Granite Construction Inc (GVA) 2010 Q4 法說會逐字稿

Good morning. My name is Taquila and I will be your conference Operator today. At this time I would like to welcome everyone to the 2010 fourth quarter and year end 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. Jackie Fourchy, you may begin.

Good morning, and thank you for joining us today. I am here today with Jim Roberts, our President and Chief Executive Officer, and Laurel Krzeminski, our Vice President and Chief Financial Officer.

Before we get started, I would like to remind you that this conference call contains forward-looking statements that should be considered in conjunction with the cautionary statements contained in our earnings release and in the Company's most recent SEC filings. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. Granite assumes no obligation to update any of these forward-looking statements or other information. Please see our filings with the SEC including our most recent annual report on Form 10-K for a discussion of specific risk factors.

With that, I will turn the call over to Granite's President and CEO, Jim Roberts.

Thank you, Jackie. And good morning everyone. During today's call, I'll spend a few minutes summarizing the year, as well as the actions we have taken, and are continuing to take to lower our cost structure. Laurel will walk you through the fourth quarter numbers and then I will wrap up with some comments around our outlook for 2011.

Overall, our business performed well last year in the face of one of the toughest environments we have experienced in decades. We made significant headway to position the Company for long-term growth, in what continues to be a very challenging market. Most notably, we successfully grew backlog in both of our key construction segments, maintained a solid balance sheet, and executed on our goal to permanently reduce our cost structure. During the fourth quarter we redesigned our cost structure to be more efficient for the current business market, while also positioning us for long-term growth. As part of the enterprise improvement plan, we made the difficult decision to reduce our employee base.

In addition, we announced that we would be divesting our real estate investment business and certain other assets in our portfolio. Our plan is to divest of the real estate investments over the next three years with the goal to maximize the value of the portfolio as much as possible. The high level of competition for the available public sector work continued to impact margins in both our construction and construction materials segments last year. In response, we have become more strategic about which projects we bid, and are leveraging the competitive advantage of our vertically integrated business model whenever possible. We are also using our experience and expertise wherever it brings the most value to Granite, regardless of which region or business unit it is in. Some notable examples of these internal partnerships are the recent successes at the Folsom Dam in Sacramento and the SR520 project in Seattle, of which we took advantage of each of our three segments to competitively bid these projects.

We are also targeting a number of opportunities to diversify our portfolio of public sector work, including federal government, rail, and energy related projects. As result of these efforts, we have a solid backlog of work carrying into 2011 that should provide healthy momentum for our business this year. We are pleased with the performance of our large project portfolio. Particularly the progression of some of our newer projects such as the Queens Bored tunnel, Mountain View Corridor, and Western Wake freeway projects. The outlook for this area of our business continues to be encouraging and our bid list remains robust. We are pursuing various types of projects across the country, including highway reconstruction, transit, tunnel, marine, airport, and bridgework.

In light of today's challenging environment, we have adjusted our operating plans with the expectation that the competitive pressure we are seeing across the country will not improve until two things happen. One, we see an increase in public sector funding and have a long-term commitment to that funding. And two, we get a resurgence in the private market. While we believe the private development market has bottomed, we do not believe we will see improvement in the near term. We expect it will bounce along the bottom for at least the next 12 to 18 months, particularly in some of the markets we serve including California, Arizona, Washington and Nevada. Given this backdrop, it is imperative that we operate as efficiently as possible throughout the Company. And equally important we must continue to lower our cost to produce and optimize the use of our assets.

As it relates to funding, we are consciously optimistic that Congress will approve another short-term extension of the federal highway bill. And note that some congressional transportation leaders are advocating that funding be held flat through the end of the fiscal year. Unfortunately, these extensions do not provide the visibility that our industry or Granite needs. Short-term fixes are not the solution. We applaud President Obama's commitment to increase infrastructure spending, as noted in his proposed fiscal 2012 budget and corresponding highway bill. Earlier this month, the President outlined an aggressive $556 billion infrastructure plan designed to create jobs and ensure we remain competitive in today's global economy. Clearly there is support for increased infrastructure investment. However, there continues to be a lack of consensus on how to pay for it. As always, we will continue to be fully engaged in the issue both at the federal and state levels.

With that, I will turn the call over to Laurel to bring you up to date on the financials. Laurel?

Thank you, Jim. And good morning everyone. For the fourth quarter, net loss per share was $1.32 compared with the prior-year net income of $0.41 per diluted share. As noted in last night's release, we recognize the $107 million pre-tax restructuring charge in the fourth quarter associated with our enterprise improvement plan. Of the total, $86 million was related to impairment charges associated with our real estate investments, $11 million was related to severance costs, and $10 million was related to impairment charges due to assets held for sale and lease termination costs. The non-controlling interest portion of the charge associated with real estate investments was $20 million. The fourth quarter charge was at the low end of the estimated range we provided last quarter.

