Granite Construction Inc (GVA) 2009 Q3 法說會逐字稿

Good morning, my name is Kristen and I'll be your conference operator today. At this time I would like to welcome everyone to the Granite Construction Third Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

(Operator Instructions)

Thank you. Ms. Fourchy you may begin your conference.

Thank you. Good morning and thank you for joining our Third Quarter Earnings Call. I'm here today with Bill Dorey President and Chief Executive Officer, Jim Roberts Executive Vice President and Chief Operating Officer, and LeAnne Stewart our Senior Vice President and Chief Financial Officer.

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 for one year. Following today's remark, we will as usual host a Q-and-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 might 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 to Bill Dorey, Granite's President and CEO. Bill?

Thank you, Jacque, and good morning, everyone. During today's call I will provide you with an overview of our new organizational structure, as well as our third quarter results. LeAnne will take - then take you through our financials in greater detail, and after that we'll be happy to answer your questions. As most of you know, we recently announced a change in leadership. On September 1, Jim Roberts assumed the role of Chief Operating Officer, succeeding Mark Boitano, who we finally let retire after 32 years of service with Granite.

Mark has been an invaluable member of our team, and has played a very important role in our company's success. He is an incredibly honest and straightforward guy, who is trusted by the entire company. He has been my business partner for the last 22 years, and it has been my honor to work with him. As I've said many times over the years, asking Mark to be part of Granite's Senior Leadership Team was my best business decision.

Okay, let's talk about the reorganization. Our new structure was the result of a thorough and rigorous evaluation of our business. This is a continuing evolution and is built around the concept of becoming one Granite. As one Granite, we expect to be more effective in the way we share best practices and the way we bid and build our work, ultimately reducing our cost structure.

At the end of the day our goal is to be a leaner, more adaptive organization that can anticipate and respond to changing market conditions and take advantage of future growth opportunities. Specifically, we are regionalizing business units, consolidating several administrative and operational support functions, streamlining process, and leveraging our resources in centers of excellence across the country. We are on track to complete this transition by the first of the year, and we will be reporting under new segments beginning in the first quarter of 2010. We are in the process of finalizing our new segment reporting, and we will share that with you at a future date.

Lastly, as part of the reorganization we made some very tough decisions. Earlier this month we announced a reduction in force that affected approximately 8% of our salary workforce. These employees have contributed to our success over the years, and have been part of our Granite family. As difficult as this decision was, I believe it will make Granite stronger over the long term.

Now let's discuss our third quarter results. Net income per diluted share for the third quarter was $0.79 compared with the prior year's $1.35 per share. Revenues were $720 million compared with $898 million in the third quarter of 2008. And gross profit is a percentage of revenue for the quarter was 15% compared with 16% in 2008, and operating income was $46 million compared with $74 million last year.

In the west we've been struggling to get our share of the work. Competition for traditional projects in the west continues to be very tough. Despite the stimulus related opportunities, there is not enough work to bid in most of our local markets to create a healthy balance between the capacity in the marketplace and the demand for services and materials we provide.

We do not expect this business environment in the west to change significantly in 2010, and to compensate for this market environment we are bidding a wide variety of work and concentrating on those projects where we can maximize profitability through excellent execution and the best utilization of our people, equipment, and construction materials.

Shifting to the east I am very pleased to confirm that as expected Granite East was awarded and received notices to proceed on three large projects during the quarter. Our portion of these projects is valued at approximately $500 million. Construction is starting on all three projects; the Queens Board Tunnel in New York, the Western Wake Toll Road in North Carolina, and the Houston Metro Light Rail.

With regard to the Houston Metro Project, I would also like to point out that are backlog does not include approximately $400 million which is our share of the remaining work we have under contract for that project. We will book the additional backlog as we receive notices to proceed.

Across the US we are pursuing large projects that by virtue of the experience, of the experience and financial qualifications required generally attract fewer competitors and have the potential for higher margins. We have a long list of these opportunities that we'll bid between now and the end of 2010. We expect to get our share of these projects, and we also expect our large project portfolio to continue to deliver gross margins in the mid-teens over the life of these projects.

On the federal front, the one-month continuing resolution of the Federal Highway Bill is set to expire this Saturday. Leaders have been attempting to pass a six month extension this week. However, the latest news from DC indicates it may not have the support it needs to pass. Separately, the House has filed an Appropriation Bill that would extend the current continuing resolution and provide contract authority for the Federal Highway Program through December 18. Enactment of a new six-year bill will not occur until congress and the administration agree on a viable financing solution, which may not occur until after the midterm elections in November 2010.

With regard to the Federal Stimulus Bill, while the increased funding has helped to offset some of the market weakness in many of our western states, it has not been the silver bullet that our industry needs. The funds have been slow to ramp up and have directed towards smaller projects. The Recovery Act stipulates that the states are required to obligate 100% of their funds by March of next year. We are hopeful that we will see more and larger stimulus-related projects over the coming months. Now we'll turn the call over to LeAnne who will walk you through the details of our third quarter financial results.

Thank you, Bill, and good morning, everyone. For the third quarter Granite West revenue was $564 million compared with $749 million a year ago. Gross profit as a percentage of revenue was 15% compared with 18% last year. Operating income decreased $37 million to $56 million. Contracts backlog in Granite West, at the end of the third quarter was $554 million, compared $749 million a year ago.

Gross profit, as a percentage of revenue was 15% compared with 18% last year. Operating income decreased $37 million to $56 million. Contract backlog in Granite West at the end of the third quarter was $554 million, compared with $915 million last year, reflecting the competitive environment for smaller projects and the lack of large project award thus far. We continue to experience decreased demand for our construction material. On a year-over-year basis material sales decreased 43% to $72 million. Gross profit on material sales was $7 million in the third quarter of 2009 compared with $15 million in the third quarter of 2008.

