Granite Construction Inc (GVA) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Granite Construction Incorporated fourth quarter 2012 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 be given at that time.

(Operator Instructions)

As a reminder this call may be recorded. I would now like to introduce your host, Vice President of Investor Relations, Jacque Fourchy. You may begin.

Good morning and thank you for joining our call. I'm here today with our President and CEO, Jim Roberts, and our Senior 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. During today's call I will present an overview of the quarter and spend a few minutes summarizing the year. And then Laurel will walk you through the fourth quarter numbers, and then I will wrap up with some comments around our outlook for 2013.

Overall we finished the year strong as our team successfully worked to complete several large projects throughout the country as well as secured two mega-projects, the Tappan Zee bridge project in New York and the and the IH-35 E highway project in Texas. Offsetting that positive impact are the challenges we continue to face in the West as reflected in our construction and construction material gross margins. The traditional public sector work remains very competitive, especially in California. In alignment with our stated strategic plan, we are also actively pursuing work in the federal, the mining, oil and gas and power end markets.

Our teams are also successfully securing work in the local commercial and industrial markets. While encouraged by the positive indicators as they relate to the residential market, we are cautiously optimistic that we will see a benefit to our business in late 2013 or early 2014. Additionally, we are continuing to grow our large projects business across the country as shown by our recent bid success announcements. As I have noted before, these projects tend to have shorter bid lists due to their complexity and balance sheet requirements. Once again we have a strong backlog of quality projects to bid in 2013. Of the large projects on our radar screen, we are committed and have teaming arrangements to bid over $13 billion worth of work during the next 12 months of which Granite's portion is about $6 billion. A sample of the projects bidding this year include the Goethals and Bayonne bridges in New York, the South Capitol Street bridge in and Dulles Metro Rail Extension in Washington, DC, and the I-4 ultimate highway project in Orlando. We have excellent teams assembled on each of these projects and continue to be very confident that we will get our share of the work.

We recently turned in our bids for the next phase of the Folsom Dam Project in California, the second phase of the US36 project in Colorado, first package of the California high-speed rail as well as the I-440 rehabilitation project in North Carolina. We intend to bid three more packages of the California high-speed rail project before the end of this year. The successful bidder is typically informed within about 120 days of the proposal date. So we look forward to hearing bid results on Folsom, US36, I-440 and California high speed rail no later than June of this year.

On December 31, we acquired Kenny Construction Company, making Kenny a wholly owned subsidiary of Granite. This was an exciting step in our strategic diversification effort as well as in our plan to grow our large projects business. Together with Kenny, our plan is to expand our presence into targeted end markets such as power delivery and water and wastewater infrastructure, both of which have attractive long-term fundamentals. Additionally, the combined Company has the balance sheet, bonding capacity and expertise to pursue larger and typically more profitable projects in all markets. There are also opportunities for Kenny to self perform more heavy civil work in the power sector or utilize one of Granite's heavy civil units to perform this work which Kenny has historically subcontracted. Also compelling is the opportunity to expand the existing underground Inliner business beyond its current Midwest and Mountain region presence, especially into geographic markets where Granite currently operates.

Another element of the strategic rationale is the expansion of the combined Company's heavy civil business and attractive large project opportunities in the Midwest. Pursuing larger projects in the broader geographic area will allow us to leverage existing relationships with contractors and engineers and increase the margin potential of the civil portfolio. In fact, the Kenny team was low bidder on its first civil projects since the combination of the firms, an $18.5 million dollar grade separation and railroad bridge for Illinois Department of Transportation as well as an $18 million sewer construction project for the city of Chicago. Okay. Let's shift gears a bit here and address the current infrastructure funding situation.

