Granite Construction Inc (GVA) 2009 Q2 法說會逐字稿

Good morning. My name is Wes, and I will be your conference operator today. At this time I would like to welcome everyone to the Granite Construction second quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After these speakers remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the call over to Ms. Jacque Fourchy, Director of Investor Relations.

Good morning and thank you for joining our second quarter earnings conference call. I am here today with Bill Dorey, President and Chief Executive Officer; LeAnne Stewart, Senior Vice President and Chief Financial Officer; 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 July 30, 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 the live transmission and any future use of the recording.

I would also like to remind you that this conference call may contain forward-looking statements. They 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. As Jacque mentioned, we have a smaller-than-usual team with us this morning. Jim Roberts, our Senior Vice President of Granite West, is currently attending an executive management program at Stanford University, and Mike Boitano, our Chief Operating Officer, is finishing up a well-deserved vacation.

As usual, on our call I will discuss our operating results for the quarter and provide some perspective on our markets. I'll then turn the call over to LeAnne to review our financial results by segment.

Looking at the results for the second quarter net income per diluted share was $0.46 compared with the prior year's $0.67 per share. Revenues were $461 million compared with $694 million in the second quarter of 2008. Gross profit as a percentage of revenue for the quarter was 18% compared with 16% in 2008. And operating income was $30 million compared with $45 million last year.

During the quarter our business in the West continued to be challenged by a highly competitive bidding environment. Although the stimulus money is beginning to move projects through the bidding process, there remains a great deal of unused capacity in the industry. As a result, our hit ratio has gone down compared with the last several years, which is translated into lower revenue and backlog. This is particularly evident in markets that have traditionally been driven by population growth and the associated residential development and related private funding construction. Demand for our construction materials has been similarly affected.

As we have discussed, one important strategy in the West is to incorporate larger projects into our traditional smaller project portfolio. These projects tend to have a shorter bid list due to their complexity and balance sheet requirements. We remain optimistic regarding the near-term and long-term growth prospects for this part of our business.

Turning to Granite East, I am very pleased to announce that a grant-led joint-venture team has been selected by the Metropolitan Transportation Authority to build the Queens Board Tunnel Project in New York. This project is part of the East Side Access Program that will bring the Long Island Railroad directly into Grand Central Station. Our share of this $660 million project is 42.5% or approximately $280 million. We will book our share into backlog upon receiving a notice to proceed. And we expect this to occur in the third quarter.

Overall, Granite East continues to execute very well and our teams are focused on building our backlog. We are actively pursuing large projects totaling more than $5 billion across the United States that are expected to bid over the next 12 months. Unlike the West, the competitive landscape in the East seems to be remaining relatively stable. This is especially true for large, $300+ million projects, which require more financial strength and access to [bonding] capacity.

That being said, these projects also typically have a very long procurement process and can be delayed due to funding uncertainties.

Turning to California, as I'm sure most of you are aware, the state's financial situation is not good. Governor Schwarzenegger signed a budget this week to address the state's substantial deficit nearly two months into the 2009-2010 fiscal year. As proposed, the budget does not suspend transportation funding from local governments as was initially proposed. While this is good news, the delayed budget has impacted transportation nonetheless. The state has been substituting stimulus money to fill the gap of transportation resulting from the state's inability to sell Proposition 1B [bonds]. Assuming the state can show that it has sufficient revenues to support additional debt service, the passage of the budget amendment should allow the state treasurer's office to reenter the bond market and once again start issuing bonds.

At the federal level, the six-year federal highway bill expires September 30th. We are encouraged that the House Subcommittee on Highways and Transit last month approved a $450 billion, six-year reauthorization bill. $450 billion in federal transportation funding would equate to a 60% increase over current levels. The administration has indicated, however, that there is insufficient time on the legislative calendar to adequately address the numerous funding issues surrounding this reauthorization. Therefore, the administration is proposing a short-term authorization plan that extends the current funding levels for 18 months. The plan also calls for a transfer of funds from the general fund to the highway trust fund to secure fiscal solvency until a reauthorization can be properly debated.

Although an extension is likely, we continue to work with our industry associations and legislators to advocate for a long-term funding solution that will address our nation's critical transportation needs.

And now I will turn the call over to LeAnne, who will walk you through the details of our second quarter financial results, and then we will take your questions.

Thank you, Bill, and good morning, everyone. For the second quarter, Granite West revenue was $348 million compared with $518 million a year ago. Gross profit as a percentage of revenue remained flat at 18%. Operating income decreased $22 million to $35 million. Contract backlog in Granite West at the end of the second quarter was $825 million compared with $1.2 billion last year.

Our construction materials business continues to feel the impact of the overall decrease in demand from customers in both the public and private sectors. In the second quarter, sales to third parties decreased to $57 million compared with $107 million in the second quarter of last year.

Gross profit on material sales was $8 million in the second quarter of 2009, compared with $18 million in the second quarter of 2008.

Turning to Granite East, revenue for the division was $112 million, compared with $171 million in 2008. Gross profit was 19% compared with 11% a year ago. Operating income was $15 million, compared with $12 million last year.

