Sterling Infrastructure Inc (STRL) 2011 Q1 法說會逐字稿

Greetings and welcome to the Sterling Construction Company first quarter conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. And now I will turn the call over to Mr. Jim Allen, Chief Financial Officer of Sterling Construction Company Incorporated. Thank you, Mr. Allen. You may now begin.

Thank you, Chris. I would like to welcome each of our listeners to this Sterling Construction Company conference call to discuss the results of the first quarter ended March 31, 2011 which we released last evening. I am joined today by Patrick T. Manning our Chairman and Chief Financial Officer and Brian Manning, our Executive Vice President of business development. First I must remind you that this call may include certain statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act of 1995.

Any such statements are subject to risks and uncertainties including overall economic and market conditions, competitors, customers and suppliers actions, weather conditions and other risks identified in our followings with the Securities and Exchange Commission. These risks could cause actual results to differ materially from those anticipated. Accordingly, any such statement should be considered in light of these risks. Predictions that we make at anytime may not continue to reflect management's beliefs, and we do not undertake to publicly update them.

Turning to the financial results, I am pleased to review the results of operations for the first quarter of 2011 with you. Revenues increased $13.1 million or 15.2% to $99.2 million in the first quarter of 2011. Primarily due to executional contracts awarded in our Texas markets in 2010 and an increased revenues resulting from the higher level of activity on joint ventures in which we participate in our Utah market. However, the increase in revenues in Texas was less than expected due to severe weather conditions in certain Texas markets during the first quarter of 2011.

The 2011 first quarter gross profit declined $700,000 to $7.6 million due to reduced margins of contracts and progress as a result of on going competitive bidding pressures since 2008. Also to under absorption of indirect costs primarily as a result of severe weather conditions in our Texas markets, and because of increases in crude oil prices from those anticipated at December 31, 2010 which resulted in higher fuel costs than the amounts we used in our estimates of cost to complete on contracts and progress at that date. These decreases were partially offset by the gross profit we earned on the increased revenue. Declining gross margin was due to the same reasons as the declining gross profit.

Operating income declined $1.1 million to $1.7 million in the first quarter of 2011 from the comparable quarter in 2010 as a result of the decrease in gross profit at $700,000 which we just discussed, and an increase of $600,000 in general administrative expenses of 2011 over 2010 due to an increase of salaries, wages and related benefits, board of director fees and expenses related to strategic, secession and compensation planning and expenses related to education training of our employees.

As a percent of revenues, G&A was 6.1% in 2011 versus 6.3% for the three months ended March 31, 2010. G&A expenses do not vary directly with the volume award performed in contract. In the first quarter of 2011 we have a loss of the sale of securities of $200,000 versus a gain of $400,000 in the comparable period in 2010. During the first quarter of 2011 we sold our position in certain ETF Securities, the assets of which were accrued all commodity pools. The gain in 2010 was primarily a gain on the sale of these securities during that period.

Income tax expense decreased $700,000 in the first quarter of 2011 from the prior year comparable quarter as a result of the decrease of income. Our effective tax rate also decreased in the current first quarter to 10.1% compared to 27.3% in the same period of last year. Primarily as a result of an increase in net income attributable to the non-controlling interest owners which is taxed to those owners rather than Sterling and in 2011 non-taxable interest income. These decreases in income tax expense for 2011 were partially offset by higher state income tax expenses.

Non-controlling owners interest in equity and earnings of subsidiaries and joint ventures was $1.4 million in the first quarter of 2011 as compared to $700,000 in the prior year. As a result of increased earnings of these entities in 2011. Net income attributed to Sterling common shock holders decreased to $44,000 in the first quarter of 2011 from $1.6 million in the first quarter of 2010 for the reasons we have just discussed. Due to the lower net income in 2011 earnings per weighted average common share out standing attributable to Sterling common stockholders was zero in 2011 versus $0.09 cents per share in 2010.

As we have previously discussed in filings with the SEC and as was the case in the first quarter of 2011, assuming the factors that are adversely affecting infrastructure capital expenditures in our market in the near term, and taking into account the lower margins in our backlog, we continue to anticipate our net income and weighted average diluted earnings per share attributable to Sterling common stockholders for 2011 will be significantly less than that of 2010. At March 31 2011 we had working capital of $103 million including cash, cash equivalence and short-term investments of $78 million. And no outstanding borrowings under our $75 million credit facility. I will now turn the discussion over to Pat Manning.

