Granite Construction Inc (GVA) 2013 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Granite Construction Incorporated second 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, and instructions will follow at that time. (Operator Instructions). I would like to turn the conference over to Jacque Fourchy, Vice President of Investor Relations and Corporate Communications. Please begin.

Good morning. Thank you for joining our second quarter call. I am here with our President and CEO, Jim Roberts, and our Senior Vice President and CFO, Laurel Krzeminski.

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.

Before I turn it over to Jim, on a personal note, I would like to share with you that today is my last day in Investor Relations at Granite. Although I am staying with the Company, I am handing over the IR reins to Ron Botoff, and moving into a part-time communications role, which will allow me to spend more time with my children. I am grateful for the opportunity to have worked and gotten to know so many of you over the past 15 years. It has really been a great ride. I will always cherish the relationships that I have built, both inside and outside of the Company.

Thank you. Jim.

Thank you Jacque. Good morning everyone. I would like to begin today with an update on Granite's strategic initiatives. Importantly, I will discuss how our strategy relates to today's market conditions, and what this means for Granite's near and long-term performance, then I will hand things over to Laurel for a review of the second quarter. Granite's strategic plan starts with our ongoing efforts to transform and grow our vertically integrated business, over the past two years we have responded to extraordinary challenging economic and competitive environments in key markets, by managing costs, and by leveraging the wealth of experience of our teams to optimize margins in a very poor market.

Notably, the performance of the vertically integrated business remains geographically linked to our fixed facilities with each market location being quite unique. In most of our locations the private market is not yet driving any significant demand, although as mentioned last quarter we are beginning to see some signs of light at the end of the tunnel. The number of bidders remains high on nearly every job, which continues to create pricing pressure. This quarter's performance in the construction and construction materials segments reflects ongoing challenging competitive environment.

Please consider a few of the key strategic tactics we employ in our vertically integrated business. We remain focused on transforming into a more asset light business. We remain focused on maintaining and instituting cost controls, balanced with a long term view on investment, as well as near term growth opportunities. We remain focused on opportunities to enter and expand into new geographic markets, an important component of our overall diversification plan. We view it as critical that overhead is driven lower relative to the size of the Company, and there does remain room for improvement here.

The second element of our strategic plan is to grow the large projects business. We have, and we will continue to do so. The second quarter results are a reflection of timing on projects that have wound down, coupled with those just getting started, including the Tappan Zee Bridge project in New York, the IH 35E project in Texas, and the I-440 project in North Carolina. I am very proud to say that our large project teams continue to execute at a very high level. The vast majority of the portfolio is performing very well. We continue to expect average gross margins in the mid-teens over the long-term for the large projects business.

Federal funding as well as innovative financing continues to be a significant driver for our large projects business. Last week I had the opportunity to appear before the US Senate Environment and Public Works Committee on the importance of the Transportation Infrastructure Finance and Innovation Act, better known as TIFIA,and the need for increased investment in highway and public transportation. As I noted in my testimony, project approvals must come faster, or the potential of MAP-21 increased TIFIA financing may go unrealized. Recently we have seen delays in the timing of projects being bid, as well as the execution of contract documents due to financing, which delays the ultimate construction.

The injection of up to $40 billion into the transportation construction market over the next few years is a very important potential source of infrastructure investment, considering the significant transportation infrastructure needs, and the uncertainty of federal, state and local infrastructure spending.

Let me emphasize some highlights and the profile of our large project segment. We remain focused on execution and driving synergies across Granite's teams and geographies whenever possible. The pipeline of large projects continues to be very robust, with more than $10 billion of large projects to bid in the next 12 months. We remain focused on bidding the right jobs, with the right partners, at the right margin profile. We are excited about the opportunities that our backlog of new projects provides, of our new projects only the US-36 project will reach profit recognition in 2013. All other recently awarded projects are expected to hit the recognition threshold in 2014. Our current expectations are that approximately $100 million to $150 million of our 2013 large projects revenue will not recognize profit until 2014.

