Granite Construction Inc (GVA) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Granite Construction Incorporated third-quarter 2012 earnings call. At this time, all participants are in a listen-only mode. And later we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Jacque Fourchy, Director of Investor Relations.

Good morning, and welcome to Granite's third-quarter call. I am here today with our President and CEO, Jim Roberts; our Vice President and CFO, Laurel Krzeminski. Following this call, each of us will be available throughout the day to answer any follow-up questions you may have.

Also, as a reminder, any forward-looking statements that are made this morning are subject to risks and uncertainties that could cause actual results to differ materially from these statements, and which are further described in our most recent SEC filings. Granite assumes no obligation to update any of these forward-looking statements or other information.

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

Thank you, Jacque, and good morning, everyone. On today's call, I will provide you with an overview of the third quarter, as well as an update on our current markets. Laurel will review the financial results for the quarter, and discuss the adjustments we have made to our 2012 guidance based on our outlook for the remainder of the year. As you can see from this morning's earnings release, Granite's third-quarter results reflect a continuation of the strong performance and momentum we have been seeing from our Large Project segment, offset by ongoing competitive headwinds in the Construction segment.

From a seasonality standpoint, the third quarter is typically our driest quarter of the year, particularly for our business units in the West. And it was the case for us again this year. Although we were busy in all segments of our Business, the competitive bidding pressures and continued delayed bid dates have impacted our ability to build backlog. Bid lists for the smaller-sized public-sector construction projects remain longer than we would like to see.

As we mentioned last quarter, we are starting to see a slight pickup in residential and non-residential work in certain markets. However, we do not expect a measurable impact until late 2013 and into 2014. I will point out that we historically see a positive impact from a pickup in the private sector in our Construction Materials business, first, followed by improving margins in the Construction segment. I would expect to see the same type of pattern in the future.

In response to the current environment, in addition to our core business, our teams are also successfully pursuing work and leveraging our capabilities in markets such as federal, power, oil and gas, water, and mining. The work we are performing in these markets is mostly our conventional, heavy, civil-type work. Not only does Granite have the capabilities and resources to take advantage of these opportunities, we are also well-positioned geographically to serve our customers from coast to coast. In addition, we are actively pursuing acquisition opportunities that will enhance our position in one or more of these markets.

As is the case with the Construction segment, our Construction Materials business in the West continues to be impacted by a weak residential market. With the exception of several projects in the third quarter that helped drive revenues, our overall demand remains low. We continue to seek out opportunities to maximize the value of our portfolio, both through controlling costs and through rigorous analysis of our fixed assets, to ensure they are meeting our performance expectations.

In contrast, I am very pleased with the ongoing strong performance from our Large Projects across the country. Solid estimates coupled with excellent execution drove improved gross margins on several projects during the quarter. Additionally, large project bidding opportunities in 2013 remain very promising, with several projects on schedule to bid in the first half of the year. As we noted last quarter, we were short-listed on several major projects. In New York and Texas, the Tappan Zee Bridge and Dallas Horseshoe projects are still pending. The I-35 E project, also in Texas, will bid later this month, while the California high-speed rail will now bid in January. The Bayonne Bridge and the Goethals Bridge projects in New York are also expected to bid in 2013.

The funding and procurement process for these types of mega-projects is very complicated, and it is not unusual for these projects to experience delays. While we are pleased with last quarter's passage of the 27-month, $105 billion surface transportation bill, Congress's inability to pass a budget has triggered a continuing resolution, in essence, freezing transportation funding at flat levels through March of 2013. Although this is disappointing news for our industry, it is not unexpected, given the funding uncertainties we have been dealing with at the federal level.

On a positive note, we are optimistic about the opportunities that will be provided by the expanded TIFIA credit assistance program, and believe it could have a very positive impact on our Business over the long term, particularly as it relates to Large Projects. TIFIA is designed to finance projects that would not have enough financing to do otherwise. As evidenced by the letters of interest tracked on the US Department of Transportation website, most of Granite's key states are applying to take advantage of the program in an effort to accelerate and facilitate projects in their respective states.

It is estimated that the $1.75 billion authorized for the program over the next two years has the potential to be leveraged into anywhere from $35 billion to $50 billion in investment for transportation projects. TIFIA is not the funding silver bullet for our industry, but I do believe it will play a significant role in project financing over the next several years.