Thanks, Jim, and good morning, everyone. Results for the quarter were disappointing. But given the weather all over Texas both in January and February, not unexpected. The high net income in the fourth quarter was somewhat of an aberration as is the last [No audio]

Ladies and gentleman please continue to hold. Your conference will resume momentarily.

Okay. Thank you.

Now joining Mr. Manning.

As I was saying, this resulted in short falls in revenue, un-absorbed equipment cost and lower productivity. Diesel fuel prices jumped up significantly causing (inaudible) job profitability on all jobs going forward. The unprecedented snowfall and cold weather also impacted projects in Nevada while work in Utah on the I-15 core project continued on schedule. The weather began to ease in March here in Texas, and we are experiencing a drought over much of the state, so revenues are picking up nicely. As we saw last week, oil fell $10 per barrel which is positive for diesel fuel pricing and those on going costs.

Backlog has continued to increase, but we have had numerous projects held up because of either financing or utility relocates which prevented us from beginning construction. We believe most if not all of these issues will be worked out in the second quarter. While they were beyond our control or even our ability to anticipate they had a serious affect on earnings. The CTRMA expects to sell bonds in June and should be able to begin construction by the end of June on our $207 joint venture project in Austin.

The Dallas toll road authority is moving forward with those projects left in March and April and construction should begin early in the third quarter on our $92 million section. Work in Louisiana will begin in mid-May. As you remember, those jobs were bid in November of last year and January of 2011. No project is in jeopardy at this point, but the timing is being pushed out. We are redistributing personnel and equipment to accelerate other projects in order to keep revenue flowing while we await notice to proceed in utility adjustments. The bidding climate remains spotty and is slow in all of our markets.

But, as reported, we have been able to increase backlog and are trending our business margins up. The [TechStat] landing in May provided us with three second place finishes on jobs on which there were five to eight bidders. One contractor picked up three projects for an approximate value of $350 million. As you saw CapEx for the quarter was $8.4 million which is not necessarily representative of the annual spent.

As I mentioned in our last quarter call, we were anticipating maintenance CapEx to increase to make up for our lack of spending the last two years and also the need for specific pieces for the I-15 core project as well as the Dallas toll road project. We have purchased the majority of the equipment needed for the I-15 core as well as some replacement pieces. We will review where we are in the new schedule when we get notice to proceed on the Dallas toll road project and the potential of the use of rental equipment.

While infrastructure funding deficiencies and increased competition have temporarily affected our markets, we expect those markets will ultimately recover and the gross margins, net income and earnings per share will return to levels more consistent with the Company's historical rates of return. Sterling remains in sound financial condition and is well positioned geographically and in terms of our diverse portfolio of skills and Company owned equipment to compete in acceptable profit margin levels for the projects as they become available. Now I will turn it over to Brian for an update on our markets and business development.

Thank you, Pat. As of March 31, 2011 l, our backlog was $740 million as compared to $618 million at March 31, 2010. This backlog includes a recent design build win of approximately $34 million located in Salt Lake County, Utah by our subsidiary, Ralph L. Wadsworth. The Bangerter project consists of a new interchange in concrete paving that will improve traffic for some of the busiest intersections in the state of Utah. Design began quickly on this project and construction is scheduled to be complete in June of 2012.

Design is also advancing on the Texas 290 design build project in anticipation of a June notice to proceed. Competition remains high for high bid work, but there are fewer competitors on design build projects where the barriers to entry are higher. Sterling continues to look for ways to differentiate ourselves in this market. One way is to keep on the leading edge of technology. Provo River Constructors, a joint venture in which Sterling's Utah subsidiary Ralph L. Wadsworth is a partner, transported and placed the pre-constructed Sam White Bridge using Accelerated Bridge Construction technology.

The bridge move was the longest two-span bridge ever pre-constructed and moved into place via self-propelled modular transporters in the Western Hemisphere. This capability to rapidly move large structures helps us to compete on some of the most difficult and time demanding projects. There has been little progress on comprehensive transportation bill, but an advanced copy of the Obama service transportation draft reveals a vehicle miles traveled system is being contemplated.