The third element of our strategic plan is to grow through diversification. At the end of last year we purchased Kenny Construction Company. We already are seeing the benefits of market and geographic diversification through the Kenny portfolio, especially in the power delivery, and water and wastewater infrastructure markets. We are working cooperatively across the larger Company to help grow the business. The integration of Kenny continues to progress well, as the fit of the company's cultures and businesses has exceeded our expectations.

The underground division was low bidder on $150 million of new contracts with the City of Chicago in the second quarter. The power division recently was awarded work in Canada. We continue to tender for work from coast to coast. And the power division already has teamed with our business in the West to procure work in Arizona, Washington, Oregon, and California. Additionally Power division opportunities are anticipated in Utah, Wyoming, Idaho, and Nevada. The synergies provided by Granite's western footprint are proving to be invaluable when evaluating opportunities for expansion. The tunnel division is pursuing work jointly with our large projects teams in the Northeast, as well as pursuing work on their own. We are also performing work in the federal markets through our newly-formed Federal division. So as you can see, we are fully focused on diversifying our portfolio of work through a variety of efforts.

The final element of our strategic plan is to optimize our business. We seek opportunities to optimize our portfolio of assets through bidding the right kind of work along with divesting of assets which are underutilized. In addition we are focused on optimizing the way that we run our business every single day. We remain in the very early stages of our process improvement program through the implementation of Six Sigma techniques. Eventually we expect process improvement to touch all parts of our business, and create significant efficiencies in both our field operations as well as our administrative procedures.

In the short term, revenues and margins remain challenged, some by market conditions and some just by timing. Record backlog of $2.8 billion is a tremendous credit to both our diversification effort, as well as to our construction and large projects teams. We are very well-positioned to capitalize on this backlog in 2014 and beyond. We will continue to bid, win, and build important large infrastructure projects and we will do it profitably. The opportunities and wins in new markets driven by successful Kinney integration, buoy our confidence that growth through diversification already is working for Granite. Though early in development, process improvement is beginning to provide our teams with exciting opportunities to more efficiently operate and grow the Company, while encouraging innovation from within.

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

Thank you Jim. Good morning everyone. Revenues in the second quarter were $550 million, up about 2% from last year. Earnings per diluted share were $0.07 in the second quarter, compared with $0.05 last year. Gross profit margin for the quarter was 9.3%, down about 30 basis points from last year. Total contract backlog at the end of the second quarter was $2.8 billion, compared with about $2 billion last year. This includes both Granite's nearly $300 million share of the IH 35E project in Texas, and our $130 million I-440 project in North Carolina.

Looking at the segment detail, construction segment revenues were $309 million compared with $245 million last year. Gross margins of 8.2% about 90 basis points higher than last year, remain impacted by the pervasive competitive pressure that Jim mentioned. Large project construction segment second quarter revenues were $181 million compared with $229 million last year. Corresponding gross margins of 12.2% were in line with last year. We had only one large project reach the profit recognition threshold this quarter, the US 36 project in Colorado.

We are managing through a couple of challenging projects. One in Washington, and one in Texas. I want to remind you that our accounting procedures provide for additional costs to be recognized when known, with future claims and change order revenue recognized when signed contract changes are in place. This continues to drive some profit volatility in the large project business, especially from quarter to quarter. Large project revenues and profitability vary widely on a quarterly basis, depending on the stages of project progression and the timing of profit recognition. As Jim said, we continue to expect large project average gross margin in the mid-teens over the long-term.

Revenues for the construction materials segment decreased 5% to $60 million. Materials gross margin in the second quarter of 6.6% reflects a decline about 130 basis points from last year. The materials market remains competitive aligned with our construction business, and we simply haven't seen a significant impact in our geographies from the private market, which we believe will mark the beginning of longer term improvement. Selling general and administrative expenses in the second quarter totaled $46 million, compared with $41 million a year ago, as nearly all of the increase was associated with Kinney.

Granite continues to have a strong balance sheet. Cash and marketable securities totaled $324 million at the end of the second quarter. This includes $64 million associated with consolidated joint ventures, compared with$68 million last year. In the second quarter as is typical for our business, we continued to use cash as seasonal business and large projects began ramping up. We expect this will turn in the second half of the year.