It is important to note that, except for general fund transfers, the highway trust fund accounts are completely exempt from sequestration, as is the Airport Improvement Program. If sequestration does occur, the total cut in the highway program spending would be approximately $56 million. Defense discretionary accounts will also see their fiscal 2013 total appropriation rate reduced by 9%. In the short run, we anticipate that Congress will pass a sizable emergency disaster relief bill to assist with the rebuilding efforts in the Northeast.

In summary, our Construction and Construction Materials businesses continue to operate in a highly competitive environment. While we are seeing some signs of life in the private sector, we are not sitting on the sidelines waiting for it to come back. As we have said, we are focusing our efforts on leveraging our capabilities into additional markets. The water, power, and oil and gas markets are providing some solid opportunities for our Businesses in the West. And we are working aggressively to expand our presence within each of these end markets. Our Large Projects business is performing very well, and to continue to perform well, as we look to grow our backlog.

With that, I will turn the call over to Laurel, who will provide more details on our results by business segment, and walk you through our 2012 guidance. Laurel?

Thank you, Jim. And good morning, everyone. Let me begin with a review of the results for the total Company. Earnings per share were $0.94 compared with $0.93 per share last year. Third-quarter revenue was $728 million, essentially in line with last year. Gross profit increased $7 million to $101 million. As a percent of revenue, the third-quarter gross margins were 13.9%, compared with 12.9% last year. Selling, general and administrative expenses increased slightly to $41 million. We continue to expect SG&A expenses for the year to be in the range of $170 million to $180 million. Operating income for the quarter increased to $61 million compared with $60 million last year.

Looking at the segment detail, Construction revenues for the quarter decreased $45 million to $386 million. In addition to the competitive environment, in the third quarter we continued to experience execution issues on several construction projects in the West. We believe these issues are now behind us. As a result, gross margins declined to 8.6%, down from 13.6% a year ago.

Large Project construction revenues increased $43 million to $256 million. As Jim noted, our Large Project teams continue to execute at a very high level. Gross profit margins increased in the quarter to 22.6% compared with 12% a year ago, reflecting improved forecasts on several projects across the country. In addition, last year we had approximately $50 million more in revenue with deferred profit in the quarter compared to the current year.

Finally, revenues for the Construction Materials segment increased $4 million to $87 million in the third quarter of 2012. Gross profit was in line with last year, at $10 million or 11.5%. Regarding our liquidity position, we are very pleased to announce last month that we amended and expanded our credit agreement. The new four-year, $250 million senior-secured facility replaces our $100 million facility, and provides us with ample liquidity and financial flexibility to pursue our strategic growth initiatives.

In addition, our cash position remains very healthy. Cash and marketable securities totaled $372 million at the end of the third quarter compared with $330 million in 2011. The effective tax rate in the quarter was 27.2% compared with 26.3% last year. Our year-end 2012 tax rate is expected to be in the range of 20% to 25%, as a result of a discrete item that we anticipate recognizing in the fourth quarter.

Turning to guidance, as we outlined in this morning's release, we've updated our guidance for the Large Project segment, and now expect revenues to be between $900 million and $950 million. As a result of successful execution on our Large Projects, gross margins for the segment are now expected to be between 16% and 17%. In Construction, we are narrowing our range for revenues, and now expect to be in the range of $1 billion to $1.05 billion. Gross margins are still expected to be in the range of 8% to 9%. Construction Materials segment revenues are now expected to be in the range of $210 million to $220 million, with no change to the gross margin expectations of 6% to 7%. Non-controlling interest for the total Company is now expected to be approximately $18 million for the year.

With that, I'll turn the call back over to Jim for some closing remarks. Jim?

Thank you, Laurel. Before we turn it over for Q&A, I would like to recognize all of our co-workers, our friends, and our families who have been affected by last week's devastating storm. Our Granite Northeast team, based in Tarrytown, has been very busy assessing the damage to our projects in the New York area, and they are working closely with the local authorities to help with the clean-up effort in any way possible. I'm not surprised by the resiliency I am seeing from the people of New York and all of those affected. Our sincerest wishes for a speedy and healthy recovery go out to all of the individuals and communities who are now cleaning up from this tragic event.

So, with that, I will now turn it over to the moderator. And Laurel and I will be happy to answer your questions.

( Operator Instructions)

Jack Kasprzak with BB&T.

