Tutor Perini Corp (TPC) 2007 Q2 法說會逐字稿

Good day everyone, welcome to the Perini second quarter 2007 conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Elaine Ketchmere. Please go ahead.

Thanks, Justin. Good afternoon everyone and thanks for joining us on Perini's second quarter 2007 conference call. With us today are Perini's President, Robert Band; the Company's Chief Financial Officer, Mike Ciskey; and Dick Rizzo, who is the Vice Chairman of Perini Building Company, the largest business unit of the Company.

Our agenda for today follows our usual format. Bob Band is going to discuss the highlights of the second quarter, new contract wins and other successes, as well as provide guidance. After that, Mike Ciskey will review the Company's second quarter financial results in detail. Then, Bob is going to come back and make some closing remarks, and at that point, we will open the call up for your questions.

Before we start, 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. 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 actual results to differ materially from anticipated results. The Company cautions that any such forward-looking statements are based upon assumptions that the Company believes are reasonable that are subject to a wide range of 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 SEC, including Perini's annual report on Form 10-K for the fiscal year ended December 31, 2006, as well as in today's news release.

Our statements on this call are made as of today, August 7, 2007, and the Company undertakes 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.

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

Thank you, Elaine. Good afternoon everyone and thank you for joining us on the call today. The second quarter of 2007 was an exceptional quarter for Perini with the highest revenues and earnings in the Company's 113-year history, as well as record operating cash flow. We reported revenue of $1.15 billion, up 62% from last year, and net income of $27.6 million, up over five times from last year's quarter. At quarter end, our backlog stood at $8.7 billion, near its all-time record level and up slightly from year-end.

Our strong performance this quarter was driven by our Building segment which continued to convert our substantial backlog of work into revenues and profit as expected. Our Management Services segment made another solid contribution to our profitability this quarter. The Civil segment's performance was adversely affected by loss adjustments on certain projects. Mike Ciskey will review our financial results in more detail later in the call.

While the residential construction market has slowed in 2007, the building markets in which Perini operates are healthy and growing. The Las Vegas market is supporting the explosive growth it has experienced over the last few years and there is an active pipeline of new projects. In addition, there are many opportunities for new gaming and hospitality, health care, high-tech and education projects outside of Las Vegas, especially in California, the Northeast and Florida where we operate.

During the second quarter, we successfully converted $1.15 billion of our backlog into revenues. The backlog of uncompleted construction at June 30, 2007 was $8.7 billion, a 2.6% increase from the backlog of $8.5 billion reported and the end of 2006. The June 30, 2007 backlog includes new contract awards and adjustments to contracts in process added during the second quarter of 2007 totaling $1.3 billion which includes approximately $960 million of additional work in the hospitality and gaming markets in Las Vegas and California, as well as approximately $300 million in various new awards at Rudolph and Sletten, including health care and office buildings projects.

Perini was recognized for our ability to deliver complex large scale projects on time and on budget with a number of high-profile awards during the quarter. In May, the Boston Globe named Perini as the top performing publicly traded company based in Massachusetts. Perini Building Company received the top three construction awards from the American Gaming Association for our work on the Redrock Casino Resort Spa in Las Vegas and Phase II of the Pechanga Resort and Casino in California. These awards demonstrate that Perini is clearly the builder of choice for large-scale and complex hospitality and gaming projects, particularly in the Las Vegas market.

We made good progress in performing work on each of our major building projects during this quarter. Our largest project, MGM CityCenter, is now valued at $5.2 billion following the addition of $412 million in new work scope and contract changes this quarter. Work on each of the main structures on the 66-acre site is proceeding on schedule. We are currently up to the 22nd floor in our construction of the 61-story Resort Casino and are up to the 15th floor on the VDara Condo Hotel and currently pouring the elevated deck on the sixth floor at the Mandarin Oriental.

We completed the first floor elevated deck of the West Veer Tower and have completed the core walls and columns in the lobby of the East Veer Tower. We're continuing our foundation work at the [Harmon] Hotel and have begun structural steel at the retail and entertainment district.

On May 31, we celebrated the topping out of Tower 1 at the Trump International Hotel and Towers in Las Vegas. Finishes are underway in all areas and we expect to complete this $365 million project on schedule in the first quarter of 2008.

During the second quarter, we received $222 million worth of additional work at the Cosmopolitan Resort and Casino in Las Vegas, bringing the total value of this project to $1.8 billion. We're continuing with below-grade steel erection, which is currently 25% complete. This project is on track for completion in mid 2009.