As we outlined in our press release, we affirmed our guidance for 2013 with two adjustments. While this provides a short term snapshot of Granite, we are very pleased to continue driving long-term growth with our strategic plan. With that, I will turn the call back to Jim.

Thank you very much Laurel. As we mentioned in last quarter's call, 2013 will be a year of transition, growth, market positioning, process improvement, and preparation for 2014 and the future. We are building a business that is ready to reach the next level of excellence.

We remain on target with our strategic plan. Across more than 90 years, Granite has managed through periods of economic weakness and challenging competitive environments. Over the past few years, our team has done a very fine job managing these challenges, and positioning the Company for growth. We are not where we want to be quite yet. But consider this; private market recovery still has not taken hold in our key markets in the West. Even modest recovery will drive significantly improved performance in our vertically integrated business. Our record large project backlog of nearly $2 billion will drive significant growth next year both in revenue and earnings, and will continue to grow this part of our business. And Granite's financial strength combined with our core competencies continue to provide new and expanded growth opportunities.

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

Thank you. (Operator Instructions) First question comes from Jerry Revich of Goldman Sachs. Your line is open.

Jim, since you are just fresh from Washington, I wonder if you could just step us through how much of your contribution you expect the TIFIA program to make to total infrastructure spending in 2014? And how do you see that playing out in 2015, based on contracts that you are evaluating, or other insights you might have at the program?

Sure, Jerry. So TIFIA if you remember in MAP-21, it was kind of a hidden gem of MAP-21, which increased the allocation on an annualized basis in 2013 to $750 million. In 2014 to $1 billion. When you add up that $1.75 billion, it equates from a leverage position to about another $40 billion into the industry. There is a good and a bad with it.

The good is that money has been set aside assuming that entitities that are applying for TIFIA loans can get through the process, and the most important part is projects that have creditworthiness. The good part is that there are a tremendous amount of letters of interest in the highway DOT. The DOT already being analyzed to determine if they will meet the creditworthiness and the requirements. The problem is that it has been very slow coming. Over the last year we have only had one project that has actually passed through the TIFIA process and actually has been approved.

There are a significant amount of projects in the TIFIA program, and Secretary Fox last week made it very clear in his testimony, that they were going to increase their staff to be able to expedite the processing of these loans. He estimated six or seven more just in the next 12 months, which is a significant increase from where we are today. I think it is absolutely heading in the right direction. They needed to increase staff, they needed to have Barbara Boxer led the EPW Committee, made it very clear that she expects those loans to be processed and put into place.

As we increase this to the $1.75 billion over the next two years, this is a significant increase in the overall amount of opportunity in the business. I think the projects we have IH 35, Tappan Zee. I know that the Senator from New York was at the hearing, and she was very focused on Tappan Zee. They have asked for a significant TIFIA loan as well. It is starting to happen, it was a little slow, but I personally believe that from what I heard, the gates are starting to open, and that is going to get more of these loans on the street in the next 12 months.

Okay. Can you talk about the cadence of orders over the course of the quarter and into July? A lot of discussion about whether other companies calls here, I am wondering if you saw any impact on your business, and how the overall cadence played out during the quarter?

Weather. I am not going to put weather in our program. Most of our businesses that would be affected by weather are in the West, and the weather was actually just fine. I will say this. It did seem we got a little bit of a slow start this year, just from getting work started. We had a good June. We had a good last month in the quarter, and the first couple of months were a little slow. From a cadence standpoint we started to see it picking up towards the end of the second quarter.

Okay. Thank you.

You bet.

Thank you. Next question from John Rogers of D.A. Davidson. Your line is open.

Good morning. I was wondering if you could go through a little bit more in terms of the impact of Kenny on the quarter? Both in terms of revenue, and did it add to margins in the period?

