Granite Construction Inc (GVA) 2009 Q4 法說會逐字稿

Good morning, my name is Kristen, and I will be your conference operator today. At this time I would like to welcome everyone to the Granite Construction Incorporated fourth-quarter year-end 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. I would not like to turn the conference over to Miss Jacque Fourchy, Director of Investor Relations. Miss Fourchy, you may begin your conference.

Good morning and thank you for joining us today. 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 investors relations website immediately following the call and will be posted for one year. Following today's remarks we will, as usual, host a 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 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 over to Bill Dorey. Bill?

Thank you, Jacque, and good morning, everyone. Overall our business performed well last year in the face of a very tough business environment. A number of factors contributed to our financial performance including excellent execution on our projects, the resolution of outstanding project issues, bidding discipline and cost reduction. However, we experienced a decline in revenue and backlog in our traditional work in the West as the weak private market released capacity that contributed to intense competition for public sector work and lower demand for our construction materials.

Despite these challenges we are optimistic about the prospect of developing a more diverse revenue stream by expanding the scope of our business. We are increasing our business development efforts, strengthening our alliances with well-established partners and pursuing work in new markets as well as in our traditional markets.

Specifically we are developing opportunities related to the civil work associated with power facilities, both renewable and conventional. Our local business units in the West are ideally suited to support solar-related energy construction and we are actively involved in pursuing several of these projects throughout California, Arizona and Nevada.

As an entry into this economically viable and sustainable market, this summer we will be constructing a 1 megawatt solar facility for our own account that will power one of our construction materials facilities by generating electricity from the sun.

In addition, we are expanding our pursuit of federal government work for owners such as the Department of Defense and the Department of Homeland Security. For example, we are part of a team that has submitted a proposal to pursue work associated with the relocation of 25,000 US troops through Okinawa to Guam.

The Naval facility's engineering command is expected to shortlist three to five contractor teams who will then have the opportunity to bid on approximately $4 billion in task orders over the next five years. We will know sometime in the second quarter if our team has been selected. The initial task orders will go out to bid shortly thereafter.

Now let's talk about funding for our work. The outlook for federal funding remains unclear as the third extension of the Federal Highway Bill expires this Sunday and we will likely be faced with the prospect of another continuing resolution. While there has been progress, the jobs bill for Main Street Act passed the House last December and yesterday a jobs bill in the Senate was passed.

However, we are without a stable and reliable federal highway program. We expect another short-term extension of the program that will give the House and the Senate more time to work on terms of an extension that will carry us through 2010.

Despite these recent efforts there is more work to be done to develop a multi-year authorization bill that will provide long-term solutions to our nation's critical transportation needs. If we are going to address this important issue properly, our legislators must find a way to pay for these improvements. We are working closely with our industry associations to attempt to influence national policy and we are leading an effort in California designed to raise the user fee on fuel to fund the transportation system of the future.

With regard to our reorganization, we have completed the transition to our new organizational structure and we are well on our way to creating a leaner, more adaptive and collaborative organization. Over the last several months we have regionalized our business units, consolidated several support functions and we are streamlining and standardizing our business processes. While this new structure will provide some short-term improvement, I believe the greatest benefit will be realized over time as we leverage resources and best practices across the Company.

Before I turn the call over to LeAnne, I would like to take a moment to highlight something we are very proud of. In their second annual go-to list for contractors survey, Roads & Bridges magazine surveyed over 10,000 government officials regarding their preferred contractor in the five various categories. Granite ranked as the number one contractor for road and highway projects and the number two for transportation projects. Among the other three categories surveyed bridges -- mass transit and airports -- we ranked no lower than the top six. I am very proud of what this says about our teams and our ability to get the job done and make it right for owner clients across the country.

Thank you, Bill, and good morning, everyone. For the fourth quarter net income per diluted share was $0.41 compared with the prior year's $0.83 per share. Revenues were $435 million compared with $627 million in 2008. Gross profit margin for the quarter was 21% compared with 19% in the fourth quarter last year. Total contract backlog at the end of the fourth quarter was $1.4 billion compared with $1.7 billion in the prior year.

It is important to note that our backlog does not include our share of anticipated future awards from the Houston light rail project, work at the World Trade Center project or the Mountain View Corridor project in Salt Lake City. Our share of those projects is expected to increase backlog in the first half of 2010 by approximately $600 million.

Our vertically integrated businesses in the West continue to experience the effects of the weak private development market and the highly competitive public sector environment. Granite West revenue decreased 35% in the fourth quarter to $302 million compared with $463 million last year. Additionally, operating income decreased $23 million (technical difficulty) $28 million for the quarter. Gross profit margin in Granite West was 18%, unchanged from a year ago.

Construction materials revenue for the quarter decreased 32% to $47 million, largely driven by the lack of private sector work in the West. Gross profit for the quarter was $2 million compared with $7 million in 2008, driven by the reduction in revenue and higher fixed cost per ton produced and sold. Contract backlog in Granite West at the end of the fourth quarter was $439 million compared with $789 million last year.

Although we did not book as much large project backlog in the West as we had anticipated, we remain committed to our large project strategy across the country. We are increasing our capacity to pursue more large projects, believing this area of our business will provide opportunities in 2010 and beyond.

Turning to Granite East, revenue for the division was $133 million compared with $163 million in 2008. Gross profit was 26% compared with 21% a year ago driven by quality backlog, improved project execution and settlement of outstanding revenue issues. Operating income was $31 million compared with $27 million last year. Total contract backlog in Granite East at the end of the fourth quarter was $963 million compared with $911 million in the prior year.

Granite's financial position and liquidity remain strong. Our cash and short-term investments were $381 million at the end of the fourth quarter which includes $122 million associated with consolidated joint ventures. We intend to continue managing our cash conservatively and, as we noted in last night's press release, have further reduced our planned capital expenditures for 2010 to approximately $50 million compared with $88 million in 2009.