Total contract backlog in Granite East at the end of the second quarter was $708 million, compared with $953 million at the end of the second quarter last year. Our backlog does not include approximately $500,000 in work that--

Billion.

$0.5 billion in work that we expect to book in the third quarter associated with the Queens Board Tunnel Project in New York, the Houston Metro Light Rail Project and the Western Wake toll road project in North Carolina.

Turning to Granite Land Company, our portfolio real estate held for development in sales totaled $131 million at the end of the second quarter, compared with $50 million a year ago. The increase is primarily due to our consolidation of an entity that had previously been accounted for under the equity method. As a result of our partner's inability to meet its financial obligations, we became the primary beneficiary of the entity, causing us to increase our current assets by $37 million, our liabilities by $22 million, and our non-controlling interests by $15 million.

Also during the second quarter we recorded a $1 million pretax impairment charge related to a residential property located in Oregon. Our real estate portfolio is general-- it is geographically diverse with properties throughout the West and Texas. As always, we continue to closely monitor all of our real estate development projects.

Overall, our financial position remains very strong. Cash and short-term marketable securities totaled $381 million at the end of the second quarter, compared with $375 million at June 30, 2008.

As you've seen, we are being more conservative with our spending given the current environment. And we anticipate continuing with this strategy until we see a material improvement in the overall economic environment.

Turning to general and administrative expenses, we continue to work on optimizing our cost structure in order to improve the efficiency and effectiveness throughout the Company.

During the second quarter a reduction in salaries, benefits and incentive compensation lowered our G&A expense by $10 million relative to one year ago. As we've discussed in the past, a portion of our G&A expense is associated with salaries and benefits for estimators.

Once we are awarded a project the estimator typically becomes the project manager and is then part of our cost-of-goods sold. In the current environment when competition is stiff and our hit ratio is lower than usual, they reside in G&A for longer than expected. In 2006, approximately 11% of our G&A was associated with this expense. In 2009 we expect this rate to be nearly 18%.

Based on our outlook for the balance of the year we now expect Granite West revenue to be in the range of $1.5 billion to $1.7 billion, with the corresponding gross profit margin in the range of 14% to 16%. In Granite East we now expect revenue to be in the range of $600 million to $675 million with a corresponding gross profit margin in the range of 15% to 17%. We expect non-controlling interest for the total Company to be approximately $30 million for the year.

I'll now turn the call back to our moderator, and we'll take your questions.

(OPERATOR INSTRUCTIONS) Your first question comes from Bob Labick.

Good morning.

Hey, Bob.

Good morning, Bob.

Couple of questions. First, thanks for taking my questions. I wanted to ask your gross profit for West for the second half, your guidance implies somewhere in the 12% to 15% range for gross profit for the second half, and obviously that's because of the heightened competitive bidding environment. Given your comments in the press release, is it safe to say that that's a reasonable range to expect for 2010 as well?

You know, it'd be pretty hard for us to sit here right now I think and try to predict 2010 at this point. I think that probably the best guidance we could give you is that we don't expect it to get a whole lot better in 2010. And I'm not sure I can provide more guidance than that, Bob.

Okay. Fair enough. One of the things you've talked about is large projects. You mentioned in your opening remarks bringing more large projects to West. And you said there could be some near-term and long-term-- you know, we could see something in the near-term or long-term. Is there anything out there that you can discuss that are potential projects we should be looking for in the West?

Well, let me answer the question this way. We've been pursuing, very actively, large projects in the West all year long. And you have heard me, from the beginning of the year, suggest that we're going to build our large project backlog in the West or grow that large project backlog in the West in 2009. And I said it again today. The fact is we haven't done it so far. And the reason that I continue, Bob, to stand by that statement is we've got several projects that we have-- you know, we have proposals in currently and/or that will go in shortly; and a number of projects, some of them very sizeable, that we will be bidding between now and the end of the year.

So I remain hopeful that we will score on one or two of those projects, and that will get us going. And we'll have a business in the West at some point, hopefully not in the too distant future, that is like the business we have in the East with regard to large projects. That's our goal.

Okay, great. And one last one and I'll get back in queue. I noticed that North Carolina got the bonding necessary for your project very recently. Could you just comment a little more on that project for East in terms of size and timing and when, you know, we should see-- I guess, you know, how long is the project for you and that kind of stuff?

Yes, I can answer that, Bob. This is Mike Donnino. Yes, the project was awarded yesterday. They're reviewing our bonds and things like that, and we expect those to proceed very shortly.

The size of the job is $447 million roughly; our share is 40%. And as I recall it-- this-- it's scheduled for about 40 months, I believe, roughly.

Appreciate it. Thanks.

Should get started-- and it should get started immediately.

Terrific. Thank you very much.

Your next question comes from Rich Wesolowski.

Thanks. Good morning.

Hey, Rich.

Good morning, Rich.

Bill, are you seeing any greater price competition on large East projects that would prevent you from getting to that mid teen segment target margin over the next few years?