The majority of the charges were taken in the fourth quarter of 2010. However, as we communicated, we will continue to execute on our enterprise improvement plan and anticipate future restructuring charges to be in the range of $2 million to $15 million. The timing and amount, however, will depend on our ability to negotiate sales of certain assets at acceptable prices.

Revenues for the quarter were $417 million, compared with $435 million in 2009. Gross profit margin for the quarter was 11% compared with 21% in the fourth quarter of last year. The margin compression was due primarily to lower margins in our beginning backlog of work compared with a year ago. Also contributing to margin pressure was an increase in revenue from projects that have not yet reached our profit recognition threshold. Total contract backlog at the end of the fourth quarter was $1.9 billion to compared with $1.4 billion in the prior year. As a result of our ongoing effort to reduce costs, selling general and administrative expenses in the fourth quarter totaled $40 million compared to $56 million a year ago. The primary drivers of the decrease were reduction in salaries and related expenses as well as discretionary spending.

Turning to operating segment results for the quarter, construction segment revenue decreased 11% to $214 million. Gross profit margin was 12%, compared to 20% for the same period a year ago. The margin compression was primarily due to a more competitive bidding environment in all our markets. Construction segment backlog as of December 31 was $465 million compared with $359 million a year ago. The 30% increase in backlog is attributable to our effort to be more competitive in today's environment, and more strategic with which projects we bid.

Moving to the large project construction segment, revenues were $155 million during the quarter, up from $148 million in the fourth quarter of 2009. Gross profit margin was 11% compared with 26% the prior year. The decreases associated with costs incurred related to the temporary suspension of the US 20 project in Oregon, as well as the lack of profitability associated with the successful completion of the I64 project, which was recognized in the fourth quarter of 2009. Large project construction backlog as of December 31 was $1.4 billion compared with just over $1 billion last year. The $391 million increase in backlog is related to a new highway project in the Northwest as well as the Fulsom Dam project in California. Revenue for the construction materials segment was essentially flat in the fourth quarter at $47 million. Gross profit was approximately $2.5 million compared with $3.6 million a year ago.

Now for a few comments on Granite's balance sheet. Granite is in good financial position. Our cash and short-term investments were $361 million at the end of the fourth quarter which includes $109 million associated with consolidated joint ventures. With regard to our credit agreement, as a result of the near term accounting impact of the charges associated with our enterprise improvement plan, we amended our credit facility during the fourth quarter. The amended agreement provides for a committed, secured, revolving credit facility of $100 million. This facility provides us with financial flexibility, as well as supports our internal growth opportunities and gives us additional capital to support our strategic growth initiatives.

Lastly, we reduced our capital expenditures for fiscal 2010 to $37 million driven by a reduction in new equipment purchases. Our capital expenditures are typically for materials related facilities, aggregate reserves, construction equipment, and investments in our information technology system. Although we have reduced our capital expenditures in response to the current environment, we continue to make investments that will help us grow as well as lower our overall cost structure. To that point, we anticipate spending approximately $54 million in capital expenditures in 2011, of which $10 million is associated with installation of new IT systems.

With that I will turn the call back to Jim for a few comments on our outlook on 2011.

Thank you, Laurel. Overall, we remain confident about the long-term outlook for our business. We are pleased with the amount and quality of backlog we have going into 2011. We've adjusted our operating strategy and cost structure in order to successfully work in today's uncertain environment, as well as be prepared to attack the market as conditions improve. We are committed to both our geographically focused, vertically integrated business, as well as our large projects business. We believe the near-term opportunities to grow our large projects business are outstanding, and efforts to diversify our revenue base will reap benefits in the years to come.

I also firmly believe that the actions we have taken this past year have made us a healthier company and given us the line of sight we need to improve our bottom line. We are on the right path. We are focusing on our core businesses, investing in our people, and being more decisive both operationally and administratively relative to cost control. These efforts will enable us to improve our bottom line performance and grow shareholder value going forward.

With that, I will now turn the call over to the moderator and we will be happy to take your questions.

(Operator Instructions)And your first question comes from Bob Labick.

Hi, Bob.

Hello, Bob.

Hello. First, I just wanted to ask about your diversified growth initiatives. You alluded to them earlier. In the past we've talked a little about it. If you could update us on the opportunities in Guam and other federal and military, where do you stand and what do you expect to learn in 2011 for those new growth initiatives?

Okay, great, that's a good question, Bob. Thank you. So, for Guam, we have two pricings that are still outstanding. We bid several jobs last year. And two of the main projects we bid have been extended, so our prices are extended until both March and May. And they were extended basically due to some of environmental issues that I think have been resolved on the island since then. So, as far as we know, we will hear in the next couple months on two large projects. We also are of the understanding, that there will be quite a few more projects bidding on Guam this year. So it is really good news for the amount of work out to bid. And we will probably have answers for everybody within the next two to three months relative to Guam itself.

