Tutor Perini Corp (TPC) 2006 Q2 法說會逐字稿

Good afternoon. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Perini Corporation second-quarter 2006 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Crocker Coulson.

Thank you, Jennifer. Good afternoon, everybody. Thanks a lot for joining us on Perini's second-quarter fiscal 2006 conference call. With us this afternoon are Perini's President, Bob Band; the Company's Chief Financial Officer, Mike Ciskey; and we also have Dick Rizzo, who is the Chairman of Perini Building Company, which is the largest business unit of the Company.

Our agenda for today is going to follow our usual format. Bob is going to start out by discussing the highlights of the second quarter, some new contract wins, other successes and issues. After that, Mike Ciskey will review the Company's Q2 financial results in detail. Then Bob is going to come back and make some closing remarks, at which point we're going to open up the call to your questions.

But before we get going, I would like to remind our listeners that our comments today will contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Now, these types of written and oral disclosures are made pursuant to the Safe Harbor provision contained in the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that such forward-looking statements do involve risks and uncertainties that could cause our actual results to differ materially from anticipated results. The Company therefore cautions that any such forward-looking statements are based upon assumptions that the Company believes are reasonable, but that are subject to wide risks, and actual results may differ materially.

These types of statements and underlying factors related to the statements are listed in filed information with the Securities and Exchange Information [sic], and including, with particular reference, Perini's Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as well as in today's news release.

Our statements on this call are made as of today, August 8, 2006, and the Company undertakes no obligation to update any of these forward-looking statements contained in the call, whether as a result of new information, future events, changes in expectations or otherwise.

With those formalities out of the way, it is now my pleasure to turn the call over to Bob Band.

Thanks, Crocker. Good afternoon, everyone, and thank you for joining us on the call today. The second quarter of 2006 was another successful quarter for Perini. Our revenues reached a record of 712 million, up 88% from a year ago. We were profitable, and our backlog reached a record of $9.0 billion.

Our building division continued to drive our growth and profitability, due to additional work from our large projects and the contribution of Rudolph and Sletten. Revenues and profits increased in our civil division, and our management services segment added to our profitability during the quarter. Mike Ciskey will review our financial results in more detail later in the call.

The outlook for the U.S. building market remains strong, with high levels of preconstruction activity in our markets. The hospitality and gaming markets remain active areas, and Perini has benefited from this trend. During the second quarter of 2006, new contract awards totaled 1.8 billion, which was greater than the 712 million in revenues recognized in the quarter, resulting in a record backlog of $9 billion as of June 30, 2006.

New contract awards and adjustments to contracts in process added to the backlog in the second quarter included $1.1 billion of additional work at the MGM Project CityCenter and the Cosmopolitan Resort and Casino in Las Vegas, 179 million of school construction work in Florida, 37 million in new task orders for work in Iraq, and approximately 400 million of various new awards at Rudolph and Sletten, most notably the $296 million El Camino Hospital in Mountain View, California.

Our building division's resources are focused on executing the significant volume of work we received over the last year, particularly in the Las Vegas market. We continued to make progress on each of our high-profile projects.

Work on our largest job, the MGM Project CityCenter, remains on track. The scope of this project currently includes a 4000-room hotel tower, casino, convention center, showroom, approximately 500,000 square feet of retail and restaurants, three branded boutique hotels and numerous residential towers. We recently opened several levels of the 10-level, 5000-car parking garage and have completed construction of our project offices, which we hope to occupy next month. We completed the implosion of the Boardwalk Casino Hotel a few weeks ago and have laid the foundation for the casino.

Our contract for the $1 billion Cosmopolitan Resort and Casino in Las Vegas involves the construction of two high-rise condo and condo hotel towers with approximately 3000 luxury hotel rooms, suites and condo hotel residences. During the quarter, we continued the underground work on this project. Thus far, we have completed the slurry walls and are ready to start excavation.

Our work on the Trump International Hotel and Tower in Las Vegas is proceeding on schedule as well. This $370 million contract includes the condominium hotel tower with over 1200 units, a 36,000-square-foot recreation deck and pool, and a five-story parking garage. Following our success on Tower One, we will be proceeding with Tower Two, which is not yet in our backlog.