Turning to Granite East, revenue for the division was $155 million compared with $147 million in 2008. Gross profit was 13% compared with 7% a year ago. Driven by a higher quality backlog and proved project execution. Operating income was $12 million compared with $4 million last year. Total contract backlog in Granite East at the end of the third quarter was just over $1 billion compared with $906 million at the end of the third quarter last year.

As Bill noted our backlog includes approximately 500 million associated with three new projects that were awarded during the quarter. However, it does not include our share of anticipated further awards from the Houston Light Rail Project.

Now for a few comments on our balance sheet. Granites financial position and liquidity remain strong. Our cash and short-term investments were $399 million at the end of the third quarter, which includes approximately $121 million associated with consolidated joint ventures.

In the third quarter general and administrative expenses declined to $60 million from $72 million a year ago. This improvement was primarily related to a reduction in bad debt expense of $8 million, lower incentive compensation expense of $2.4 million and salary expense of $1.5 million. Reducing our cost structure remains a top priority and is an important element of our reorganization.

As Bill discussed, we recently took steps to consolidate functions throughout some of our business units. As we transition into our new structure, we will be seeking opportunities to improve efficiencies and reduce expenses throughout the organization.

Looking to the rest of the year, as we noted in last night's press release, charges associated with our reduction in force will be recognized primarily in the fourth quarter of 2009. These charges are expected to be approximately $6 million pretax. Going forward, we currently estimate annualized pretax cost savings associated with the reduction in force to be approximately $11 million.

We also expect the fourth quarter of 2009 to include approximately $4 million of additional gains on the sale of gold, as well a gain of approximately $6.5 million associated with the sale of a previously mined aggregate property.

Lastly, capital expenditures through the nine months were $76 million and are expected to be approximately $105 million for the year. CapEx in 2009 included significant investment in three long-term construction materials-related assets. These were multiyear investments that will generally be complete in 2009. You can therefore expect our CapEx to be significantly lower in 2010.

Turning now to our guidance for the rest of the year, given our results to date, we now expect Granite West 2009 revenue to be in the range of $1.4 billion to $1.5 billion with a corresponding growth profit in the range of 15.5% to 16.5%. In Granite East we expect the revenue to be in the range of $600 million to $650 million with a corresponding gross profit margin in the range of 16.5% to 17.5%. We now expect non-controlling interest for the company to be approximately $26 million for the year. Now I'll turn the call back to Bill for some additional comments on our outlook.

Thanks LeAnne. Before we open the call up to your questions, I would like to spend a few minutes on our outlook for next year. There's no argument that we're in the midst of a very challenging environment, particularly as it relates to our business in the west. We believe margins on traditional work will remain under pressure next year in most of our markets. We also believe that we will emerge from this downturn stronger than when it started.

With regard to large projects, we are very pleased with the opportunities that lie ahead. In the west, we currently have the exclusive right to negotiate two CMGC Construction Management General Contractor joint venture contracts valued at over $450 million. Our joint ventures have been awarded the construction management portion of these contracts, and we are negotiating to develop a price and schedule to build this work as the general contractor.

We are optimistic about the prospects for both of these projects. Our business development teams are busy seeking opportunities like these across the country. While we expect a macro-economic challenges to continue in 2010, we believe we will book quality backlog, reduce costs, and position our company for the long term. Now I'll turn the call back to our moderator, and we'll be happy to take you questions.

(Operator Instructions). Your first question is from Richard Rossi with Wunderlich Securities.

Just a couple of things on these pipelines of projects and your mid-teen margin expectations. If we went back a year-and-a-half to two years ago what might your expectations have been then? I know it's hard and obviously it's a difficult question.

It's a good question Rich, and by the way we're happy to have you back. It's been a while.

I'm glad to be back.

We actually, as you remember, we came out of a period where we had underperformed on large projects, and about two years ago Rich, we began to talk publicly about the prospect of performing at the mid-teen range in our large projects. I remember a conference in New York in probably early 2008, and we began at that point to suggest that we could perform in the mid-teens. We've done that. We wouldn't have said it until we were pretty sure we could do that. Looking at the backlog that we currently have, we expect to be able to do that and we expect to be able to book backlog in that range and continue that level of performance.

Now do those projects, are there incentives in there also that are helping you achieve that kind of margin expectation in this competitive environment?

Well, I'm not sure what you mean by incentives. I mean there are some early completion incentives and that sort of thing associated with these jobs but I'm not sure I would say that's the reason. I think it's the level of complexity, Rich, and a level of risk associated with this work that I think drives financially sound businesses to properly assess that risk. We're pretty careful when we bid that kind of work, and we don't expect to make the mistakes that we made a few years back.

Richard, in addition to that, this is Jim, most of this larger work that we're bidding is design build work, and certainly our relationship with our designers is a key component to being competitive on bid day and also providing some innovative approaches to the jobs which allow you to get a higher rate of return on the ultimate project. So, those complexities with the design build addition really allow the higher returns.

All right, one other thing, these cost savings of $11 million related to your recently announced cutbacks, is that $11 million include the cost reductions that you saw in the third quarter or is that all going forward?

The $11 million isn't going forward savings, so the cost is about 6 million and then the years going forward on an annualized basis you'll have savings of about 11 million.

And for the first year I'm assuming you'll get most but maybe not all of that first 12 months.

I think that's fair. There are some people that are transitioning out over a longer time period because we need their help, but most of it should be attainable within 2010.

Well that's it for me and give Mark my best.

We'll do it. He's listening I think.

Your next question on the line is from Kathryn Thompson with Thompson Research Group.