On the -- another key ingredient there, it's not a matter of going forward in Guam, it is really a matter of when. And we were not prepared for the delays. We really expected to hear last year. We have been telling everyone that we expected to hear in the third quarter, and then the fourth quarter. We do believe that they've got their environmental issues organized today. So, in the next couple months, hopefully, Bob. Relative to the rest of the work, we've actually, on the federal side, we have dedicated some additional resources to pursuing the federal work. We are looking at a lot of the base work that is really close by our vertically integrated businesses. So we are trying to get more of a -- capture a larger share of the market that's in the geographic areas in which we work today. And that's actually, we're finding quite a bit of opportunities on some of the smaller type of work, the IDIQ work that goes on in those environments.

The other thing, from a diversification standpoint, we are continuing our focus on renewable energy. And we have several projects that we are building today. And we're happy to report that. We're doing a project in Arizona, we're doing a project in the Central Valley of California, a couple projects down in Southern California. I mentioned, I think, in the last call, that we've diverted some of our vertically integrated business people to be working full-time now on the renewable energy side of the business and it's going quite well. Again, a lot of that is a dependent on some DOE funding and that has been a little slower than expected. But we are seeing a lot of opportunities out in front of us. And I think 2011 will be a breakout year on the renewable energy side. So, from the federal side, we have dedicated resources now. Renewable side, we have dedicated resources. I think you're going to see a lot of headway in 2011.

Okay. Great. And then, you've spoken a fair amount about, obviously, you cost initiatives. And you've lowered your cost basis a lot. Is Q4 indicative of a runway going forward? It sounds like you've shifted resources and you have new capacity in federal and renewable, et cetera. But should we see G&A grow from here or is this level more indicative of future levels?

Yes. I think that what we said before was that we had about a $35 million to $40 million overall reduction in our cost structure due to our enterprise improvement plan. And, I think that going into 2011 we said that. And I think that what you can do is look at some of the actual numbers from last year and apply about two-thirds of that to the SG&A for additional reductions this year. I'm not so sure the run rate on the Q4 is exactly right. So I'd be more affable we said before, which is somewhere around a $25 million to $30 million decrease off the 2010 numbers.

Okay. Great. Thank you very much.

Thanks, Bob.

Thank you, Bob.

Next question, operator?

Your next question comes from the line of Dan Edelson.

Hi, Vance Edelson. Thanks for taking the questions. Can you just reconcile the strong pipeline, the growing backlog with what you described as a very tough competitive environment? It almost makes it sound like the competition is a bit desperate. Are they not seeing the same opportunities that you are?

Vance, let me make sure I understand the question first. Certainly the competition level is there today. And, our backlog has increased mostly because we're trying to be much more strategic and focused on the type of projects that we bid. And we are sending, we are really sending our estimating teams into the locations where we have the best chance to win projects instead of bidding everything that comes our way. So, I don't think the level of competition has changed. Especially in the vertically integrated model. It is very competitive. But we have been able to target certain jobs. And when we target jobs, and spend the additional time and energy on them, we have tended to see ourselves be successful. So, the level of competitiveness in the large projects and the vertically integrated business is still there. I don't think it has changed from 2010.

Okay. Sounds like you have a good approach. And then shifting gears, I know last year the adverse weather conditions played a role over the winter. It seems like if anything, it could be little bit worse this year. So are there any impacts there worth pointing out?

I don't think they're substantial enough to really point out as something that affected our business. Most of the weather has hit the East Coast, we were very well-prepared for it. Certainly it's been a little more than normal but I don't think it has impacted our financials a great deal.

Okay. Good to hear. And then just one last one for you. It sounds like you're cautiously optimistic on a continuing resolution which we'd have to get over the next week. Assuming that we get it, how would you handicap the length of the resolution? Is it something you think takes us through the summer construction season or through year end? What do you think the chances are there?

Dan, I think that it will get a continuing resolution to get us past March for probably, let's say, another month or so, while they work to get us, I would say through September 30 this next year. And, it's really an issue where they are going to try to work on a long-term bill, but I think they're going to try to give themselves enough time between now and September 30 to find a bill that works for everyone. So, the hope would be a short-term continuing resolution for the next month or so and then an extension through September 30, as well.

Got it. Okay, thanks a lot for the color.

Okay, Vance. Thanks a lot.

Your next question comes from the line of Jack Kasprzak.

Thanks. Good morning, everyone.

Good morning, Jack.

First, relating to the restructuring charge, can you tell us the tax effect -- the associated tax effect of that restructuring charge?

Jack, we have historically not given out non-GAAP measures. But I would be happy to walk you through the details of our tax rate so that you can get -- work your model, which I know is what you're trying to do here to arrive at that.

Sure. So, is that something we will do off-line, or?

Yes.

Yes. And, I just want to make sure I'm looking at this correctly. It's spelled out in the press release, but the $20 million of non-controlling interest associated with the charge, if we are going to adjust our models for the charge, we have to adjust the non controlling interest for that amount. And when we do that, it would make it about a negative $5 million effect, excluding the charge for the quarter. Is that correct?