Good morning John. Yes, sure. A couple of things. It is a one of the main drivers of the increase in our construction revenue is due to Kenny. I will say that because the majority of their work outside of the tunnel business falls into the construction segment. They have been meeting their budgets, and have been doing as we anticipated. Laurel do you want to focus a little more on the actual bottom line numbers if you have it for Kenny? We don't break it out by segment. They are through the first half of the year operating as planned.

They had about $50 million of what we would call construction revenue. And then about $20 million of the large projects. We hadn't expected Kenny to deliver any significant bottom line to the Company because of the amortized intangibles, particularly the acquired backlog. We are on track with that as expected.

Yes. We had a slight increase on Granite Construction side of revenue, and then the remainder was due to the Kenny business.

Right.

Okay. Jim, are you thinking about considering any additional acquisitions at this point?

Absolutely. That is part of our diversification plan both from an end market and from our vertically integrated business, John. As we have suggested over the last year or 18 months, we are actively pursuing expanding our geographic presence with a vertically integrated business, and we do believe that there are additional markets that we want to diversify into. We have made it very clear water, wastewater infrastructure, rail, the federal business is doing very well, as well as the power business. We are absolutely looking at additional acquisitions.

Okay. Then lastly, just in terms of the large projects hitting the profit thresholds, can you give us a sense of what the schedule is like for the second half of the year, and with the problem projects, are there significant timing issues to be aware of, in terms of settlement negotiations, or anything else that could cause margins to change appreciably there?

So the second half of the year, John, large projects. We are starting as I mentioned, we are starting Tappan Zee, we are starting IH 35E, we are starting I-440, US 36 is kicking off and starting to gear up. So most of our projects are just starting to gear up. The most of the newly awarded. I think you will see the ramp-up. They were delayed a little bit in the start as I mentioned in my script. That is why you see us make some guidance adjustments on the large project revenue. But I think they will be progressing quite well through the end of the year. I don't think again that they started quite as early as we had originally anticipated during the year. Secondly on the other projects, the one that Laurel mentioned.

Jim, just on those large projects that you mentioned. None of those hit the 25% threshold this year, is that correct?

No. US 36 did.

The US 36 project in Colorado hit it in the second quarter.

That is it for the rest of the year.

The bigger jobs will not meet proper recognition in 2013. Now the second half of the question John, was the projects in Washington and Texas. As Laurel mentioned, and specifically how we recognize those projects that do have some issues that we are working through with the owners, specifically up in Washington, and we are not at a settlement discussion yet, but we could be. If we have a dispute that does gets settled, we would take that settlement at that point in time. Yes, we believe there is something out there we are working on with them. They are very good agencies, in both cases that we are working with. We believe that at some point in time there will be an adjustment.

Okay. I am sorry. On those large projects that are with no significant threshold milestones in the second half of the year, we are probably looking at margins roughly where we are now through the rest of the year?

I think that our guidance we kept our guidance still in alignment with what we had in the first quarter. We just dropped the revenue down because of some late starts. We will push a bigger portion of those into 2014.

Okay. It seems like you would be at the lower end of that if you don't have milestone benefits?

Well, it depends again. You think about some of these disputes and things, when the timing of those occur, could change that ultimate margin play out as well.

It is also includes the progression on the existing projects that we have going on right now.

Which are good projects and how they close out will make a determination on a couple of points there possibly as well, John.

Okay. Thanks for the color. Appreciate it.

Thanks John.

Thank you. The next question is from Nick Coppola of Thompson Research Group, your line is open.

Wondering if you can add some color on benefit and timing of private dollars coming back? I heard your comments in your opening remarks. Obviously, res and non-res are region-specific, but more generally, it seems like things are starting to move in the right direction. What are your thoughts around that, and when do you start to see improvement in your vertically integrated business?

Nick, I think that is what I was hoping to work on a little bit in the script, was that we have seen some signs of light. What I mean by that, on the private sector is that we are starting to see developers come in to work with our teams to get pricing on larger developments. We are starting to see engineering firms start building plans for development, we are starting to see permits increase for development.