Hi and thank you so much. First question on backlogs, is there a duration change in backlogs giving you a greater emphasis on longer term projects?

I suspect so but I think if you dig into the question that I think you're asking we have more large work as a proportion of our backlog today than probably we ever have, and some of that is a product of having less day-to-day work. So I think the answer is probably yes.

Okay, and just the overall, you talked some about your pipeline having mid-teen from your longer term projects. If you could just talk generally about your margin profile on your backlogs for Granite West too, and also if you could clarify why you don't expect this condition to improve in Granite West in 2010?

Yes, so this is Jim. The backlog we have in Granite West, although reduced, is still fairly healthy backlog and we're pretty happy with the backlog we have. Certainly in the same range is the large projects that we going on. I think that one of the reasons that we're struggling on suggesting that we're going to have issues in 2010 is that it's a very competitive environment out there. And although the Stimulus Package is hitting and certainly there's work to bid, it's just very, very, competitive on that day-to-day work and we look at that day-to-day work as projects under $50 million. And right now there's still an excess of probably 10 bidders on a lot of that work. So we're reluctant to suggest that that kind of backlog is going to pick up a lot, and that's why we are focusing a lot of our efforts on large projects.

And what progress have you made and Granite West for some of your larger projects?

Well, one of the things we did in 2007 was to actually reorganize and actually have an entire large projects team in Granite West. They've been pursuing work over the last couple of years. Bill mentioned several projects that have been awarded in the west on these, what we call CMGC contracts, and so we think that if we follow up on the exclusive rights to negotiate, that we could put some of that in our backlog in the near future, probably the first quarter of 2010. We've been bidding a lot of work. It's very competitive as well. Our teams are getting better and better in the quality of the proposals that they submit. And they're really just now hitting full stride in their ability to bid this large work, and they've got projects from Alaska down to San Diego that they're working on. And so it's taken a while to get it up and running, but it's actually running quite well right now.

So, it's you don't want to put the cart before the horse with large projects in Granite West and so the buy to be more on the upside should those go through, it sounds like.

Well again, it's slow to ramp up. You're absolutely right. You want to make sure you're doing quality proposals and have the teams available to build that work, and we certainly are very methodical on our approach, and we definitely do not want to move to fast. But I think it's going pretty well. It's going as planned.

Finally, you'd talked to some extent in the last call about bidding expenses going up. With a competitive bidding environment just in general, how would is that tracked in this quarter? And how do you see that tracking in the next six to nine months?

I think that the way, Kathryn that we look at that is that there are estimating teams which consist of fulltime estimating teams and field superintendents and management teams that literally come into the office to help put proposals together. Certainly that has increased in 2009, and as we build backlog and get work, it will decrease. So I would suggest to you that probably for the next six months it will be at an elevated level, and hopefully we will be able to put those people back to work out in the field after that time.

Okay, and my final question, have we been tracking at I-80 Caltrans Project that's been delayed a few times. And what's - wondering would you be able to give some color on those projects or other projects that are delayed by Caltrans and why that may be the case?

Yes, but I'm not sure which project you're talking about. From what I understand most of that I-80 work has been put out to bid. So I'm not aware of one that's been further postponed.

Okay, I'll follow up after the call on that one. Thank you very much.

Thank you.

Your next question is from the line of Bob LaBick with CJS Securities.

Good morning. Hi, first I want to say congratulations to Mark and to Jim. And for my question, relates to the reduction of forestry discussed earlier. Was this a reflection on the outlook you see over the next few years, or more structural trains that you've been looking to do for the last couple of years, you know, to put in place? In other words is this just reacting to a smaller environment or was there something more behind this move?

Bob, this is LeAnne, I'll answer that and others can certainly dive in. But I would say it's a combination of both two things. Some of it is reacting to a revenue line that has obviously shrunk throughout the year. And another part of it is there are more efficient ways for us to do some of our work, and there's more to come but this is sort of a part of the progression towards becoming more efficient and more effective in a lot of functions throughout the organization.

I think the other thing, Bob, that we looked at was we really want to grow revenue in our Company, and to grow revenue we need some more efficient systems in place. And so, this was not only a reactionary move but it was also saying that in order to grow the Company we have to have the scalable support system and really utilize some of the talents. We found that with this Granite East and Granite West and the large project of building of the business in the West that we have tremendous talent throughout the Company that we weren't sharing as well as we could. So we want to grow revenue. We want to share the resources that we have in a more efficient manner. So combination of somewhat reaction but I would say the majority of it I would say is being proactive for the future.

Great, that's very helpful. And then as it relates to Q4 you actually bumped up the gross margin assumptions in West and I was wondering, you know, what are the reasons behind that, and then just looking to 2010 without giving guidance on specific numbers, would you expect margins to be higher or lower than 2009?

Well let's go back to 2009. The projects are being built very well Bob. We're very happy with what our crews in the field are doing. As we build this large [ore fact], I think we've mentioned it on the calls and certainly when we're on the road. We have contingencies in our bids for potential issues. It seems a lot of the issues that we had contingencies in place for did not occur, and when those things don't occur the contingency falls to the bottom line.

And we're meeting our productions, and they're doing a really nice job putting the work together. So that's fall to the bottom line, and that's why you see an increase in gross margins. I will say going forward that the bids that we're putting together are very competitive, and I would hope the margins would be able to stay in the mid-teens like that. It's kind of yet to be determined I think. We're going to end up, probably the next three or four months will determine next year's numbers.

Okay great. And then just looking to 2010 and beyond, what is it going to take to get those small projects which you said are extremely competitive right now, to turn around. What are the indications you'll being look forward to seeing fewer bidders and things like that.