Well, there's always no lack of competition, Rich. I mean, it's never easy. But I will tell you-- and we said this in the script-- that when we get over that $200 million, $300 million, $400 million range, the risks associated with this work go up. The financial capacity required to get in the game is limiting some-- you know, it limits a lot of people. And as a result, you know, the bidders, I think, really approach this work as if, one, it's risky and you'd better price it that way, and, two, there's opportunities to make some money if you're going to build this work. And we certainly do it. I think our competitors do it as well.

And so the answer is I expect that we can maintain those margins on this large work. We've said that for a couple of years, and we've been able to do it.

Okay. And you mentioned the financial capacity necessary to bid the work. You still have a strong balance sheet, although your net cash balance has taken a hit over the past two quarters. Can you talk about the change in your overbill position since yearend '08? Maybe confirm whether or not that reflects any fiscal issues in California. And then remind us of how much extra cash you need to keep on the balance sheet in order to compete for the large deals.

Rich, I can answer that for you. First of all, I think the first comment I made is this time of year is typically our lowest part of the year with regard to the cyclicality of cash. So to some extent what we're seeing is expected. The changes in the billing cycle, that is a lot of timing, but some of it is certainly related to the fact that we have less revenues coming through the system, and so you've got the timing issues associated with that.

Having said all of that, we are not at all concerned with about our cash position. We need to maintain about $150 million worth of cash, give or take, to maintain our bonding level. We certainly have adequate cash to do that and then some.

So we continue to monitor cash very closely. You've seen that we've been focusing on spending as little as we can in this environment, and we don't intend to change that.

Thank you.

Your next question comes from Richard Paget.

Morning, everyone.

Richard.

Good morning.

Richard.

I'm wondering if we can get back to the highway bill. If it does, in turn, come out that we do an 18-month extension, do you think that that will just stretch it out long enough that we start getting close to the next election cycle, and they really won't have a complete bill resolved for an even longer period of time? Or do you get the sense that this administration is really committed to getting a set highway bill, and they will bring this debate up even before the extension runs out?

Richard, I-- this is Bill Dorey. Let me answer that question. I think the reason-- the primary reason that the extension will likely be the short-term solution is because of the license cycle. I don't think that the administration wants to deal with the funding element of that bill right away because it will likely require an increase in gasoline tax to fund it.

The-- Jim Oberstar, who is the ranking member in the House is probably the strongest advocate for this bill in the Congress. Well, he is the strongest advocate. He is proposing a $450 billion bill, and he is proposing to fund it with an increase in the gasoline tax of between $0.11 and $0.15 or thereabouts that would go into effect after two quarters of positive growth in the GDP.

In the meantime, they anticipated revenue would fund the increased transportation bill and get the program started immediately, even if the positive growth is in the future. So that's the game plan. He is advocating very, very strongly for a bill now. He's getting a lot of pushback from the administration because of the election cycle, and you are correct about that.

I guess with Congress it'd be a-- probably be not a very popular move for some of them to raise the gas tax, but I think it's needed.

And then getting on to the aggregate side of the business, are you starting to see some of your competition come under financial duress given the-- how everything's going out there? And would that possibility give you guys some opportunity to get some distressed assets out there at some decent prices?

The answer is yes. And interestingly enough the ones that seem to be-- at least the ones who are getting the most visibility are some of the bigger players, and you all probably know who they are. And there are some assets that have been advertised for sale. The investment bankers have gone to the market to try to sell those but few of them have actually traded. And what it seems is that while there's an interest in selling some of these assets, the value proposition hasn't changed much in the eyes of the seller. So we've not seen a lot of them actually trade.

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

Your next question comes from Jack Kasprzak.

Good morning, everyone.

Good morning.

Could you talk about aggregates, specifically aggregates pricing in the West? Are you seeing-- what's the environment like? I mean, I assume there are no increases but-- and they've been relatively flat lately. Has it gotten-- is there more deterioration? Are prices trending down right now?

Well, you know, in the aggregate market it is a-- very much a local market phenomenon. So it varies from place to place, depending on, you know, what's happening in that market and what competition structure is and so forth.

The records that we have, Jack, would indicate that our pricing has stayed relatively stable. Having said that, there's no question that there's pricing pressure. And as volumes continue to deteriorate I suspect that that will continue.

Okay. Thank you. Secondly, I wanted to ask with regard to the West business, I mean, you mentioned that the competitive bidding environment and that it's likely to stay that way for the next several quarters. What's the balance you have to strike between maintaining your discipline on bids and margins, which seems like you guys have done a really nice job of. Your margins have held up well so far. But maintain that discipline versus needing to get some work in a-- what you describe is an ever more competitive environment.

Well, I mean, that's the classic-- that's a classic question for contractors. You do need a certain of work to cover your fixed costs and your overhead and all that and generate the cash that was asked about earlier. Having said that, there's plenty of risk associated with the work that we do. And if we get too aggressive and we end up doing the work and wearing out equipment and not generating the cash that we need to replace that equipment.

So that's-- that is a very classic dilemma. And our answer to it traditionally has been-- and this is our strategy currently-- is to bid more work and try to maintain the discipline but take more shots. And we're casting a pretty wide net these days in the West and our local marketplaces to try to do just that and bookwork that has margin associated with it. Get enough of it to make it through this. And of course we've done a pretty good job so far. I'm really proud of the teams that are out there. They're working their tails off to do just what we suggested here, and so far it's working.