This vehicle miles traveled system would move away from the traditional gas tax system that is becoming more and more irrelevant as high mileage vehicles and electrical cars have contributed less tax on a vehicle miles travel basis to rebuilding our transportation system. The proposed bill would also provide for $69.7 billion in fiscal year 2012 highway funding. The House Transportation Infrastructure Chairman, John Mica, indicated that the house version which is due out around Memorial Day would include more reliance on public-private partnerships.

In a public-private partnership, Sterling would enter into a construction joint venture, or concessionaire, who would finance and maintain the project for several years. In Texas there are many proposed bills to support infrastructure. The Texas legislature, Senate Joint Resolution number four calls for a proposed constitutional amendment which will be on the November ballot. If passed by voters, it will give the Texas Water Development Board the authority to approve $6 billion in bonding on a continuing basis for water projects. Texas Senate Bill number one will deliver the remaining $3 billion in general obligation bonds to improve the state highway system.

This approval will supplement the Texas Department of Transportation construction budget in fiscal years 2012 and 2013 to allow for nearly $4 billion annually. In all, the Texas House approved 14 projects for comprehensive development agreements or public-private partnerships. Texas Transportation Commission recently approved $350 million for the construction of Houston's Grand Parkway segment E. The $350 million comes from uncommitted dollars in the Texas Mobility Fund.

Utah's budget for new projects will be down to the $750 million level for 2012 versus authorizations of $1.2 billion in 2011. And finally we estimate the Nevada Department of Transportation budget will be between $300 million and $400 million. There are numerous acquisition opportunities, and we continue to explore ones that complement our culture, help diversify our geography and in some cases diversify our service profile.

We continue to be opportunistic both in M&A and alternative delivery projects. The Texas economy is strong and continues to support infrastructure. We are well positioned in our market to partner on larger design build projects and we continue to pursue teaming arrangements for public-private partnerships. Now if there are any questions we would be happy to entertain them.

Thank you. (Operator Instructions). Our first question comes from the line of Rich Wesolowski with Sidoti & Company. Please proceed with your question. Your line is live.

Thanks a lot, good morning.

Good morning, Rich.

We have heard management speak about reduced margins and backlog for awhile now, but the base upon which we are judging that has become a little unclear. Have your backlog margins declined meaningfully within the last six months?

The last six months I believe they have started to come back from where we've been in 2009 and 2010, Rich. As we mentioned, those were very low years, but you don't see the affect of bids that have been bid lately in the last six months very much in our performance. It will come later in the year.

Are you under the impression that any of your name brand competitors in Texas, privately held companies will in 2011 reach backlogs that would turn them off the idea of bidding so aggressively?

As I mentioned, one of our major competitors picked up $350 million in the last [letting] so we are hopeful that will happen. But that's something we just have to wait and see. In that case there was a large amount of money that he left on the table, so you would think his prices will rise.

Okay. Now that the state senate has approved the use of the remaining Prop 12 bonds in Texas is there any remaining risk in your minds to their inclusion in the fiscal 2012-2013 road building budget?

I think there is always some risk, but it seems fairly solid at this point that 2012 and 2013 should be similar budgets in the $4 billion range.

Appreciate it. Thank you.

Thank you. Our next question comes from the line of Tahira Afzal with KeyBanc Capital Markets. Please proceed with your question. Your line is live.

Hi, guys. This is actually [Saul Duron] for Tahiro. My question relates to looking at the margin front. If I'm going to look at 1Q 2010, you guys reported $0.08 cents. Now this quarter came in at $0.01 cent. And we know a portion of that was due to weather and fuel costs. I just want to see the break down of was it utilization related? How much was utilization related? How much pricing and backlog versus water versus fuel costs? Just trying to see how we can model it out going forward, how much margins have to come down in our forecast.

We don't discuss the absolute dollars or percentages with respect to these decreases, and frankly many of the contracts have more than one factor involved. So that's about the best I can do in answering you.

Okay. And then so looking at going to Rich's question about the backlog profile. You said the last six months the profile has been better in relation to backlog. Now, if I'm to assume that the previous backlog that was booked is causing margins to go down a little bit, how much longer should I go out?