You are in the ballpark. Yes.

Yes. Okay. And then with regard to large projects sales, were you guys disappointed in the level of large project sales in the quarter? Did it meet your expectations? I don't know how you'd qualify it, but it seemed like you might have been teed up for a bigger increase on a year-over-year basis. Am I reading that right?

I would say, Jack, in the fourth quarter, we probably under ran a little bit on the revenue side of our projects. That was mostly weather related issues. Again, I don't think it's substantial, but yes, I think you're right, that it is a little bit less than we anticipated.

Okay. And apropos the comments on competition and ongoing pressure there, which is obviously something you guys have been living with for a while now during this downturn, are you seeing further pressure on margins? Or just a situation where you are having to maintain a similar level as to what you've seen for the last 12 or 18 months based on the competition?

Yes, Jack, I think the latter is more appropriate. We have seen it bottom out. I would say that it bottomed out probably Q1 or Q2 of 2010. And it has been pretty static since then. And I think what we are doing today, in our business, is becoming more competitive and lowered our cost structure to be able to deal with that kind of a market. So that's, I think it is where it has been. I think it will be there for a little while longer, as well.

And are you seeing any, have you seen any smaller marginal, private, competitors fall out of the market, go back to their home markets to the degree that they searched around for work where they traditionally would not? Have you seen any change in that landscape?

A little bit, but not as much as I probably would have anticipated. I think the terminology I'd use with a lot of our smaller competitors is that they are just very resilient. And I do think that their business models themselves have shrunk, so I think they're doing smaller work today. I do think they are obviously cash constrained and are having issues in their own geographic markets. But I have not seen them just flat go away.

Got it. Okay. Okay great, thanks very much.

Thanks, Jack.

Your next question comes from the line of Joe Ritchie

Good morning everyone.

Hello, Joe.

So, a few quick questions. I guess focusing on the environment today, your backlog, as people have mentioned already, was very good in the fourth quarter. But as we start to look at 2011, in my view, I would expect to see some type of boost probably in the first half of the year, because of the strong Build America bond issuances that we saw late last year. But I'm trying to understand, as we progress through 2011, how your backlog is going to trend given that we are seeing very strong headwinds across federal, state, local, and the municipal bond market?

Well I think that overall our expectation is our backlog should say consistent throughout the year. I think we do anticipate to grow the company. We have said that. And to do that you're going to have to grow the backlog. Again, it gets lumpy on the large project side. But, Joe, we have a tremendous amount of large project work bidding. It is a very robust bid list. I've got pages and pages of projects that we are pursuing. So although it is competitive, I see the opportunities out there to build backlog, still is a great opportunity for us in 2011. Again, the big backlog buildup is mostly in the large projects work. That's where we get the big boosts. And we are bidding more work than we probably ever have. So, I think there's an opportunity for the backlog to stay very healthy throughout the entire year.

Okay. How are those projects then being funded? Is that still a carryover from stimulus? Is that some of the Build America bonds? I'm just curious to get a better understanding on how those projects are moving forward?

There are various funding mechanisms. Some of them are federally funded. A lot of them are transit authority projects that we're bidding that have a separate stream of funding. The states, certainly the DOTs, have their funding mechanisms in place for the first half of the year in most states. And then other projects that we are pursuing, we know will have probably a questionable funding level, so, we are a little more skeptical on how much effort we put into them as we pursue them. But the majority of the ones we have on our immediate radar screen are fully funded.

Department of Defense with the special --

The DOD, on the Department of Defense, is actually another opportunity for work. And the DOE is funding quite a bit of the renewable projects that we have.

Okay. One last question, really focusing on your materials business. Saw that the margins in that business were 5%. Can you comment on the pricing environment that you are seeing there? And then, just an ancillary question, you mentioned the strength of your vertical integration strategy. I was wondering if that has changed at all or whether you still anticipate to continue to be vertically integrated going forward? Thanks for answering those questions.

Sure Joe. First, the materials pricing. It certainly is not where we'd like it to be. I think we had probably some slight reductions in 2011. It has been very static, I would say, over the last several quarters. Volume wise, we had a little increase last year from 2009, so that was a good sign. That may be the precursor to getting some price increases this year. I'm not going to suggest that we are going to have price increases this year, but the key ingredient is, again, I believe it is very similar to the overall vertically integrated business. It is in the trough. It is moving along at that level and I think it's going to stay at that level for 2011.

In the vertically integrated business, we are dedicated to that process. We think it is a very good business model. Certainly some geographic markets are performing better than others. And, overall, it's a great model. Teamed up with our large projects business. It's served us very well. And, as we continue to lower our cost structure, we will continue to be more competitive. Not only have we lowered the cost structure relative to our administrative and operating groups, we have also spent a lot of time and energy at the end of 2010 and in 2011 trying to optimize our asset base. And as we optimize our asset base and divest of certain assets that are not productive, I think will be even more competitive going forward. So, we are definitely dedicated to the vertically integrated business model, Joe.