Our work at the $500 million Foxwoods Resort Casino in Connecticut is right on track. Finishes are underway in all areas of the hotel tower and we're currently working on upgrades to the existing casino which will be completed by the opening in March of 2008.

We also made good progress this quarter on the $683 million joint venture contract for the Gaylord National Resort and Convention Center in Prince George's County, Maryland. All upper trusses in the atrium area are complete and finishes are underway in all other areas. The first 300 rooms were turned over to the owner just last Sunday, August 5. This project is scheduled for completion in April of 2008.

Rudolph and Sletten made progress in expanding its presence in the Native American gaming market. In the second quarter, Rudolph and Sletten was awarded a $210 million project in work at the Shingle Springs Tribe Foothill Oaks Casino near Sacramento, California. The project includes construction of an 85,000 square foot casino and a 2400-space parking garage and is sponsored by Lakes Entertainment.

The number of new Native American gaming projects is increasing, particularly in Southern California. In June, the California State Assembly ratified gaming compacts that will allow five of the state's largest tribes to expand their Casino gaming operations. Assuming there's no referendum requiring a statewide vote, these compacts could take effect in January of 2008 pending final approval from the U.S. Department of the Interior.

Our Civil Division incurred an operating loss during the quarter due to a downward profit adjustment on several projects in the metropolitan New York region. We review our projects on a quarterly basis and make adjustments as necessary. We're continuing to bid new work in that region. There are a number of attractive projects up for bid, particularly in the Baltimore-Washington-D.C. area as well. Recently, Cherry Hill Construction, our subsidiary in Maryland, was the low bidder on two road projects totaling $123 million which have not yet been awarded.

During the quarter, a Perini joint venture settled all disputes with Siemens Transportation on a transit project completed several years ago in Puerto Rico with no net impact on our operating results.

Our Management Services segment had an excellent quarter due to the continued delivery of several overhead coverage projects in Iraq. Given the high-risk nature of this work, we have taken a conservative approach to recognizing cost savings on these projects. This can result in substantial profit increases when we turn the facilities over to the U.S. Army Corps of Engineers. We continue to work on the approximate remaining $100 million worth of backlog in that region at U.S. military bases and regional embassy compounds. These were awarded in the fourth quarter of last year.

In the second quarter this year, we received $13 million in new work from the Army Corps of Engineers in southern Iraq. The increase in war funding has improved opportunities for new work in Iraq and Afghanistan and we expect to see a continuing stream of ongoing projects in that region. We continue to pursue work outside of Iraq through the HERC and [SENTCOM] programs and with our surety clients in the U.S.

This was another great quarter for Perini. We added new work that more than replaced the backlog converted, and our backlog is near record levels. Given the healthy pipeline of construction project opportunities, we anticipate more additions to our backlog during the remainder of the year.

With the visibility provided by our backlog, we are increasing our guidance for the full-year 2007. We now expect revenues in the range of the 4.1 to $4.3 billion, up from a range of 4 to $4.2 billion, and we now expect diluted earnings per share in the range of $2.80 to $3.00, up from $2.40 to $2.60 per share. These increases in guidance are based on our expectation of continuing high revenues from the Building segment and strong profit contributions from the Management Services segment.

Now let me turn the discussion over to Mike Ciskey, who will give you the financial details for the quarter.

Thank you, Bob. I will now review the second quarter financial results in some detail. In the second quarter of 2007, revenues were $1.15 billion, an increase of 62% from the $712 million reported in the second quarter of 2006. On a reportable segment basis, revenues from our Building segment were $1.05 billion, an increase of 79% from $587 million in the second quarter of 2006. This increase was primarily due to an increased volume of work in the hospitality and gaming market as a result of the new contracts received in the latter half of 2005 which are now well into the construction phase, and an increase in volume at both Rudolph and Sletten and James A. Cummings.

Revenues from our Civil segment were $63 million, down 12% from $72 million recorded in the second quarter of 2006. This decline was primarily due to a lack of new contract awards in the latter part of 2006 and first half of 2007. Management Services revenues were $36 million, down 34% from $54 million a year ago. This decline was primarily due to the completion of our nuclear powerplant maintenance and modification contract with Exelon, which ended at the end of 2006.

Our total gross profit increased $27.9 million to $64.9 million, a 75% increase from $37 million in the second quarter of 2006. Overall gross margin percentage for the quarter was 5.6%, up from 5.2% in the second quarter of 2006, reflecting gross margin improvement in the Management Services segment.