I would first be careful in generalizing in all this.

Okay.

We have seen in the last six months some trends that maybe the bidding has been better from the margin standpoint, but That's not necessarily so on all of the jobs that were left. What we are seeing affecting us now are the lower margins in our backlog. And while we may have some jobs that are higher, they are still average.

Individual jobs we bid based on risk profile, equipment usage and a number of factors. So it is hard to generalize as Jim says.

Okay, and one last question, looking at 4Q, I know 4Q was a special quarter related to the margin fund, but in your mind, what was the biggest delta that lead to that 20.8% gross margin in 4Q. Was it the Utah operation, the mix shift?

It was a number of things. And I think these were discussed in the 10-K rather completely. And again I wouldn't try to put dollars on each one of them, but certainly we had better, we had a lot of progress in Utah on the joint ventures. We were wrapping up some jobs which, as we have said numerous times, our jobs, we have a lot of jobs and as they go towards completion, we can have more visibility with respect to final cost of revenues as well as the change orders that are to be approved, and so forth like that. And I think you just ought to review the K and that will give you all of the reasons.

Sounds great, thanks, Jim.

You are welcome.

Thank you. Our next question comes from the line of Todd Vencil with Davenport. Please proceed with your question. Your line is live.

Thanks, good morning, guys.

Good morning Todd.

Just to try and circle around on this margin question a little bit, Pat right around the time we had some technical difficulties, right after that you were talking about the fuel costs and the weather, and you made a comment about having write downs on all job profitability going forward. Did I hear that and write it down right? Can you tell me what you said on that because I missed part of it.

Yes, it was write downs on all jobs because all jobs are affected by the fuel cost bid in the project.

Got it.

Yes, those jobs were written down and now hopefully fuel might come back to something reasonable, but we'll have to see.

So the jobs were written down. Would the write downs, the adjustments you made and the job profitability assume that the fuel costs that you saw in the first quarter persisted throughout the life of those jobs?

Well, they were written down, taken into consideration what we would anticipate based on those numbers, yes.

Got it, got it. Can you tell us the amount of those write downs in the aggregate?

No.

But I assume if you wrote them down, again Jim, tell me if I am understanding the percentage completion of accounting right, if you wrote them down they would be less profitable going forward as well than you would have otherwise expected, is that a fair statement?

That is a fair statement. However the write down, we wrote down, there was a write down in the first quarter. You have a catch up on the percentage of completion basis.

Right. Got it. That makes a lot of sense to me. And you guys said --

Todd, I want to clarify one thing.

Sure.

We estimate cost going out and we don't necessarily think it will always stay at a hundred and some odd dollars a barrel or a $110 a barrel. But we do look at futures and so forth like that and how we feel about the cost going forward. We know what the price is now. We know how it is affecting us now. But when we get out into 2012 and 2013, we've got to go with what we think is out there. But we don't know. We don't have a crystal ball.

You will note that in our Q we discuss we have entered, subsequently entered into a hedging program for a portion of our fuel to, in order to contain the volatility in fuel prices. Now, this is not a large part yet, but may very well grow over time to better help us contain the volatility. So if I didn't muddy the water, I hope I didn't, but I wanted to make sure you don't think that we just took a one great big swat of write downs. We tried to look at it realistically.

Got it, no, that's great. I appreciate that color. Thanks for that. You mentioned in the release and in the prepared, I guess your script there, that revenues in Texas ended up being less than you would have expected due in part to the weather and I guess some other issues potentially too. Can you tell us how much revenue you think you left on the table because of that?

Unless you can tell me what we would have worked had the weather been better, I can't. Even if the weather had been good, that would have been unexpected changes in what we probably would have anticipated. We just know that with all the snowstorms, ice storms all over Dallas, San Antone, even some bad weather here in Houston, that it caused us downtime when we could have been working. So we know there is a decrease there.

Understood. That makes a lot of sense. On the CapEx side, I understand you are waiting to figure out about the Dallas toll road to figure out what your final budget is going to be. But can you give us any help on how we ought to be thinking about that for the rest of the year, one way or the other?