In the fourth quarter general and administrative expenses decreased to $55 million from $59 million a year ago. Additionally, as we -- we recorded a $9.5 million restructuring charge associated with our reorganization. Included in the charge is $7 million associated with a reduction in force and a $2.5 million impairment charge related to plant facilities in the Pacific Northwest. I will now turn the call back to Bill for some additional comments on our outlook.

Thank you, LeAnne. Before we take questions I would like to spend a few minutes on our outlook for 2010. As we have noted, bid day margins are coming down, particularly on our traditional smaller projects. While we expect to benefit from some large projects reaching the profit recognition threshold this year, it will not be enough to offset the lower margins on our work in the West. State and federal funding is also expected to continue to be challenged in 2010 as many states deal with lower tax revenues and budget deficits. Based on our current expectations our 2010 earnings will be lower than what we achieved in 2009.

Longer term we remain bullish about the outlook for our business and prospects for our vertically integrated business are solid and the opportunities to grow our large project business are outstanding. In addition, efforts to diversify our revenue base will reap benefits in the years to come.

I want to acknowledge our employees from coast to coast who have done a remarkable job in 2009. And on behalf of myself and our management teams around the country, I want you to know how much we appreciate the work you do and the commitment you make to Granite. Now I'll turn the call over to the moderator and we'll take your questions.

(Operator Instructions). Kathryn Thompson, Thompson Group.

Thank you very much. First, could you give us an update on materials pricing trends that you're seeing out West?

Hi, Kathryn, this is Jim Roberts. Sure, I think that what we did look at or saw in 2009 was a slight reduction in pricing. And I think what we're suggesting for 2010 is pretty static pricing in the Western markets. So, I would just say they're going to be leveling off and staying at that point going forward.

So, in other words you're seeing some leveling in pricing in that market?

Yes, we are.

Okay, great. Also, you mentioned some municipal work in energy -- with energy and military. Will you be working with JVs for those projects? And could you talk a little bit more about the trend of working more in joint ventures when bidding for projects?

The answer is yes, we will be working with joint ventures as I think we alluded to in our opening comments. The proposal in Guam, we are on a team and it is a joint, joint venture. And certainly our participation in any of the -- particularly the conventional power facilities would be in a joint venture basis. Or as a subcontractor.

Sure, great. And also, last quarter you talked about the duration of backlog changing as you increasingly focus on larger projects. With one quarter behind you after making those comments have you seen a more definable change in the length of your backlogs? And if so, if you could give as much color on that as possible it would be helpful.

I don't think we've seen a particular change. I think one of the things that is important in our opening remarks is the prospect of booking $600 million in backlog by midyear on work that we've already bid. That is -- we mentioned that because we think it's important, we think without it you wouldn't have a clear picture of our backlog.

We have not been, as we said, as successful as we had hoped in booking longer-term larger -- or large project backlog in the West. However, we do expect that will happen and when that happens you'll see that backlog grow and be a longer-term event for us.

Yes, I think the natural event here, Kathryn, for 2010 will be the fact that the shorter term work as we put it with the vertically integrated businesses, as it is still struggling with the economy we'll try to add the larger backlog which will lengthen out the overall backlog timing as that ratio gets more focused on larger projects.

Okay. And final two questions. Could you just (inaudible) have a few comments on the impact of weather early in 2010 and how that impact is hitting the profitability threshold for larger projects? And then also just stepping back and thinking, what are the biggest line items where you can squeeze cost when bidding for projects? Understanding that you have still maintained a great deal of discipline in bidding for projects?

Kathryn, let me address first the weather. This is Jim again. Certainly the weather in the East Coast has had an effect on everybody. We have a couple projects on the East Coast, one of them the ICC in Maryland that did receive some pretty significant inclement weather and slowed the progress of that job down in the first to the last two months. It is our intent on that job itself to accelerate it and get back on schedule.

So I don't see the weather being significant in terms of meeting deadlines, but we will have to accelerate our workforce in order to meet those deadlines. And that's mostly attributable to work in the East.

Lost -- in order to squeeze profits on line items in the bid process, I think what we're doing more than anything instead of maybe squeezing profits; we're looking at being more innovative on bid day. We're looking at different ways to build our projects and we're literally having comparative estimates in the Company from taking different businesses from let's say the South, the West, the East and doing comparative bids, allowing more input into the bidding process so that we can provide a better mechanism on bid day.

So we're being a little more innovative on bid day which is really the key to getting this larger work. Isn't necessarily just skinnying up profits or literally going faster, it is finding a different way to bill the job.

Okay, great. Thank you very much.

Robert Labick, CJS Securities.

Good morning. Congratulations on strong execution in the quarter. You finished with very good margins particularly in West construction. And I was wondering if you could just give us a little more insight onto that. Was it finishing some projects very profitably? Were there true-ups? And then how should we look at margins in general for 2010 for West?

Okay, Bob, this is Jim again. We did close out strong and we're very proud of that. There were some resolutions, as Bill mentioned in his opening remarks, to some project issues which certainly helped in the fourth quarter. I would suggest to you that as we enter 2010 it's going to be very difficult to retain those margin levels. We are suggesting that bid day margins are coming down.

I think that -- very interesting, we're beating our bid day margins today on a lot of our projects. And that's just due to project execution. So, it's going to be difficult to retain those high levels of margins, but I do think that if we continue to execute we can meet our expectations on bid day margins although they're going to come down in the West.

Okay, great. And as it relates to the $600 million that's going to come into backlog, how much of that is in West versus East?

A small part of it is in the West. I'd say probably about 20% of it is in the West.

Okay. And just a bigger picture thought -- have you -- or when do you make a decision to lower your bid day margins just to cover your fixed cost and keep the business going? And are you near that yet given the margin level or when would that become an issue?

Well, I would suggest that we're not just doing it to cover our fixed costs. I'd say that we're not at that point yet and hopefully we don't get to that point. But we're just trying to make sure that we are competitive on bid day and the margins have just reduced from last year. So every market is different, Bob. And I would also suggest to you, in some locations we're not reducing our bid day margins at all.