Going forward, we expect growth in our building division to come from growth in the values of our existing large projects in Las Vegas and from continuing opportunities with our existing client base.

As a project moves forward, we are often asked to perform enhancements or improvements and additional work not originally contemplated. In our experience, this is the normal progression for these types of contracts, and it speaks to Perini's reputation for on-time delivery and execution, that the owners trust us to build these enhancements. A good example is the 1.1 billion of additional value work added during the second quarter of 2006 just in the MGM CityCenter and the Cosmopolitan Resort and Casino projects.

On our other major building projects outside of Las Vegas, the $469 million expansion of the Foxwoods Resort Casino in southeastern Connecticut and the $635 million joint venture contract for Gaylord National Resort and Convention Center in Prince Georges County, Maryland, are also moving ahead right on schedule.

Our Rudolph and Sletten subsidiary received a major win this quarter with the award of the $296 million El Camino Hospital in Mountain View, California. This project includes the construction of a five-story, 450,000-square-foot facility, a 66,000-square-foot medical office building, a 29,000-square-foot pavilion and a four-story parking garage, as well as expansion of the central plant.

Rudolph and Sletten enjoys a solid and strong reputation for quality, honest dealing and fair pricing in its core business -- the construction of corporate campuses, health care, biotech, pharmaceutical and high tech projects, particularly in California. Since joining the Perini family in October of last year, we've successfully reduced general and administrative expenses, focused on growth in existing markets and have begun incorporating this unit into some of our smaller-scale Native American gaming projects in California.

We began by putting Rudolph and Sletten into the lead-in and preconstruction stages, but recently began utilizing R&S in the construction stages as well. We believe this type of measured entry is the best way to transfer Perini Building Company's knowledge and expertise in hospitality and gaming projects to Rudolph and Sletten. Once the Native American gaming market picks up again, we will have additional resources available to perform new projects.

In addition, James A. Cummings, our building subsidiary headquartered in Fort Lauderdale, Florida, won major new work this quarter with the award of $179 million of school construction work in Florida, including high school and middle school projects. Cummings has the reputation as the premier school builder in the state. We believe this market will provide additional opportunities in the future.

The market for civil projects remains strong in the Northeast and Mid-Atlantic regions, with many attractive contracts up for bid. Since acquiring Cherry Hill Construction in January of 2005, our goal has been to move them into larger-size jobs. And we have been successful in that effort. In fact, Cherry Hill was recently the low bidder on a $53 million bridge project, which we expect to have awarded in the second half of this year. Perini Civil was the majority partner in a joint venture that was awarded a $144 million piece of work on the Tappan Zee Bridge just recently.

During the quarter, our management services division was awarded $37 million of new work in Iraq, and this is follow-on work to the overhead coverage systems in existing U.S. military bases throughout Iraq in support of the U.S. Army Corps of Engineers construction programs.

Earlier this year, Perini was one of several companies awarded a task order contract under the U.S. Air Force's $6 billion Heavy Engineering Repair and Construction, or HERC, program. The HERC program supports the design and construction of new military facilities and infrastructure and the remodeling and upgrade of existing facilities and infrastructure worldwide. We do not yet have any task orders under this ID/IQ contract, so no work is reflected in our backlog at this time. We are actively proposing on additional work with U.S. government agencies worldwide.

This was another strong quarter for Perini, characterized by strong revenue growth and profitability. We dedicated our resources to converting our significant backlog into revenue and continued building upon our reputation for quality and on-time delivery of high-profile construction projects.

Our outlook for the remainder of the year is for growth in revenues and earnings for both the building and civil segments, along with profitable earnings in the management services segment. In addition, in regard to guidance for 2006, we reaffirm our guidance for 2006 revenues in the range of 2.6 to 2.8 billion and for diluted earnings per share for 2006 of $1 to $1.10 per share.

And now, I would like to turn the discussion over to Mike Ciskey, who will give you the financial details for the quarter.

