Granite Construction Inc (GVA) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Granite Construction Incorporated third-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to introduce your host for today's conference call, Ms. Jacque Fourchy. You may begin, ma'am.

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

Before we get started, I would like to remind you that this conference call will contain 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 Jim Roberts. Jim?

Thank you, Jacque. And good morning, everyone. On today's call I will provide you with a brief overview of our third-quarter financial results. And then Laurel will provide further detail on our results by business segment, as well as an update of our 2011 guidance. And I will conclude with a look ahead to 2012.

Overall, I am very pleased with our third-quarter results, and with how well our business is performing. The third quarter is seasonally our driest quarter, which was the case again for us this year. Revenue was up in both our construction and our large project segments, as teams were busy building work across the country. Gross margins in the construction segment were stronger than we have been seeing, driven by improved forecasts on several projects. In addition, two of our large projects, the World Trade Center PATH station, and the Mountain View Corridor projects, both reached the proper recognition threshold during the quarter. Our performance in the third quarter is a testament to our people, our diverse and resilient business model, and our ability to continue to reduce costs.

Unfortunately, we have yet to see an improvement in the overall economy, as well as the competitive environment in the construction industry. Bid lists for both construction and large projects are still longer than we would like to see. Consequently, margins remain under pressure. Given this level of competitiveness, status quo is not an option. Our teams are actively targeting new customers, new work that leverages our capabilities, and aggressively seeking opportunities that we feel we have the best chance at obtaining.

In relation to backlog, I would like to point out that our reduction in backlog volume from the second quarter does not include approximately $410 million in new work that we expect to book between now and the end of the year. This includes approximately $240 million associated with the Houston light-rail project, and $170 million associated with a highway project in Texas.

With regard to Guam, we are very pleased to have been awarded a $90 million contract during the quarter, of which our portion is $44 million, or 49%. This is one of the first bids we have submitted to date for work on Guam. We are very excited about this opportunity, and expect to bid anywhere from about $300 million to $600 million of additional work on the island over the next 12 to 18 months.

Although funding is a factor for many of our customers, the number of opportunities by market type and geography remain healthy. Our large project teams expect to bid on projects with contract values totaling over $9 billion between now and the end of 2012. While we expect there to be substantial competition for many of these projects, we are committed to being patient in order to acquire a solid backlog of work that will provide value to our Company over the long term.

Let me now address the infrastructure funding situation. Beginning at the state level, I am pleased to say that California recently sold $1.8 billion in general obligation bonds, of which a portion will be allocated to fund transportation. Given this sale, we do not anticipate any disruptions to the transportation funding flow through the end of June 2012, which is the end of the California state's fiscal year.

At the federal level, the current extension of the Federal Highway Bill expires March 31, 2012. Both the House and Senate are actively working on bills that will provide the states and our industry with a much-needed longer-term solution. Senator Boxer continues to fight for a 2-year bill, while House Transportation and Infrastructure Chairman John Mica is seeking additional funding to pursue a 6-year, $350 billion surface transportation bill.

And, as many of you know, in early September the President proposed a $447 billion American Jobs Act, which includes $50 billion for infrastructure funding and $10 billion for the National Infrastructure Bank. After failing to pass the overall package, the Senate leadership introduced the infrastructure portion of the President's proposal as a stand-alone bill this week. Portions of the package are still under consideration in the House. We are cautiously optimistic that some form of additional funding will come out of the American Jobs Act.

With that, I will now turn the call over to Laurel who will review the third-quarter results. Laurel?

Thank you, Jim. And good morning, everyone. Looking first at the total Company for the quarter, net income per diluted share was $0.93 compared with the prior year's $0.99. Included in the third-quarter 2010 earnings is a tax benefit of $8 million versus a tax provision of $15 million for the third quarter in 2011. Revenues for the quarter were $729 million compared with $670 million in 2010. The gross margin for the quarter was 13% compared with 11% in the third quarter of last year.

Construction segment revenue for the quarter increased 5% to $431 million from $410 million a year ago. Gross profit margin for the third quarter increased to 14% compared with 11% last year, driven by improved execution on several projects, as well as our ongoing efforts to reduce costs. Large project revenues increased 26% to $213 million compared with $170 million a year ago. Gross margin was 12% compared with 11% a year ago. Revenues for the construction materials segment declined to $83 million in the third quarter of 2011 compared with $88 million in the third quarter of 2010, driven by weak demand in the west. Gross margins on material sales decreased to 12% compared with 14% in 2010.