Okay. Thanks again.

Thank you, Joe.

Your next question comes from the line of John Rogers.

Hi, good morning.

Hello, John.

Good morning, John.

First of all, in terms of the booking opportunities that you've got this year, is there -- can you give a sense of geographically where they are? Are they markets that you've worked in in the past?

Well, Okay, John.

Ex Guam, right, but?

Well, Guam, obviously. And Guam should have a lot of opportunities going forward this year. Once they open the door, I think we believe Guam will really have a lot of great opportunities for the second half of this year. I'm looking at a list in front of me, and I can tell you, John, it is all over the map. Arizona, California, New York, Florida, North Carolina, several jobs in North Carolina. Really, the large project side of the businesses is pretty well spread out into all of our regions that we currently occupy.

Okay. And the margins in this business, I know they're lumpy, because of the way you look at profits in the business. But, especially in the fourth quarter, you mentioned that revenue or the burn rate was a little bit lower. Were the - and I know that it, and it -- I calculate it's about $29 million of revenue had no margin with it, but were the margins on the rest of the business within budgets or within plan?

Overall, I think that we are doing a really good job keeping with our budgets. We have very few write-downs. So, I think that yes, we are pretty much on track for the majority of our work making our budgets. I'd probably say, John, we are doing as good or better as I've ever seen us do meeting our budgets on our projects.

Okay. Good. And then lastly, in terms of the tax rate going forward, and I would love to follow-up with you, too, on how to think about the tax in the fourth quarter, but, what should we be expecting?

John, it's a little bit early to tell, but I think that we would expect it to go back to a more normalized rate next year. The big wild card is non-controlling interest and what that ends up being as it compares to pretax income. But, for the most part I think we would expect it to be back at a more normalized level. Our statutory tax rate is between 39% and 40%, and if you look at the last few years, our non-controlling -- prior to 2010, our non-controlling interest was somewhere around 6% to 7%. So, expect to be back more in line with what we were in 2009 and 2008. But we'll be able to tell more as we get through the first couple quarters.

Okay. Lastly, seasonally, any significant disruptions in the first quarter so far?

No. I think that from a weather standpoint things are going as planned. Certainly there's a little more weather on the East Coast than normal, but I don't think it has had a significant effect on us.

Great. Thank you.

Thank you, John.

Your next question comes from the line of David Wells.

Good morning everyone.

Good morning, David.

Good morning, David.

First off, just looking at the construction segment more specifically, as you look into 2011, and we continue to hear about state budgets, specifically at the DOT level, many being cut now for the first time, stimulus dollar funds rolling over, as you look at the opportunities there, do you feel that that's a business you can grow backlogs? Or would maintaining flat backlogs there be pretty good, all things considered?

I think it goes state-by-state. So, David, certainly in the states we work in, the five or six states in the West, every one is a little bit different. I think there are opportunities to grow our backlog in the construction segment in some of the states. And I think that some of the states today, some of the opportunities are really right by our core business segment. So, the work that is out may not be as much as we've seen in the past, or they may be struggling with their own budgets. The key ingredient for us is where the projects are located, and if we have an advantageous position on those projects. We believe we do on a lot of the projects bidding in the states that we work in, so we are going to spend more effort just focusing on the jobs we have advantages on. So, I think again, less overall opportunity probably in the second half of the year. The question really is, can we be more focused and be more competitive in the environment that we are in today.I think we can.

That is helpful. And in looking at the larger project pipeline, certainly can understand that the appeal of the owner looking to do larger alternative delivery, be it design build or some of the other methodologies that are out there, as you look at that segment, though, we continue to hear about the international contractors looking to find attractive ways to come into the US. I heard some commentary out of Texas that they have been extremely aggressive in the margins that they bid work on, and certainly, just from a relative size perspective, they are a lot larger than domestic competition. So, do you feel like that international presence limits the ability to win work successfully? Or is it one of those situations where you could actually JV with some of those folks and win work that way?

Well there's a combination of thoughts there. And I think that first of all, we do partner with all companies from all over the world. Some of the international players today we do partner with, as well. I think that when it comes into some of the alternative procurement type projects where there is a significant, a very large financing or concessionaire approach, some of the international firms that are substantially larger do have advantages. But when it comes to physically bidding and building the work, whether it's design build, or what we are looking at as our core business, I think we are very competitive with anybody. And we team up with domestic and international contractors on that work, as well. So I think, for us, as long as we stay focused on the work where we have advantaged positions, and it is the bid-build type of work, or design-build type work, that we are very good at, I think we are going be competitive with anybody. But we do team up with players from all over the world.

Got it. That is helpful. Thanks for your time.

Thank you.

Thank you.

Your next question comes from the line of Avi Fisher.

Hello. Good morning.

Good morning, Avi.

Hello.

Just a few quick questions. There are a few questions on the material pricing, but I wanted to look at it from the other angle in terms of the materials embedded in your contracts. How has that impacted margins and how do you manage the gross changes in, say, diesel fuels and such?

