I don't see the processing being an issue at all.

Okay, then, real quick, what should we expect on tax rate going forward?

You can expect for us to be around 28% this year.

Okay, thanks, I'll get back in the queue.

Your next question comes from the line of Vance Edelson.

Thanks a lot. Just in terms of the timeline going forward, you're starting to see stimulus work coming out to bid and more of a financial impact in 2010. I'm just wondering-- considering the large project nature of the projects that seem the most exciting, could you walk us through the longer-term timeline? Are these projects that could run for several years, therefore adding to growth for years to come? And is it possible that we won't even see a majority of the related revenues in 2010?

Well, Vance, this is Mike Donnino again, it really depends on the project, and they're all a little bit different, but in general, the large projects, the multi-hundred-million-dollar ones and higher, they tend to be three to five-year jobs. They ramp up, it takes generally the second year before we start recognizing profit on those, just do to either the size and/or the design build nature of them. Once you get into the flow, though, the revenue usually ramps up and then stays pretty heavy and then tails off at the end. It just depends on the project.

The Houston project, for example, isn't-- the schedule isn't completely set, but it is scheduled to be four to five years, depending on when the notices to proceed come and the revenue will come out accordingly.

Okay, that's helpful. And could you provide a little more detail on the commercial and residential side of things? I didn't hear too much on that. Is that business still slumping, or are there any signs of stabilization? What are you seeing on the margin right now in terms of activity?

Vance, this is Jim Roberts. Let me, if I could, just a second back up and talk about those large projects just as Mike did for the East. Very similar environment is happening in the West. We have built up our large projects due to our realignment in 2007, and we are bidding quite a few large projects in the West as well, and Mike is absolutely right that really what you see is the first year is really a get-organized year, and the second and third years are typically the ramp-up years. We are bidding a lot of work this year that we think will create value for Granite West in 2010 and 2011 and then, having that, move forward from that point on, so we're pretty excited about the large project business in the West, as well.

Back to the commercial and private, it's pretty slow. There's not a lot going on. To be very honest, we still think that the tight credit markets are having a strong downturn in that market, and I think that what you're probably seeing in all press release is, that's affecting our materials business, which is really tied to the retail market for commercial and residential work, so we think that will be slow throughout 2009.

Okay, and a final follow-up also on the G&A reductions that you mentioned earlier. The level that you brought it down to, the $43 million a quarter, are there more cost reductions in the works, or should we consider the $43 million sort of the bare minimum upon which we might see growth from here? Can you answer that?

Well, we've got-- we are continuing to work on process improvement, and other strategies, to help us become more efficient and keep that overhead factor as low as possible. I would be reluctant, though, to just take our first quarter and multiply that times four. We did have a bad debt recovery in our first quarter that is reflected in a lower overhead rate, so, we were-- the overhead numbers were affected by that bad debt recovery a little bit, but we do intend-- we do expect to be lower for the year than a year ago.

Okay, that's great. Thanks a lot.

Your next question comes from the line of Todd Vencil.

Thanks, guys. Quick follow-up on that, how much ah how much was that bad debit recovery that you guys had backing out of G&A?

I think it was $4 million.

Okay.

Excuse me, $3 million.

Okay, and on the Houston metro just sort of point of order on how this project works, I guess. How big do you expect the notice to proceed that you think you are going to book in the second quarter to be and how are those notices to proceed going to phase through in terms of size and timing, if you have an idea on that?

Todd, this is Mike Donnino again. Well, the owner hasn't decided yet. We have heard that the initial notice to proceed will be anywhere from maybe a third of it up to possibly half the volume. It still a little bit depends on their internal funding and then what they foresee for their total funding of the entire package. And then there is a possibility that there could be-- we think there will be two but there could be more. But, I believe once they get started that the subsequent notices to proceed wouldn't necessarily delay the project any, but hopefully they will get them in a timely manner so that we can execute it on the original schedule.

Got it, and, final question, just on that $16 million settlement adjustment that you guys had in the quarter, can you talk about what went into that, and I guess I'm thinking, I mean, I realize that it's overall sort of better performance, but what kind of an impact might lower diesel asphalt costs have had on that, or, just help me understand maybe what drove that in addition to doing a really good job?