Thank you, Bob, and good afternoon to everyone that's on the call. I will now cover the second-quarter financial results in some detail. In the second quarter of 2006, revenues were 712 million, an increase of 88% from the 378 million reported in the second quarter of 2005.

On a reportable segment basis, revenues from our building segment were 587 million, an increase of 153% from 232 million in the second quarter of 2005. 355 million of this increase in building revenue was due to the addition of Rudolph and Sletten, which we acquired in October of 2005. The balance of the increase, the 164 million, was related to the increased volume of work associated with new contract awards in the hospitality and gaming market we received in the latter half of 2005.

Revenues from our civil segment were 72 million, an increase of 13% from the 63 million reported in the second quarter of 2005. This increase is primarily due to a larger backlog of civil construction work entering 2006 compared to 2005.

Management services revenues were 54 million, down 35% from 84 million a year ago. This was due to a decrease in volume of work in the Afghanistan area.

Our total gross profit increased 12.5 million or 51% to 37 million from 24.5 million in the second quarter of 2005. Overall gross margin percentage for the quarter declined to 5.2% from 6.5% a year ago. This decline in margin is the result of the larger proportional contribution by the building segment in the second quarter of 2006. Due to the guaranteed maximum price contracts performed by our building segment, it has a less volatile risk profile, and as such, lower initial margins than work performed in our civil and management services segments.

General and administrative expenses were 28.5 million or 4% of revenues compared to 12.9 million or 3.4% of revenues in the second quarter of 2005. This 121% increase was primarily due to 5.7 million of additional general and administrative expenses associated with Rudolph and Sletten and 8.6 million in stock-based compensation expense from restricted stock units granted in April 2006 designed to retain key personnel.

Income from construction operations before corporate G&A was 19.7 million in the second quarter of 2006 versus 14.7 million reported in the second quarter of 2005. Breaking down income from construction operations by segment, the building segment income from construction operations for the quarter was 14.6 million, an increase of 136% from 6.2 million in the second quarter of 2005. Rudolph and Sletten accounted for 4.9 million or 58% of this $8.4 million increase, with new work in the hospitality and gaming market accounting for the remaining 3.5 million.

Operating margin for the building division was 2.5% in the second quarter of 2006 compared to 2.7% in the second quarter of 2005. Civil segment income from construction operations was 1.8 million in the second quarter of 2006 versus 2.9 million in the second quarter of 2005. This decrease was primarily due to downward profit adjustments on certain projects in the Mid-Atlantic and Southeast regions. As a result, operating margin in the civil segment was 2.5% in the second quarter of fiscal 2006, down from 4.6% in the same quarter last year.

Management services income from construction operations was 3.3 million compared to 5.6 million in the second quarter of 2005. This was due to the previously mentioned decrease in revenues associated with the decreased volume of work in Afghanistan. Management services' operating margin declined to 6.1% versus 6.7% a year ago, largely due to this volume decrease.

Other income was $300,000 in the second quarter of 2006 compared to other expense of $400,000 in 2005, primarily the result of increased cash available for short-term investments.

Interest expense was $900,000, up from 300,000 in the second quarter of 2005, due to increased borrowings related to the term loan portion of our credit agreement. The provision for income tax was 3.2 million compared to 4.4 million in the second quarter of 2005.

Net income was 4.6 million in the second quarter of 2006 compared to 6.5 million in the same quarter a year ago. Diluted earnings per share were $0.16 versus $0.24 for the same period of 2005. Excluding the impact of stock compensation expense related to the restricted stock units granted in April, earnings per share would have been $0.36 per diluted share in the second quarter of 2006.

Looking at our balance sheet at June 30, 2006, our working capital stood at 161.9 million, up from 153.3 million at December 31, 2005. This represents a current ratio of 1.24 to 1, compared to 1.23 to 1 at December 31, 2005.

As of June 30, 2006, we had 88.7 million in cash and cash equivalents compared to the December 31, 2005, balance of 139.9 million. The 51.2 million decrease in cash was the result of 30.9 million in cash flows used in operations, including the 40.4 million in cash used to pay the WMATA judgment, 7.3 million in cash used in investing activities related to the purchase of construction equipment, and 13 million in cash used by financing activities, including 8.8 million in cash used to redeem the remaining outstanding shares of our $21.25 preferred stock and 6.9 million used to pay down our term loan and to pay down debt we assumed in conjunction with the Cherry Hill acquisition.