Yes, we don't publish those numbers exact. You can see that they were $8.7 million in the first quarter. We will certainly spend money in the second through fourth quarters, and I would anticipate that it would be less than the $8.7 million and then a long when we get to award on the, or notice to proceed on the toll road project, then we will decide what we are going to do on that. So to some extent it is a state of flux at this point.

But you would say, Pat, that we will probably continue with the maintenance CapEx in order to, since we did not do as much of that in 2009-2010, so we would expect that this run rate on CapEx this year certainly in the second, third and fourth quarters would be higher than what it was last year.

Yes.

Fair enough. And then the final one from me. Just on G&A, I understand that that is not tied to the amount of work that gets done. It does bounce around a little bit. Last year it was close to $25 million, I guess. Is that a reasonably good amount for G&A on an annual basis at this point?

Well, we were up $600,000 in the first quarter. So I guess you have to extrapolate that somewhat to the whole year. But maybe some of the expenses we had in the first quarter, the additional board fees, travel and so forth like that would not be as great. I think you are still in the ballpark.

Okay. That's great. Thanks, guys.

Thank you. Our next question comes from the line of John Rogers with D.A. Davidson. Please proceed with your question. Your line is live.

Hi, good morning.

Good morning, John.

A couple of things. First of all, in terms of the bid market, you've got some projects that hopefully are in backlog, but will be resolved in June. But what is the rest of the market look like? I mean are you seeing more opportunities because the last couple of quarters actually have been fairly active in terms of awards for you.

I think we are seeing more opportunities, and my comments earlier hinted towards more opportunities, especially when it comes to alternative deliveries projects. So we are finding more funding and we are finding more opportunities in these projects that require a little bit more work to enter into them, John, than some of the traditional ones.

So, Brian, does that mean that the business or at least the awards will be a lot lumpier as they come in rather then the slug or the flow of smaller projects in the past?

Sure, the regular projects that come in, a lot of times there will be a lump, if you will, towards the end of a fiscal year for an entity, whatever the entity may be, a municipality or a department of transportation. But certainly these design builds or public-private partnerships are going to come out in larger projects and the timing of those will be just subject to the ability of the organization to get the project out on the street.

And it seems, maybe it is my perception, but in the past these larger projects you have had opportunities to collect award fees or improve margins towards the end of those projects. Is that the case now?

I think in some case there are bonuses connected with the projects. The basis of selection a lot of times is priced and how quickly you can deliver the project and the owners are certainly motivated to get the projects completed quickly and therefore they offer incentives many times.

And are there bonus opportunities this year?

This are milestones that are set up within the projects, but we are not focused on those. We are focused on delivering the project in a timely manner. So we may have built in some fees into our projects in order to meet those milestones. So I don't want to talk specifically about specific bonuses within projects. Just know that the schedules are aggressive and we are working to achieve them.

Okay. But I guess given your schedule this year, are there more closeouts this year compared to last year or less, and is it more into 2012?

I think it will be less and some of the projects that we are beginning are multi-year projects. The one project, the Bangerter project that I mentioned, is a June 2012 completion, but the other projects have a longer lead time.

Okay. And then just lastly, in terms of your expansion and push into the east in Louisiana, are you pretty comfortable there, and would you look to go even further east or, I don't know, other areas contiguous to Texas?

I think the push is not necessarily in a particular direction. It is being opportunistic when programs come along. The Louisiana projects are part of a larger sanitary sewer program that they have there. So we continue to be opportunistic no matter where the project is.

Okay. Thank you.

Thank you. Our next question comes from the line of Nick Coppolo with Thompson Research Group. Please proceed with your question. Your line is live.

Good morning. Yes, I wanted to drill down on those projects that are pending funding issues. I know you said you were confident that, but I wonder if there is any risk there and if there is any concern that there will be further delays or cancellations potentially?

It looked like from glancing at some of the analyst reports there was some confusion on that this morning. But there was $223 million worth of projects that we typically put into our 10-Q that had not been awarded as of the time we published.

That's formerly awarded.

Formerly awarded, that's correct. Although we were notified that we're [a little bitter]. Out of those $184 million are two projects. The one joint venture and the one toll road project hasn't been funded yet, but we had expected those -- we had expected those delays and at this point we don't see any issues in their awarding only timing.