Well, actually, I wish I could claim credit for that, but that was actually a settlement for outstanding issues on a major project, and it was just the net result for things that had been written off in previous quarters and years.

So, just things like change orders that you finally got back and--

Yes, change orders, change in condition schedule, things like that.

Got it. Okay, thanks, guys.

Your next question comes from the line of John Rogers.

Hi, good morning.

Hi, John.

Couple of things, Bill, just relative to the comments about the large project opportunities out there, are these projects-- are these fully funded at this point, or are they dependent on additional bond issues, a federal highway program, or is it just a matter of getting the local jurisdictions to get the packages together and get them out?

I think it's a mixed bag, John, I mean, certainly, some of the CalTrans work has been affected by funding and, conceivably could be-- continue to be affected by funding, but one of the things that I think is so interesting about the business model that Granite has is that we work for hundreds, hundreds of different agencies across the country, from transit authorities to the corps of engineers, to the military, to the various DOTs, and so if a particular agency has a funding issue, it really doesn't spread beyond-- oftentimes doesn't spread beyond that agency, and there are other groups and federal agencies, state and city and county agencies that don't have funding problems, and we have the ability to follow where the money is.

In-- we said in Granite-- you heard Mike talk about it in the East, where we have $4 billion worth that we think we will bid on this year. We expect that that is funded, and we talked about the list of--

You mean, that's the--

Pardon me?

That's the 4 out of the 30 that you referred to in terms of tracking?

Right. Right. And in the West, we have a similar issue, where we literally have more large work than we can prepare proposals for that are funded and ready to roll. That doesn't mean we're going to get them all, it's a competitive climate, certainly, but we're pretty optimistic that with any kind of a reasonable hit rate that we will land some of that work.

And, John, let me add one other comment, this is Mark Boitano-- even when some of the agencies have had some funding problems, there have been several states that have developed in their county jurisdictions, half-cent sales taxes that then allow those agencies locally to fund projects that might have, in a more typical scenario, been funded by the state jurisdiction. So, even though there has been problems from time to time with certain agencies, it's interesting that they developed scenarios that have helped them to really get over the problems at a broader level and handle it locally, so it's-- no, it's always moving-- sort of a constantly moving target in terms of where the money is coming from, but it seems to get to the goal line, so--

So, is this surge or bulge of work that's coming through, is this just a function of the way-- coincidence of schedules, the way they've come together, as opposed to stimulus money, or?

Yes, John, this is Jim Roberts. I think the real key here is that there's pent-up demand for infrastructure building throughout the US, and what we're seeing is that although there is this bulge, we don't see long-term it really changing. We think that just, this demand has started to change, and people are looking at different ways to fund up the needs that they have in their infrastructure improvement, so we think these large projects are actually going to continue over the next several years.

So, I wouldn't call it a bulge. I would say that it's just kind of a new level of demand in this kind of work.

But it's higher, Jim, than it has been over the last couple of years. Is that fair?

I'm not sure I'd say higher. No, our large project opportunities over the last several years have been pretty robust. What we haven't had is, we haven't had the infrastructure in the West to pursue as much of that work as we currently have. We've had that infrastructure in the East, but we've not had it in the West, and we've built that over the last couple of years, and I think that's the-- one of the more exciting elements of our business today is to try to figure out how to make that additive to our existing branch-like business that we have in the West, and, as I said in our prepared remarks, we expect that large project work to act as a bridge to some degree in the West until the general economic climate for the day-to-day stuff improves.

John, let me just add to that. This is Jim again. I think the reason that you haven't heard us chat about it as much as we are now is because we weren't pursuing it as strongly as we are now, and that's where Bill says we've built up these teams now to be able to pursue it, so we're more focused on the large-project environment than we ever have been, and as you get more focused on it, you see more opportunities, and that's what got in front of us today, is we see a lot of opportunities that were probably there before, but now we're ready to go attack them and do what we can to go procure the work.

Okay. I mean, I look at it over the last couple of years, especially-- and I can see it more in the East, your backlogs have declined there, but if the market is still the same, you're just saying you're going after it more aggressively now that you've got the operations?

Yes. Keep in mind we purposefully slowed our operations down in our large projects while we were kind of regrouping, so we're regrouped now, we're ready to roll, and as a result, we think those opportunities-- there's plenty of opportunities out there in front of us.