Bob, the driver here is the private sector economy. We got to get the private sector moving again. We've seen people bidding work against us on this large work in [Canault], focus on California for a minute. We've never even heard of these companies that are bidding against us today. The private sector has to get moving again, and that does two things. It allows those companies that are focused on that environment to move back there and make it a little less competitive on the public sector. It also moves our materials business.

That's a huge driver for our materials business, and we've seen that over the last few years have a negative effect on our revenue and our margin in the materials business. So we got to get some private sector funding back in place, and when that happens, we won't know that immediately, you can start getting the feel for it. There are certain areas today where we're starting to feel a little bit of it, but we got a long way to go before that's a healthy environment.

Thank you very much.

We also think this transportation legislation at the federal level, and at some of the states as well, is an important element, but Jim's absolutely right. The real spark will be the private development in the marketplace.

Great, thank you.

Thanks Bob.

Our next question is from the line of John Rogers of D.A. Davidson & Co.

Good morning. A couple of things, first of all, in terms of the results of this quarter and the fourth quarter any significant in terms of reaching 25% hurdle rates on any of these projects?

I don't think so.

Okay, and then LeAnne you mentioned some of the gains on gold sales and old quarry in the fourth quarter. Is that quarry sale, I'm curious, in part of Granite land or is it separate?

It's separate. It's part of the Granville West asset.

Okay, and then I guess for whomever, the lower prices that we're seeing for materials, I guess both aggregates and other things, how much of an impact has that had on your revenue?

That's a good question. The majority of our revenue is just in the materials business is due to volume, not due to pricing. And the pricing issues that we've seen, the majority of them are really because of the lack of really high quality products going out the door. John, we're selling from a retail standpoint, and the majority products we're selling are the lower value products. So certainly that drives lower revenues, but the biggest single issue in our Materials business is the volume.

And if you look at your entire business, the construction business as a whole, is there a deflationary element in this?

I'm not sure I understand the question, John.

Well, in other words, if your total revenue is down for the quarter, year-over-year, almost 20%, is there lower materials costs are flowing through that, and is it significant?

Yes, I would -- John, I think the key driver there is the competitive environment is driving prices down from the materials side, certainly equipment. Labor's pretty static. Labor's not changing. Most of us come from basic wage work. So whether it's deflationary from an economics standpoint is one thing, but certainly from a demand standpoint, it's driving those inputs down.

Yes, John, I think the answer to that question is yes. The cost to build, you know, a particular project today relative to two years ago, it's gone down. So I would say that there is a deflationary element in the mix today, that I'm not sure what that means to our business, or to your view of our business, but the answer is yes, I think.

Well I'm trying to think about it, or understand it in the context of, you know, what we're seeing in bids relative to engineers' estimates of about two years ago.

Yes. Well they're down, there's no question about that. And that's a combination of just a whole lot of, you know, all the elements that go into pricing one of these projects, subcontractors are bidding to us in a more competitive environment. The various materials that go into our projects are generally lower than they were a few years back, certainly cement, asphalt, we've seen all that stuff go down. And, truthfully, I think bidders, including Granite, are more aggressive in how we try to analyze how long it's going to take us to do this work.

You know, Jim mentioned that fact that we'd been able to keep our margins up in spite of all this, and I think one of the reasons that that's occurring for us, and I suspect it's happening with other companies as well, is if our revenues are down, and our workload is down, we have eight teams out on all these projects. We've got our core people, our best people out building work for us right now, because we have less work to do.

And what that has allowed us to do is to be more consistent in our performance with fewer mistakes and more projects where we, in fact do a better job than what we had anticipated in our estimate.

Okay, and just one other follow up. On the CMCG work, does that -- is the Mountainview Corridor included in that?

Yes.

Okay, and the 450, is that your share?

No. Well that's the joint venture share.

And approximately what would your share be?

Approximately half.

Okay, great. Thank you.

You're welcome.

Your next question is from the line of Rich Wesolowski, from Sidoti & Company.

Thanks. Good morning.

Hey, Rich.

So could you discuss the salaried workforce reduction within the context of your strategy in the west, to bid much more work than you have in the past, which typically requires more designers and estimators?

I don't think that our -- in fact I'm certain that our reduction in force significantly, or even impacted our ability to bid work at all. We are simply, I think, adjusting for the environment that we have, making -- beginning to make the changes that we need to take advantage of what we think is a more efficient structure, take some redundancy and duplication out of our system.

And as Jim said, try to organize ourselves so we're more scalable, so we can plug things in when we ramp business up, and pull them out when we ramp business down, in a position to add an acquisition, I think more readily than we have been in the past, become a little more flexible, but it has not impacted our ability to bid work or develop proposals.

So, in the west, you still expect the large work to come on top of any small work you get, and not supplant the small work.

Our goal is to add larger work to our business portfolio, and not do it at the expense of our day to day traditional work.

And with that being said, Rich, certainly that day to day work is very competitive. But we are bidding every job that we normally would be bidding in the smaller work, as well as the larger work.

In the west, some of the big projects, I know you've narrowly missed some big ones this year. But your comments here suggest there's more to come. Is there a finite number of these jobs that you see over the next four or five quarters, or does additional work come onto your radar screen every quarter?

Rich, it is coming onto the radar screen every quarter, but it is also somewhat finite. We know what's out there, especially for 2010, and we've got a very, probably more work than we can actually bid, so our job now is to really optimize the jobs that we think we can bring home, and create value for us. So even though it is finite, it's more than we can actually tackle, at the same time.

Okay, given that, and you had mentioned the proportion of the backlog, much more weighted to the east, two thirds plus, especially if you consider the unbooked Houston Metro portion, than you've had in the past. Is that ratio going to continue, or will the west come back?