The guidance for large construction revenue came in a bit. Can you talk about the reasons for that? Were you just finishing more work than you thought in the third quarter? What was going on there?

I think it's Large Projects itself. You're talking about the revenue guidelines for 2012, Jack?

Yes.

I think that some of that included some work that we were hoping to actually build on the tail-end of this year by getting a couple of projects which seemed to be delayed now into the beginning of 2013. So really, I think our execution of our work on our books is going very well. It was just a couple projects we were hoping to book in the fourth quarter and get revenue for that we don't see that happening.

Got it. Okay. And with regard -- the comments on the Construction segment -- several execution issues in Q3. Are those related to the problems that started in Q2? Can you quantify the impact in Q3?

Well, I will let Laurel quantify it, if she can. Some of it is a carryover from Q2, and some of what are discrete items in Q3, alone, Jack. But, I think that the way we look at it today, those jobs are basically complete now. So, we don't see them going forward. But I would say that there was some carryover on the back-end of Q2, as well as the new stuff in Q3. Laurel, do you want to quantify that?

Sure. Our 10-Q will be coming out shortly, Jack, with a little bit more details. But the net decreases in our forecast were negative $6 million this year versus $1 million last year. So, if that gives you any context of the difference.

Of that construction project?

Right. Of the Construction segment.

Is that a --?

And there were four projects that had downward estimates.

Okay. Is that in the quarter or year-to-date?

Quarter. For the year-to-date, the net decreases are $9 million versus $2 million last year.

$9 million verse $2 million. Okay. Thank you. The revenue in Construction was down year-on-year. You've talked about the competitive pressures there. But it's a little worse than I have been modeling. Was there just less shorter-term tern work to go after than maybe you thought? Or was that business kind of in line with what you were thinking in the quarter?

It came down a little bit, but it really comes down to -- how many days, how many crews, how many you got working -- we are busy, Jack, we are very busy. It just wasn't quite at the pace that we had anticipated when we talked about this a quarter ago. Hopefully, it will pick up and continue to pick up. It's more of a -- do we have the backlog or not? We do have the backlog for the remainder of the year. So, we will just have to see how the fourth quarter plays out.

Got it. Okay, great. Thanks, everyone.

John Rogers with DA Davidson.

Jim, you gave us some of the projects that you are looking at for 2013. But I know over the last couple of months or quarters, in terms of presentations, you talked about the whole bid market. Could you just update us on what that is? What that looks like? (multiple speakers)

Well, I think probably, John, focusing on the Large Project arena or you want to talk about --

Yes, I'm sorry, yes.

The Large Projects environment is staying robust. Whether or not it is -- I would suggest that some projects have been delayed into the beginning of 2013 and the tail-end of 2012. So, what I would suggest that for the overall size of the market is staying quite large. We are seeing new projects come on board. Our list is still up about a $16 billion number right now, in pursuits, between now and the end of 2013. So it's staying as large or larger than we've ever seen. That's a good sign.

It kind of goes back to remind me, on Large Project side, of some alternative financing mechanisms that I brought up in the discussion earlier. With the TIFIA loan process in place, they are upgrading and upping the overall volume available into the marketplace. We are seeing more applications for TIFIA loans on these large, what we call mega-projects. So the mega-projects are continuing to come out. Overall, the market size for large projects is staying very robust.

Okay. But it sounds like the first half of 2013 -- is that what you're -- when we should see a lot of these awards, the way they're -- unless there's more slippage?

Well, I think that, for example, the I-35 job is turning into the next couple weeks. We are still waiting to hear on Horseshoe in Dallas. We are still waiting to hear on Tappan Zee in New York. We've got a series of projects that will be turned in, in the first quarter. I think the first quarter is going to be a very busy Large Project quarter.

First half.

And first half in general.

On the local business, I just looking at some of the numbers out of California and elsewhere. There's a big increase, in terms of just the dollar value of what the awards have been over the last month or two. But it doesn't sound like you are seeing that.

Well, I'm not so sure if I would notice it. There have been a large increase in overall awards. There are projects out to bid, and we are getting our share of them. It's just competitive, so we're getting work. Specifically, if you are talking about California, we are getting our share of the work, it is just very competitive.

Okay. And then, in terms of the private markets, you talked about oil and gas and industrial markets. How far away are you from a major project from a private-sector client?