Now, in the larger project arena it's a different ballgame because, you know, if you make a mistake on a large project you live with it for several years. So there's no room at all in this large project arena to get aggressive.

How competitive is the environment in the West right now? Are you guys seeing bids come in from people that you don't recognize and at levels where you just know they're not going to make money?

Yes.

So we'll probably have to shake through that for some period of time before they -- you can normalize a bit in the environment.

Yes. You know, in my career I've been through a few of these. I'm not sure I've been through one quite like this one. It's pretty broad. But, yes, it takes some time, and there will be some casualties. And in the end that's good for the industry, at least it's good for Granite, usually.

And, you know, one of the things that LeAnne mentioned earlier today is that we are really, really watching our balance sheet. And one of our primary goals is to stay very, very strong just for that exact reason because I do think there'll be some shake-up before this is over.

Great. Thanks very much, Bill.

Your next question comes from [Katherine Thompson].

Hi. Thank you so much. First I want to focus on your Granite East margins. You did a great job in the quarter. And just in terms of modeling and how we should think about margins, not just beyond the guidance that you gave but going forward, how sustainable are your Granite East margins going forward? And if you'd give some clarity-- I know that you've been working on the margin side in Granite East. And specifically some color and how sustainable these are based on how you've changed bidding for projects.

Katherine, this is Mike. I'll try to answer that for you. As Bill said, on the larger projects, I mean, we pretty much look at them, you know, one at a time as we bid them. Our goal is I think as we've stated before, in the mid teens for these jobs, and I think that's, you know, I think sustainable over time for the size projects we're bidding in the East.

There-- in terms of competition we do see some more competition, but typically on these larger projects the [owner] shortlist down to either three or four. So on the projects you ultimately go after I think the competition is still reasonable. So I believe in the long term we can still-- we hit our margin type goals of the mid teens.

Okay. Last quarter you had stated that there was an additional $430 million in Granite East backlogs. In this quarter there's another additional $500 million for Q3. My question is given project completions expected in the third quarter, how realistically accretive is this $500 million in backlogs?

In terms of backlog?

Correct.

Well, we do expect-- well, one-- part of the $5-- the $430 million and the $500 million are the same number, I believe. We've just been-- you know, those have been delayed. So the $500 million we talked about this morning is the Houston job, which that hasn't been executed, so that will hit our books in July. The North Carolina project, as we spoke earlier, got awarded yesterday and will probably-- more than likely hit our books in July as well. And the last one is the Queens Board Tunnel, which we expect to get executed and receive NTP fairly soon.

Overall, when those-- the mix of these projects are a little different than in some of ours in the past. Two of these larger ones are not being consolidated in our financials, so that's a little bit different for large projects like this. But as far as whether it's accretive, I believe at the end of the day it will be even with the way we're treating them on our books.

Okay. As far as you're sticking to some of your guidance, how much of the stimulus work is included in your Granite West revenue guidance? And if you could talk a little bit about the margin profile of those revenues.

Okay. So let me see if I understand the question. How much of the large project?

Stimulus.

How much the--

How much of your stimulus work is included in your Granite West revenue projections or your guidance revenue?

Well, the Granite West revenue projection anticipates that we'll get some of the stimulus money. You know, one of the things we said in our prepared remarks is that at least so far in California the stimulus money has been used to backstop the Prop 1B program. We've clearly seen stimulus money in some of the other states begin to move projects through the bidding process. It has not as been as-- it has not been as dramatic as I think we expected. I don't think it's been as dramatic as the Congress thought it would be, for that matter.

But we probably haven't peaked out yet with that, so I think the best is yet to come there. And we have anticipated that in our margin guidance.

Okay. Could you also give an update on your World Trade Center re-bidding process?

Yes. Currently, there's two projects on the street. One's, oh, in the $500 million range, and it bids within the next two weeks. The second one, it's-- and it has to do with the reconstruction of the 1 and 9 subway line, if you know that site at all.

Yes.

The second one is the hub up to the street level, which is a major project in the $1.5 billion range is what's kind of surfaced as an estimate. And it's scheduled to bid in late September or October, probably the fourth quarter sometime. And we have joint ventures and we're bidding-- we're part of joint ventures on both of those projects.

Okay. And finally could you talk a little bit about the composition of your long-term versus your short-term projects in the quarter? Thank you.

Are you talking about the Company or Granite East?

The Company as a whole. You typically give that type of information out. And I know it comes out in the Q, but I didn't know if you had a chance to have any comments on it in advance of the Q being released.

I'm not sure I understand the question.

I'm sorry, the backlogs. I misspoke. The long-term versus the short-term backlogs that are-- overall that are in your backlogs.

So how much of it is large projects and how much of it is small projects?

Short-term or there-- or smaller projects.

Well, let me-- the backlog in the East is all along backlog. It's all large projects.

Correct.

And the-- I'm not sure I have this at the tip of my tongue, but I would guess the backlog in the West is-- between 10% and 20% of our backlog is longer-term backlog.