Well I think, with the large project efforts we have in the west, we're certainly hoping that that backlog can be moved up quite a bit probably in the first half of next year. So I would hope that that ratio wouldn't stay the same.

We're going to add that we are pretty confident, Rich. We are going to add this work in Utah as well, this CMGC work so, you know, as Jim suggested, that -- we expect that will come our way, likely in the first quarter of next year. That will help, but I think it's important that the investment community appreciates that we are in a tough environment in the west, we don't know that there's a silver bullet out there that's looming right around the corner, so we expect this environment that we're dealing with, it's a competitive environment in the west, to persist for some time.

Having said that, we are -- we believe that our best opportunity to try to really counteract that, I think, or build some backlog, would be in this large project work. And so that is why we have -- we are building that capability, and have built that capability in the west, and as Jim suggested, I think we're pretty good. I think we have very good teams, you know, we need some more capacity, frankly, because those larger projects, we do not have enough capacity to bid all of them, which is probably a good thing in some respects. It's sort of good news, bad news. It's good news that we have a lot in front of us, but we do need to build some capacity.

Great, thanks again.

Thank you.

Your next question is from Richard Paget, from Morgan Joseph.

Good morning, everyone.

Good morning.

I just want to be clear on the large projects. I mean, obviously you guys booked a good amount in this quarter. Do you think that's reflective of the industry, in terms of the large projects that are moving forward in general, and I guess this would be relative to last quarter in the beginning of the year, or just the particular ones that you were going after just happened to hit in that quarter?

I think it's more of a timing thing, particularly as it relates to these three projects in the east. We have been talking about all three of those for some time. At least two of them had been delayed because of either funding or some bid protests and that sort of thing, and you know, they just happened to all come in in this quarter.

I think, also, Richard, we've always said that those awards are fairly lumpy in nature, and they're going to continue to be lumpy. Certainly there's more work that we're going to be bidding in the large project arena, but, at the same time, the awards will continue to come and go in a very lumpy fashion. And we track a lot of these jobs, and, as Bill said, it takes time to finish them and actually get the award. So they're planned like that, and I think that for next year, hopefully we'll have some lumpiness earlier than later next year.

Okay, right, and I realize the lumpiness is inherent in the business. But just generally speaking, are the large projects moving forward more quickly, now in the second half of the year, versus the first half of the year, just given the trepidation to move forward and some of the financing issues?

No, it's pretty much the same as it's always been.

Okay, and then getting to the west, you know, you guys have talked about this competition being intense for a while, new bidders coming in, who might not know what they're doing. Is there -- have you noticed any potential backlash on this, where, if they're not executing on the jobs well, things might get delayed, not go according to plan, might even end up costing, you know, the DOTs more money and time relative to the lower bids, and we might get some kind of, you know, more stipulations for prequalification or anything?

I don't think we've said that there's bidders out there that don't know what they're doing. I don't think that's our phrase. We've got plenty of competition that we've not seen before. As Jim suggested, a lot of this is coming out of the private market. It doesn't mean that they don't know what they're doing, it simply means that they would prefer to do private work and have, in many instances, built their businesses around that private work business model.

I don't know that I could say that the -- for sure, that any of the public works agencies are suffering as a product of having these folks in the marketplace. It is our belief that if the private work comes back, they will migrate back to the private work marketplace, because that's what we've seen in the past.

Okay, and then just keeping on the west, I mean, you talked about you like to focus on projects where you can maximize your profitability. I mean, is there any way you could better profile those for us, you know, what they exactly look like? I mean, I know you've talked about having your A team on some of them, and good execution as well as, you know, some of the bigger projects. I mean, is there any other characteristics that you really look for?

Richard, yes, this is Jim. I think there is, and I think we've been pretty consistent in what kind of projects we track. We certainly track them in our home markets. So the projects that are close to our current regional bases, where we know we can utilize the resources of those business units, those are the ones we track. And we also really track the ones that have construction materials in them. We want to use that vertically integrated business model in the large projects as well as the day to day work, so you'll see us on a lot of these projects, if we think there's a materials component, we'll really track that, and have that as the priority bid that we're going after.

Okay, great, I'll get back in queue.

Thank you.

Your next question is from the line of Jack Kasprzak, with BB&T.

Everyone.

Hello, Jack.

The equity in income of affiliates in the third quarter is about $4 million. That's a little outsized versus previous quarters. I was hoping you could talk about that, number one, and number two, the minority interest you lowered your guidance a little bit from the previous quarter. Could you talk about that as well?

Sure, Jack. The equity interest as affiliates is primarily our interest in an oil processing facility that has been pretty profitable and has been returning some nice returns to us this year.

With regard to minority interest or a non-controlling interest, I guess we call it now, there really isn't any significant changes in there. It's just a forecast adjustments that are typical every quarter, and how that impacts non-controlling interest.

And the equity, will that, just in terms of modeling purposes, I mean, will that, probably remain somewhat more profitable than we've seen in previous quarters going forward?

I don't -- I wouldn't bank on that. Our history with that particular investment is that the returns on it have been kind of up and down somewhat market related, somewhat commodity price related, so I wouldn't bank on this level of gains on a regular basis.

Okay, right. And the gains that you mention, LeAnne, that you're going to have in the fourth quarter, the gold sale, and the sale of the old aggregates quarry. If one were going to include those in a model for the fourth quarter, would that affect your tax rate, which has been fairly consistent here, in the high 20s?

I don't think so, it's not really having a significant impact on our tax rate.

Okay, with regard to materials sales, the declines, obviously it's been a weak business here for a number of quarters, as it has been for everyone, are the declines you're seeing in sales still largely a function of volume, or have you started to see more price competition and weakness in line --

Jack, it's definitely volume. Volume is the key driver for that business today. Pricing is, I would say, moving lower, but not being -- that is not the major issue in the materials business.