Turning to backlog, total contract backlog at the end of the third quarter was $1.8 billion compared with $1.6 billion a year ago. Backlog in our construction segment increased to $563 million compared to last year's $497 million, driven by a very active market in California. Large project new awards in the quarter include a $64 million bridge project in Florida, as well as $44 million from our portion of the utility and site improvement project in Guam, and $24 million for our portion of an airport project in California.

Selling, general and administrative expenses decreased to $39 million in the third-quarter 2011 compared with $47 million a year ago. Our efforts to reduce our cost structure have led to a significant reduction in SG&A. For the full year, we anticipate SG&A expenses to be approximately $170 million.

Our cash and marketable securities totaled $330 million at the end of the third quarter compared with $388 million a year ago. The decrease is being driven by a shift in our mix of consolidated versus unconsolidated joint venture projects. Our share of cash in our unconsolidated joint venture is not recorded as cash on our balance sheet until it is distributed to us, which is typically not until the end of the project. Our portion of unconsolidated cash is approximately $133 million compared with $90 million a year ago.

The tax rate in the third quarter of 2011 was 26%. And we continue to expect our fiscal-2011 rate to be approximately 24% to 27%.

Turning to guidance, construction segment revenue is now expected to be $1 billion to $1.1 billion, with a corresponding gross margin between 10.5% and 11.5%. Large project construction segment revenues are expected to be $650 million to $700 million, with 15.5% to 16.5% gross margins. And construction materials revenue is expected to be $190 million to $210 million, with 7.5% to 8.5% gross margin. We now currently expect non-controlling interest for the total Company to be in the range of $13 million to $15 million for the year.

With that, I will now turn the call back over to Jim.

Thank you, Laurel. Before we take questions, I would like to spend a few minutes looking ahead to 2012, which, as many of you know, is not an easy task given today's environment. Our backlog of projects, large projects, which provides us with the most visibility of our segments, will provide a solid base of business for us in 2012. New work that we acquire in the next several months will positively impact backlog, however, it may or may not reach the profitability threshold in 2012. Its impact on next year's business will depend on the size and scope of the work, as well as the speed in which the work progresses.

Our construction and materials segments, on the other hand, do not provide us with the same level of visibility due to the smaller size contracts, and the fact that a significant portion of the revenue will be generated from projects that will not be out to bid until the first or second quarter of next year. With that being said, we do believe that competition will remain intense given the ongoing weakness in the private development market. Another driver for these segments is the local and state budgets, which we expect to remain relatively stable next year. This outlook could change quickly -- for the better, we hope -- given any incremental improvements in the funding landscape.

In closing, I'd like to reiterate our strategy to focus our energy on those things that we do well, and are within our control. Our markets will not improve overnight. But by operating as efficiently and effectively as possible, I am very confident that we are making the strategic decisions necessary to diversify, reduce costs and leverage our core capabilities to grow the business.

Before I turn it over to the moderator, I want to acknowledge our employees for their dedication and perseverance. We are asking a lot of our people right now, and they are performing at levels that are exceeding expectations. We have incredible people at Granite, and I could not be more proud of our team.

With that, we'll be happy to answer your questions.

(Operator Instructions) Avi Fisher with BMO Capital Markets.

Very impressive quarter, and great cost controls. The first question I have is on the guidance. The SG&A guidance you issued indicates that there is going to be a big bump in 4Q 2011. I am wondering what is driving that? And also, at the segment level, it looks like there's a big bump in gross profit margins in the aggregates business, and in the large construction project business. I wonder if you could talk about those?

I will talk about SG&A first, Avi. SG&A is impacted by seasonality. In the fourth quarter, in some of our locations, people aren't able to work, and so they might come back in the office and do estimating. So we will sometimes see selling expenses, which typically we do increase in the fourth quarter. Additionally, we have some expenses that are associated with earnings, for example, incentive comp. And so those costs would get higher in the fourth quarter. So, those were our assumptions behind the fourth-quarter guidance.

Okay, and Avi, and maybe I will address -- I think the other two were materials and large projects. Materials first -- we do anticipate a fourth-quarter bump. We are very active currently. October was a busy month, November and December will be busy, weather allowing. We have the backlog of work, and we have a lot of materials in that backlog. So, we do think that the material business will be strong in the fourth quarter. As far as large projects, we do expect a couple of jobs to come into play in the fourth quarter, to reach recognition. And obviously with the lumpiness of the recognition of these jobs -- obviously in a given quarter you will see a bump in the overall earnings.