Okay. Great. Thanks. Sorry for the confusion with the question.

I'm sorry.

Your next question comes from Brian Rafn.

Morning, everybody.

Morning, Brian.

Morning, Brian.

Give me a sense-- Bill, I think you had talked about a deterioration in your hit rate, your bid quote to actually, you know, securing a contract. Can you give us any numerical guidance on that, percentages, 1 of 6, 2 of 10, that type of thing?

Well, you know, it has varied over time. And, you know, when markets are strong we've got markets that are in that 20% to 30% hit rate. And, you know, we've got markets today that are down to 10% hit rate. So it's deteriorated. And what that's caused us to do is to have to bid more work.

And one of the things that LeAnne talked about in our prepared remarks is that we have more of an estimated expense in our G&A today because we're bidding more work. So we bring people out of the field and we bring them into our offices to cast that wider net to try to address the revenue issue, and we have to bid more work to do that. And so it's a kind of-- it's a little bit of a double hit, frankly, in a tough market like this. But this is how we have chosen to deal with it.

Okay. As you guys are in this period where it's been a little more difficult from the standpoint of competitiveness, is that on an annualized basis affecting your property plant and equipment, buying bulldozers and backhoes and machinery at all? Are you stretching out the maintenance or the lifespan of that equipment?

Well, just-- okay, there's two questions there. Number one, we are not neglecting maintenance on our fleet. That's the first thing. We won't do that. We're in this business for the long run, so the stuff that we've invested in will be properly maintained to the highest standards just like always.

Having said that, if we don't think that we have either the work to justify an investment in a new tractor, and by that I mean we need to put a lot of hours on a new tractor to pay for it to make it worthwhile, otherwise we should rent, if we don't feel like we have that work we won't buy a new tractor. And we've seen our CapEx for the rolling stock go down quite a bit in the last year or two as the operating folks in our various business units have appreciated that and have managed-- and we're managing our business accordingly.

The second part of that equation, I think, is that we're paying attention to the cash in our balance sheet and the cash that we're generating, and we're trying to manage our business with that in mind as well.

Okay. Relative to the stimulus and funding and the extension, we saw it with SAFETEA-LU -- with, you know, with some of these stopgap measures. Once the funding comes, once the highway bill is approved, what are you getting the sense from the state DOTs? Are there any cutbacks in budgets where you say, oh, now we have another problem. California or Oregon or pick your state has had to cut back on its estimators to get projects to the market. Is that a risk going forward?

I don't think so. I think if the money is-- if there's money in the transportation funding programs of the various states, they'll get the projects to the market, if that's the question.

Yes. Right. Okay. And then the sense with -- with being somewhat less competitive in the East pressures, do you see any ability for regional contractors, road builders to migrate to the East, or is that really a geographic barrier to entry?

You know, regional players migrate a little bit, but they don't go very far. You know, 50 miles, 100 miles usually. So I don't think it's-- I don't think the regional players are, you know, going to migrate around too much.

Okay. Any sense in the East, Bill, from the standpoint of availability of quarries, gravel pits, and that to vertically integrate, to be able to buy that type of thing? I would imagine the permitting is just as tough on a Greenfield basis as it is in the West.

Well, you've asked a couple questions there. Is there opportunities to buy things in the East to-- I think it's, as I understand the question, to take the vertically integrated model to the East, and the answer is yes, there probably is. Well, I know there are and there will be.

But, you know, the truth of the matter is that you have to balance that desire against the realities. And that is that the smaller business is tough in the East as well. And what kind of risk is associated with that? What kind of pressure does that put on the balance of Granite Construction Company to be growing aggressively in an environment like this? And so we're trying to be very careful in what we take a look at, you know, at this time.

Yes. One more. Anything on-- you know, we've certainly seen some volatility with oil prices. Anything on oil, gas and how it's affected either the aggregate side or just, you know, running machinery?

I don't think there's anything that you all need to be concerned with there.

Okay. Thanks so much.

(OPERATOR INSTRUCTIONS) Your next question comes from Joe Ritchie.

Good morning, everyone.

Good morning, Joe.

Good morning, Joe.

Quick question on the-- on your construction gross margins. How much help are you still getting from the border fence work that you're doing?

We have a little border fence yet to finish. It's not a great deal. Are we-- Jacque are we able to modify that?

Yes, we don't-- well, we have about-- we have less than $30 million left on one contract, Joe, for the year.

Okay. Okay. And that'll be burned off in the third quarter. Is that fair to say?

The third and fourth, yes.

Yes. And you all, no doubt, are aware that there's some conversation-- recent conversation in the Congress about another round of that fence, and we're watching that as well.

Okay, great. And then just one other question on-- I thought it was somewhat interesting. In Granite East it looked like your awards were negative for the quarter. Can you just give us a little clarification on what happened there?

I'm not sure I can.

I guess I took a look at your book to bill, and it looked like it was negative for the quarter, and you know, I-- was there-- maybe I'm looking at it wrong. But is-- does that sound right to you?

Well, I don't think we booked anything in the East in the quarter, and we may have adjusted the size of one of our jobs or burned off some backlog or something like that.