Okay, so Jim, is that just really a function as old work rolls off, new work's bid at a little more competitive price and you get slippage there, but that's kind of -- that's really it.

I would say that is correct.

Yes, okay, thanks a lot.

Thank you.

Your next question is from the line of Avi Fisher.

Hi, Avi.

Hi, excuse me. Thanks for taking my questions. LeAnne, I apologize, I missed the prepared remarks. Did you quantify what 4Q gold sales were going to be?

We estimate the gain for the fourth quarter on gold to be about $4 million.

$4 million, and it sounds like, obviously some kind of quarry sale. Is that included in that, or --?

No, that's separate. There's another gain that we anticipate in the fourth quarter of about $6.5 million related to property that used to be mine.

A property sale, okay, the -- and Jack had asked about the minority interest, and I just wanted to dig into it a little bit, because you talked about, you know, it was below what you had guided. You lowered the guidance on it, the minority interest, and typical -- you know, forecast adjustment is typical. Is there anything that -- I would say just occurred in the period -- can you sort of specify what led to their forecasts adjustment? Was it one project, was it just a variety of mix of projects?

It's a variety, but there's a couple of big projects in Granite east that are nearing completion, I-64, and ICC, which I know you're very familiar with, and typically what you'll see at the end of a large project, is, you'll start working through the contingencies, the things that you're worried about with the job until you'll tend to have some positive forecast changes. And so that's probably the big driver of that change in minority interest.

What, positive forecast changes wouldn't that increase the minority interest, though?

Well, it would.

What led to the decrease in the minority interest, decrease, as in, below what you had previously expected?

The rest of it -- I apologize, I wasn't really thinking about, or wasn't specifically answering your question. What I was getting at, which we've been focusing on is, if you look at the minority interests, or non-controlling interest line in the P&L so far, we're only at $16 million, and yet we're saying we're going to be at $26 million, so that's what's really driving that, is those two big projects. But otherwise, downward pressure on the minority interest line is a combination of a whole bunch of stuff, nothing specific.

Probably lower volumes, you probably noticed our volumes have drifted down in our guidance over the year, in Granite East, and as a result the minority interest goes down as well. You know, projects were pushed off till later in the years, so --.

Okay, so it was weather had something to do with it, or really clients were kind of deferring and slowing things down?

I don't think it was weather related, it was simply just not getting as much work done as we had anticipated.

Is that because a client specifically wanted it, or just things are slower? In terms of, obviously pace can catch up with you, or you can catch up with it.

I don't think there's a story there, Avi. Yes, there's really nothing there that you should be concerned with.

Okay, that's all. I'll move on to another story which actually looks interesting, you had a lower G&A cost in West, it actually looks like around 5.25%. Is that the new normal? Does it get better after the reorganization, you know, where does that go?

Well, it gets better on an absolute basis. Whether it gets better on a revenue is a product of the revenue.

The other thing I would suggest to you, Avi, is that during the busy months in the summer, certainly a lot of that workforce that could be assigned to G&A is out in the field assigned to project costs. So you've got to be -- I agree with Bill, look at it up from an absolute annual basis, versus a quarter-to-quarter.

If it gets better on an absolute basis, not necessarily -- okay. And how much better?

Well we've given you the overall savings --.

Right, that's the 11 --

-- for next year, and you apportion it however you think you should in your model.

Is most of that $11 million in West?

Yes, disproportionate amount is in the west.

Okay, and in East backlog, obviously you've booked a lot, not just this quarter, but you know, through the year. Any color you can give us on -- and also late '08 -- what -- how much is expected to hit the 30% threshold in 2010? I mean, are projects booked in 3Q '09 going to hit the profit recognition threshold in '10?

Well, okay, so you know we anticipated this question, and --.

I'm glad I asked it.

I'm not sure there's a precise answer for this, and I sure don't want you to bank on any of this, but we do expect that we will reach the profit recognition threshold on the Western Wake project, and on the New York Tunnel. It's questionable whether we'll get there on Houston Metro. In fact, I don't expect to reach that in 2010. And part of the reason for this, is, and this is good news, I think, that we will be booking the additional backlog on the Metro project associated with that complete project, and when that happens, that profit recognition threshold will get pushed into 2011.

And that -- would this be another phase, or would this be the bulk of what's left?

It's the notice to proceed, it's a continuing negotiation and a notice to proceed, which is primarily based on funding so when they get the funding to assure that they can provide us with a notice to proceed on the balance of the project, they'll issue that NTP. The project is -- the price has been negotiated, we're just ready to go. We expect that will happen in 2010. It will drive that project up above the $1 billion mark, and we'll be booking our share of that.

And then two quick more questions. When can the -- obviously you're lowering your overhead in West. When can that lower overhead pass through into more -- I'm going to use the term, aggressive bidding, but I know you're bidding profitably, but when can it sort of translate into, you know, more aggressive bidding?

Avi, I would suggest to you, this is Jim, that the idea behind the restructure is to lower our G&A throughout the company, which allows us to be more competitive on bid day, so I wouldn't just focus that on Granite West. So I would suggest to you that in today's environment, we are looking ahead at a more streamlined G&A, which will make us more competitive, and that is being put into our bidding environment today.

So it's already -- the benefits of it have already been passed through into the bidding environment.

Well, they're starting to be.

Okay, and when does it sort of, really -- I guess with the next bidding season, for the 2010 bidding season, specifically?

Yes, I would say we would have a really good understanding of this competitive environment we're in at the end of the first quarter, looking at some of our restructuring.

Okay, and I'm assuming that there are a lot of comments in the prepared statements on this, but if so, just say so, I'll read it out of the transcript. But can you talk a little bit about the California infrastructure markets and what you're seeing in general, if you haven't discussed it already?