We continue to see fiscal constraints at the state and local levels driving increased interest into alternative project delivery such as public private-partnerships or better known as P3s. Underpinning this interest is the increase in TIFIA funds which were authorized in the recent federal highway bill MAP-21 and will serve as a critical source of sub debt. Given the fact that historically these loans have outpaced supply nearly 107 to 1, we are quite confident that TIFIA loans will provide a meaningful benefit to our business over both the short and long term and conceivably free up additional funds for additional projects. With regard to state budgets, while revenues across the country have been improving, funding levels remain relatively low. As evidenced from recent budget proposals, states are looking at ways to either maintain their existing transportation budgets or raise taxes and/or fees to fund much needed improvements. The need for infrastructure investment continues to outpace funding in all parts of the country and at all levels of government. We will continue to work closely with our representatives in Washington and in our local states to close this huge gap by increasing revenue as well as through the use of innovative financing to support public-private partnerships.

With that, I will turn the call over to Laurel.

Thank you, Jim, and good morning, everyone. Let me begin with a review of the results for the total Company this quarter. Earnings per share were $0.46 compared with $0.48 per share last year. Fourth quarter revenue was $505 million compared with $540 million last year. Gross profit margin for the quarter decreased to 11% from 15% in the fourth quarter last year. Total contract backlog at the end of the year was $1.7 billion compared with $2 billion last year and includes $357 million from Kenny.

As Jim noted, we are very pleased to secure both the Tappan Zee bridge and IH-35E projects at the end of 2012. We have signed a contract for the Tappan Zee bridge project and will book our approximately $730 million portion into first quarter backlog. We will book our approximately $300 million share of the IH-35E project once we have final award and a notice to proceed has been issued, which we anticipate in the second quarter. SG&A expenses in the fourth quarter totaled $57 million compared to $43 million a year ago. The quarter-over-quarter increase is primarily attributable to increased costs of $5 million related to our pursuit of large projects and $4 million in acquisition related costs.

Construction segment revenue was $235 million compared with $250 million -- $259 million last year. Gross profit margin was 8% compared to 14% for the same period a year ago due to the continued competitive environment and higher than expected costs on several projects. Construction segment backlog at the end of the year was $630 million compared with $514 million last year. Moving to the Large Project Construction segment, revenues were $215 million during the quarter up slightly from the fourth quarter last year. Gross profit margin was 19% compared to 16% the prior year. The overall margin expansion was driven by on-going strong performance on several projects.

Revenue for the Construction Materials segment was $55 million compared with $56 million last year. Gross loss on materials for the quarter was $1.5 million compared with a gross profit of $6 million last year. In addition to a wet December in California, fourth quarter margins were impacted by an inventory write down as a result of slow economic conditions in certain markets. Gain on sales of property and equipment increased to $21 million compared with $4 million last year. Included in the fourth quarter 2012 is an $18 million gain on the sale of a quarry investment. Other income for the quarter includes a $2 million gain from the sale of gold, a by-product of one of our aggregate production facilities. Our effective tax rate was 24% for the quarter and 26% for the year. Lastly, we once again ended the year in excellent financial position with $433 million in cash and marketable securities which includes $106 million in cash associated with our consolidated joint ventures.

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

Thank you, Laurel. As we enter 2013, we continue to see excellent opportunities in the large projects business. We see a healthy bidding environment for all the new Kenny group markets, coupled with a continued difficult environment for our Construction and Construction Materials business. We remain focused on increasing our SG&A efficiencies, especially with the completion of the new enterprise business system, and we are laser focused on increasing efficiencies in all of our core business segments. In addition to our on-going focus on efficiencies, we are continuing to ramp up our growth expectations through both organic growth and acquisitions. We believe the timing is right to aggressively pursue all components of our strategic plan. With that, we will open it up for questions.

Moderator, we will take questions now, please.

(Operator Instructions)

John Rogers of D.A. Davidson.

A couple of things. I guess, first of all, in terms of the construction segment, margins declined substantially year over year. How much of that -- I mean, Laurel, you cited weather, but I'm just trying to understand what is going on in that market, especially the fall off in revenue?

Well, a couple of things, John. The beginning target is that (multiple speakers)

Jim --

Pardon?

I'm sorry. One other part to that. Is there -- Kenny is all in large projects?

No.

No, Kenny actually is majority of it would be in construction.