Great. Thank you.

Your next question comes from the line of Avi Fisher.

Hi, good morning. Thanks for taking my questions. How much was the border fence work in the quarter? Did that contribute to West?

Avi, I don't have that answer in front of me, to be honest with you. we can certainly get back to you at a later time.

Okay. I'll try to follow up with you after the call. What was-- can you give a color on what aggregate mix volume and pricing was?

Color. The color will not be real bright, Avi, but I will give you as much color as I can. Certainly the volume on the aggregate side came down quite a bit, I think you noticed in our Q--

I haven't seen the Q yet. I don't think it's been published, yet.

Or, I should say, in the press release.

Okay.

The press release showed about a 43% reduction in revenue from the same time period in '08, and that is indicative of just lower volumes in general. Interestingly enough, our pricing for the first quarter for materials actually sold did not go down, but I will--

Because pricing was flat.

Yes, pretty flat, but I will tell you that the marketplace today is really forcing some reduction in pricing, and so as we go forward, I think we're going to see a slight reduction in pricing, although we didn't see it in the first quarter.

Yes, I've always been wondering how long some of the (inaudible) riders could continue to show declines in shipments and maintain price. So, what you're saying is you're starting to see some pricing slippage?

We are. In the work that we're bidding going forward, yes. We still have quite a bit of backlog materials coming in from previously-quoted jobs that have higher pricing.

Got you. And with respect to West, I think one of the first questions was talking about with the West margins and the benefit from adjustments and the expectations that-- the normal ins and outs of benefits, last year I think you had about $64 million, or about $16 million per quarter. Is that normal, is that the normal-- I'm trying to just sort of estimate what the normal is going forward. I know what 1Q will be in the Q, but what's the normal thing we should look for?

Okay, Avi, can you restate that? I'm not so sure I understand the question.

Sure. In terms of-- West's margins were very strong this quarter. I think earlier in the Q&A, you or LeAnne that it was because of some project adjustments, running projects better than expected. I think the question was sort of quantify that, and the answer was it was sort of the normal ins and outs, and so I'm trying to quantify what normal is.

Okay, so I think that-- let me answer that relative to the adjustments. So, we had some adjustments in the first quarter in the projects themselves, and I think what I was trying to say, Avi, is that we will continue to have adjustments in the forecasting up and down in our projects, that you can expect every quarter. Whether or not it will be to that magnitude that you saw in Q1, I can't answer that, because I don't know what's going to happen in the next several quarters, but those adjustments are just standard-- that you can expect on a quarter-to-quarter basis?

And dare I ask what it was in the quarter? The West project adjustments? Closing my eyes and hoping I don't get yelled at for asking that?

It's a multitude of things, Avi. Every quarter in both Granite East and Granite West, we reforecast-- well, we literally reforecast about every month, but--

Right, I'm just-- what was the net number that will show up in the Q?

About $15 million.

Okay. That's-- okay. I know it's a lot of different things. I realize that. You've been talking a lot about the large project-- you know, going after the larger projects, and I'm kind of curious what you view as your capacity in East and West for large projects. It looks like your peak backlog was about the $1.8 billion to $2 billion range. What kind of capacity do you have for those projects?

Mike, why don't you speak for the East, and Jim, you can speak for the West?

Well, I think if you look at our history, even before the split, we are revenue in the large projects, in the old HCD and now in Granite East, peaked at the $1.1 billion range, I believe, and we feel like we can get back to that, and we have the structure in place to get back to that level, and we're certainly prepared to grow that if the opportunities are there and we need to.

Avi, let me comment for the West. I think that we're certainly not at the level that Mike's team in the East is yet. We're slowly ramping up to make sure that we are very cautious in the way that we ramp up that business. We have performed about $246 million in revenue last year in large projects. We define large projects in the West as anything over $50 million. We see that ramping up. It could easily get to twice that over the next several years, and I think that that's kind of in the environment of maybe 15% to 20% of our revenue, could come from large-project business, maybe a little bit more, but we're going to slowly ramp that up along with the rest of our business to keep in it alignment and keep our portfolio businesses pretty much focused maybe no more than 25% large projects?

Okay. 15% to 20% West revenues, no more than 25%-- capping it at 25%.