Well, we've got several. It depends on what major means. We've got several projects in the $20 million to $50 million range today in the energy market, in the mining market, in the refining oil and gas market. So we are seeing some, I wouldn't call mega-projects, but they are fairly large construction projects. We have several of them going today.

Is that generally site preparation work or --?

Well, it's still the work. It could be utilities. It could be structural concrete, as well. It is mostly our heavy civil type work, though, John.

Okay. And is there a chance that we could see something larger or more significant in the private sector? Are you pursuing those types of opportunities now?

Yes. I would suggest to you that, yes. We are trying to play a larger role with larger projects in those areas.

Okay. All right. Thanks, I appreciate the help.

Nick Coppola with Thompson Research Group.

Looking at Large Project construction margins, they were obviously really strong. Is there anything unusual you could call out there without the Q? Were their less projects below the profit threshold, relative to prior quarters? Anything that you could point out there would be helpful.

Well, I think there is a -- you mentioned a couple things there, Nick. Yes, there were less projects that had not reached the 25% threshold. But I don't think that's the most significant issue. The most significant issue was that the execution on these projects is going very well. I said that in my discussions earlier. The estimates are good. The risk analysis is excellent. Our execution is going well. And as the execution continues to go well, they continue to create a lot of opportunities for the Company. I would call it more just really positive execution than any other issue.

Yes. It's still well above the mid-teens, what you'd typically expect, though, right?

That's correct. I would say long-term, and we mentioned this. And so now is the good time where the returns are above the mid-teens and there is quarters where the returns are below the mid-teens. But yes, we believe Large Projects continually, year over year over year, should be in the mid-teen level returns.

Can you talk a little bit about the seasonality of revenues in Large Project construction? Because looking at the midpoint of guidance, you are looking like -- it looks like there's going to be some sequential growth in Q4. More typically, there's a decline. Is there anything going on there? Or is that just the flow of the projects?

I think it just depends on where the projects are all located and into what stages are in, Nick. Our projects are going strong. I think if you have good weather in the locations where the large projects are located, they will continue to perform at a high level during the fourth quarter. Obviously, if weather sets in, in some places, it will impede the progress of those jobs. So they are all over the country, though. So it's not as weather-driven as the Construction and the Construction Materials business.

Right.

I think, Nick, it's the portfolio and where we are in progression of the project. We happen to have a lot of large projects right now that are in a sweet spot of progression. So, anyway. As far as I mentioned on the script, we had $50 million more last year in deferred revenue for the quarter and $100 million more, year-to-date, of projects that didn't -- revenue that didn't have any profit on it. Just to give you some context for those numbers.

So it does have some -- having less will bring that overall return up for the quarter, up a little more, because of less projects below the threshold. But I don't think that's the major driver.

Right. Okay. And then just one last question. I was wondering if you could talk a little bit about dedicated sales tax for transportation projects? I saw Arkansas voters approved the statewide sales tax. Also, you've got a county in North Carolina and South Carolina that did something similar. Do you think we can get any traction on that, as a way to increase highway spending?

Well, I was going through some of those public works balance this morning. Actually, it's kind of -- I wish we could get momentum. As I look, there are some that passed, some that failed. I think it really comes down to a quality-of-life issue in those locations. I think it's going to end up being that the local areas are going to have more of the burden put on them. They've got to feel the pain before they are willing to pass it.

So, as I looked down my list, yes, there were many of the tax override measures that passed. That's a good sign that some of the local environments do understand it's going to end up being more in-their-court going forward, to handle their local infrastructure measures.

I think if we can get the two-thirds majority vote lower, that threshold reduced, we would see a lot more of these pass. It's just that it's a tough hurdle to get over un this environment today. So that's a push right now, to get that threshold lowered.

Okay. That's helpful. Thank you.

(Operator Instructions)

Sameer Rathod with Macquarie.

You talked about delays in some of your larger projects from the bids outstanding. Is there a common thread why projects are moving to the right? I understand there is always some slippage. But as you look at our portfolio of bids, is there something that's common between all these projects that are slipping? Or no?

I don't think there is any commonality. But I think that, if there was anything that was the overriding, I think it's getting all the financing and funding in place for these projects. I think that with some opportunities today, as I mentioned with the TIFIA increase, to set $150 million next year and $1 billion the following year, I think some of these more local agencies that have these mega-projects are now getting in line for TIFIA assistance and waiting for responses. Because they see a better opportunity for funding or financing their projects.