Well, okay, so in our prepared statements, we attempted to describe the competitive marketplace that we're working in.

Okay, I'll just read it in the transcript, you don't need to repeat it.

Okay.

Thanks a lot.

Your next question is from the line of Sameer Rathod with MacQuarie.

Hi, how are you?

Good morning.

I just had a quick question. Most of my questions have been answered. So, on the three projects, the large projects that you earlier talked about, how are they funded at the moment?

And how do you generally see the funding environment for these larger projects?

Well they're all three different funding source. The Houston Metro is a combination of Metro funds, I believe there's some stimulus funds involved there as well, and private funds that -- its' not our money but its private funding that was a product of the financing mechanism that made that project a reality.

In New York in the tunnel, that's a Metropolitan Transit District project. It has Federal funds involved, as well as local funds. From the metro system, and the project in North Carolina, the Western Whig is bond funds from the North Carolina.

Right, so would you -- I mean, generally speaking, do you think the funding environment is improving vis-a-vis the highway bill through these other sources?

No, I don't think so. I think the traditional funding sources that fund transportation, and I think this is important for the investors to appreciate, that it doesn't come from one place.

There are literally hundreds of federal, state and local funding transportation funding sources. But there clearly are some major funding sources. And the transportation bill is clearly one of them. There's a lot of the big transit authorities around the country that are very, very, important these days.

And with regard to the federal funding, and most of the state DOT funding, most of them are under pressure. States are not collecting the tax revenues that they had in the past and that's translating down into lower funding. Clearly the federal government's under pressure from a deficit spending standpoint. That's influencing their interest in -- or at least it's creating a challenge for them as it relates to the next transportation bill.

Having said that, there is a clear need for investment in transportation. And I think that is illustrated currently by what's happening on the Bay Bride. And Bay Bridge is closed up in the Bay Area right now. And it's an old bridge that needs maintenance. And those kinds of things are happening around this country.

And I believe for the first time in a long time, there is a sense that something needs to be done. And I am of the opinion that while I probably won't happen interest he next couple of months that the Obama Administration, the Congress, will deal with the federal transportation bill funding.

And when they do, they will increase the gasoline tax some, probably not a lot, $0.10 or $0.15. And that will provide funding for some long term needed investment in our transportation systems. So I'm pretty excited about what the prospects will provide as a product of just reaching that point that where there's really no other option.

Right, so one last follow-up, of the projects that have been awarded what has been the catalyst? To me it seems like the funding environment is still pretty poor, and the outlook seems uncertain.

What's really -- I mean why would a state, or a local municipality, go ahead and move forward with a large project when they're not sure -- or there's still a lot of uncertainty in the future?

Well I think that's a concern. And I don't think they will generally move forward with a project unless they've worked out the funding. So they can complete it.

Almost none of these projects will move forward unless there is full funding that's been identified. So that's the challenge. That's the challenge for governments both at the federal level and at the local level.

What some of this will probably spur over time is more private investment, some more innovation relative to the contracting community developing financing and so forth. And we've seen some of that.

And the truth is, we think that will work for us because it's complicated. It takes a level of sophistication that not everybody has. And we think that'll work for us. But I the meantime, you're right. There is a little bit of -- this is a funding issue around the country, but projects are still moving forward.

Okay, thank you, have a great day.

You're welcome.

Your next question is from Todd Vencil with Davenport & Company.

Thanks, good morning, everybody.

(inaudible - multiple speakers) good morning.

A couple of quick questions you had certainly addressed a lot of them. LeAnne is the quarry sale gain in the margin guidance for the West?

No. The margin guidance that we provided for Granite East and for Granite West is at the growth profit level line. And its gain will show up down below that --.

Got it.

In the other income expense kind of area.

Okay, excellent. And the [Gold] sale, is that going to show up in corporate other net again?

Yes, yes.

Okay. And just sort of go back to the funding questions that we were talking about, what level of consternation or dislocation at this point you feel like the delay on the Highway Bill is causing?

Can you guys tell if there is anything, or if there is anything at this point?

Well I'd kind of characterize it as business as usual.

Okay.

I mean you can make an argument that with this recession, I think they call it, or rescission, that there's been a slight decrease in funding. But I'm not sure any of us are probably smart enough to quite figure out what all that means. I'd say its business as usual until they deal with the next bill.

Okay. And you mention the hundreds of different funding sources for public works investment. And we know we have the stimulus and we have the issues with Highway Bill and we have the states which each of them has their own situation.

But from where you guys -- from where you're sitting as you look at 2010, how do you feel like that all blends? What are the -- obviously there's some positives and some negatives. And what are you guys expecting in terms of the opportunity for bidding as you look out the 2010?

We think there'll be plenty of opportunity in the large project arena, as Jim said, probably more than we can actually develop bids on. It's not without competition. There's plenty of competition in that arena.

But typically, because of the financial qualifications required, the jobs get in excess of let's just say $300 million or so. It does winnow the field down some. And it does provide us with, we think, a better opportunity to win.

In the small work, as we said in our prepared remarks, we think that market's going to stay very tough. And it is a product of too much capacity and not enough demand. And that demand is influenced by some funding challenges that the state and local agencies have. And it's also influenced pretty dramatically by the lack of private work in the market place.

Okay so, given all that, and given you've talked a bit about the likelihood of some of the projects that you've signed up this year to hit 25% complete in 2010 and the likelihood that the Houston Metro is probably not.

What's the likelihood that even if you come out and are successful from today through say the first half of next year and winning a lot of these larger bids, that you could still see maybe results next year? Not up to the level of this year just because of the delay in getting those big jobs rolling, and then hitting the profit recognition threshold?