At June 30, 2006, long-term debt stood at 35.6 million, down from 40 million at December 31, 2005. Our long-term debt is comprised primarily of a secured term loan, which was used to refinance a portion of the purchase of Rudolph and Sletten. At June 30, 2006, we had 7.5 million committed for outstanding letters of credit, leaving a balance of 42.5 million available under our $50 million revolving credit facility.

Stockholders' equity increased 9% to 200 million from 183 million at December 31, 2005.

As Bob mentioned earlier, our backlog at June 30, 2006, was a record $9 billion, up 14% from our previous all-time record of 7.9 billion at December 31, 2005. Backlog by segment is the building segment backlog of 8.5 billion, civil segment backlog of 294 million and management services backlog of 241 million.

With that, I'll now turn the call back over to Bob for his closing comments.

Thanks, Mike. Our second quarter was a strong quarter. Revenues reached a record 712 million, up 88% from a year ago, and we added 1.8 billion of new contract awards to our backlog, which, as Mike said, reached a record $9 billion.

Much of our success this quarter was due to our building division's steady execution of work on our large-scale projects. Our civil division also performed well and received 179 million of new work awards. Management services favorably impacted our results in terms of both revenues and profits.

In the second half of the year, we will continue to focus our resources on converting our backlog into revenues and profits and reinforcing Perini's reputation for on-time delivery and quality construction of high-profile projects.

That ends our prepared remarks. Mike Ciskey, Dick Rizzo and I are happy to take your questions at this time.

(OPERATOR INSTRUCTIONS). Richard Rossi, Ferris, Baker Watts.

Could you give us some general sense of -- your backlog in the hospitality area, obviously, is enormous. How far out does that carry? How much of that is scheduled to be burned through in and '07 and '08? And does it go out to '09 or further?

It really goes out through 2009, Rich, not exactly on a linear basis, but you would expect that there will be an increase in 2007, an increase in 2008 and then a tail-off in --

And a finish in '09?

Right. But the backlog does carry pretty well through '09. So it's not a great tail-off.

Obviously, the condo and townhouse market in Las Vegas has been written up as having softened considerably over the last number of months. And you mentioned that you're already working on one of those condo townhouse projects. I am presuming that once you start breaking ground, it is pretty much a go through the project completion. Is that a fair assumption?

Yes, it is. Actually, we are working on more than one just strictly condo projects. And there are condo elements of the Cosmopolitan and the MGM as well. And because we stayed with the high-quality, high-end condo projects, we anticipate that these projects will be fully built out. And again, as you say, we don't start, of course, until the financings have all closed and monies are escrowed. So once these things start, they typically will go to finish, because a half-finished project is not worth anything.

And you said that the Trump Tower Two isn't in the backlog. Any sense of what that might be worth if it went forward?

I don't want to throw numbers around on a contract that we haven't negotiated yet. But we had very favorable experience on Tower One and good discussions on Tower Two. Is that right, Dick?

Yes, that's right. And I think it is 370 million currently on Tower One. Obviously, we haven't put together the final budget on Tower Two, but it should be in that area as well.

A similar-sized job?

Yes. Exactly the same, actually.

And looking at the cost structure, not only in Vegas, but everywhere, and also the people capacity issue, as a tied-in question, what's the labor situation in that major market and elsewhere? How tight is it? How much are you having to pay up? And that, I am presuming, if you are paying up versus where you originally made your forecast, that is something you are absorbing, while on the material side, do you have -- are you fully protected?

Just in general, Richard, the contracts that we have discussed are largely still in the cost-plus phase and have not converted to guaranteed max contracts. The Trump Tower One has converted, but of course MGM, Cosmo and some of the other work that we are involved with has not yet converted.

And because of that, we are able to buy out the materials in the front end, so that, as any escalation and materials from original budget flows through to the project, [Jmax], in other words, and we're not going to buy our way into some large unknowns.