I think it's more a question of timing, Joe.

I don't think I'd get-- I don't think there's a story there. That'd be my opinion. In fact, I'm sure there isn't.

Okay. So it just sounds like maybe there was a slight scope reduction on one of your projects and nothing was really booked in the quarter. Is that fair to say?

(Inaudible). Mike? Go ahead, Mike.

Yes. Things like that do happen from time to time, a change order, a deductive change order or something like that. But we have not had any occurrences of work that we've booked and then unbooked. Is that-- ?

Okay. And I guess, lastly, you're doing a really good job on the-- on managing your SG&A. Is kind of mid $50s million sustainable going forward?

We're going to continue to work that SG&A just as hard as we can, but I would caution you all to-- about just taking, for example, what we've done in one quarter or another quarter and extrapolating to the-- for the whole year.

Okay. Thanks for taking my questions.

Your next question comes from John Rogers.

Hi. Good morning.

Hi, John.

Good morning, John. How are you?

Bill, just relative to your comments on Granite West, particularly about the larger project opportunities.

Yes?

Can you quantify that? I mean, you guys walked through some of the big projects in the East, and I'm just trying to understand, I mean, how big a portion-- or how big a business could that be for you, you know, over the next couple of years, not the quarter.

I think-- here'd be our goal. I think this is a stated goal inside the West is that we'd like to have that part of our business be about 25% of our revenue.

Of the division's revenue? Sorry?

Of Granite West's revenue to be jobs larger than $50 million.

Okay.

Now-- and to do that we've got a ways to go, so-- but that's what we're working towards. That's the team, the kind of team that we're building. And with-- you know, truthfully, with a little luck we'd be on our way right now. We've been second bidder on about three major projects that we did a very, very good job in estimating and proposing. You know, absent one bidder and we'd have been-- you know, we'd be on our way.

So that makes me continue to be optimistic about the statements we've made regarding this business. This business has the potential to be the same kind of business we have in the East, but it will take us a while to get there. We don't have the depth to either get it bid or to get it built that we have in the East yet. But we'll get there.

And we won't give up the smaller work along the way, and that's very important. We don't want to migrate into larger work at the expense of the day-to-day stuff that we've always done. We want to add the larger work.

You know, is there the opportunity in the larger work that you're seeing in the East, in the West?

Yes. The market seems to be a little bit tighter in the West for whatever reason. I think it's just because so much of the West was-- the Western business traditionally has been supported by growth in housing and that sort of thing. And with that, you know, not in the picture it's released more capacity for other things. But there's more work-- more large work in the West than we can estimate.

Okay. Thank you.

Okay.

Your next question comes from Avi Fisher.

Hi. Good morning. Thank you for taking my questions.

Hi, Avi. How are you?

I'm good, thanks. I have three very quick accounting questions for LeAnne and then just a strategic question. And if you mentioned these I apologize for repeating them.

LeAnne, did you talk about the tax rate going forward? It looked like it was a low-- like 26.5% this quarter. Is that the new run rate or --?

We're expecting for the year that we'll probably be around 27%, and you'll see that in the 10-Q that we file later today.

Okay. So 27% for the year. And then I noticed there was a reversible of an allowance for doubtful accounts, and I apologize for asking a basic accounting 101 question. Does that flow through the P&L?

Yes, it does. It came through as a bad-debt expense last year, and then it comes back as a recovery this year. Both -- and so [this year they'll see] a pickup or the reduction in expense, and that'll run through the G&A line.

And how much of it-- of that ran through the G&A? Was that the $1-something million that was in the cash flow statement?

Do you mean this quarter or year to date?

Yes, in the quarter. That's what I meant.

It was about $1 million for the quarter.

Roughly $1 million. Okay. So it kind of offsets the real estate impairment, so to speak.

And then the unallocated corporate costs. It was roughly $20 million. You've said in the past you think $20 million is roughly where it should be around the floor. Has that changed at all?

No. I think I'd kind of go back to what Bill said. We're working pretty hard on trying to figure out how to reduce our overall G&A expenses. So we are optimistic we'll continue to bring it down, but I wouldn't get too excited or too unexcited about what you've seen thus far because it's a work in process.

Right. But you have said -- you said in the past don't look at it as a percent of revenues, and we think we can sustain it at a dollar value. And it sounds like you're still looking to drive costs out.

Yes. I'm optimistic that we can bring the dollar number down. But unfortunately with the shrinking revenue number the percentage doesn't look very good.

Right. And then related to that I just wanted to ask two strategic questions and then I'll turn it over. There seem to be very low burn rates in West this quarter, and I wondered why that was and what's the outlook? Is weather an issue? Is it timing of projects? You know, that's the first quick question.

Well, so much of our work in the West, it's smaller work that we bid, book and build, and it really does-- it's not really reflected in our backlog.

Right.

And if our hit ratios are down and we're doing less work, it's just a product of the environment we're dealing with.

Yes. It's a product of-- so that hits those projects out, revenues are down. That implies-- would imply a low burn rate even though those would never actually be included in a burn rate.

Yes. That's correct.