So that could be a reason for some of the short-term delays today. I think that's actually positive, because what that will end up doing is getting more of these opportunities out on the street, once they figure out the new TIFIA process. Other than that, I don't think there's any commonality, in terms of why they are being postponed.

Okay. Next, post-election, I think Obama's been pretty vocal in terms of infrastructure. How do think policy can change or will change in the next four years? What impact do you think that will have on your Business?

Well, I wish I knew. And I don't. There is no doubt that he has been pro-infrastructure. He has proposed some very nice funding opportunities. But boy, I am not a political pundit. I really don't know where it would go.

I can suggest to you that there needs to be a significant funding discussion in the next 12 months to 18 months, before [mac 21] is completed in September of 2014. I think it's going to take place. I think this is a good opportunity now, to really bring up some key infrastructure funding opportunities. And I say that, because what we have been dealing with so far are more financing issues.

The key ingredient, and I've said this several times, historically, is that it is about funding. Financing is good to get the mega-projects onboard and everything, but to get the overall infrastructure back where it needs to be is going to be a funding mechanism. I think you are going to see in the next 12 months to 18 months, that will be the top of the list.

Okay. My last question is on Tappan Zee. It seems like you guys, your consortium, was selected for final negotiation. What are the final hurdles before you can book that project? Could you remind us how big of a award this could be?

Well, let me suggest this -- that project is still in the bidding phase, the analysis phase by the owner. So I think it would be probably best that we don't comment on a project like that, while it's in a phase with the owner being analyzed today. There's a lot of information floating around in the media. I would just leave it at that for the moment, and let the authority do its work.

All right. Thank you.

Gregory Macosko with Lord Abbett.

Just with regard to delays, et cetera, Tappan Zee, whatever, do you see that the Hurricane, the storms in the Northeast, are having any affect on your Large Project business up here?

Well, I think it does have some affect. Most of our projects are pretty well enclosed. I will say the World Trade Center, certainly, we are in a observation mode there, and gathering up information to determine the damage done there. We have a large tunnelling project that seems to have come out very well from the storm. And most of our projects are well contained.

There will be some slowdown and some cleanup as we try to get our arms around any of the damage that may have occurred with any of our projects. But we will get back on board, and get them to the point where they're moving ahead here in the next month or so, as soon as they get cleaned up and the analysis is completed.

With regard to the construction side, are you -- just help remind me then, are you well-positioned relative to the work that might be done in New Jersey or along the coast at all? Is that -- will you be looking at that, bidding on that kind of work?

Absolutely. If it is work that is in alignment with our infrastructure teams in the Northeast, we will absolutely be bidding that work. I would like to suggest first that we'd like to sit back and help with the cleanup first, and then wait and see what kind of overall infrastructure improvements are going to be needed. Of course, we would like to take part in that if it's at all possible.

Okay. But you feel like you have the capabilities on the ground to serve a pretty broad area of where the damage has occurred?

Yes. In fact, as a nationwide Company, if we needed to, we could bring in help from other places as well, if that was needed to help with the local efforts.

Okay. Thank you very much.

Min Cho with FBR Capital Markets.

Actually, most of my questions have been answered. I just have one final one regarding the TIFIA opportunity. When do you expect to see some significant positive impact from that? It obviously sounds like it's going to take a while to figure out the entire funding process. But have you started to see some of the impacts? When do think that will occur?

I think we have, actually, starting to see the impact today. My feedback I've gotten from our teams on the ground is that a lot of the projects that we are pursuing have already applied for TIFIA applications. They are waiting to hear back. And that's a good sign, because there are projects that are right in our wheelhouse. And I am looking at about 10 of them on the list today that have already made applications. So with the increase in the loan amount, I think this is going to be a great catalyst for 2013 and 2014.

Great. Thank you.

I am showing no other questions. I will turn it back to management for any closing remarks.

Okay. Great. I want to thank everybody for your time today. Before we close, I would like to thank our employees from coast to coast for their dedication and their commitment to Granite. To everyone on the phone and the webcast today, we appreciate all of your interest in our Company. If you have any additional questions, as always, please do not hesitate to call us, Laurel, Jacque, myself are all available. Thank you, and have a great day, everyone.

Ladies and gentlemen, this does conclude today's conference. You all may disconnect and have a good day.