In terms of the labor, we have all been involved with the recruiting of the management labor that has been required, including myself. We've put a full-Company effort into that. The trade labor -- Dick, maybe you can shed some light. I know that things haven't peaked yet in Vegas, but we have got a close eye on that?

Yes, we do. And we are, of course, all union, and there is about 27,000 available craftspeople in the Las Vegas market that does not include any Travelers, which we average about 4000 to 5000.

We believe that we will be fully absorbed with that particular labor pool by the middle of '08, and the capacity will actually be absorbed by all the existing projects that are underway right now. So we are very concerned about any new projects that come on in terms of how they are going to accomplish them because we believe the market is totally absorbed during this next couple of years.

And what we see is that the Travelers will line up to go to Vegas, because Vegas does pay a premium wage.

That is correct.

And again, that tightening of labor, that is an industry situation, not just yours, so what does the next casino project do in terms of trying to get done in Vegas?

Richard, we have overlayed all the known work in Vegas in terms of the manpower histograms that we have built, not just reflecting our project demands, but all the known -- right. So what we're saying is that we have accommodated the known and contemplated projects in that analysis.

And we believe that the capacity is at limit and will be for the next couple of years. So I don't expect that any new projects will come online because of that very reason.

And then one final question. Looking on towards the transportation infrastructure market, it wasn't mentioned here at all -- that's an improved market because of federal funding and state and local tax receipts, etc. Much activity in that area for you? I know you said you had the Tappan Zee project. Anything else of size that is in the backlog? Or are there sizable jobs that you are contemplating bidding on or are in the bid process right now?

I will say, Richard, there are sizable jobs that are on our bid list for which we've lined up either joint venture partners or the resources to propose on those projects. Again, we are very selective. We are looking at projects that would offer strong fee opportunities. But it is very much a target-rich environment. It is hard to dedicate too much of the conference call to the civil or the management services, since combined, they are probably less than 10%, maybe in the 5% range of our backlog now.

But infrastructure always has a warm place in my heart.

Well, it has one in mine, too. It's definitely --

For all of us.

Yes, for all of us, right.

Steven Fisher, UBS.

On just the pricing environment, I know you booked a number of new projects in the quarter. Are you experiencing generally a better pricing environment, that there is so much demand for your services? And would that then translate into a better margin expectation going forward?

Well, I assume you are mostly focused on the hospitality and gaming markets, Steve.

Across the board, I guess.

In that market, we have increased our fees, which is always the way we apply selectivity to project choice. And we have been attaining these higher fee levels. So we do see that, that the demand has pushed the fees up. We also see that -- we're more selective. We are allowed to be more selective, because there's such a significant target-rich environment out there right now. And that holds true also in the civil market. There's a lot of projects to look at. So we can adjust our sights.

The international market, that's always been a very selective market for us. We are very careful with the type of work we take. It does seem that the work is in dangerous areas, but the reason for that is there are some strong margin opportunities for that work.

On CityCenter, when does that shift to guaranteed maximum price?

Steve, it will be done in phases. There are basically three phases to the project. Each one of them has its own milestones with regards to establishing GMPs for them. And even within each phase -- [AD&C], they are called blocks -- there are many GMPs within it, because each one of those programs has multiple projects within it. So it is really on a gradual basis as we finalize drawings, put it out to bid. We usually try to not establish a GMP until we are about 75 to 80% through the bid process.

Great. In the civil business, the margins were a little lower than expected. I think you mentioned there were some downward profit adjustments. Could you just talk about what that was?

It was some work in Florida that really was acquired work when we acquired Cherry Hill. And frankly, the performance wasn't there that we had expected, or that was evident at the time that we purchased them. So there was some profit adjustments there.

Does that have any reflection going forward in that business?

No, we would hope not.

We don't think so. We hope not. You know, the pressure is always to call the most accurate forecast at the time. So we are hopeful that whatever the issues are, we have found them all.

And then lastly, I kind of have to ask this, but obviously, the Big Dig is under intense scrutiny right now. But I haven't see you guys mentioned in any of the investigations. Can you remind us exactly what you did on the project and whether you think there's any reason to be concerned that you could get dragged into any of the investigations or have any financial risk?