Yes, Okay. (multiple speakers) How much was that in the quarter. Sorry.

I think in the P&L in the quarter, just balance sheet we closed on the 31 so we have an -- a closing balance sheet, and then we have added to the backlog. So there's $139 million in construction backlog and $218 million in large project backlog. That is included in the numbers we gave you.

Okay.

John, you want -- let me see if I can address the question around construction. So, for us last year, we had several jobs in the construction segment that continue to deteriorate starting in the middle of the year and then work their way all the way through the end of the year. So they did -- we had three to four fairly large projects in the construction segment that we continue to write down last year. So, that was one of the components to draw it down and, in addition, it is competitive. In the California market still, the margin expectations in the market have come down. Now, hopefully with some opportunities in the residential and things we will see a turn around here this year, but when they came down so did the pricing, and then we had a couple of problem jobs on top of that.

So, and I know you typically give us some guidance as we get further into the year. But, I mean, are we ever going to see margins get back in that business? Or is it -- what do we need, housing or -- I'm just trying to understand what -- if there is any hope there?

Well, I think there is hope. I say that because as we see the residential -- little flickers of residential light at the end of the tunnel, so to speak, John, we are also seeing a little industrial and commercial investment here as well. So, what we have been saying over the last year is that we would have anticipated some of the private sector to move up at the tail end of 2013 and always questionable whether or not it would have a positive effect in 2013. But I think the business will be back to some nice healthy margins. It's just a matter of the balance you have to have -- the private sector and the public sector both at the same time.

Okay. And then one other just a quick follow-up if I could. In the large project work, was there any significant 25% hurdle benefits in the quarter.

I think there was --

There were three, but they weren't terribly significant, Chisholm Trail, Guam and Miramar all reached profit recognition thresholds.

And I will add, too, John, I think what is important on the construction side to think about is where the recovery is going to come from is probably not from some of the traditional work that we've been doing. It's more in some of the markets that we are pursuing in oil and gas, power, federal, underground and mining, all areas that we are pursuing more now than we ever have before.

And a lot of those are -- would fall into our construction segment --

Right.

-- based on the size of the project. So it's a very good point.

Thank you.

Jack Kasprzak, BB&T.

The $13 billion of work you are bidding over the next 12 months, does that include Kenny?

Yes it -- well, I would say, yes and no. Yes over as far as mega-projects go, because they really don't get involved in the large, large projects. But there will be -- there will be some additional projects that are not on that list that will come on board because of Kenny. But it will still be very close, Jack.

Okay. Got it. And with regard to formal guidance, you didn't give it this quarter. Is it just -- would you describe that as your normal practice, because it's early in the year, and you like to get into the construction season before you offer formal guidance? I just want to make sure there is not really a change to policy.

No, you are right, Jack. It's not a changed policy. We want to get a little more organized relative to seeing some line of sight for the 12 month period and another couple of months would make a nice opportunity for that. Typically, we would give some preliminary guidance on the Q1 call.

Right. Because we know the fourth -- I'm sorry the first quarter is tougher typically the loss quarter, winter quarter for you guys. So we get through that and get to the Q1 call and have a better view. So --

Yes.

That makes sense. Okay. And just on residential outlook, construction, I appreciate your comments with regard to timing. I think it makes certain -- certainly makes sense that, with the back half of this year into next year to get projects going, but the caution on the trend or impact there. If I'm hearing you right, why wouldn't we be more optimistic about it eventually coming given that most home builders are talking about higher subdivision count, and it sure seems like the investment activity for residential development is going to pick up in a major way.

I think -- we agree with you, Jack. The question we have always said is we didn't want to move that timetable too far up. So we've always, over the last year or so, said push it to the back of 2013. Could have an effect on 2013 or 2014, but I don't think that we have shied away from suggesting that there will be a good come back in that market.

Okay, that's fair enough. And, just a couple of housekeeping items for Laurel, I guess. CapEx for this year and tax rate, if you care to give some guidance, that would be appreciated.