And which projects hit the recognition threshold in 4Q?

HRT, the job in Texas. And then SR520, the job up in the state of Washington.

And two other quick questions. On the direct cost line, is that a reflection of the restructuring and cost controls, or is that more a reflection of project contract revisions? Or both?

A little more detail on the question, Avi, if you could, please?

You had phenomenal gross profits and direct cost control at the segment level. Is that a function of the restructuring you did earlier this year and late last year? Or is it mostly a function of just the contract profit adjustments -- positive profit adjustments on contracts?

I would even go one step further. I would suggest to you that it is the ability for our crews in the field to meet or exceed their costs. And I mean that in a positive sense, by exceeding -- by beating their cost basis on projects. We are making or beating the cost estimates on our projects.

Project performance, okay.

It's Laurel. We had 2 projects reach profit recognition threshold in the third quarter as well.

That would impact the large project side, right?

Yes.

And finally, can you provide an update at all on what is happening on US 20, if the DRB had a resolution yet?

We're still in the middle of the dispute review process. And that means that we are working towards a resolution, and we aren't at a definitive ending of that dispute review process yet. And we continue to maintain the site from an environmental standpoint. And we continue to work with ODOT on coming to an ultimate resolution. And if you remember, we firmly believe that there are different site conditions; we firmly believe that we deserve to have additional compensation on the job. But the dispute review process is still underway. And it would probably -- I hope it would be completed by the end of the year, but it could even drag on into next year, Avi. So, we are just in the middle of the program today still.

Thanks for your time, Jim, and great quarter.

Jack Kasprzak with BB&T.

You talked about the margins obviously in the quarter and in your guidance, but also the competitive environment's still tough. You look at the construction segment, sales are up, backlog's up, and you raised your margin guidance there. I understand that the competitive environment is still tough, but directionally is it getting a little better? Is it helping at all in terms of a backdrop for the better performance on the construction side?

Jack, I guess the best way to answer that is that we are performing -- we are making our estimates. And that means that our field teams are doing an excellent job building the work. I don't want to go too far forward suggesting it's getting better, because I think it is still very intense. But I do think that what our people and our crews are doing is showing that they can operate very efficiently in this environment, and they can compete. And they can compete and keep the margins at a level that are acceptable. And I don't expect the competitive environment to change, though, in the next 6 months.

And one of the things I think you guys were seeing, going back a couple of years on bids is not just that the number of bidders were increasing, but you were seeing firms come in that maybe you didn't recognize or see that often from other areas, going out to scalp work. Are you still seeing that, or are the bidders more familiar these days?

Maybe there is a way to answer that, that the ones that came in 6 months ago, now we are familiar with, and they are still there. I do think, though, that those people who came into the market a couple of years ago, Jack, at pricing that was, what I would call ridiculously low, maybe have changed their cost structure a little bit. And so they understand maybe today what it takes to build some of this agency work versus some of the private work that they were involved in previously. But the bid lists are long still, and the competitive atmosphere certainly has not changed.

With regard to 2012, what can you tell us about your expectation for the price of materials -- cement, aggregates, concrete? We hear already talk of price increases generally. Specifically in California, do you think you'll see some inflation in those materials?

I would like to think that there would be some inflationary increase in cost next year. I think that what we have seen this year is pretty much static pricing. We hope that as this market continues to adjust a little bit, that there would be some upward movement next year. And I think that the California market itself does have a strong budget for next year, and that should allow some increase in aggregate pricing. I'm not going to put a number on it because I think it is too early to tell.

Okay, great. Thanks a lot.

John Rogers with DA Davidson.

Congratulations as well. A couple of things -- just in terms of margins, it sounds as if in the construction segment you are either hitting or exceeding your as-bid margins. So you are fully reflecting the pricing in the market. But in the large project work, are the margins that you are recognizing now in line with the pricing you are seeing now?

I think it is an interesting environment because as we build out these projects, as we price them, we put contingencies in and then we go build the job. And sometimes the contingencies fall to the bottom line, sometimes they don't. We are aggressively pursuing large projects. And the market fluctuates depending on the complexity of the job, John. So, some jobs are being bid with higher margins, and some of the more less-complex jobs are being bid with margins below where we are at today. But I would say to you -- the key ingredient to those margins are the fact that we are making or beating our estimates in the field.

In terms of hitting the 25% threshold, as you look at the full-year 2011 -- and I guess we will get some of this out of the Q -- and then as you look at '12, how does that balance work in terms of getting to the 25.1% levels in '12? Is it the same sort of ratios, or it would be significantly lower or significantly higher?