Those are all the beginning signs of that private sector coming back. We haven't seen that previously in 2012 and earlier, it was pretty much dead on arrival on that kind of signs of light at the end of the tunnel. What we haven't seen is a significant amount of that hitting the street yet. There has been a little bit. That is part of the third-party material sales for us is the first thing that will be affected when that residential projects actually hits the street. Our best estimate and it is consistent with what we said over the last couple quarters, at the end of 2013 we think those projects will now be out on the street and starting to see it in our business model. So again, end of 2013 and then 2014 being ramped up.

That makes sense. I may have missed this, but can you talk about any specific large projects that are being bid, say over the next, the back half or early next year? What opportunities look like?

I will give you a couple of examples. California high-speed rail. Back out on the street packages two and three. Those are big. They will be on the street at the end of this year, beginning of next year. Probably a couple of billion. We are looking at a very large job, a couple of billion job in Florida, the I4 Ultimate job. We are looking at I-85 in South Carolina, US 95 in Las Vegas, I-73 in North Carolina. The Johnson Gateway project in Kansas. There are two more large projects in North Carolina the Garden Parkway jobs. There is I-69, that fifth section of I-69 in Indiana. There are some large metro jobs down in LA that we are bidding this year. A large project the Capital Street Corridor Bridge in Washington. SH 183 in Dallas. It is endless.

That is great color. That shows all of the opportunity out there.

It is. It is not slowing down. Our job on our large project business is to pick and choose the right jobs. I said that at the right margin with the right partners and the right owners. We have the ability today to be quite choosy, and to really get the right projects on the books. That is what we are working on.

Alright. I appreciate it.

I show we have a question from Jack Kasprzak, BB&T Capital Markets. Your line is open.

Good morning everyone.

Hi Jack. I would be disappointed if you didn't have a question, Jack.

I don't want to disappoint anyone. I do want to ask about construction materials. You mentioned weather was not a factor. That makes sense given your geographic exposure, but sales are down a little bit. Is this just a function of the ongoing difficulty in the private market?

Yes. Two things happened. I mentioned it briefly, Jack. We started off slow in the first half of the year. June started ramping up a little bit. It has got momentum today. For us, our California markets are still seeing some weakness in third-party sales and materials business in general. But as I mentioned I think towards the end of the year, we see it starting to turn a little bit. We have had a little bit of slowness in the first half. We are starting to see the private sector with the development plans and engineering plans coming into play. I will say this. Actually the overall average pricing is up. It isn't a pricing issue. What it really is, is getting the private sector back in gear. We have actually seen price increasing so far this year.

Given your comments about what you are saying with developers, and maybe sort of indications of interest, if that is the way to say it. And the second half is usually seasonally better for you guys anyway. That business should presumably give a bit of a ramp or improvement and set the stage for an even better 2014. I know we are not giving 2014 guidance, but is that trend a fair assessment?

I think that it is. I think that is what we have been saying for the last two or three quarters, Jack. You are going to see what we believe is the private sector starting to impact positively our business at the tail end of 2013.

That is given enough time to get projects going. SG&A has bounced a bit I guess is fair to say, is the Q2 rate is there anything terribly different in the back half of the year, what movement should we expect there, if any?

When we gave the guidance there, we left our guidance where it was. We are seeing SG&A playing our pretty much like we anticipated at the beginning of year, within that area of the guidance that we gave out last quarter, which is the same as this quarter, Jack. We don't see a huge difference.

We are accelerating our integration of Kenny a little bit, so we will have costs that will be in this year associated with that, as well as some of the acquired intangibles. Although that is not a significant cost.

That is in our guidance.

Right.

Okay. If you already touched on this I apologize. I was a touch late on the call. On Kenny, do you think that is a push on earnings this year, and accretive next year, or what is the update there?

That is correct, Jack. Very little has changed. They are operating as expected, doing very well overall. Probably a push on earnings then some of the amortization issues falling off next year, we believe that it will be accretive next year.

Okay, great. I think that is it. Thanks a lot, guys.

Okay, Jack, thank you.

Next question from Sameer Rathod with Macquarie. Your line is open.

A couple of quick questions. First, on the $10 billion that you say you are bidding on for the next 12 months. What portion will be Granite's share, just given with the joint ventures, and what have you?