I don't think the funding is questionable. It is just the timing of the process for achieving those bonds and then getting to formal approval.

For example, there was a group of projects for the toll road in Dallas and one contractor, or the contractor that got the first of those projects, [SEMA], was awarded their project and has been scheduled to begin construction. We are second in line. So I don't anticipate any problems.

And they were just awarded that, weren't they?.

That's right.

We hope ours will be very soon.

Okay, well That's helpful. Thank you. And then if I can just get one follow-up question. I wonder if you can talk a little bit more about the competitive environment, and whether you are seeing an acceleration in small players maybe going under and, I guess building off of that. If you are seeing any increase in surity projects?

Not seeing anymore inquiries on surity projects although we still anticipate that they are coming. And again I mentioned that in the May letting there were five to eight bidders on the contracts that we were bidding on which is a better number than we have seen over the last 12 to 18 months.

We have seen one more contractor failure in the Dallas area that would classify as your smaller contractor or a contractor that was, their bidding practice wasn't sustainable.

Okay. Thank you.

Thank you. Our next question comes from the line of Jack Kasprzak with BB&T. Please proceed with your question. Your line is live.

Thanks, good morning, guys.

Good morning.

On the subject of bidding at acceptable margins, maybe in a more normalized environment, what kind of margin level would you guys be targeting or would be acceptable to you guys in the next sort of up turn better economy? And what I am also thinking about is any changes you have made to the types of projects you bid on? You mentioned technology and pulling some technology. So not just the market, but things you guys have done that might improve your margin and profit profile during the next upturn. Is there a level you guys are targeting that we can think about?

Let me answer that first part of the question Jack. We have historically maintained margins in the 10% to 12%, gross margins, in the 10% to 12% range. And we believe that the market will allow that in the future. When you get very much over that I think competition begins to pick up, and it begins to trend back down again. So I think that's a likely possibility. We have also said that the design build contracts due to the timing and the method that they are bid in might provide slightly higher margins. Brian, do you want to address the second part of the question?

On the second part we continue to invest in equipment that will allow us to have quality construction. ABC Bridge Technology was one of the methods we have talked about earlier. And that is a technology where we rapidly deploy or move a bridge in an over night operation, if you will, which saves us a lot of time on the schedule as well. And then we continue to develop our project managers in the design build methods and put them on projects to help build their experience to help them compete on future projects.

Okay, thanks for that. Second question is with regard to the federal highway bill, still a lot of uncertainty there. I think we all realize, given the situation we have now which is continuing resolutions at a low $40 billion level of spending, would you guys trade that for a new six-year highway bill, but that is at a lower level of spending given where gas tax receipts are? Meaning that you get the bill in place so the uncertainty is gone, but it is at a lower level of funding, or would you prefer to have the sort of continuing resolutions be what are in place instead of going to a lower level of funding?

I would trade if they were higher.

We would all do that.

I think the longer term bill gives more visibility to a lot of the organizations that we are working for. And a lot of the projects that are being designed or contemplated need that visibility so we can better understand how to plan for the future.

So even a lower level, a little bit lower level of funding, again, we would assume we are just going fund it out of gas taxes. You might take that for the visibility that you get in return.

Good visibility would certainly be important. We are hopeful that they will come up with something, a resolution that realizes the infrastructure situation that all the states are in and they will provide more funding, but we have to wait and see.

I would add that we would, taking what Pat just said, we still anticipate there is going to be additional funding coming from PPP's and so forth like that. So the visibility on a six-year bill plus the additional would be a welcome situation.

Got it. Okay, thanks very much.

Thank you. Our next question comes from the line Avi Fisher with BMO Capital Markets. Please proceed with your question. Your line is live.

Hi, good morning.

Good morning.

Just follow-ups on questions already asked, but the 223 worth of projects not formerly awarded. Are any of them holdovers from last quarter? In terms of last quarter you had --

Dallas wanted to holdover because it was awarded in, I want to say December, November, and then we got word that they were delaying the official award, and so it is a holdover, but that one is I say is probably closer to being resolved because of some recent agreements between the parties up there in [TechStat].

Is that the $94 million one way or the non-controlling venture or is that a --

It is the $91 million toll road project in Dallas, Ft. Worth.