Well, I think that's possible as we start some of this new work, particularly through the early part of the year, there'll be revenue without associated margins that we'll report. If you're really looking for us to try to provide any more guidance than we already have, I think it's a little early in the year yet for us to -- or it's a little early for us to start doing that.

We expected, I think, early in the year that this was going to be pretty tough, this 2009 year. And the team's -- we've made the best out of a bad situation. And I fully expect us to do it again in 2010.

And just to add to that, Todd, we have several large projects, not just in addition to the two that Bill mentioned in his script earlier, that we are actually have proposals turned in today, and are waiting for results, some in the east and some in the West.

So certainly, if we got positive results on those, we would know even prior to the end of the year or maybe in the first quarter, there's opportunities for those to be recognized if they actually did come in positively.

We also have the five, station projects that we expect to hit profit recognition in the first half.

And that's the five stations project in New York.

About $160 million.

Right, all right, that's very helpful. Thanks a lot.

Your final question is from the line of Brian Rafn with Morgan Dempsey Capital.

Good morning, everybody, in under the wire, so --.

That's a boy, Brian.

Design build, give me a sense with Granite East, would you guys say that the component of design build in your backlog would be at an all time high?

Well, design build in our backlog in the East has been the majority of our work for some time. I don't know if it's going to be at an all time high, but it's going to stay up there pretty high. I'll put it that way.

Okay, are you guys seeing any -- and you talked about the complexities and the bonding functions, and having a national footprint in these, and I think you said there's probably a half a dozen managers in the country that could do that as a general contractor. Are you seeing any mobility of regional's going to that next level? Or is there still a barrier to entry there in the design build side?

In this environment, we're seeing regional players stretch. And they're stretching as far as they can.

And that has pushed some, I would say, strong regional players into that $100 million plus range. Or it has put -- they've stretched to team with national players in larger work. And I expect that to continue.

Okay, okay. Jim was talking about -- you were talking about scalability. You're talking about plugging in, the right sizing, expanding, contracting.

In Granite West, are we to look at going forward is there a new mobility to labor and equipment, moving between branch offices? Or is it -- I'm hearing a rapid deployment teams, kind of a military, almost like a Marine expeditionary force, where you're kind of moving around. Or is that just -- am I reading too much into that mobility?

Brian, that sounds good. We're going to be -- we've got the Marines coming in. I like it.

But yes, I think your right. There is a renewed energy for having our resources. And whether they're people or equipment or plants or anything, being relocatable, so that we can move those resources to where the work is. We're working very hard to get that to happen.

Sure, sure. On the 8% headcount reduction, is there any parallel on the property, plant and equipment side? Are you accelerating the salvage or reduction in bulldozers or backhoes? Or are you dialing back any of your property, plant and equipment from the hardware side, versus just the people side?

Brian, we normally have a very methodical approach towards getting rid of older equipment. We're going to continue with that. Once equipment gets used out and gets a certain amount of hours on them, we typically put them in the sale, into the market.

What we are doing though, and I think LeAnne mentioned it in her remarks earlier; we are reducing our capital expenditures going forward. And that's really due to the fact that there's no need for some of these big plant investments that we had long term plan.

So you'll probably see a reduction. And you will see a reduction in the capital expenditures. But I would not suggest that we're getting rid of equipment at this time, outside of our normal process.

Okay, okay. Dovetailing on that, relative to permitting or greenfielding new asphalt plants, forget about the secular decline in the number of business, but with cap and trade, and ecology and save the polar bear and all of this, is that making the daily process, or the yearly process, or the five-year plan tougher to greenfield and permit in the West, new quarries and that type of thing?

I don't know if it's making it any tougher today. I can tell you it is very tough period.

Okay.

And it has been that way, Brian, for I'd say the last five years, and maybe even longer. It is very difficult. And you have to have a lot of patience and a lot of time. And as Bill said, a lot of money to permit these things. They do take a long time.

But we are still -- we are not walking away from our efforts with the permitting efforts we've got going on today. And we're actually making a lot of progress.

Okay, you talked about your term business under $50 million in the West, the number of bidders that you see on a specific project, give me what you see today. I think someone mentioned we were seeing ten plus or ten additional -- is it four or five bidders to start on term business and now we've got a dozen? Or give me a sense of what kind of competitive environment you're seeing.

I think you're right on, Brian. I'd say four to five normally, and probably ten now.

Okay, okay, okay. You're Materials business has always given you a vertically integrated cost benefit in both your sourcing materials, the ability of availability, deliverability, is that giving you any cost benefit in being able to maybe be a little more aggressive in bidding some of the turn business in the West, where you have more of the infrastructure in quarries and that?

Brian, absolutely. That's one of the key ingredients to having that vertically integrated model.

Okay, okay.

We better wrap up here, Brian. It's quarter after nine, in California anyway. And we've been on for an hour and 15 minutes.

An employee call --.

Yes, we've got an employee call here at ten. So we need to wrap this up.

LeAnne did you have a --.

Yes, I just wanted to remind everybody that we'll be filing a 10-Q this afternoon, which as I think you all know, has a ton of stuff in there that's interesting to read. So look for that later this afternoon.

Okay, so let me wrap this up. I want to thank everybody for being with us. And thank you for your questions.

To summarize, Granite is a company with a solid fundamentals and incredibly resilient and dedicated teams of people. Our reorganization will better position the company over the long term. And we are managing our costs, improving efficiencies, and working diligently to grow revenue.

We appreciate your interest in Granite Construction. And if you have additional questions, please don't hesitate to get in touch with us. We'll be around for the rest of the day.

Have a great day. Thanks.

This concludes today's conference. You may not disconnect.