Well, we are part of probably six different joint venture contracts on that program. The major contract that we did is the northbound section of the tunnel, the Central Artery Tunnel, right by South Station in Boston. That segment is the one that Perini/Kiewit/Cashman, that one has the ongoing binding dispute resolution process, which is now scheduled to go out through 2007.

So that one is still active in that sense. You are right, we have not been named in all these various investigations. We knock wood all the time, of course. But you know, I think they had some issues with the hangers on those ceiling panels. Fortunately, we weren't involved in the finished contract for that section of work.

Richard Paget, Morgan Joseph.

Getting back to the civil segment, on a sequential basis, revenues are generally flat, backlog down a bit. Can we assume -- is this kind of lumpiness on a quarter-to-quarter basis, or are you guys placing less of an emphasis on this segment, concentrating on buildings more?

No, it is just lumpiness -- it's a low bid kind of thing, so you don't get work every quarter. As Bob mentioned, we are low bidder on about $170 million worth of work that we -- actually, 144 million, which is, we are a 70% partner. That has been awarded. The other 53 is a Cherry Hill contract. That should go in the third quarter. So the backlog on civil will jump up in the third quarter.

But first, it is even in civil -- that award of 144 is not in the June 30 backlog. So there is a time lag between being low bid and getting the award. It is definitely the lumpiness -- there's some very large projects that we're contemplating as well.

And then overall, given the heat waves, any weather impact that we could expect in the third quarter?

No, we don't see that the heat wave that rolled across the country had any real impact. We are accustomed to working in those climates. The only impact was on us, as individuals.

Gary [Flacken], private investor.

I have a question about the 8.6 million in stock-based compensation expense. That was about 40% of your first-half net income. Can you tell me what your guidelines are for issuance of stock options and other kinds of expenses like that?

And secondly, what is the likely magnitude of this kind of expense going forward over the next few years?

Well, first, to the guidelines, Gary, this was a series of grants that were made to about 30 individuals to tie them up generally through the end of '09, which is the performance period of the large backlog. And of course, the amortization of the grants will continue over that period.

Some vesting occurs in '07 and '08, as well as '09. In particular, though, part of the big hit that came in '06 was a grant that was made that vested at the end of the second quarter. So the guidelines are set at the Board level. And they were particularly focused on retaining the folks in the senior management talent that we felt we needed to ensure that would be here to put this large work in place.

Okay, and going forward?

Gary, where you not on our last earnings call?

Yes.

Because this was covered in some detail on that earnings call.

Yes, we talked about the amortization in the ensuing years being less and less each year as the grants work off.

I don't recall that, but I believe you. Thank you very much.

(OPERATOR INSTRUCTIONS). Steven Fisher, UBS.

I just saw something that said there was a new compact signed with one of the native tribes in California with the state. Wondering, can you just comment on what you are seeing in those markets out there? I think a couple of quarters ago, or maybe last quarter, you mentioned that you thought things could start to pick up by the end of '06. Could you just comment on what the dynamics and what kind of discussions you're having with your clients at this time?

Dick?

Steve, we've recognized about 2 to $2.5 billion worth of potential work that we believe will be burnt off subject to the finalization of these agreements with the governor in the next two years. I would say of that amount, we have an inside track, actually, through Rudolph and Sletten right now because we're transferring all that work to them in the short term, of about 80% of it.

So we are positioned extremely well. That was one of the strategies in purchasing Rudolph and Sletten, to take advantage of the client relationships and contacts we have established and earned over the years with the California tribes. All the tribes that are now in current negotiations are clients of ours. And they are one by one, I think, grinding themselves to an agreement with the state. So that will certainly benefit certainly Rudolph and Sletten backlog in the near term.

(OPERATOR INSTRUCTIONS). At this time, there are no further questions.

Okay. Well, thank you, everyone, for joining the call. And have a safe day. Bye-bye.

Thanks a lot.

Thank you.

That concludes today's second-quarter 2006 earnings conference call. You may now disconnect.