Okay. I'm sorry, I missed what you said. And that you expect to be, that's fully funded and expect no issues, just timing?

Yes. As we have no indication that it is other than that.

Okay. And then quickly on the hedging, how come you weren't hedged this quarter?

We were in the ETL which had a commodity pool and all of a sudden it went to tracking what our diesel was doing. So we got out of it and we are cautious about doing anything like this. Hedging is not an expertise. We are not Southwest Airlines or somebody like that who does this all the time. So we are cautious about going into it. We have to learn. We did our homework, and it was in April that we got into it. We are still not in over our head. We are not in over our waist. We can still wade in this thing. That's the best answer I can give you.

Okay. And then just kind of taking a different wrinkle on what John was asking, in the queue it talked about significant projects, about 60 projects that are less than 90% complete. And do you have a hunch of when, I'm sorry, do you have a bunch of those that hit that threshold this year or do most of them hit that threshold next year?

I really don't have an idea, but I don't have any specifics to tell me that, but we do know our average contract runs two to three years, and so, and as long as we are getting work, I guess you can say well the average is always about half of the two to three years.

Gotcha, Thanks for taking the questions.

Thank you. Our next question comes from the line of Jeremy Helmond with Avenue T Funds. Please proceed with your question. Your line is live.

Hi, good morning, guys.

Good morning.

Two questions for me please, if I might. First, and of course no one would wish for the situation, but with the flooding in the Mississippi river, does that ultimately serve to put some capacity to work? Not necessarily yours, but from an industry perspective, or is it more of a negative situation?

I think it puts some of the capacity to work on a temporary emergency repair basis, but then there are projects that need to be contemplated and funded to avert the same kind of problems in the future. I think it is more of a short-term and then there is possibilities on a long-term basis as they identify projects that are necessary.

Okay. And then second one for me, and this kind of more of a longer term thought around the fuel prices topic. Have you guys thought about or would you look into any sort of nat gas conversions for any of your equipment? Is that something that would be within the realm of possibility and that you would explore given the diesel versus nat gas fuel spreads?

We have talked about that before, and on a continuing basis. The problem is that our offices and our work sites are so spread out, all of our markets, Texas, Utah and Nevada, and the supply is not readily available except if you have it at your shop, and we can't afford to do that. So unless they can get the supply so you can shop much like you do at a gas station, I don't think a conversion would be possible for us.

Okay, thanks.

Thank you. (Operator Instructions). Our last and final question comes from the line of Rich Wesolowski with Sidoti & Company. Please proceed with your question. Your line is live.

Thanks. Two follow-ups. First I noticed you entered hedging contracts for 400,000 gallons of diesel fuel. How did you arrive at that volume? Is that a typical volume number that you use in a year or someway else?

We sit down and look at what we thought our requirements were by month over the next three years, and we decided that again we didn't want to rush into this and sink. We don't anticipate sinking, but we are still cautious. So we decided to do something very modest on this to begin with and make sure we know how it works and see that it does work before we get real deep into it. And those were the gallons, we picked certain months, and those were the gallons we selected for those months.

At this point everything that we see I think it is going to work. So I think we will be ramping that up and we will likely not have the anomalies that we have had in the past.

Not going to be 100 percent either.

No.

And lastly the 2012 cut or perspective cut in the Utah road building budget seems pretty drastic. Is their historic average closer to the $1.2 billion for 2011 or the $700 million for 2012?

I've done some research there and it seems like that in, I to go back to 2011, 2010, it has been closer to that $1.1 billion over the last couple three years. However, they have had this I-15 core project and you are talking about spending versus lettings and you get into some reconciliation differences there. But they are maybe a little bit behind Texas and there is some constrains on their budget up there too now.

Great. Appreciate it.

Part of the high average was likely the core project that was in excess of $1 billion which gets assimilated into the total.

Right, so that really moves the needle. Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to you for any closing comments or remarks you may have.

We want to thank each and every one of you for joining us today, and obviously if you have some questions you have my phone number or Pat's phone number to call. Thank you.

Thank you, everyone.

Ladies and gentlemen, this does conclude today's conference. You may disconnect your lines at this time, and we thank you all for your participation. Good day.