Okay, great. And then --.

But Bob, in the tough markets we've done that six months ago. I think that's one of the reasons that I think the Company is just proud of itself and proud of the employees because, despite the fact that we've done that really throughout the course of 2009, we still delivered very, very respectable gross margins. But I think as Jim said, I don't think we'll be able to keep that up as we get further and further into this recessionary climate.

Yes. Really, Bob, the key is that as we -- if we reduce our bid day margins the real key is to execute in the field and make sure that those bid day margins are maintained or exceeded, that's going to be the key ingredient for 2010.

Okay, great. My last question and I'll get back in queue. You discussed diversifying into maybe energy and federal and military. Why now, what's different and what does Granite bring to the equation in those endeavors? If you can just tell us a little more about it.

Well, okay, let's take the government military type work to start with. We found ourselves building an awful lot of that border fence over the last couple years. And that was a program that I think traditionally we probably we wouldn't have pursued. But we did and we found it to be a very, very good part of our business in 2007 and 2008 -- 2008-2009, excuse me.

And it really, I think, made us aware of a market that's out there that had not been part of our -- so much part of our traditional marketplace. And the truth of the matter is it's one of those parts of the government that is still spending money.

So, we made a concerted effort to try to build some alliances with contractors that do this for a living, this is where their primary business is, and get in that game. And we've got ourselves in a position, I think, to be a player in that market to a much greater degree than we have in the past. So that's important.

With regard to power, I think to some degree it's probably the same situation. We are looking for markets in which money is being spent and clearly the United States is building or rebuilding its conventional power system. We are not a builder of power plants; however, we do think there's an opportunity to get in the game as the civil contractor associated with the major players in this market place.

And so, we are building those alliances or attempting to build those alliances and I know we'll be successful there. And our expectation is that we will propose on several conventional power plants over in 2010.

The renewable energy is different. Renewable energy is -- particularly the solar business, is just beginning to surface. There has not been a lot of that work built in the past. There will be, in my opinion, quite a bit of that built in the future. And we have educated ourselves to the point where I think we might emerge as one of the preferred contractors for this kind of work and we're hopeful that that's the case.

Let me add to that, Bob, just another point there is that as we expand this large project capability throughout the country we're better able to follow clients from the West Coast to the East Coast, from Alaska to Florida. And therefore I think when we enter a market segment now we can say that we can cover the whole nation. We couldn't say that before. And so that's another opportunity for us to expand this large project capability into these new markets.

Great, sounds terrific. Thank you very much.

John Rogers, D.A. Davidson.

Good morning, this is Tristan Richardson in for John. Just was hoping you guys could give a brief update on the Mountain View project?

Sure, Mountain View Corridor, Tristan, is the project in Salt Lake City. We're in the process of finishing up our pricing. That's what we call a CM/GC project. So, we were awarded the CM portion of the project last fall and what we're doing now is finishing up a -- really a complete estimate to build the project. That will be submitted in the middle of March. So we would hope to have an answer back from the Utah Department of Transportation by the end of March as to whether or not we'll be selected as the general contractor.

And that one -- correct me if I'm wrong, but that one was funded at approximately $500 million just for the Salt Lake County portion, is that right? And that's the portion you guys are working on?

I think it's less than that, but I don't know what the funding mechanism is. I do know it's fully funded, but I am not sure what the overall value is for it.

Okay.

That will depend on the pricing over the next month.

Right, okay. And then I guess the same question just on your recent low bid for PATH Station at World Trade Center?

Yes, sir.

I'd like just an update there.

Well again, that's a joint venture project with Skanska that we're waiting to see what the award is on it. We were low bidder. We are a 20% partner on it and we're hoping for the award in the near future.

Okay, great. Thank you guys very much.

Jack Kasprzak, BB&T Capital Markets.

Thanks, good morning, everyone. I was curious, I suppose, that you guys didn't mention the impact of the stimulus at all with regard to your 2010 outlook. And I only mention it because other companies that have exposure to infrastructure spending are still mentioning the impact -- the potential impact, i.e. that the majority of the more money is yet to be spent. Is it that either you're not seeing the money and don't think it will make an impact or -- and/or the competition for the bids is just so intense that even though it's there it's just not having much benefit?

Well, I'd say it's a little bit of all of it. And here's what I -- I've been thinking about this question because we expected it would come and we've been reading some of the comments from others. And I would say this, that it certainly appears as if, based on the numbers that we have and I'm not sure that anybody absolutely knows how much more there is to bid, but clearly about two-thirds of it has been bid, certainly in the markets that we're in.

That does not mean that that money has been spent, and some of it will be spent in 2010, and some of it is yet to be bid. What the -- this is my opinion relative to some of the comments from others. The material suppliers likely are looking at this as if while the work has been bid the materials have not been purchased yet for those projects.

So that material sales will likely be a bigger impact to those companies than for a company like ours who is relying primarily on the construction (technical difficulty) activities. And when the work has been bid, at that point if we're not the successful bidder then the game is over for us. So we're looking at the stimulus as what's left to bid.

Jack, in addition -- this is Jim. Some of the state budgets -- with not knowing where a lot of these DOT budgets and state budgets are today it's very difficult to determine whether or not the remaining stimulus monies, and we'll talk mostly in the West here, in Texas and Florida as well, we are just not sure if they're going to be additive or in lieu of the state budgets. Until we get a really good feel as to whether the state budgets are going to come in where they anticipate and the stimulus monies will provide additional work, we're very reluctant to say anything as to exactly what that's going to provide for our company.

Got it. Okay, thank you. I also wanted to ask, the margin in Granite East was stellar in the quarter. Did you see -- were you suggesting that that margin was helped by some project resolutions as well in the fourth quarter? What sort of margin expectation -- I mean you gave some directional indications for the West, how about for the East? Will it stay in the mid-20s or is the high teens around 20 a better (multiple speakers) run rate?