Okay. I get it. And then another thing I've noticed while doing the channel checks for bids, you've seen-- I've seen bids up in Alaska. I've seen some in Wyoming. Is West segment casting a wider net in order to diversify away from California?

Well, no, I wouldn't say that. I mean, we're casting a wider net in the areas where we have a presence, you know, what we characterize as our home markets. But we have a business, Avi, up in Alaska. We're likely the largest civil contractor in the state. So we're bidding work in Alaska because we're there. We have a business there. Granite Construction, you can see the green trucks driving all over Anchorage.

Just to give you sort of an aside. We actually have a hot plant about 1,500 miles down the Aleutian Chain, building an airport right now. So, yes, we have a major presence in Alaska, although I don't think we're bidding a whole lot in Wyoming, other than maybe some slurry seal work.

So what I'm hearing you say is you don't see yourself trying to cast a wider net to diversify out of California more than you already have. And I know you have a presence in Alaska. You've done a lot of runway work there.

Well, we've made a conscious effort-- this is not something that's new. We made a conscious effort since the early '90s to diversify geographically across-- you know, not out of California but in addition to the work we're doing in California. And currently today about 40% of our business, overall business, is in California, and the rest of it is elsewhere.

And so we continue to build the work, to build our business across the country. That strategy has proved to be a darn good strategy, frankly, and I'm really happy today that we did that because those businesses that are out of California are performing generally better than those that are in California today.

Got you. I appreciate the color and the clarity, and I hope to see you guys soon. Thanks.

Thanks.

Your next question comes from Rich Wesolowski.

Hi. Thanks. Just to confirm, the $500 million expected to be added to the 3-Q backlog in the East, it includes only the $40 million from Houston Metro that you press released, or is there something more?

The $40 million for Houston and it does not include the next tranche.

Right. On the last call you had spoken of $4 billion in East jobs and kind of the opportunity pipeline that you expected to bid in 2009. You have a nice $280 million win to show for it so far. Can you get even ballpark estimates as to how much of this has been bid, how much is ahead and maybe how much has been shelved or pushed out?

Well, Rich, this is Mike. We will have a second job to show for it, and that'd be the Queens Board Tunnel, so you put that on the list as soon as it's executed. We've got jobs that are kind of in the pipeline. There are still two major flood wall jobs that were part of joint venture teams on in New Orleans that are pending that should be-- should have results, 30 days I'd say.

And then as far as new work, where there are several projects in the Southeast that are in the estimating stage that'll turn in this year. And there's, of course, the two Trade Center projects we spoke about earlier are still in the pipeline for this year. And a Powerhouse has bid -- with the tax incentives and the stimulus bill, a Powerhouse that we're looking at in Pennsylvania has resurfaced. That'll be bidding as well. So we, right now, are pretty happy with the opportunities we have for the-- you know, for the near term.

Okay. Thanks for that. And then lastly, Bill Dorey, could you just give me your personal impression given the dire fiscal stance of California? It looks like the major pain that they had in their fiscal 2010 budget resolution for transportation was taking money out of the local entities. Do you think transportation got off easy? Do you think it got the short shrift? What do you think that says about their desire to push infrastructure forward?

Okay. Start with it does not appear, Rich, that the state is going to be taking money from the local agencies. The way the tax-- the gasoline tax works in California is 35% of it, it's an $0.18 a gallon tax. It comes in and 35% of it goes to local agencies. And there was some conversation earlier this-- oh, in the last several weeks since this thing was coming to a head, that the state was going to keep that money-- it's about $1 billion-- and use it to satisfy their own general fund requirements. And the local agencies would then not have that money available to fund their local city streets and so forth.

That did not happen. Transportation came out absolutely great compared to other constituencies. At this point there's very little that-- almost nothing, frankly, at this point that's been harvested in this discussion around the budget. So we're pretty happy with the outcome.

I think there's still some risk that Prop 42 money might be at risk, and I think they've moved some of that. They harvested some of that money for a couple of quarters, and they're going to pay it back at the end of the fiscal year.

But for generally speaking, we came out very, very well.

Thanks again.

Your next question comes from [Samir Razad].

Hi. Good morning. Actually, all of my questions have been answered. Thank you.

You're welcome.

Your next question comes from Fritz von Carp.

Yes, hi. I just-- you know, I maybe didn't totally adequately hear one of the numbers you gave out during the prepared presentation. The change in the bidding expense you expect to be in G&A. Would you mind to give me those numbers again from what percent to what percent?

Sure. As a percentage of total G&A this estimator expense that I was referring to was about 11% in 2006. And we're expecting it to be up in the range of 18% for 2009.

What was it in 2008?

I don't have all those numbers. The idea was to point out to you that it's gone-- it's been at a steady incline, but I don't have all the numbers.

I mean, so let's say it was-- it might-- so let's say there's, you know, maybe 4 or 5 percentage points increase year over year. Is that a fair guesstimate?

Yes, I think that's fair. I mean, I wouldn't say it's in exactly a straight line from one place to the other, but it's fairly linear.

And that's as a percent of G&A and --.

Right.

-- then I could just -- we just take that out of the operating margin. Okay. That's very helpful. Thank you.