For the moment, with our strategic plan, that would be in alignment with the plan itself.

And that's West-- 25% of West revenues, right?

Correct, and, ideally, Avi, that would be additive, assuming that we get a recovery in the general economic climate.

You're kind of anticipating just my next-- what I think will be my final question which was, what will you give up-- is there anything that you give up by going after the larger projects and gain, also? What are the pluses and minuses of sort of going after the larger projects? Do you give up going after the smaller projects?

Bill mentioned it in his opening discussion, that we consider these large projects in the West to be additive. We're very focused on making sure that they are absolutely additive, so the bread-and-butter business, the branch business that you've seen for years, is going to continue to operate as it is. We've added a large group of people in our corporate office here to help facilitate the development of large projects in the West so that we do not detour those individuals that are working on the bread-and-butter work in the branches to those large projects.

So, we are looking-- we think it could actually help our large projects-- our bread-and-butter jobs in the branches by adding to the materials business in these larger projects, so I would not suggest that we would be moving off of our plan with our model branch business at all.

Okay, alright, thanks. I will follow up with you after the call on that border fence (inaudible). Thank you.

Your next question comes from the line of Brian Rafn.

Morning, everybody. Question for you on the-- with the decline, I think, in the commercial and residential-- the turn business that you guys used to-- the bread-and-butter business in the West, and the fact that a lot of the regional highway construction companies tend to bid that pretty fast, as you start to focus on these larger projects, some being design build, is there a natural barrier to entry and complexity that some of these small regionals can't bid over the next few years?

Brian, Jim again, yes, exactly, there is. Certainly as you get into the design build several hundred million dollar job range, it limits the competitors that we have that are capable of bidding that work, both financially, and just capabilities relative to building the work, so it is a different group of competitors, and we have seen that in the East, and we are starting to see that in the West.

Okay, okay. Let me ask you-- given what you describe, I think, a 43% decline in revenues on the aggregate stall on the material quarry side, does that decline in business run rate-- does that give you guys any greater ability to either permits to greenfield develop new quarry sites or to maybe acquire new sites? Or even to develop some of the branch businesses in the East?

Well, Brian, that's a good question. I think that-- we think that there's an opportunity there to really, probably, get into the acquisition mode a little bit as time progresses, as the earnings of maybe materials businesses or smaller businesses starts to decline-- it has declined over the last twelve months and going forward maybe for another twelve months or so, but we haven't seen a lot of opportunities yet. We haven't seen any easing in the permitting, at all. Environmentally speaking, I would suggest to you that permitting is getting more difficult as we go forward, but I would say that we will hope that it does create acquisition opportunities going forward.

Okay, okay, fair enough. And then, one final, just anything on Granite Land? What's-- give me a sense of status?

Let me respond to that. This is Bill Dorey. There has been a little change from what we reported in our last quarter with regard to the land company. There is little or no activity. We are not out seeking new deals at this point. We're not actively selling much at this point, and we record revenue and profit when we sell projects-- when we develop those projects and we actually sell them, and there are not a lot of buyers out there right now, so what we're doing in our land company is simply moving our entitlement process forward on the various projects that we have, we're moving the process forward on almost all of them at this point, and a lot of them, I think, as we've said in prior calls, our actual date to take some of these projects to sale is out in 2010 and 2011, so we're hopeful that by the time we get them entitled and we get them ready to sell, that there will be a market there. But we're hunkering down in our land company to some degree at this point.

Okay. Let me ask one more, just on the-- what are you guys seeing-- you guys talked for years about bend strength, and what are you seeing in these markets relative to the mobility of trade people, expediters and that. Are you having a lot of people come to you looking for jobs? Is employment pretty tight? Because you guys talked, I think, about excess capacity in the industry.

I think it depends on where you are in our system. I mean, if you consider the environment we're in in the eastern part of our business, we expect-- with the advent of booking Houston, the prospect of Western Wake being funded, we're probably going to need people in that environment, and the truth is, if there is opportunities for folks in the West, where we're a little slower, currently, to move East, if they were inclined, so we probably need people in our Eastern business, and our-- I would say, just generally speaking, in the West, we probably need work more than we need people at this point.

Okay, that-- to that comment, Bill, do you have within your bullpen of labor-- is it normal for people to relocate across state lines? I mean, is that mobility common?