What we've said, Jack, for the last couple of years is that we expect our large projects over the course of the project, keeping in mind that we are starting -- we will be starting some work that will not reach the profit recognition threshold in 2010. But over the course of these projects the expectation is that we'll deliver mid-teen profitability. We did have the resolution of one outstanding issue on a project in New York that did contribute to our fourth-quarter results in our large projects and that amount was about $5 million. So you can put that into the equation and take it from there.

Well, I'd maybe add that there is always resolution of project-related issues every quarter. It's a constant day-to-day sort of process. But Bill is right. There was one item I wouldn't call particularly material relative to some of the stuff we've seen historically.

Yes, I think the other thing is we did finish up the I-64 pretty strong. So that helped as well.

Will the percentage of revenue in East in 2010 that's less than 25% complete be more than in 2009?

That's a pretty good question, Jack, and I think what we're up against is that we're not positive yet and so we don't want to mislead you. We have several large projects that are going to be on the threshold of possibly meeting recognition or not. Hopefully we can give you better guidance at the end of the second quarter or the end of the -- even at the end of the first quarter here. But we've got several large projects -- QBT, we've got Houston, we've got several --.

Trade center.

Trade Center, Western Wake, a lot of jobs that we just -- they're going to be on the cusp. So I think we really need to wait to give you a better answer.

Fair enough. And finally, the reference in the press release to delayed notices to proceed on the three large East projects awarded in 2009. Did that -- I consume that negatively impacted revenue in East in the fourth quarter? In other words would it have been higher had that not occurred?

Likely, yes. It negatively impacted revenue and the others were a tail on or add on to that, Jack, is that that is lead to negatively impact margin in 2010 because we got started later on the stuff.

If they don't meet recognition.

Exactly. So, especially in the first half of the year. By the second half of the year hopefully we'll start to see some of it.

So it's a push out -- I got it, okay, great. Thanks very much.

Just pushing everything later.

Thanks.

Todd Vencil, Davenport & Co.

Good morning. Hey, everybody. You talked about the state and local budgets in the release and then you kind of addressed that in response to the earlier question there. But maybe you could drill down a little bit and talk about where we stand in the process of figuring out how those are going to shake out. And I think you mentioned that we're still looking at some uncertainty with how they are going to shake out and how much of the stimulus will be additive versus merely replace the money they wouldn't have spent. But do you have a feel for what magnitude of adjustments you're expecting to see out of the states?

Well, I think it depends on which state you're in; they're all really different. I mean we've got certain states that we're pretty bullish about their ability to put work on the street and the market conditions. And then there are others that we're not, we're worried about.

And I think the distinction is if you think about the structure, the structure of the market that's developed over the last 30, 40 years in states where population was booming, houses were being built and a large part of the market was built around that activity, California certainly is one of those states. But there are others too like Florida, for example. And those are the states where they seem to be in the most trouble.

And I don't expect that that condition is going to change in 2010. There doesn't seem to be any fundamental thing that's going to drive a change. So, we're hoping that at some point this general economic environment is going to improve and the builders will start building and that will be the spark that will change it.

Got it. LeAnne, on the restructuring charge, $9.5 million, how should we think about splitting that up between the segments?

We're actually keeping it all at a corporate level so that you don't have to get into that. I couldn't tell you exactly where all that fits. The asset impairment charge is all Granite West, but the people themselves I have no idea.

Okay, got it. Thanks for that. And then there was a pretty big gain on sale of property, plant and equipment. Can you just talk about what's in there?

The most significant thing that's in there, and we talked about this last quarter, is we had a piece of property in the Sacramento area that we sold and we anticipated that gain of about $6.5 million that you saw in the fourth quarter. And then the other stuff that's in there is just sort of a myriad of the general sorts of stuff that we're continuing to sell as we don't need it.

Got it. I guess the final thing out of me for now, you guys have been talking about more detailed topline and margin guidance for the segments. I don't recall exactly, I think maybe you didn't give as much detail at the end of the year last year as we were heading out. Is it your plan to -- as the year progresses to get more detailed on the outlook for the year?

Yes, we started a trend two years ago where the goal is to provide a range for revenue and for gross margin for each of the segments when we release the first-quarter numbers. And that is certainly still our hope and intention to do that.

Fantastic. Thanks a lot.

Rich Wesolowski, Sidoti & Company.

Thanks, good morning. Of the two prospective large wins in the West that you had cited on the last call, I think today you had only mentioned the Mountain View Corridor. Is the other project still on the table?

Yes, CM/GC in Utah --.

Yes, if you're referring to the other CM/GC project in Southern Utah, the answer is yes.

Well, I think the other -- I think it might have been the (technical difficulty) Corridor project.

We didn't win that.

Which we didn't win. But that actually came announced after our last call. So, no, the answer was that we did not get the other job.

Okay. I was under the impression that maybe it was just for Mountain View or for both that you had exclusive rights to negotiate these projects. But it sounded from Jim's comments that this is more a normal bid process and that you might not win the work.

Okay, Rich, let me clarify that because I did suggest to you that there's an opportunity even in the Mountain View Corridor where the owner doesn't have to accept our bid price. But the CM/GC process, the first half of it is where they select the construction manager and in the Mountain View Corridor that is Granite and our team. And then we have negotiating rights with the owner to negotiate a price for them to either accept or not accept.

And we are fairly confident in Mountain View Corridor's case that they will accept the price; we're working very closely with the Utah Department of Transportation. But I wanted to make sure that I put out there that they don't have to accept the price. We are hoping that they will and I think that's probably the direction we're heading.

The other CM/GC project that we may have mentioned previously that you might be thinking about is the Dixie Interchange, which is in Southern Utah. It's a smaller job, about $70 million and we are negotiating that one with that Utah Department of Transportation as well.

So, yes, there are two CM/GC jobs and, yes, it is our intention and our inclination to suggest that we will negotiate a price. And they will probably hit our books before the second close of -- probably by the close of the first quarter, but hopefully within the second quarter.

Okay, that's helpful. Would you mind relaying your interpretation of Governor Schwarzenegger's plan for Prop 42 funds and maybe a guess at the chance it will pass the state Congress?

Yes. It's complicated, as you might imagine. And it's driven -- the proposal is driven as -- it's really driven by the budget issues that the state of California has. And what they are attempting to do is to generate some funds to help pay the interest on the bonds so they can get those bonds, the transportation bonds into the system. They're also attempting to move some money around in the general fund.

And so the proposal was that they would kill the Proposition 42, which is the sales tax on gasoline, about half of which goes into the transportation fund and half of it goes into the general fund, and replace that with an excise tax, an increase to the excise tax which is the fuel user tax on gasoline.

The initial proposal would have been a reduction in the amount of total funding that transportation gets in California. That did not pass the democratically controlled Senate or controlled legislature. However, there will be -- this will pass, but it will pass likely with an equal amount or even slightly greater amount for transportation, that's our understanding.

And I can tell you I was in Sacramento this week talking with legislators and my belief is that this will pass but it will be a good thing for transportation in California for two reasons. One the excise tax cannot be moved from transportation, so it really ties that money up for transportation, whereas the Prop 42 money had been subject to being used for other things. This will not be the case going forward.

And secondly, I believe when it's all said and done there will be likely somewhere between zero and a nickel more for transportation per gallon than we currently have. But I don't think it will be a reduction.

Okay. And then lastly, you discuss your initial push into alternative markets. Would you give us a sense of how similar or different your services on these jobs would be relative to your typical book of business?

Well, I think the work is -- in some cases there's some commonality in the work that we would be doing and would be grading and roads and access and leveling it out and hauling rock and putting it down so there's access to these fields and so forth. There's a lot of that. But then in addition to that there's the actual erection of the solar field and solar panels themselves, which is different than the kind of work that we've tradition done but it's certainly not complicated, and it's clearly not as complicated as some of the highway work and bridge work and so forth that we do. So we are confident we can do it.

We mentioned in our opening remarks that we intend to build a one megawatt facility for our own account. And part of that is to build a resume and part of it is to learn a bit a little bit about what it really takes to do one of these fields. It will produce power for our aggregate facility that is at least as cheap as what we can buy it for. So we're into this business and we hope that it will become, and I believe it will become, an important part of our portfolio over the next 18 months.

Just to give you an idea, we competed for a small solar project in Tucson recently with the Tucson Electric Power -- or Tucson Electric Power. There were 140 proposals and we were selected. So we think we -- we think that's a good sign and we're hopeful that this is going to be an important part of our business going forward.

Thank you.

Joe Ritchie, Goldman Sachs.

Good morning, everyone. Starting off I guess on Granite East, I just want to make sure that I understand your expectation for the three projects that are in backlog right now that have delayed notice to proceed. Are those projects moving forward already or are they still delayed and you're expecting them to pick up in 2010?

I think that every one of the projects is moving forward now, Joe. So they've just been delayed up until now, but now they're on board and in our workload and -- most of them, I'd say all three of them, although some acceleration are being built as planned now.

The reason we highlighted them, Joe, is because they were delayed in 2009 hence delaying our ability to recognize as much revenue as we had expected in the year.

Got it, got it. Thank you. And then on the profit enhancement opportunities, if I understand that correctly there are multiple projects in 2010 that could hit. So does that mean that if you do have -- I'm trying to understand the timing of the profit enhancement opportunities -- does that mean that they're pretty much backend loaded for the back half of the year?

They're all fourth-quarter events if they hit.

Well, the reason they would be back-end loaded is because they wouldn't hit recognition until probably the fourth quarter. So they will be going full bore relative to building the work, but whether or not they get to that threshold would be questionable.

Got it. And if they do hit the threshold by the back half of the year, is there a possibility that you do better in 2010 versus 2009?

No.

And here is the reason. Our business in the West at our traditional vertically integrated business is just so much bigger, today at least, than our large project business that it won't carry the day. The large projects can't carry the day for us. We have to have this vertically integrated business working and working well to really perform the way we need to. And in this environment, it's very difficult for us to look into the future and try to say that that is going to happen in 2010.

Okay, that is fair. And it sounds like you are going to see some margin pressure, particularly in that business. But I guess on the awards side, on the Granite West side, of your business, could you potentially see awards, or is your expectation that awards are going to be better in 2010 versus 2009, or are we looking at potentially another down year?

Well, I think our projection is it would probably be similar in the awards area. Still very -- I think the term of limited visibility would be good at this point, depending on if the market becomes more competitive or less competitive. But we are talking about probably fairly static relative to the previous year's awards.

Okay, great. Then I guess one last question. You have done a really nice job of controlling your cost structure in this down market. Can you provide any commentary on potentially the direction of your SG&A in 2010? Do you expect it to be flat, down, potentially up for any reason?

If we speak in terms of dollars, Joe, I think you can expect that G&A will be down in 2010 relative to 2009. That is what we are working towards.

Okay, great. Thanks so much.

Trey Grooms, Stephens, Inc.

Good morning, this is Will Green on the line for Trey. I wanted to touch back on the state budgets. Obviously there are some funding challenged state, you mentioned Florida and California specifically. I wondered if you could maybe talk about the ones where you do see some positive opportunities this year.

Well, Will, there are some states, and again, the states that probably have the healthiest position are up in the Pacific Northwest. And certainly New York, New York is a very large market that seems to be -- still have a strong bidding environment. So if we were going to suggest any place it would be up in the Northwest and in New York.

New York is not driven though by the state budget, it's driven by our --.

It's driven by the actual construction market itself (multiple speakers).

And the authorities that we work with there, yes.

And then I guess looking at backlog, at this stage what would you say is playing the biggest role in backlog declines? Would you say it's more due to stiffer competition or is there just simply less to bid on right now? I mean is it -- I realize it's maybe a function of both, but what would you say is having the biggest effect?

Well, I would say the competition is definitely the issue. We actually bid more work in 2009 -- and I'll say specifically in the West because that's certainly where the backlog issue is -- we bid more work in 2009 than we've ever bid. So there is work to bid, but, as Bill mentioned in his opening remarks, the competition is probably the toughest we've ever seen it. So that's the biggest issue.

And I think to really try to frame this up, there's public work to bid. I mean, as Jim said, there's plenty of competition and that competition is coming -- is there because it's been released out of the real estate development marketplace. And if the real estate development marketplace were there we would not be in this situation, I can just absolutely tell you. Despite the fact that there are some state budget issues, it's the real estate development marketplace that has really released this intense capacity that's driving the competitive marketplace.

Thanks, that's all I had.

Richard Paget, Morgan Joseph.

Good morning, everyone. I wonder if you could talk a little bit more about the bid environment on the large project side, at least in your traditional transportation segment. I mean, are there still decent near-term opportunities to bid over the next couple quarters? And just as you guys have started to branch out into other areas of the business, have you seen some of the other big guys team up and start getting into that large project business, so competition is inching up?

Richard, certainly there are transportation projects available, large projects available, and we are bidding those projects. And I think you are heading in the right direction. Even the large transportation -- typical competitors of ours have branched out as well. But I think from our perspective the overall marketplace, transportation and other civil work, is definitely large enough to support our large project needs.

Okay, and then on to the Guam base relocation project. Is one of your partners a local there or will this -- your team it be a total greenfield expansion?

Yes, our team is US-based mainland contractors. We have opportunities to team with local players as subcontractors and materials suppliers and that's how we're approaching that work, at least the work that we've bid on already. We may, as we go on and find more work there, we may team up with some local contractors as joint venture partners but we have not done that yet.

Okay, and I think that whole project was on a time schedule to be completed by 2014, I think. It seems like it's been going slower at the front end. So do you get a sense that once everyone is approved and they get a sense of who the contractors are going to be that work is going to come out rather quickly?

They have told us that exactly. That once they choose their three to five contractors, as Bill mentioned, that the task orders to begin construction would begin in 2010. So we think they are going to move very rapidly, yes.

Okay, thanks. That's it for me.

Brian Rafn, Morgan Dempsey.

Hey, everybody. Let me ask from the standpoint of are you seeing the turn business, the branch business, are you seeing -- certainly it's been a lot of pressure, you talked about the capacity being released into that. Is there any difference today going into 2010 in the turn business? Are other projects smaller, more fragmented, are they geographically specific, is it more county roads versus industrial parks? Can you give any sense of where the strength is if there is strength?

I'd say it's in a very similar position to where it was 12 months ago. It's variable all over the place, every state is different. So I don't think there's any consistency at all, would be my answer, Brian.

Okay, okay, okay. You talked -- maybe a question for Bill. You guys talked about your CapEx going to a little and with the difficulties (technical difficulty) you guys have always built bench strength over the past. How do you see the business from a strategic standpoint, both rolling stock machinery, CapEx, business (technical difficulty) bench strength, estimators, expediters, engineers -- that type of thing going forward? Mitigating that to be ready for a reflation when the economy turns and -- because there are certainly lead times in letting go people and trade craft and that type of thing.

That's a mouthful of a question there. That's a good one. Okay, from the standpoint of let's take CapEx. We are consciously paying attention to that, probably the best way to phrase it. We're trying not to buy stuff that we don't need, we're trying to, as LeAnne said, manage our cash conservatively. And I think that's just prudent. And what's interesting to me is that our business units out there have, for the most part, taken on this point of view on their own because they certainly appreciate the situation that they're in.

As Jim said, we don't have that situation everywhere thankfully. and we do have business units in our system that we expect to perform better in 2010 than in 2009. So that's important.

From the standpoint of how we are trying to manage our business to ensure that we will come out the back end of this strong, there are a couple of things. Number one, we're trying to stay financially strong. And I think we're doing that.

From the standpoint of keeping our teams together and our capacity, we are continuing to invest in people, we haven't stopped that. We will be talking about changing how we do that a little bit with our employees later this afternoon in an effort to try to do it in the most economical fashion we can. But our goal is to hold our teams together so that we have the capacity to attack when it's time to attack. And we'll be able to do that, I'm absolutely certain.

Our strategy is to keep our traditional business strong, but also diversify into some of these other areas that we talked about. If you think about Granite's strategy in the past, it's been very focused transportation oriented with a geographic diversification strategy. And we clearly want to continue to be geographically diverse, but we also want to broaden our scope of our business and entertainment some different revenue sources that will provide a little more diversity from a revenue standpoint. And that's our strategy.

Okay. If you look at -- you kind of talked about funding and that. Given the -- certainly the funding impairments and we've had the Minneapolis Bridge collapse and steam pipes busting in Manhattan. Going forward from a top-down and finding ways of paying for the -- certainly California has been pressured on that. Do you get a sense of any sea changes? Is it more privatization, more toll roads, a national infrastructure bank, or is it just simply the reflation in the overall economy that's stimulating budgets?

Well, I think there's a belief with certain legislators that privatization is the answer. And there is no question that will have -- that will play a part, but it's not the answer. The answer is adequate reliable funding, public funding to build the infrastructure of the future. And that is woefully under funded.

What's interesting is that you cannot, literally cannot find a legislator when you talk one on one, whether it's a state legislator or a federal congressman or senator, that won't agreed with the prospect that we need as a country to invest significant amounts of money in our infrastructure. The infrastructure is not being maintained currently and we are clearly not building the transportation system of the future.

The transportation system of the future includes maintaining the system we have, building new capacity on our highways, and a great deal of investment in public transportation. And we have to do that. And everybody that I talk to agrees.

The difference is -- I don't want to play partisan politics here, but this is absolutely the truth -- when you talk to the Democrats they say, yes, fine, let's raise the user tax on fuel or some other mechanism to generate that funding. And when you talk to the Republicans they absolutely agree it needs to be done, but for the most part say, they won't to do it or can't do it because it includes a tax increase and they simply can't -- they won't put their own job on the line to -- and vote for a tax increase.

So it's a very polarized political environment out there relative to how this needs to be done. But there's no question, in any of the legislators that I've talked to, that it does need to happen.

When you use the word, Bill, woeful funding, the Army Corps of Engineers has -- comes out with its annual report card and it's horrific and it's C's, D's and F's. Will you guys, as being out and bidding on infrastructure, would you agree with those general trends of the Army Corps?

I haven't studied that report, so I'm not sure I'm prepared to comment on that. I will tell you that I've studied transportation quite a bit, general transportation funding. And just to give you an example -- in California the Caltrans will tell you that they need $6.8 billion more annually simply to do the maintenance on the system that's in California.

The Governor's commission on transportation in California has indicated, has said publicly, that they need $16 billion a year more to fund transportation, to fund all the needs in transportation in California that are not being -- not currently addressed. And the DOT Director would suggest that that number is closer to $20 billion.

Now to put that into perspective, we burn about 20 billion gallons of fuel per year in California, so that's a buck a gallon more to address the needs in California. I don't expect we're going to see that $1 a gallon. But I absolutely am convinced that within a reasonable period of time the legislators in California will be forced to address funding in California if they want to keep a transportation system current in the state.

Okay. On the engineering and construction relative to the solar panels and some of this new work you're going in in energy, are you doing anything with the onset maybe with windfarms and/or nuclear?

Good questions as well. The windfarms -- we have tried to get into that game and have been reasonably unsuccessful at this point. And the reason is that the wind energy is a little more mature in the United States than solar. And so a lot of those alliances have been built already. And most of that frankly is in the -- most of that is in the middle of the country where the wind blows regularly and we're not as strong there. So the answer is if we get into that it will be a smaller part of our business.

Solar is part of -- excuse me, nuclear is part of what I would characterize as conventional power. It is our hope to participate in nuclear facilities as a civil contractor, not building reactors or anything doing like that, anything like that. And traditionally that work has been a cost plus a fee type work. So there's actually less risk associated I think with that work than a lot of the stuff we do.

Okay, okay. Anything on what -- Granite Land Co., how many projects you've got in the pipeline? And give me any sense of what's ongoing and permitting of any new sites on the gravel or any of the greenfield stuff.

Well, the Granite Land Company and gravel are two different things. The land company is our real estate development company. We are not investing in new projects at this point for I would imagine obvious reasons. We're managing the projects that we have.

We think that our portfolio is valuable, very valuable. We think that over time it will produce an acceptable return for us. But these are -- we're not out actively trying to sell things at this point because there's not a lot of market for that. So we are continuing to permit projects that we currently have and work those projects as best we can and get ready for a recovery.

Our gravel business, we do continue to invest in that business, as we have said several times here this morning. Our revenues are down, our volumes down, demand is down in that business. But it's an important part of our vertical integration strategy and we are continuing to buy aggregate reserves at this point.

Chase Jacobson, Sterne, Agee.

Good morning, guys. You talked in your prepared comments about the Senate jobs bill and how it includes a 10-month extension of the current highway funding. Now this has been -- seems to be the talk that's been coming out of DC for the last month or so. But if that jobs bill doesn't get approved this week and we end up with another 30-day extension, how do think the states react? Were they expecting a 10-month extension? And does a 30-day extension verse a 10-month extension really make a difference or is it really still all about the multi-year highway bill?

Chase, this is Jim. I think the key ingredient for the states is to get some firm hold of what they know that their federal funding mechanism will be. So the 30-day delay will definitely hurt the individual state programs. The bigger key to waiting is that we are currently under a rescission, which means that there is a lower allocation to the states than there would be if we actually got an extension.

And that's probably the biggest key ingredient is there's about a 30% reduction in funding right now that's being made available in the states. And once an extension does get put into play, and we'll hope it's through the end of the year, that 30% (technical difficulty) go back into play for the states. So they don't know how to plan right now. And so a 30-day extension will cause problems for them to plan jobs in the short run and certainly in the long run.

So from your conversations with the states it seems like they were really using the rescission case for their plans?

They have to today because that's what's in play.

Okay, all right. And then just another quick question on expanding into some of the new businesses like solar. You said that a lot of your work in those new businesses is going to be the traditional Granite type work. But if you get into some of the more construction-related work, like you said on the solar, and given the competition in the market, what are the assumptions that you're using for margins on that business, at least if you could quantify relative to where you've been historically?

I would just suggest to you that it's going to be right in line with the rest of our work for now. And it's too early to tell exactly where the margins will end up.

All right, thank you.

Avi Fisher, BMO Capital Markets.

Thanks for taking my questions. I missed some of the comments earlier. You said there were three Granite East projects with delayed notice to proceed. Have those been booked or those are expected to be booked in the first quarter?

They're basically booked, but the entire revenue hasn't been booked on them yet.

The backlog hasn't been booked.

Yeah, all the backlog hasn't been booked. But we are under contract with -- and one of them was the Houston light rail project, Avi, and certainly we're waiting for the final contract NTP to be put into play and then the entire amount of the project will be put into backlog.

Got you. The timing on that is still in definite then?

Well, we've actually negotiated ourselves to a contract, we're just waiting for the documents to be completed as of now.

Got you. And the other two projects?

I think we were mentioning it was -- the Queens Bored Tunnel was one of them and that obviously has been booked, except that there is some additional revenue that will be booked here in the first quarter. I forget (multiple speakers).

The World Trade Center.

The World Trade Center which obviously just ended being bid and we were low bidder recently on.

And what was the value of that?

It was about $500 million plus but we were about a 20% partner in it. So a little over $100 million of it will come to Granite.

Perfect, thank you for that color. And on contract recently, I mean these are some of the recently announced contracts. When would you expect either -- two questions. When would you expect to reach a 30% threshold on it and what would be the timing of the minority interest on those? I guess in Granite East in general, those are the big contracts.