Okay. We are looking at somewhere between $40 million to $60 million in CapEx and around 29% to 33% for a tax rate.

Great. Thank you very much.

Nick Coppola, Thompson Research Group.

First question, on large projects, particularly revenue in Q4, it was a little below what we expected. Is that some lumpiness in that business? I also understand you had good visibility on large projects that you are working through. So any color on -- whether that missed your expectations.

Nick, it did a little bit but not significant. It's awful hard on those projects to forecast exactly where you are going to be at the end of the year. Obviously we are very excited about the quality of the work. The gross margins are up nicely. Not -- no real apparent reason accumulation to get the miss on the revenue side but no significant event.

Okay. And thinking about Tappan Zee and IH 35E and how those projects, how we should expect those projects to progress in '13 and '14. Can you give us any color on how we need to think about potential margin drag and, I guess -- maybe they need to be spoken about separately. But what margin drag we should expect in the back half of '13 as revenue is produced at no margin. And then into '14, how quickly those projects will be constructed over a number of years.

Yes, we can get into more detail on some of those projects if that's needed, Nick. Every one of them is significantly different to whether they are design build, bid build, depending on the time frame for the revenue, the cost and the margin projections. We would be happy to discuss the big ones individually, but I think it's a pretty detailed subject matter for this call.

Okay. We can talk about it off line on that.

Yes, you bet. We would be happy to, Nick.

Last question, (multiple speakers) are there any -- I guess pretty simply, are there any large projects expected to hit key milestones in, I guess, Q1 of this year. I guess we are already two months through.

Not at this time, nothing in the first quarter.

Okay. All right. Thank you.

Alex Rygiel, FBR.

Two questions, first, can you comment on what your view is on margin in your backlog today? And then, secondly, can you talk a little bit more about Kenny [phoned] for a couple of months, maybe some positives, some negatives that you have noticed and talk a little bit about what they see in oil and gas and power.

Okay. Let me address the margin issue first in the backlog. Most of our backlog typically resides over in the large project side. The margin side in the backlog is high quality. Very -- it should be in alignment with what we continue to always say. It's mid-teens, so, very good work there. I would suggest that our backlog quality is as strong today or stronger than it was 12 months ago. Now, is that -- do you want me to go into a little more detail there, Alex?

No, that is very helpful.

Okay. So, on the Kenny side, two months into the acquisition, very happy, very happy buyer, really high quality people. We are working on strategic and operational plans. We have developed an integration charter. We've really had some great introductions of the two business units so the Granite civil side coupled with some of the end market driven programs at Kenny, the power specifically and the underground. So far excellent. We are going to have a large working program over the next several months to really share more information, but I couldn't be happier. The management team and the people have been first class the whole way.

It's good to hear. Thank you.

Brian Rafn, Morgan Dempsey Capital Management.

Give me a sense of -- on Kenny, is that business -- I think you make a good point. You have been lighter in the midwest. Is Kenny -- do they do the type of team design build, or is it more a stand alone business? And is their business more heavy civil or is it more of a turn business.

Okay. A couple of things, Brian. They have several business lines. And let's look at three of them -- tunnel, and then look at the underground Inliner business, and then the power business. The tunnel business is very similar to what I would call our large projects business. So, that is a public sector funded work and it is -- should be equivalent returns, as I said, in our large projects business.

The power business is substantially different. They are mostly a construction management firm, logistics firm. They physically don't do a lot of the construction themselves. They have subs or joint venture partners that do that part of the work. That is different. That delivery method is different than what Granite is typically used to. And it is a very interesting program model they have and they do very, very well.

Then the other one is the Inliner business. I would call that very similar to our construction business. Typically we are $50 million or less in a local municipality upgrading streets. The difference there and the positive part there is that most of that funding for sewer water jobs is done by rate payers. Although, quasi-municipal there really isn't a public funding stream requirement. So that's a real positive. The other one, the tunnel, I'll go back on. A lot of the tunnel projects, Brian are done in the large product environment with joint venture partners. That is very typical in the tunnel environment more risk, more partnerships, and a larger portfolio of work to.