Well, the answer is yes, but it's becoming less prevalent as people have two-income families and that sort of thing, it becomes more problematic for people to just pick up and move and follow their work, but clearly, in a large-project environment, we have people that move around the country and follow the workforce.

Okay. Thanks, guys, I appreciate it.

Your next question comes from the line of [Samir Rathad].

Hi, good morning.

Good morning.

Just-- most of my questions have been answered, but could you talk a little bit about rescissions under safety (inaudible) and the possible impact that can have in the next six to nine months?

You're asking about the surface transportation bill?

Yes, to my understanding there will be about $8.7 billion of rescissions this year? Does that normally impact your business at all?

Samir, I think you're talking about-- when you say rescissions, are you talking about the fact that we have an underfunded highway bill for 2009 and how that could affect our work out in front of us?

Yes.

I'd look at it this way. You've got an administration that has actively been the champion for a stimulus bill to put people to work, particularly in the construction and transportation industry. I can't imagine that that same administration would allow the current transportation funding to expire. I think, more importantly, there is the six-year extension of the transportation bill which is due to expire in September, and it will need a re-enactment, and what is happening in Washington is, Congress Oberstar, who is the Chairman of the Transportation Committee in the House, is likely, in the next couple of weeks, going to suggest-- publicly suggest that the transportation bill should be doubled, should go from $250 million to something like $450 million to $500 million.

He is not, however, my understanding is, he is not, however, going to suggest how it should be funded, and I think that will prompt quite an interesting debate in Congress relative to what the next six-year transportation bill will look like in this country, and how it will be funded. I think that's very, very important to the industry, and I suspect it's something that, no doubt, you all are watching quite closely.

Okay, thank you.

Your next question comes from the line of Jack Kasprzak.

Thanks. All of our questions have been answered.

Your next question comes from the line of Richard Paget.

Just a quick follow-up. On the large project opportunities, how many other bidders are you seeing come to the table on average with some of these projects? And maybe if you could compare that to the smaller side of the market and give us a sense of the competition there?

Richard, I can tell you in the West that the smaller projects are typically exceeding ten bidders today, and I would say that would be in the $10 million and under type of project which we bid every day. The large projects typically are in the range of three to more than five, typically, or in that area. If you do get a non-design build job, a "rip and read" job, as we put it, you could have in excess of maybe six or seven bidders, but on the design build, more complex, larger job, typically less than five, typically closer to around three.

Okay, and you would define that as $300 million and above?

I would say a couple hundred million and above design bill. The complexity of the design build adds to the difficulty in teams actually qualifying to bid the work. Typically, owners will allow you to turn in qualifications, and they will limit the number of bidders at a certain point in time in the qualification process, because it is a long, drawn-out process, and a very expensive process to bid the design build work, so they typically limit it to three to no more than five bidders. Mike, you want to elaborate on that?

Yes, I would really just echo what you said, and the bigger the job, obviously, the smaller the number of bidders on the $400 million, $500 million and up. Generally it's three at the most, and sometimes two.

Okay, thanks. That's it for me.

Your next question comes from the line of Katherine Thomson.

Hi, just to follow up on some of your commentary on the writeup in quarter for Granite West. One thing I wanted to get my hand around is, it appears that you're saying you bid a project at a certain level with a certain pricing discipline, and you're getting upside on these projects. Just for modeling purposes, or me trying to understand how we should figure that forecasting over the next one to two fiscal years, how should we think about these contingencies and potential writeups? And all these writeups that (inaudible) happened in the quarter, are these accounted for in your guidance for fiscal '09?

Yes, Katherine, this is Jim again, and I think we were talking about the writeups in Granite West earlier, and I think the way to look at that-- the best way to look at it in your forward-looking models is to utilize the fact that our guidance that we gave in the press release and in Bill and LeAnne's discussion really includes writeups and writedowns. We have both writeups and writedowns, and when we bid a job, they don't always go necessarily exactly as planned, and so what you see in writeups-- actually, you will probably see some writedowns, it's really the combination of the two, but it is included in the guidance that we give you.

Okay. Have you seen, just overall, I know that in Granite East, (inaudible) have been a little bit more strategic in bidding for projects, going after more profitable projects in the past, and that's had a subsequent positive impact on your margins. Have you seen a change in your Granite West bidding activity other than the obvious of going after large projects that we should be aware of?