Okay. So, maybe the first question on the materials pricing itself internally. We tend to, and if I answer the question incorrectly, Avi, certainly let me know, if I'm not addressing the right question. But about half of our product does go to our own construction business. And pricing is very similar to what it is in the external market. And it certainly is part of our construction margin, is where that margin shows up today. I would expect that it is in the same margin range as our materials, external materials is. On the diesel side, we have escalation clauses in the majority of our contracts around fuel for the larger contracts. We do have some projects where we are susceptible to changes in the crude markets. And certainly diesel would be affected from that. In some cases, we literally do hedge and go out there and lock in some long-term pricing, both on a financial position and on a physical position. So, we have very few projects today where I would suggest to you we have a real risk associated with increases in the diesel products.

Okay. I don't presume you could quantify?

I can't, Avi, today, here, right in front of you .But I could probably over time tell you how many projects we have that are probably not locked in, which is probably very few today, but there's probably a couple here and there on the large side. Some of the smaller ones, we do price into some of the smaller ones increase in pricing going forward. So some of the potential increases are already in the pricing basis. But I don't think it's a significant or a material issue.

Got you. I noticed as I was trying to decipher the charge, decline in receivables and billings in excess, were there any backlog write-downs in the quarter where you had to write-down any value of backlog? Or cut any value of backlog or billings in excess?

No.

So, it sounds like the biggest swing was in the real estate?

Well the impairment came from the real estate market, the majority of the impairment did. Correct. The vast majority of the impairment. And that was as planned.

Got you. I also have tax questions, so I'll follow-up after the call. But just quickly on the margin, and I know this will be in the K when it comes out, but could you quantify and your margins, I thought, were better than expected in the construction side, what were the project benefits in the quarter in the construction segment, if you can disclose that?

The net impact was a positive $3.9 million on construction and a positive $6 million on large projects.

$6 million on large, okay. Thanks very much for your time.

Yes.

Your next question comes the line of Todd Vencil.

Thanks. Hello, guys.

Good morning, Todd.

Hello, Todd.

Jim, when you mentioned that materials volumes were up in 2010 versus '09, were you referring to aggregate specifically there or all products, or does it not matter ?

It is probably across the board.

Okay.

That's pretty much the aggregate and hot mix.

Got it. Just staying on the materials for a second, you said that you need the private market to come back, obviously. But are you seeing any sort of developments in demand trends out there for those products that would be notable?

I would say they are not significant. I would say that we are certainly banking on the opportunities in the public sector that are nearby our plant facilities. We think those are good opportunities in 2011. A slight movement in the private sector, but I would suggest it's not enough to really provide any significant momentum for us. We are waiting for it. We're certainly hoping for it. I think it is still a good 12 to 18 months away.

Got it. Got it. And then, can you just give us an update, walk us through the projects that you're looking, the significant projects that you are looking to have 25% complete in 2011, and what the timing is on those, at least as far as you expect them right now?

Okay. Well we've mentioned that there's probably three of our large projects that we're looking to get into the proper recognition threshold this year. First, the large one being, one large one being, the Queens Bored tunnel. We currently have the TBMs in the hole getting assembled and hopefully we'll start tunneling in April. So, that's very exciting and things are going as planned on that job. Probably recognition-wise, Todd, I would say in the mid to late year, and I would say probably third quarter, would be the first shot at getting that recognized , maybe the fourth quarter

Okay.

On that project. Houston Metro is moving along well. We have agreed to contract modifications and value there. And we are being funded partially right now, hoping for a fully funded project here by sometime in the middle of the year. That will probably meet recognition in late this year. So I would say third or fourth quarter, as well.

Okay.

And then the third one of significance would be the World Trade Center. And the World Trade Center project has just started in the fourth quarter of last year. We are in the 10% to 15% completion range now. It will take a while for that project to build momentum. So that project will probably get into the recognized financial state in the fourth quarter of this year or maybe the first quarter of next year.

Got it. Okay. And then building on that, looking at the margin for the year, large project, obviously it was down several hundred bips from where it has been in '08 and '09 due, no doubt, at least in part, to the fact that you've got these large zero profit jobs that you're working on right now. How should we think about the outlook in large projects, both thinking about the things you're working on now and the things that are going to hit 25%, but also what has been going into your backlog? Where should we think about gross margins coming through there over time?

Every one of the projects is a little different. I think that we are still pretty confident that the overall large projects portfolio should be in the mid teens margins over periods of time, over a long period of time. I will tell you that the more complex the project, certainly the higher the expected margin. The more simple highway work, we have been a little bit more competitive on the margins. But I still would put them, on average, into the mid teen margin expectation on our large projects.

Okay. And so, based on the comments about when things are going to hit 25% with those three big jobs hitting late this year, maybe even one of them pushing over into next year, fair to think that we are going to look for margins a bit below that in the first half of this year, and then maybe pushing up at that mid teens level later in the year and into next year?