Your next question comes from Chase Jacobson.

Hey, guys. Thanks for taking my call. I just wanted to follow up again on the Granite East margin. The margin in the second quarter was strong, and it was well above the guidance that you had previously given for the year. I was just trying to get a bit more color. I know you did mention the border fence project, but I was just trying to get a bit more color on what was better in the second quarter and what the differences are in the back half of the year, and whether it's in the third quarter or fourth quarter given that it looks like it'll be down sequentially pretty significantly.

I didn't catch your name, but this is Mike. I'll try to answer that. As we go farther in-- first of all, the improvement is just basically the guys doing a great job on their projects and the forecasts are just coming in a little better than the previous quarter.

But your question about going forward, as we get father into the year we're going to be starting projects like the Western Wake and more of the Houston project and the Queens Board Tunnel. And as those projects go forward, as you know we don't recognize profit, and so we get to a certain portion of the project. So they'll be generating revenue without any associated income, which will take the average down.

Okay. And did you give the timing on those projects?

Well, we expect to book them all in the third quarter. Two of them are imminent, and the other one should be fairly quick as well.

Okay. But related to how long they last.

Well, the Houston job, you know, the NTP or the portion that we've booked is certainly within the next 12 months. But there'll be additions to that project, so that's-- may be hard to keep track of. The Western Wake job is about a 39-month project. And the Queens Board Tunnel is a similar range, about 40 months, I think.

Okay. Thanks.

Your next question comes from Michael Corelli.

Hi. When do you expect to file the 10-Q?

We're filing it this afternoon.

Okay. And do you have what the changes in project profitability were, I guess, versus a year ago?

Yes. If you give me a minute here I can look it up.

And then just lastly what do you think CapEx will be this year?

I'm anticipating CapEx this year to be in the $110 million range.

Okay. Thank you.

Your next question comes from (inaudible) [Redmond].

Just a couple of quick follow-ups. One for you LeAnne. With the International Accounting Standards coming in 2014 and restatements back to 2011, what's kind of that impact? And what's your preparation for Granite?

We haven't done a ton of preparation yet. As I think you probably know, there's a lot of debate over whether that'll actually happen in 2014.

That's good. Yes.

My personal belief is it's not going to happen then, but, you know, I could very much be wrong on that one. Probably one of the issues that we're following most closely is percentage of completion accounting which in the world of International Accounting Standards doesn't really exist the way it's done in the United States. And, in fact, I'm going to be attending a conference next month to make sure that Granite is a part of those conversations and understands where they're going.

So at this point I think I'd really say we don't know what all the impact will be, but we'll be ready when it comes.

Okay. A question for you, Bill, relative to bench strength, you've talked about it over the last three or four years, you've dialed it in a little more competitive market, certainly. If the stimulus continues to flow through, the highway bill gets passed 60% higher, does that put you in a position to ramp up more bench strength or is the ability to do large project business in the West give you the capacity with mobility of crews that you maybe don't need to ramp up the bench strength like you did in the past?

You know, the question is interesting because we've got plenty of bench strength currently. And the concern that we have, truthfully, is how do we pay for the bench strength we have. We're dealing with trying to generate revenue currently.

I don't think the stimulus package is going to change that equation much. I do think, however, that the highway bill could affect it. Now, the highway bill is a big deal. And if that highway bill gets approved at the $450 billion level, it will create opportunities for all of us in the industry, and we'll be-- we could be back to that very, very welcome challenge of going out and trying to hire more bench strength.

Okay. Okay. I think that's fair. You also talked, I think, about a-- looking at bidding about $5 billion in potential projects. Can you talk nationally what component of that would be design build?

I'm not sure that I actually know that. Unless you do, Jacque, I see you looking at something there. But I would tell you this, that our large project backlog is 70%-- 60%, 70% design build. I suspect that ratio would remain pretty close to that.

And then just one on could you put a little more color on the project that you-- the Granite land project that you consolidated. Is that just raw land? Is it a subdivision? Is it industrial park? What specifically is that?

It is a development. It's a residential development in Oregon, as we mentioned. You know, it's in its early stages at this point.

It's a land development venture in which we do not intend to build houses on.

Okay. Okay. Thanks, guys. Appreciate the hard work. Thanks.

Ladies and gentlemen, we have reached the allotted time for today's Q&A session. I'll turn the conference back to Mr. Bill Dorey.

Thank you for your questions. To summarize, while our markets remain competitive, our teams have many bidding opportunities across the country. The demand for our construction materials continues to be down as a result of the slow real estate development market.

We remain optimistic we can grow our large project backlog and enter 2010 with a solid project portfolio. We continue to manage our cost structure to balance current challenges with the investment necessary to drive long-term growth and performance. And lastly, our financial position remains very strong, and we intend to keep it that way.

As always, I'd like to thank our employees for their support. It is your commitment and know-how that allows us to compete and perform in these tough times. To the investment community we appreciate your interest in Granite Construction. And thank you for joining us this morning.

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 and have a great day.

Ladies and gentlemen, that concludes the Granite Construction second quarter 2009 earnings conference call. We appreciate your time. You may now disconnect.