I would just say on average at least 50%. Some of them were 100%. Some of them were down at 30%. It really just depends on the mix that we are successful on. For example, I was just mentioning the three big jobs that are coming into play for the second half of this year, Tappan Zee, IH 35, and I-440, where we have partnerships in Tappan Zee and IH 35, but we are 100% the sole contract on the I-440 job in North Carolina. It is just depends on the mix. If you used about half, 50% on average or a little higher than that, you would probably be in the ballpark.

Right. Right. Okay. Then my next question is, last quarter I think you guys said you got 3% to 5% pricing on the aggregates. Has that kind of carried over into this quarter, or could you comment on the pricing this quarter?

I think pricing is actually pretty strong. I would carry that forward to saying that we are seeing those increases in pricing stick. What we are not seeing is the volumes. That is the bigger issue, and it really is not due to a pricing issue, it is more the market itself. Pricing is staying fairly strong.

Okay. I believe that is it for me, thanks.

Thanks Sameer.

Thank you. Next question from Jerry Revich of Goldman Sachs. Your line is open.

Thank you for taking the follow-up. Jim, on the magnitude of projects that are out there, you were stepping through a pretty exhaustive list earlier, I am wondering if you could just aggregate all of that for us, as you have done in the past, and what is the range of, the dollar value of projects you are evaluating or bidding on?

Kind of interesting. I mentioned that it is $10 billion that we are pursuing in the next 12 months. That does fluctuate depending on owners, some new stuff comes on board, some stuff may slip. But it is about $10 billion. That we will move around about half of it, 50% of it would be our value. I gave you a short list compared to the exhaustive list that I actually have. The list is endless. It just keeps fluctuating and adding. I gave you about 10 projects that we know that we are pursuing. But there is at least a list twice as long as that, that I could add to that. We are certainly willing to talk about all sorts of projects if somebody wanted to call us, we can go through a lot more than that. But I would say $10 billion in the next 12 months is about right.

In terms of your historical run rate, you mentioned the Granite content is half of that, how would you encourage us to think about the win rate?

I think that the win rate fluctuates annually. I will tell you that we have had years where we have actually gotten zero, then we have years where we gotten 50%. I would just continue to use 1 in 3, and 1 out of 4, as being a reasonable win rate. As I think that as we bid these larger projects, that first of all, they do short list them. They do a statement of qualifications. They do take typically four to five bidders. When they short list them and our anticipation it would be to get our share of the work. That is one out of four to one out of three for us, is in alignment with where we think we need to be. Again, it will fluctuate quarter-to-quarter, it will fluctuate year-to-year. But on average just like large project margins, we believe we should get one out of three to one out of four of the projects that we bid.

Given how strong the bid environment is, just wondering what is driving the reduction on the high end of the range for large projects this year? Are they just taking longer to play out and reach a final investment decision, or what is the driver there?

You are referring to revenue, Jerry?

Yes.

Exactly. Some of the projects started a little later. Some of the financing. I mentioned during the TIFIA discussion that some projects were delayed in awards and startups. The TIFIA program has been a little slow coming into play, although I am a strong advocate of it, and I want to make sure that people understand that we think that is a great opportunity in MAP-21 to create more opportunities. But it has been a little slow coming. Secretary Fox said that they were going to add staff and speed up the awards of TIFIA loans. That has slowed our progression on some of our large projects a little bit for the year. Other jobs are ramping down. It is kind of a lull during the ramp down and the ramp up. That is why we guided to a little lower revenue for the year, because of a little bit of changeover there and the start-up of the new jobs.

Thanks for the context.

Thank you Jerry.

Thank you. (Operator Instructions). There are no further questions at this time. I would like to turn the call back over for closing remarks.

Thank you very much everybody for your questions. I want to close by thanking our employees across the country. I know I say this every time. But they absolutely are the primary reason we have been successful in the past, and they are the key to our future as well. Laurel, Jacque, myself, and Ron will all be available all day if any of you have any further questions. We appreciate your interest in Granite, and thank you very much.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.