I think that's a pretty good model. Yes.

Great. Okay.

Todd, we also could see recognition on the SR520 project in 2010 -- or 2011 or early 2012.

2012, right.

That's another one on the list.

The 520 project is the project up in the Bellevue, Washington area that I did not mention, but there is a chance we could get recognition this year.

Got it. That is great. Okay, thanks a bunch.

Thanks, Todd.

Your next question comes from the line of Brian Rafn.

Good morning everybody.

Good morning, Brian.

Hello, Brian.

Jim, you made a comment, you said we are being real specific about the type of projects. Is there any bridges, dams, highway versus transit or is it the geographic area or is it the type of owner?

Well, actually, Brian, it is all the above. And I'll tell you what we did. We've actually assembled a group of our senior leaders to put together what we call a project committee. So, we are looking at the right projects from coast-to-coast and actually diverting resources from anywhere in the Company -- and I mentioned this in the call, to really go attack those projects we have the best chance of success on. We haven't done that in the past. In previous years, what we would do, is let a region, really much stay working within that region and bid whatever came to them. In today's environment, we're looking at the whole country. And if there is a project that is better for us to bid up in Seattle than down in the southeast somewhere, we will literally be taking resources from the southeast and having them help bid and build the job up in Seattle and vice versa. So, that's the change for us. So, it's more of looking at the overall market and picking the best projects for Granite from the entire country, instead of each individual region.

Right. You guys talked about, and I've asked this in past quarters, would you say that when you sat down and thought and talked about the mobility of your engineers and your expeditors and literally your welders and your guys that are on bulldozers, is that mobility of moving people around the country playing out as you thought?

Certainly mobility is a big issue in our business, and it is somewhat of a struggle, but I think our employee base has come to the conclusion, as well as everybody, that, in order to keep the engine really fueled, people are going to have to move. And resources are going to have to be relocated, some of them on a temporary basis, some of them on a permanent basis. And we are getting a lot more momentum in that part of the business than we've ever had, I think. It's a slow process. I would said that 2010 was a learning curve. We put some things in place to help our people be more mobile and 2011 is the year in which we make it happen.

Okay. When you talk about that Jim, are you actually staging people? Are you moving families primarily? Or are you putting guys in hotels? What level of permanence? Obviously, it's dependent upon the scope of the project, but are you having families relocate for two or three years to a project?

Well the answer, again, is all the above. Yes, we are asking families to relocate. In some cases, if it is shorter term, yes, we do put them up in temporary housing. If we see a market has a long-term growth opportunity, we are asking people to move permanently. And then in other cases, we will move them on a temporary basis and allow them to fly home over a period of time. Literally speaking on Guam, we have people that are excited to go to Guam for several years at a time, and come home once every six months, once every three months. So the entire work force is understanding that, to be more competitive in the environment we're in, everybody's going to have to be a little more mobile.

Okay. All right. Sure. If you look at -- you guys have talked about in the past about getting your profitability embedded in the backlog, getting it right on bid day. If you look at how difficult it has been, certainly the last year, year-and-a-half, when you're looking at jobs that you bid that you are successful on, is it that you are giving up and relinquishing some gross margin? Is it that you have rapidly brought down your cost structure? Or is it you're winning projects because you are vertically integrated?

Well I would say that we are winning projects mostly because of our approach towards the bids themselves. We pick the right projects, the ones where we have inherent advantages, whether it is working with an owner before, whether it is the type of product that needs to be constructed, we have an advantage because we've done it before. It could be that we are located relatively close to one of our vertically integrated businesses. And we just happen to have the people and the resources that have the expertise. So it is a combination of all those things.

Okay. Okay. When you talk about, for us non-engineering types, when you talk about the type of project we like, what -- give me a sense of something that moves a lot of gravel, we don't like marine projects. What type of projects do you avoid and what ones do you favor, if you could put a little more of an engineering spin on it?

Well first of all, any heavy civil project we are very comfortable bidding and building. I mentioned, whether it's highway reconstruction, tunnel, marine, bridges, that's right in our bailiwick. So it doesn't really make a difference as to the type of project. Certainly, we would like to, when they are central and located close to our vertically integrated business, would like to incorporate as much of our materials as possible. But we want to be able to bid and build projects where we have an advantage going in. That is the key. So, we spend the efforts in bidding the job and can actually create a higher level of margin for the Company.

Okay. You guys talked about divesting the Granite Land, winding it down. How many specific number of projects do you have to divest?

I don't have the number in front of me.

About 19 projects.

But I'd say at least a dozen to 15, in that neighborhood. And that divestiture program will take place, like I said, over the next three years, and some this year and some over the next two years.

Okay. Jim, are you just winding those down to their natural conclusion or are you actually selling those inter-period to another developer?

We could very well do that. We are not winding them down naturally. I will say that, because naturally would have been to hold onto them for a substantially longer period of time.

Okay.

And as we decided to move that timeframe up to a three year period, that is one of the major regions for the impairments you saw in the fourth quarter.