Yes, I think that's the issue that we were bringing up earlier, Avi, was that some of the delays that we experienced will put that threshold recognition into potential jeopardy by the end of the year. So whether it is the World Trade Center, whether it is Houston Light Rail, those are going to be the two big ones, they're going to be right on the cusp of potential threshold recognition or not by the end of the year.

Right. So it could be a 2011 event.

It could be, yes.

Okay. And then the minority interest wouldn't accelerate until then as well, right? Well, I guess if you're a joint -- a minority partner on it there isn't so much (multiple speakers).

Right.

Correct.

Okay. But for Queen's Bored, are you a minority or the --?

We're the sponsor on the Queens Bored Tunnel.

So the minority interest on that would be accelerating when you start recognizing profit?

That's right.

Okay, thanks. And then someone touched on this before in terms of the type of work you would be doing for some of these alternative -- "alternative power clients" and sort of mix -- and market mix shift clients. What are the -- how are the contract types different based on what you've done in the past either for say the transportation -- public transportation or even homebuilders and stuff?

Well, I think the majority of these contracts will be with private developers. Although some of them may be with utilities as well. And I don't think from a contractual standpoint they'll be significantly different. I think they'll be unit price, lump sum, fixed-price jobs.

So your work with -- so it will be more like your work with public contractors -- with public entities?

Or private. It could very well be private as well, Avi. A lot of the contracts are very similar.

Right. And any expectation or difference in the payment terms or cash flow terms?

Not at this time, we do not have any changed expectations.

Got you, I appreciate that. The tax rate in the quarter seemed a little bit higher. Should we still look for 2010 in the 27% range?

I think you can expect for it to come down, Avi. It's a little early for us to predict, but I think it will come down in 2010.

Versus the 27% you guided to in 2009 or versus what you reported in 2009?

Versus what we reported in 2009.

Got you, okay, I'm just working down. And if I understood some comments you said earlier -- forgive me if I'm stating this incorrectly -- it sounded like you were kind of guiding to flat book to bill's in East and West next year? Or flat backlog? That you'd replace whatever revenues you burn into backlog? I heard a --.

Well, I think we're a little unclear (multiple speakers). I mean, we're suggesting we've got $600 million that we're going to book by midyear and we've identified those projects, Avi. So that's a good thing. I think having said that we also think that work is going to be tough to get in 2010. So, beyond that I think you know what we know at this point.

Yes, yes. I mean there's just not a lot of visibility. And a lot of competition. In the aggregates business, obviously margins remained weak -- significantly below what I had seen. How much of the margin pressure in aggregates is due to under absorption and how much is due to pricing?

Well, I think they go hand in hand. I think that certainly the under absorption is affecting the pricing, so it's just a demand curve model or a demand capacity model. And so I don't think that's going to change for 2010, it's going to be very similar.

30 event with our employees that we have to be ready for at 9:30. So we can probably go for another three or four minutes and I think then we'll have to wrap it up.

Okay. Well, that was actually my last question. I appreciate you taking the time to answer them. Thanks, guys.

Todd Vencil, Davenport & Co.

Thanks a lot, I will talk fast. Just to follow up on your comments about the fact that you're still looking at adding aggregate reserves. Can you talk a little bit about where you see pricing in that market? And what the pipeline of potential sellers looks like?

Well, Todd, this is Jim. The pricing, as we mentioned, I think the visibility for 2010 would be that pricing is going to be pretty static.

I'm sorry, I meant pricing on deals.

On deals, well let's go back to the acquisition side. It's kind of hard to tell today. Certainly the smaller players are going to be -- are under pressure, financial pressure today. But one of the things as we talk within the industry, these are fighters, they're not going to just walk out the door and sell something that they've been personally attached to for their entire life.

So I think we haven't seen a lot of downward pressure today in the acquisition or M&A market. I think we'll probably see a little more visibility at the end of 2010 or the beginning of 2011. But it's very quiet in that market today.

Got it, okay. Thanks.

Brian Rafn, Morgan Dempsey Capital.

Two-minute offense here. I'm just going to ask one to Jim. On the West side you guys talked about the heavy civil not being as successful, you're talking about mobile teams. What's been the strategy? You guys have always been known in the West for your turn business. But what are some of the issues with the heavy civil or the design/build?

Well, certainly we bid quite a bit of work last year, we just weren't successful on it. And so what we're doing -- probably the difference between 2009 and 2010, Brian, is we're going to reallocate resources. We're taking -- literally we have a team from Las Vegas now that is up in Alaska. We have another team from Las Vegas that is in Salt Lake City.

So what we're going to do is instead of geographically focusing on large projects we're going to take talent we have and reallocate them to the individual locations that have opportunities. And I think our employees understand that and a lot of them are really excited about getting into new markets and going where the opportunities are.

Okay. On the gravel pits asphalt side, what's your capacity utilization on some of those plants out West?

We have a lot more capacity.

Yes, but will they be running at half capacity? Can you give me a sense?

I would say some yes, some no. But even -- I think one way to look at it, if we get down too far relative to capacity we'll just shut them down for the short time. And just it may be the most economical short-term viable option. But we're definitely well below half of our capacity.

Okay, sounds good. Thanks, guys.

There are no further questions at this time.

All right, let me summarize what we -- what I think we've been talking about here. We're pleased with our business performance in 2009 given the market conditions we're facing in the West. We don't see much relief in our local markets in 2010. We continue to be excited about the long-term and short-term prospects for our large project business. We're focused on driving revenue in our traditional markets and expanding into new markets. And we continue to reduce our cost structure and maximize the use of our assets.

The know-how and commitment of our people is our most important resource and we are fortunate at Granite to have extraordinary teams that honor us every day with their diligence and dedication even in these tough times. As always, we thank you for your interest in Granite Construction. And if you have additional questions, please don't hesitate to get in touch with us, we will be here for the rest of the day. Thank you.

This concludes today's conference. You may now disconnect.