Okay. Is there any ability -- as you guys have talked about mobility of moving crews around. Does Kenny give you any ability to bundle or put a turnkey with some of your design build and maybe capture on an infrastructure project, not just the surface but some of the underground utilities where you capture more of a project?

Brian, that is part of the plan itself right there. The coupling of the two together -- we're working on projects right now, putting bids together, where Granite Kenny, or Kenny Granite, whoever the lead is, that two of them work together on projects where we could not have before. That is part of the plan.

Okay, okay. On the quarry -- the aggregate site, what capacity are you guys running at and obviously subdued. What would be your the internal versus external mix?

Well, we are still pretty close to the 50-50 which we have been for quite a while. But we are probably going more towards actually the external. The internal slowed down this last year. But I think that business is going to come back with the private sector, and it is starting to see some light at the end of the tunnel, and it's a very heavy asset business. The assets are frozen in one geographic spot. So, that is a little more market driven and there is -- but I do see opportunities there really in the tail end of this year.

Okay. I missed -- I was writing fast. Could you go back over, you talked about the $6 billion component of the $13 billion in some of the larger design-build work. What were some of those projects again.

Okay. A whole host of them. I think I mentioned, Brian, the ones in New York, were the Goethals Bridge and the Bayonne Bridge.

Okay.

And those are two very large jobs. And both of those look like they are bidding in the first half of the year. And they are estimated to be a little less than $1 billion dollars each. So these are big jobs.

Okay, okay. What is on bid day? What are you seeing bid quotes, how many bidders, any change in the markets as we have gone through 2012 on some of the heavy civil stuff? Are you still two or three or four bidders or are there more or less. I'm just wondering what the competition is.

Yes, on the large projects, Brian, it's pretty well ironed out that there's probably going to be somewhere between three to seven, the way I look at it. It's been nice that a lot of the owners have been really getting into a preferential treatment where they will pull based on scoring systems they'll pull only three or four and limit the numbers of bidders. That has been nice to see because of the cost of literally pursuing these jobs has gone up. So, really on the large side, I really don't see a lot of difference in the competition at all. And then on the smaller work it is still fiercely competitive. It continues to have five to ten bidders on most all of the jobs on the smaller stuff.

Okay, okay. What are you seeing, if you go out, certainly you have talked, I think, Jim, about the private residential. What are you seeing in some of that local roadwork, county roadwork, maybe small state, under $50 million to $100 million which can be turn business. How is that -- for better vernacular, you call it middle market business? What is that like? Smaller than the heavy civil but obviously not doing some guy's driveway. What is that tone of work.

Well, hat's the typical work that we have done in our vertically integrated businesses for years, the $500,000 street job ripping it out, putting new curb, better sidewalk in, or doing something in a municipality overlaying a street. So we do that all the time. That is probably the most competitive market today there is, the $50 million in under-road type of project. So, that is the part that worries me the most, Brian, is those jobs right there. And, although I do think that most of the municipality that we have seen today are looking for alternative funding mechanisms, they are trying to figure out ways to pay for the work that they haven't been doing. So we see a lot of backlog. We are just still struggling to see the actual funding. And that has got to happen, coupled with the private sector, for that level of market to even out a little bit.

Okay. All right. Are you seeing anything -- you talked a little about state budgets. Are you seeing any differences between regional players? We certainly have seen as you go across with the political mosaic, California versus Texas, up in the Midwest, Wisconsin versus Indiana. It's really a state by state relative to budgets and surpluses and deficits. Are you seeing pockets of strength regionally among state DOTs.

Yes, you bet, Brian. They are all doing things substantially different. Some of them have actually balanced their budgets quite nicely. Others of them are behind. You saw what happened in Virginia in the senate just this week. They are passing a gas tax, sales tax combination. I've seen Florida moving its way up the ladder on a lot of funding. Texas has always been healthy. So every state is different. And they are all looking for different ways to fund the work that needs to be done at their level, and it's starting to be creative. Actually, I think they are going to see a lot of different ways over the next 12 months to get that work caught up. But, In the last two years, Brian, that has been the toughest market right there.

Yes. Okay. But it's really -- fair enough. Give me your sense, Jim, relative to we had looked at this highway bill which had, I don't know, '11, '12, '13, '14 extensions, three months, now you have a two-, three-year bill. There was some talk about it being at some point $500 billion, $600 billion. The Army Corps of Engineers has its report card, and the infrastructure always gets a D or an F. It's been -- it's been certainly significantly less than that. How has that highway bill -- has that done anything from the federal level to stabilize highway construction at all, or is that a pretty limp bill.

Well, I think it was a little bit slight to begin with. I think it has stabilized things, Brian, $40 billion to $41 billion level annually. I think the local entities were happy to see some form of knowing what their opportunities were. It is under funded dramatically at $41 billion. So the good part is stability for two years. People know where they are at. It expires September of 2014.

The other good news is that, if we continue to get these report cards, continue to accumulate a huge backlog of infrastructure improvement work. That is good news. Unfortunately, the question is going to be when. But these states, there are certain states today that I can tell you are doing a nice job. They are also diving into the alternative funding market as well. So, every state is different. And we certainly focus on the states that have the attitude where they want to grow their investment in the state over a long period of time.

Okay. How is your crew, your mobility of moving guys around the country? You guys have been in that now a little more than a year. How has that played out relative to the rank and file guy -- as it has impacted your culture?

I think it's getting better and better every day. I will give you an example, Brian. We bid, oh, let's say the IH 35 job in Texas, we bid that job with people from Florida, people from Seattle, people from the central coast of Washington and then our main team located in Louisville, Texas, itself. Then, now that we have the job, there will be people moving in to help build that job from all over the country. So people realize today that mobility is part of the construction industry.

Hey, Brian, we have got a few more people in the queue (multiple speakers).

Okay. Thanks, I appreciate it.

Thank you.

(Operator Instructions)

Lucia Marquez, Macquarie.

Thank you for taking my questions, [Sameer] is on the road today. For the projects that you mentioned where you expect decisions by June, what is the Granite portion of these projects?

I don't have it off the top of my head, but I could do it very quickly for you.

Okay, just an estimate.

I would say the total of all of them has got to be close to $0.75 billion our share.

Okay.

Somewhere in that neighborhood.

Okay. Excellent. And then my second question is if you could give us a sense for when the Tappan Zee project, where it is in the funding process and maybe when TIFIA funding decision is expected? How long do those usually take?

I can't really answer when on the TIFIA funding question, but I can tell you that the job, the state of the job is well funded at this point in time. So, there is no issue with the project. Contracts are relative to funds from the owner at this time. The job is in the design phases. So that means that a job like this, since we are the design build contractor, our team is finalizing the design. And then we will start towards the middle to the end of the year driving what we call piles to help start to build the super structure of the bridge. So, most of this year will be design then at the tail end we will get into some of the construction.

Okay, great. Thank you very much.

Our next question is from John Rogers of D.A. Davidson.

A couple of quick follow-ups. The lower minority interest in the quarter, is that related to the project in Washington where you took the charge?

Yes.

And secondly, Laurel, do you know or can you tell us what your expectation for the D&A run rate is now? It looks like it dropped down in the quarter, but I assume with Kenny it picks up again.

Yes. We expect an increase of around $25 million associated with Kenny. Other than that the run rate should be in the range it has been the last couple of years.

So $25 million on top of the $56 million run rate that you had this past.

Yes. Or $60 million, around that.

Okay. Great. Thank you.

I am not showing any further questions in the queue. I would like to turn the call back over to Management.

Okay. Well, thank you, everyone, for your questions. I would like to once again thank all of our employees for their tireless effort this past year and their remarkable commitment to Granite. To our investors, we thank you for your continued interest in Granite. If you have any additional questions, please don't hesitate to get in touch with us. Thank you, everybody. Have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.