Yes.

They will be certainly devalued as compared to what they would've been holding onto them for 10 years or plus. So now that they have been impaired, our intent now is to move them much more rapidly off of our books. A lot of them we would sell to other developers; a lot of them we could build out quicker; some of them we could turn over part of our portfolio to other people. So, there's a whole series of events in how we would divest of those assets.

Okay. As you look at the reason for divesting it, is it just the amount of time? Is it a cost issue? Because you've had Granite Land for some time. What -- you're leaving a legacy business. What is the thought behind that?

Well first of all, it was always intended as a non-core business part of the Company. And when the real estate business was going well, it certainly proved out to be a good investment. We don't foresee a huge change in the real estate market over the next several years. And what we want to do is focus on our core business and expand our core business. So, yes, it is somewhat of a distraction. I wouldn't say that it's a huge distraction, but we would love to take the investment that we have in the real estate business, reinvest it back in our core business and grow the Company.

Okay. Okay. What a -- when you talk about the design-build, specifically in the heavy civil area, what is the bid quote pipeline look like? If you measure it, say, over the last three or four years, is it accelerating? Is it?

Maybe the answer is that it is plenty big enough for us to pick and choose which projects we are going to go after.

Okay.

And that hasn't changed for several years now. But I will say our approach, by having our large project regions now in the West, along with the East, gives us more capability and overall the ability to bid and build more large projects than probably we ever have been able to.

Okay. Okay.

The pipeline is still full and we are picking and choosing the right ones only.

Okay. How would you describe that pipeline, Jim? Is that -- would this be hundreds of projects and you're looking at maybe 10 or 20 or 30 a year? What percentage are you cherry picking?

Well I would say that we track dozens at a time, and I would say probably up to 50 projects at a time we track.

Okay.

Then we determine, obviously, when the potential funding will be in place, if they meet our hedge hog, if they're ones that are right in our line of sight. And then from those we literally determine what we have the ability to bid and build from a capacity standpoint. But again, there's a big pool that we draw down from. It could be hundreds down to dozens, and then we pick and choose from those amounts. So, it's just a selection process that we go through. And the selection process, as we expand more into the federal government, renewable energy market, and expand more into rail, the overall number of projects has increased in the last couple of years.

Okay. Okay. You spoke little bit about the renewable energy. Is that solar? Is it wind turbine? What specifically are those jobs?

Well the majority of it is solar.

Okay.

But we are actually bidding some wind turbine projects, as well. And so I would say 80% of the overall volume of work that we bid and are building is in the solar market, but we are starting to get a little momentum on the wind side, as well.

Okay. Okay. And then one last question. If you go back and look over the last, say you go back to the last two or three, maybe four years, when you look at the old branch division, the old turn business, if you looked at me turn business in 2010, how is that business different than it was, maybe, three, four or five years ago? Are you seeing more projects, but they are smaller? Is it just very, very competitive from a standpoint of pricing? If you can just put a sense on what the turn business looks like.

Well the turn business and go back to the branch business, we call it the vertically integrated business today, very competitive. And the major reason for that, Brian, is the fact that the private sector is gone. And so, what we saw happen several years ago was a migration of a lot of those private sector contractors moving into the public sector. The public sector has been pretty stagnant relative to the overall size of the marketplace, but it has been more competitive because of the private sector contractors being inserted into the market. And I would say it is very, very competitive. I would say it is saturated with plenty of contractors to build the work. And until the private market comes back, I think it is still going to be very, very competitive, and that's going to be, as I mentioned in my opening remarks, at least the next 12 to 18 months.

Okay. All right guys. Thanks, I appreciate it.

Thanks, Brian.

Thanks, Brian.

Your next question comes from the line of David Wells.

One quick follow-up, given your commentary on the QBT being more mid-to-late year. I was just looking back at my notes from the last call and it sounded like the expectation was more on a mid-year time frame. Just trying to get a sense if there's anything that's changed there or if that's some of the snow that we have seen more recently in that market that that would move that towards later in the year before hitting the profit threshold. Thanks.

David, I think the key ingredient there is that once you get the TBMs in the hole and get them working, you're not going to know exactly what the progression rate on those machines are until you literally get down there and get them working. And so we'd rather be a little more conservative and suggest it could move a quarter or two even depending on the rate of the machines. So, nothing significantly has changed. It's going to be more a matter of how quickly it progresses once it's in the hole.

Okay. That's helpful. Thanks.

Thank you.

I would now like to turn the call back to Jim Roberts for closing comments.

Okay., well thank you. And thank you for your questions. I would like to thank our employees from coast to coast. You have done a remarkable job in 2010. And on behalf of myself and our management teams across the country, I want you to know how much we appreciate the work you do and the commitment you make to Granite everyday. To our investors, we thank you for your continued interest in Granite. And please, if you have any questions, don't hesitate to get in touch with us. Thank you.

That does conclude today's conference call. You may now disconnect.