I don't know the answer to that off the top of my head. I would say, though, that whether or not there are more or less jobs that reach the 25% threshold, I think the other thing to take into consideration on large projects is the run rate on the jobs and the quality of the backlog we have. And I would suggest to you that the jobs that we have on our books today, our large projects, is excellent backlog. Backlog is always good, but the kind of backlog we have is really good.

I would suggest to you that's a combination of the run rate on those jobs, as well as what jobs reach the threshold. And I can't tell you today exactly where we are at, but that will depend a little bit on what happens in the next several months, as well. Because we have quite a few bids out into the marketplace today, and if we were able to obtain a couple of those jobs, they would have the ability to make the 25% threshold next year, as well.

I realize quarters are going to be all over the place, but it's not going to get materially worse next year, and possibly could get better?

I think, again, I'm not sure that I can answer that right now, depending on what the backlog and the condition of our bid structure today. That will depend on how successful we are, probably in the fourth quarter and in the first quarter.

And the last thing, Jim, you all have the organization running pretty well now compared to what we had seen a few years ago. Is it opportunities to look at acquisitions, or is that just still too far out?

I think, John, that as we continue to focus on our core business, which is what we said we were going to do in 2011, we certainly would look at M&A in our strategic plan going forward in 2012. We're really not in a position to suggest anything definitive at this time. But I think you're right, it's time to look at other opportunities, probably in 2012.

Great, thank you very much.

David Wells of Thompson Research.

First of all, looking at the large project pipeline, I guess we have been in that $9 billion to $10 billion number for a number of quarters. And so I was wondering if you could walk us through maybe the composition of that. Is the opportunity set fairly defined, and you're seeing just pushbacks in awards? Or maybe could you talk about the turnover in terms of the amount of that that is turning over, and are new projects being added to it?

David, I will say this -- I think that you did allude to something. Some of the jobs were pushed into 2012 that we had actually hoped we were going to have bid this year. So, the makeup of this is really all over the country. And I have a list in front of me. And I actually, Laurel and I both wrote down the $9 billion number just from the jobs, that is a 2-page list. There is actually more that we are pursuing than that.

But they range anywhere from large projects in New York, the Goethals Bridge is huge. There's some other large bridge work there. We've got Dulles Metro Rail. We've got some large projects up in the state of Washington. We've got Guam. And I've got a list here, we've got large projects in Colorado we're pursuing. It's really all over the boat. And they do maneuver in and out. But I would say the $9 billion backlog does seem like a number we've said for several quarters now, which is good because that means that as we bid work, whether we are successful or not, there is other work coming up behind it for our estimating teams to pursue, as well.

And I was wondering if you could give us an update on the QBT project, and where things stand there currently?

Today that job, both of the tunnel machines are working. And they are working quite well. And I would suggest to you that we are on schedule, or close to being on schedule. And I would classify that job as progressing very well.

And then lastly, I'm a bit confused, perhaps, by your commentary regarding 2012. And I can't tell if you're optimistic about next year or cautious about it. Just given the uncertainties on the macro front, tone-wise, how are you feeling as you head into the year? Or is it just at this point a wait-and-see, it could go either way at this point?

Can I rephrase your two comments and call it cautiously optimistic? And I say that because I think that our teams are really operating at a very high level today. And I think that is the real positive sign, is the quality of the teams and how well they are performing. The cautious side is that you look into the marketplace and the funding mechanisms. If we can get a boost out of the federal government, if we can get a highway bill that will boost some of these states' ability to put some projects on the street sooner than later, I think that would be a big positive for us. If we can see some positivity out of the American Jobs Act, I think that would, again, infuse some additional work for us that we can't anticipate today.

But nowadays, it is awful difficult to really understand exactly what is going to happen at the federal level. The states are pretty stable, I would say, and I don't mean that necessarily good or bad. But I do think that pretty much we know where we are at there. I think that I say cautiously optimistic because if the feds can come up with a program, and reinvest into the infrastructure, which we think is badly needed, I think it could really take us over the top.

Okay, that's helpful; I appreciate that, thanks.

David, we're about 50% complete at QBT.

Great, thanks.

(Operator Instructions) I'm not showing any further questions at this time.

Okay, everybody. Thank you. And as always, we appreciate your interest in Granite. And don't forget, all of us will be here for the rest of the day, as well. Certainly you are welcome to call any of us after the call, and we will be happy to answer your questions. Have a great day, everybody. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect.