Granite Construction Inc (GVA) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Granite Construction, Inc. first-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the call over to your host for today, Ms. Jacque Fourchy, Vice President of Investor Relations and Communications. Ma'am, you may begin.

Good morning. And thank you for joining us today.

I'm here with our President and CEO, Jim Roberts and our Senior Vice President and CFO, Laurel Krzeminski. I would also like to introduce the newest member of our investor relations team, Ron Botoff. Ron will be dedicated to IR and will take over many of the day-to-day IR responsibilities, including getting to know many of you. I'm sure you'll find Ron to be a great addition to our team and hope you all get to meet him soon.

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 statement 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 provide an update on the integration of our Kenny acquisition, an overview of our markets, and I will review some of our current large projects and large project opportunities. Laurel will then take you through our first-quarter numbers as well as our guidance.

For the first time, I'm pleased to report the integration of Kenny is going very well. Kenny is proving to be a great fit for us and demonstrates the commitment to our strategic plan to grow our company.

Our expanded capabilities in geographic regions have been well-received by both project owners and joint-venture partners. As a team, we are successfully working together to expand our collective presence in the power delivery, water and water infrastructure, and tunneling markets, all of which have very attractive short and long-term fundamentals.

Our teams are pursuing numerous projects in 2013 that leverage the combined capabilities of the company. I'm very pleased to see that new synergies already are creating opportunities as we have submitted several bids with new customers.

I look forward to updating you on our integration progress and benefits as we continue to open doors with new owners, new partners, and expanded markets.

We are pleased to enter 2013 with a solid backlog large project work that will provide long-term earnings potential for our business. Notably though, Granite's short-term results and outlook have been impacted negatively by the competitive environment in certain markets related to our construction and construction materials businesses, particularly in California.

As our construction season moves into full swing, our teams are bidding a high volume of work for various public and private customers. We are encouraged that certain parts of the country are experiencing an increase in private sector work which should help to absorb capacity and potentially improve margins over time.

As we have said previously, some of our vertical integrated businesses are in markets that were hit very hard in the downturn. Significant recovery in these markets remains behind the rest of the country. And in these markets we are implementing targeted action plans to address immediate performance enhancement.

We are focused on making improvements and driving change in personnel, structure, and under-performing assets as we continue to adjust and tune our business model. Our long-term outlook is very positive as we expect the actions we are taking will materially benefit our business in late 2013 and beyond.

Beyond our traditional construction segment type work, our teams successfully are pursuing federal, mining, oil and gas, and power-related work. These opportunities utilize our core capabilities with different funding sources than our traditional transportation sector.

In addition, we are developing valuable relationships with key owners and partners, as well as enhancing our capabilities that will enable us to further diversify our portfolio of work. Overall, our large projects are performing very well with a mix of new and near-to-complete projects in the portfolio.

In the East, preliminary geotechnical work is underway on the newly awarded Tappan Zee Bridge project in New York. Early project forecasts indicate we will reach the proper recognition threshold in late 2014.

Our team is finishing up work on the Queens Bored Tunnels and Structures project in New York.

We are also winding down on the successful Western Wake Freeway project in North Carolina. On the heels of that project, we were low bid on the $130 million Interstate 440 project in Raleigh, and pending award by the owner, we'll expect to book that project in the backlog during the second quarter.

In Texas, the Houston Metro Light Rail is making significant progress and is currently about two-thirds complete.

Last but not least, we anticipate a final award and Notice to Proceed on the Texas IH-35E project later this month. An early look at the project schedule shows us reaching profit recognition on our $300 million portion in the second half of 2014.

The bidding pipeline of large projects remains very, very full. Although we were not successful in some of our recent bids, we have many more opportunities ahead to continue to grow this part of our business. We are committed and have teaming arrangements to bid in excess of $13 billion over the next 12 months of which Granite's portion is nearly $6 billion.

In addition to numerous projects ranging between $100 million and $300 million, we are committed to bid on a number of very large projects, including the $2 billion I-4 Ultimate Orlando project, LA Metro's roughly $500 million goods movement package and projects, and the multi-billion-dollar State Highway 183 project in Texas. These projects and almost two dozen others in excess of $75 million will be bid by Granite over the course of the next year.

With respect to large project financing, we are encouraged that the Federal Highway Administration has allocated additional funding to the Transportation Infrastructure Finance and Innovation Act, otherwise known as TIFIA. Pursuant to the level stipulated in the Federal Highway Bill, Map 20 -- Federal Highway Bill Map 21, TIFIA will authorize $750 million in fiscal 2013 and $1 billion in fiscal 2014. These funds service critical sub-debt around which various types of senior debt and equity can be utilized to leverage the $1 billion in TIFIA funds to $30 billion-plus in projects.

Notably, for the fiscal 2013 alone, the project value of submitted letters of interest total more than $41 billion. Recent TIFIA-funded projects secured by Granite include the $3.2 billion Tappan Zee Bridge, the $1.1 billion IH-35E, and the $350 million US-36 Phase I and II projects. Absent TIFIA, a number of these projects would have remained on the shelf for years due to local budgetary constraints.

The industry strongly supports TIFIA and believes it is critical. And it plays a critical role in the financing structure of most large infrastructure and 3P efforts today. Given its success thus far, we are confident it will continue to provide meaningful benefit to our business going forward.

And with that, I will turn the call over to Laurel. Laurel?

Thank you, Jim. And good morning, everyone.

Revenues in the first quarter were $379 million compared with $310 million in the first quarter of 2012. Net loss per diluted share was $0.57 in the first quarter compared with the prior year's net loss of $0.31. Gross profit margin for the quarter was 8% in line with last year. Total contract backlog at the end of the first quarter was $2.4 billion compared with $2.1 billion last year. We booked our $733 million portion of the Tappan Zee Bridge project in the first quarter. In addition, we anticipate booking our approximately $300 million share of the IH-35 East project in Texas later this month.

Looking at the segment detail, construction segment revenues were $177 million compared with $118 million last year. The increase is primarily associated with Kenny, which contributed $53 million in the quarter.

Gross margins were in line with last year at 7.5%. Impacting the first quarter of 2013 gross profit is approximately $2 million of amortization of Kenny-acquired backlog.

Large project construction revenues were $172 million compared with $164 million last year. Kenny contributed $10 million to the large project revenues. Recall that large project revenues can vary widely quarter to quarter depending on the stage of project progression and the timing of profit recognition.

In the first quarter of 2013, gross margins were 13.2% compared with 13.6% a year ago. We did not have any new large projects reach the profit recognition threshold this quarter.

Revenues for the construction materials segment increased 15% to $30 million. The gross loss on material sales was $6 million, similar to last year which is not unusual for the first quarter.

Selling general and administrative expenses totaled $58 million compared with $45 million a year ago. The increase breaks down as follows. More than half of the increase is associated with Kenny, 15% is related to the amortization and timing of restricted stock awards, and the remainder's primarily related to compensation and a continuous improvement program we initiated in January. Our continuous improvement process utilizes SIX SIGMA techniques and is expected to drive incremental savings and operational benefits beginning late this year.

The tax rate in the first quarter of 2013 was 31.3% compared with 28.9% in the first quarter of 2012. Granite's balance sheet remains solid. Cash and marketable securities totaled $364 million at the end of the first quarter which includes $99 million associated with consolidated joint ventures compared with $69 million last year.

Now turning to guidance for 2013, we currently expect construction segment revenues to $1.25 billion to $1.4 billion with a corresponding gross profit margin of 8% to 10%. Large project construction segment revenues are expected to be in the range of $850 million to $1.05 billion with a corresponding gross profit margin of 12% to 14%. Construction materials revenue is expected to be $200 million to $230 million with a corresponding gross profit margin of 6% to 9%.

For 2013, we expect SG&A to total between $210 million and $220 million. Gains on sales of property and equipment are expected to be $10 million to $20 million. And non-controlling interest is expected to be $15 to $20 million for the year.

We expect our tax rate for 2013 to be in the range of 27% to 31%. And our planned capital expenditures are expected to total $40 million to $60 million.

As we continue to invest in and grow our business, I'm very pleased with our cash-flow trends. Building on last year's success in this area, we expect continued excellent cash flow from operations in the range of $80 million to $120 million.

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

Thank you, Laurel.

Before I turn it over to Q&A, I want to reiterate that while we are facing some short-term challenges, we are very excited about the positive direction of our business. What I want to leave you with is this. First, we expect to grow the top line of our business by at least double digits in 2013. We continue to implement our strategic long-term plan and are very happy with our continued progress. We have a solid large project portfolio and significant opportunities to growth this part of our business. We have tremendous opportunities to grow the Kenny business, namely in power, underground, and tunnel markets. And we have competence that the combination of a recovery in the private construction market and our targeted actions will help drive significant long-term operational and financial performance in our vertically-integrated business.

The fundamentals of our business remain extremely solid. And our future is very bright.

With that, we will open it up for your questions.

(Operator Instructions)

Our first question comes from the line of Jack Kasprzak of BB&T Capital Markets. Your line is open. Please, go ahead.

Thanks. Good morning, everyone. Jim, on the construction side, the comments on the competitive environment have been consistent for the last few quarters, but your backlog there is up 19% year over year based on your margin guidance. It would imply that pricing's certainly not getting worse, stable if any -- at worst, it's stable. And so do you see with the growth there a path where we're finally going to soak up some of the capacity and finally get to a point in the next few quarter where you can start to push price a bit?

Jack, I'll tell you, I would certainly hope so. And I think you're right relative to the backlog is solid in construction. Pricing is probably static with previous quarters.

But what really drives pricing in the construction business is looking out ahead and seeing what else is out there. And we are seeing a private sector -- and I'm going to suggest again very similar to what I said last quarter -- towards the end of the year, I'm hoping that that will help drive some pricing changes. And because we are seeing some permits. We are seeing some action on the private sector. And as that happens, it will maneuver some of those public competitors back over to the private sector side and hopefully, begin to drive prices a little higher in the construction segment, and obviously, the gross margins as well.

So I think your analysis is correct. As I've said previously, Jack, it's kind of about the timing of this. I've mentioned previously, I think it's going to hit positively towards the end of 2013. And obviously, we'll continue to update you as we get the feel of what's really going on in all the markets overall. But that's still kind of where we see it, Jack.

Okay. That's fair. Second question on SG&A. Laurel gave us some good detail there (inaudible) as far as what happened in the quarter. When you look at your guidance and if I just spread it evenly over the final three quarters of the year, implies a little bit of a reduction in terms of SG&A dollars perhaps by quarter versus what you reported in the first quarter. Is that -- is this a situation where the run rate into next year could be a little lower. I realize we just started this year. But just thinking ahead without putting some numbers on it, is a situation where maybe the run rate could be lower next year versus this year due to these one-time items?

Yes. So we expect for this year the run rate to be about equal to last year and maybe a little bit less. We do have some one-time costs associated with the Kenny integration as you know. That might go over a two-year period but we're looking at whether we can accelerate any of those into this year.

Sometimes, we have higher costs in the first quarter depending on how well we utilize all of the people due to the seasonality of our business. So we're -- like I said, the total year we expect it to be in the range of about what it was last year as a percentage of revenue. Obviously, it'll go in absolute dollars because of Kenny.

Yes, actually, I think that the one thing to look at in the guidance, Jack, would be Laurel's guidance of $210 million to $220 million on the SG&A is really the number to think about relative to the run rate for SG&A. First quarter is typically almost always higher than any other quarter.

So I would focus more on the guidance than on the first quarter.

Thank you. Our next question comes from the line of John Rogers of Davidson. Your line is open. Please, go ahead.

Hi. Good morning.

Morning.

Good morning, John.

A couple of things. First of all, in terms of Kenny, is it still assumed to be essentially breakeven for Granite this year?

The answer would be yes. And it's very early. They have a lot of the turn work just like a lot of the Granite business. So we'll update you on that as the year progresses. But I would not change our original statement of breakeven for 2013, John.

Okay. And then, Jim, in terms of the guidance, especially for the large project work, with margins what they are -- and I realize it looks like there's a lot of work that's going to hit the 25% threshold in 2014 -- what portion of your revenue that you are expecting this year is breakeven? Or, sorry, what are the profits deferred for now?

Oh. Boy, I'm looking at Laurel. I don't know if we have that calculated off the top of our head, John. We can certainly get that for you as to all the projects we're going to be building.

Assuming what you're suggesting is how many projects anticipated revenue what we're going to have in 2013 that will not meet recognition, that will be a 0 margin. Is that the answer? Is that the question you're answering, John -- or asking, John?

John, are you there?

John has removed himself from the queue.

So okay, that's unfortunate. I hope it wasn't my answer. Okay.

Our next question comes from the line of Jerry Revich of Goldman Sachs. Your line is open. Please, go ahead.

Hi. Good morning.

Morning, Jerry.

Jim, can you just say more about the competitor bid environment on projects today? I know you're optimistic about improving bid environment towards the latter of the year. Can you just give us an update on how the environment stands today on projects that you're bidding? And maybe you can answer that by giving us a sense for your anticipated gross margins on projects that you're bidding today compared to projects that are on backlog directionally.

Well, Jerry, I think the market's kind of static. And I say that because if you look at our guidance for construction margins, it's up a little bit from last year. We had some lost jobs last year that brought it down a point or two. We anticipate those lost jobs not occurring this year. We're doing a very nice job building our work so far this year in 2013.

So the market's probably the same. I think what we're doing in our guidance is building the work at a little higher quality level. And I say that, there's a lot of activity in the $75 million and under work, which is our construction work. Very active right now. We are getting our share of the work right now but with similar margins to what we have been getting over the last 12 months. My hope and why I mentioned in my discussion earlier, was that as we see this private sector begin to kick in -- and there is light at the end of the tunnel -- there are permits being pulled -- that towards the end of the year, we would have more opportunity to increase the margin on that work.

That's perfect. And, Jim, in terms of just overall activity levels, at this point, obviously, first quarter had very tough weather comps really across the country, I'm wondering if activity has picked up in April particularly for non-residential construction?

Well, it always does for--

Private. Yes.

Yes, I would pretty much put it into maybe a little different format. We really do a lot of things in the first quarter in our construction business and our materials business to get prepared for the year. And I don't like to use weather because in the West, we think we actually had reasonable weather on the smaller -- in the areas where we have our smaller work.

But we do a lot of preparation. So yes, April is when we really begin to build our work and start really into the materials sales program. It's April and May in most of our markets, specifically the markets in the northern half of the country.

Does that answer your question, Jerry?

Thank you. Our next question comes from the line of Nick Coppola of Thompson Research. Your line is open. Please, go ahead.

Hey, good morning.

Morning, Nick.

First question. We've heard about pockets of the US where there's skilled labor shortages. Specifically, with all the bridge work going on in the New York area with Tappan Zee, and the (inaudible), and the (inaudible), do you expect any kind of strain on specialized labor?

Not at this time, Nick. I think the overall infrastructure volume is down in the country. And I don't see labor being an issue today. I think it was an issue maybe four or five years ago when we were really in the height of the build out, but not today.

Okay. Yes, that's fair. And then, switching gears to the construction materials side of the business, are you starting to see any better pricing kind of consistent with the comments out of some of the large public aggregate companies that have recently reported?

Yes, on the aggregate side, actually, we did have a slight increase in the first quarter, I think somewhat between 3% and 5% across the board in our pricing -- our average pricing. So that is a good sign, Nick.

So the answer to that is yes. I think the real issue is that you'll really be able to tell about pricing and volumes when the seasons really take off in the West, which really begins in about, like I said, mid-April. And we'll be able to get a better feel for it during the second quarter call.

Okay, that's helpful. And then, my last question's going to be on SG&A. And how much of the increase that's implied by guidance is from just additional bidding, right? Because this is certainly an unusual year in terms of the amount that you're bidding. So how do we -- how do you think about that relative to Kenny or relative to the core business?

It's a few million dollars higher. It's not the -- associated with the pre-bid cost. It's not significantly higher year over year.

I think, Nick, that we've been bidding a very high volume of large projects the last -- in 2012 as well -- this is probably the second year of us moving into that higher level of volume in large projects. There is more and there certainly is more SG&A with the addition of Kenny, which Laurel commented on during her comments to begin with.

But we're geared up now to do a lot of at-large project volume bidding.

Okay, that's helpful. Thank you.

thank you, Nick.

Thank you. Orr next question is a follow up from Mr. Rogers at Davidson. Your line is open. Please, go ahead.

Hi. Thanks. Got to careful of these. They're quick to cut me off.

Yes. I'm sorry, John. I heard that -- I was waiting for response from you.

That is the question I was asking earlier.

But the follow-up question that I had was, in terms of the state budgets, especially in the West, Jim, what are you seeing there? And do you have a rough breakdown now of what your mix is between private and public work and what you're kind of expecting this year especially with (inaudible)?

Well, let me talk about the state budgets to begin with. So a lot of the state budgets are a derivative of the Federal Highway Bill. And I was just reading some information on California, for example. It's pretty static from the federal side. But it has been reduced because they have some California propositions that are coming to a close, whereas other states have been able to add back in some sales tax overrides as well.

So every state is a little bit different. The federal portion of all of these states is pretty static and has been the same for the last three years.

So what I see is kind of a transition going on in a lot of these states. There's a transition to more county, city, regional transportation authorities. Metropolitan transportation authorities are picking up a higher percentage of the overall bidding volume that we work on. And the transportation DOTs are kind of static.

So we have a rundown of every single state as to what their budgets are, which we can certainly talk off line about. But I think the key ingredient, John, is what all the other agencies are doing in addition to the DOTs.

Okay. So if you were to lump that together, so to speak, the state and local as a total, is that spending going up significantly?

Well, then I would say that we're seeing a lot of this TIFIA money that's rolling into these metropolitan transit authorities is escalating the overall value of the work. I don't know if I have the answer for you state by state, if that's offsetting the downside of the DOT, but certainly a reasonable question that the answer can be calculated.

And private versus public?

We're starting to see private pick up. We've -- and I don't have the numbers right in front of me. Laurel might have a better understanding of the percentages than me -- than I do. But typically, we've been in the last couple of year, a 95% public, 5% private. Certainly with the addition of Kenny, which had actually a large portion of their work in the private side, I think we've gone closer to the 90/10 range.

And I think you're going to see us probably migrate more into the 85/15, 80/20 range this year as we see the mining work pick up, which we have some mining work that's going well. The power delivery work is mostly done with private entity -- or private entities. We are seeing a pick up in the development work which is a positive environment. And then the other area of private sector that we've increased our play on is in the oil and gas sector and dealing with some of the large refining companies as well.

So I think you'll continue to us slowly through the end of the year, maybe get to the 85/15, maybe even 80/20, depending on what our hit ratio is.

Thank you.

Thank you. Our next question comes from the line of Michael Dudas of Sterne AG. Your line is open. Please, go ahead.

Good morning, everybody. And welcome, Ron.

Thank you.

Morning, Mike.

Morning, Mike.

Jim, two questions. First, the -- maybe elaborate a little bit more on your (inaudible) remarks on what you're doing at the construction business in optimization, staffing, capital? Is there a level of business run rate that you're anticipating or targeting in the next three to five-year cycle that you're almost to the point where you're at from a staffing or asset basis? Or is there a bit more to go?

Okay. So first of all, we operate in a whole host of different markets. So every market is substantially different. And (inaudible) we want to lump the whole thing and it's kind of a little early in 2013 to give too much information on 2013. But in general, Mike, we are actually looking at some really nice opportunities in optimizing our assets, number 1.

We have continued to divest of underperforming assets in a very detailed program. And that is working. Little slower than anticipated. But we are divesting of assets that are not producing at what we consider to be a reasonable rate of return.

We have consolidated and moved some office -- offices together over the last couple of years. We'll continue to look at that. And I think we're going to have a little bit of -- in some of our markets that are yet to be determined if the private sector's going to come back strong or not -- we'll probably have another several months before we determine to make any significant changes in those individual offices.

So I would suggest to you, by the end of the second quarter, we'll probably have a pretty definitive program set for 2013. But we are constantly trying to analyze the size of the asset base with the market going forward. And that's the number 1 thing we've been working on.

I appreciate those thoughts. My second question is, can you remind us what will dictate going forward share repurchase opportunities from your level given what you did in the first quarter and how the year's shaping up?

Well, we always look at share repurchase. And we actually have a position in place today and some size let in that additional -- original request.

We look at it as a board. We look at it continually. And utilizing our cash for the best short and long-term needs of the company.

Today, we'll look at it for the year we'll analyze it at the next board meeting and the following board meeting. Today, right now, we believe that the best use of our cash is to invest back into the business through CAPEX and acquisitions.

But I will -- but we always look at it with the board to determine if a buyback is in the best interest of the company.

And the range on capital that you gave for it this year, is that dependent on with bidding success or just timing?

Range on cash flow?

No, no. Just capital expenditures, like what you're--

Capital expenditures.

Yes. It's pretty typical for our business from the turn standpoint.

Yes, what we do, Mike, is we actually do a detailed capital expenditure program towards the end of the previous year. We go through a process and agree at that point in time to buy mostly -- and I'm going to say -- rolling stock and plant equipment that is for the long term needs of the company, not just the short-term needs.

If we have more success on the bidding side and mostly large projects, we tend to finance some of that inside the projects alone. But the CAPEX really is for longer term needs of the company, not just a fluctuation in short-term results.

Yes. I think it's important to find out on that that if the -- if we don't consolidate a joint venture, then it's not going to show up in our capital expenditures. As Jim said, it's going to be funded through the project. And that's the direction we've been taking for the majority of the joint ventures most recently.

Thank you. Our next question comes from the line of Sameer Rathod from MacQuarie. Your line is open. Please, go ahead.

Yes, hello. Good morning. Just two, quick questions. How should we think about the revenue ramp on some of these large projects throughout this year, and for the next couple of years given the longer duration?

Well, I think this year, we've given guidance on the revenue for the year, which is similar numbers to what we saw last year. And I think over time, you're going to see it methodically ramp up, Sameer. That's the intent.

We had a pretty big ramp up the last couple of years. But we think we can maintain that or increase that methodically going forward.

So again, there's a little bit of timing issue there. But our intentions are to consistently grow the large projects part of our business over time.

Okay. Okay. That's helpful. I know it's a little early to talk about 2014. But given that some of these projects don't hit profitability until then, is it fair to say 2014 should be more profitable in large construction compared to 2013?

Well, let me put it this way. We have some very large projects that we anticipate meeting the threshold for recognition in 2014, which should equate to higher margins in 2014 and 2013, yet to be determined on what additional work we get to support it, yet to be determined on the quality of the finished product for this year. But we're situated very well for 2014 with large projects right now.

Okay. Thanks a lot.

Thank you. Our next (inaudible) question is a follow up from the line of Jack Kasprzak of BB&T Capital Markets. Your line is open. Please, go ahead.

Thanks. I don't think you gave in the quarter in Q1 revenue less than 25% complete this year versus last year if you had that.

Yes. It's about half of what it was last year at this time. I think we were around 20 last year. And we're around 10 this year.

And I just wanted to -- did you guys say that Kenny was -- I think you said it met your expectations. Was it breakeven in the quarter? I know you expected it to be breakeven for the year, but you probably wouldn't break even in the quarter though.

No, Jack, it was a slight loss in the quarter.

Yes. And just seasonally slower period so you have the full SG&A load, but not as much revenue. So that's probably straightforward, right?

Well, there's other things associated with that as well, Jack. Certainly, we have some of the amortization of the acquired backlog. That is in there as well. We have some integration expenditures in there as well.

So -- but yes, a slight loss in the quarter would be the way to look at it.

Got it. Okay. Thanks, again.

You bet, Jack.

Thank you. Our next question is a follow up from the line of Jerry Revich of Goldman Sachs. Your line is open. Please go ahead.

Thanks. Jim, just following up on your prior point on capital allocation (inaudible). Can you just characterize for us how you see the M&A pipeline and environment at this point? And to the extent that you're comfortable comment thing what type of businesses, what makes sense as (inaudible) to your portfolio at this point?

You bet, Jerry. We're continuing to actively pursue the M&A side of our business. It's a very substantial portion of our strategic plan. We are continuing to look into the diversification of our core businesses, which would be into the oil and gas, water, water infrastructure areas of the business. And we are also looking at geographic expansion of the vertically integrated business, which is in alignment with what we have mentioned as our strategic plan.

And I think it's important to note that the -- we're very comfortable with where we are with Kenny. And we are actively pursuing our strategic plan to continue to grow the company right now.

And how would you characterize the pipeline where you're doing due diligence?

Lots of opportunities, Jerry. We continue to analyze a lot. There are very few that make it through our filtering process, but we continue to have several that make it through the first phase and second phase. Again, as you can anticipate, we're very, very choosy as to which ones we spend diligence efforts on. And we're not yet at the stage today, but we do have several in the pipeline that are of strong interest.

Okay. Thank you.

Thank you. Our next question is from the line of Brian Rafn of Morgan Dempsey. Your line is open. Please, go ahead.

Morning, everybody.

Morning, Brian.

Morning, Brian.

Talk a little bit about -- historically, you guys over the years the turn business has been 60%, 65% of the business. California is still kind of tough. Are you seeing any better reflation in the local turn business in other areas outside of the West that you guys can take advantage of?

Okay. So I want to maybe make sure I approach that properly, Brian. You're talking about the construction, the vertical integrated business work outside of California? Are we seeing it come back faster? Can you really restate the question?

Yes, yes. I'm just getting a sense -- and I guess maybe it's a broader issue. And maybe I should restate. If we were running just in housing markets, the 2.2 million units. We got done at 315,000 in the January/February of 2009. We're back to 8,900-something. If that business doesn't come back on the residential side, and local issues, tepid economy, weak local tax structure flows. I'm just trying to think maybe a better way of asking the question is, how would Granite change if structurally going forward, the heavy civil business is much more prominent today and continues to be that. And I'm going back to kind of your analyst day back in Utah a couple of years ago when you did that kind of flip. How would that change Granite going forward? If heavy civil is going to be the largest and it's here to stay, even a larger part of the mix? I'm just -- if we don't see the resurrection of the branch business back to its old historical level, how does that change kind of your operating plan going forward?

Well, let me just talk strategically what I think is the right direction for the company. And really, Brian, it's focused on a risk portfolio. There -- as we look at or as I look at our business model going forward, I think that the overall risk management is just as important as the size of the business.

So as we have grown the large projects business over the last couple years and have not grown equally the vertical integrated side, it changes the risk complexities of the company.

What we were able to do very positively with the Kenny acquisition is to raise the -- really the construction segment. The majority of the Kenny work is in the $75 million and under range. The lower risk portfolio type work which raises that portion of the business. So I want to keep the mix in alignment so we don't have a riskier overall portfolio.

I also see if indeed we don't see private sector resurrection as you put, that there are other vertically integrated markets that will grow without just the private sector resurrection. I think California does need that in order to get that business back on track.

But when we targeted our vertically integrated geographic expansion, we targeted several states that we saw had substantial DOT programs over the next 5 to 10 years. Those could grow with a lower risk portfolio without necessarily having the private sector come back.

So we'll look at Kenny-type work, water, we will look at oil and gas. We will continue to look at the geographic expansion of the vertically integrated business. All of those will be more in the construction segment than large projects.

Now, with that said, we do think the large project business is sizeable. We think we have a very good opportunity to continue to grow that. And therefore, a part of our goal and our strategy is to grow the construction segment simultaneously.

Yes, okay. Okay. Jim, the Kenny acquisition, is there a way for you guys, one, leveraging that in driving it out geographically, expanding? And/or are there kind of cross-selling abilities with meeting new customers, new clients, new entities that you can then bring through those relationships some of your legacy highway transit business? Construction?

Brian, that is our plan. You just absolutely reiterated our plan.

So both -- if you look at the Kenny business and you look at all parts of it, the private -- the power delivery business, the underground business, which a big portion in their business is this InLiner business, which is a very high-quality business, and the tunnel business. Our strategic plan is to integrate those and cross-reference really in a matrix organization with the Granite geography to move the power, tunnel, and underground into our local geographic markets of which we have a very, very strong relationships with all of the owners.

We're already seeing that. We've actually worked our power -- the power group from Kenny has actually brought on some Granite employees onto their team. And they are working all the Granite regions to expand power in those regions.

We've actually had a couple of very already wins in the underground part in our Utah business, the underground division of Kenny. Bid work with the Utah business.

So what you're suggesting is exactly what we are doing with the Kenny business.

Okay, thanks.

Thanks, Brian.

Thank you. And I'm showing no additional questions in queue. I'd like to turn the conference back to Mr. [Rogers] for any closing remarks.

Okay, well, thank, everybody, for your questions. Those -- we're certainly going to be around later today if you would like to ask myself, or Laurel, or Jacque any other questions.

But I want to close by thanking our employees across the country. They are the primary reason we have been successful in the past. And they are absolutely the key to our future.

So again, all of us will be available for the rest of the day to ask questions. So thank you, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Have a great rest of the day.