Well, I think I said it earlier, Katherine, this is Jim again, the smaller projects are certainly very, very competitive, so that would mean that we are being more aggressive in our bidding environment on the smaller projects, and we're bidding a lot more of them as well. So, I think that from a strategic standpoint, you could assume that we're being more aggressive, which means that margins are lower than they were in the past on the smaller projects, and, as we said, the larger projects we do see creating some very nice opportunities for margin.

Great. Thank you very much.

Your next question comes from the line of Avi Fisher.

Hi, thanks for letting me have a quick follow-up. Last time there was pent-up demand in construction was after the 2001 recession, and the backlog of large projects grew for you, as well as for a number of other contractors, and across the board, nearly everyone experienced some level of unprofitable projects, and so when I hear about this mix shift towards larger projects, I sort of-- my heart sort of skips a beat. I get a little anxious. I'm trying to get a sense of sort of what can sort of put comfort-- has anything changed, is there-- will some of these be unprofitable down the road? That's just sort of the ins and outs of construction? How do-- what's done to sort of mitigate that down the road?

Let me take that one. Avi, you've listened to-- you've been following Granite for a long time, so, clearly you've watched the cycle we went through with some of this large work, and you've heard us talk about it, I think, pretty candidly, as we went through that cycle and talked about some of the changes that we were making in our process, and without trying to go back through and list the various changes, I can tell you, generally speaking, we have become way more selective. There is way more process regarding-- in our system today regarding what we bid, how we assess risk, how we price risk, how we decide to bid something, and how we discuss the team that might be available to actually build a project if we're successful, than ever before.

And a lot of the stuff that we have been doing over the last four years, really, has precipitated the kind of performance that you're seeing now in our large projects, both in the East and in the West, and I don't expect that to change. We have made pretty dramatic shifts in the way we approach this work. I think the marketplace will support a different viewpoint and, quite honestly, I think the entire industry has learned a lot, particularly around design build, over the last several years, so I don't expect to go back to where we were.

Your next question comes from the line of Michael Corelli.

Hi, good morning. Could you give us a little more color on the G&A reduction? I know there was a-- you talked about a $3 million one-time benefit. I'm just trying to figure out what this kind of sustainable level of reduction and what went into that reduction in the quarter?

Yes, I can speak to that, Michael. There was a number of things that went through there this quarter. There was a reduction in travel and entertainment expense, as an example, there was a reduction in some severance to related-- I should maybe say compensation-related expenses. Generally, there was a reduction, or a recovery and debt expense. Lots and lots of really, really little things, not a whole lot of things that stand out on their own as being particularly noteworthy.

I think we, too, are trying to figure out what a better, a reliable, longer-term estimation on G&A is in our organization. I will tell you I think we still have lots of opportunities to become more efficient and more effective, so I expect for you guys to be able to see continued and improvement on a gross dollars sort of level, but we're obviously being challenged by the topline revenue number as well, when you look at it from a percentage perspective.

Okay, and then in the guidance, you're obviously not giving an earnings guidance, and revenue and margins and some decent-sized ranges which could really range by, like, almost $1 a share in earnings. Is there any thoughts about tightening that range over time?

I think our hope is that as the year progresses and we have more visibility into what the rest of the year is going to look like, we can tighten up those ranges.

Okay, and when do you plan on filing the 10Q?

This afternoon.

Okay, great. Thanks a lot.

At this time, I will turn the call back over to Bill Dorey.

Well, thank you for your questions, and to summarize our discussions this morning, there is a great deal of work out to bid right now in both divisions, including work that is either partially or fully-funded by stimulus money. There is also a great deal of unused capacity pursuing the smaller work. We expect to grow our large project backlog in both Granite East and Granite West in 2009. Our financial condition is very strong, and we intend to keep it that way, and I'm optimistic about the long-term demand for services we provide and the opportunities for our business.

And finally, I would like to acknowledge our people and the work they do every day to deliver excellent results in these difficult times. Thank you all for joining us this morning. As always, we appreciate your interest in Granite Construction. If you have additional questions, please 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 does conclude today's conference call. You may now disconnect. Speakers, please hold.