General and administrative expenses were $24.2 million, down 15% from $28.5 million in the second quarter of 2006. This decrease was primarily the result of a $5.1 million decline in stock-based compensation expense and a $1.5 million decrease in administrative expenses related to a potential debt offering in 2006, partially offset by a slight increase in general and administrative expenses at various operating units. Income from Construction Operations was $40.7 million in the second quarter of 2007, an increase of 381% from $8.5 million in the second quarter of 2006.

Breaking down income from Construction Operations by segment, the Building segment income for Construction Operations for the quarter was $35.6 million, an increase of 144% from $14.6 million in the second quarter of 2006. This increase was due primarily to the increased revenues as discussed above. Operating margins for the Building segment was 3.4% in the second quarter of 2007, up from 2.5% in the second quarter of 2006.

Civil segment loss from Construction Operations was $2.1 million in the second quarter of 2007, compared to income from Construction Operations of $1.8 million in the second quarter of 2006. This decline was primarily due to downward profit adjustments on several projects in the Metropolitan New York region. Management Services income from Construction Operations was $12 million in the second quarter of 2007 compared to $3.3 million in the second quarter of 2006. Management Services' operating margin was 33.6% for the quarter versus 6% a year ago. This substantial increase in margin was due to continued favorable performance on projects in Iraq.

Other income was $2.8 million in the second quarter of 2007 compared to $300,000 in the second quarter of 2006. This increase was the result of higher interest income due to a significant positive cash flow from operations in the first half of 2007 resulting in an increased amount of cash available for short-term investments.

Interest expense was $400,000 compared to $900,000 in the second quarter of 2006. This decline was the result of decreased borrowings on our term loan which was paid in full in connection with entering into our new credit agreement in February of 2007. The provision for income taxes was $15.5 million compared to $3.2 million in the second quarter of 2006. The effective tax rate for the first quarter of 2006 was 36% compared to 41.5% in the same quarter a year ago.

Net income was $27.6 million in the second quarter of 2007 compared to $4.6 million in the same quarter a year ago. Diluted earnings per share were $1.01 in the second quarter of 2007 versus $0.16 for the same period in 2006.

Now looking at our balance sheet, at June 30, 2007, our working capital stood at $235.8 million, up from $194 million at December 31, 2006. This represents a current ratio of 1.23 to 1, up slightly from year end. As of June 30, 2007, we had $343 million in cash and cash equivalents compared to the December 31, 2006 balance of $225.5 million. The $117 million increase in cash was the result of $150.4 million in cash flows provided by operating activities due to the substantial increase in or Building segment revenues, combined with favorable performance by the Management Services segment. It should be noted that in the last 10 days of the quarter, we collected a substantial amount of accounts receivable resulting in a substantial timing variance in our cash balance at quarter end versus December 31, 2006.

In the first half of 2007, cash used by investing activities was $13.6 million primarily for the purchase of construction equipment and property to be used in support of our Building Construction operations. Cash used by financing activities was $19.3 million, of which $22.5 million was used to pay the outstanding balance of our term loan.

At June 30, 2007, long-term debt stood at $16.1 million and we had $113.5 million available under our credit facility. Stockholders equity increased 26% to $306 million from $244 million at December 31, 2006. We believe that our strong financial position and credit arrangements provide us with sufficient resources to meet our liquidity and working capital requirements.

As Bob mentioned earlier, our backlog at June 30, 2007 totaled $8.7 billion, up from $8.5 billion at December 31, 2006. Backlog by segment is -- Building Segment backlog of $8.2 billion, Civil segment backlog of $326 million and Management Services backlog of $110 million.

I will now turn the call back over to Bob for his closing comments.

Thank you, Mike. The second quarter was an all-time record in terms of revenues and profits. Revenues totaled $1.15 billion, up 62%, and net income rose five-fold to $27.6 million. As expected, our Building segment was in top form in the execution of our major hospitality and gaming projects in Las Vegas, Connecticut and Maryland, Rudolph and Sletten expanded its presence in the Native American gaming market and James A. Cummings had an excellent quarter. Management Services made a substantial contribution to our profitability due to its continuing delivery of overhead coverage projects in Iraq.

Our $8.7 billion backlog remains at near record levels and the pipeline of new construction projects in strong. In the second half of the year, our top priority is to continue to convert our substantial backlog of work into revenues, profits and cash flow through consistent and steady execution of our large-scale projects.

That concludes our prepared remarks. Mike Ciskey and Dick Rizzo and I are happy to take your questions.

(OPERATOR INSTRUCTIONS). Richard Paget, Morgan Joseph.

You guys continued to make us analysts look foolish here with the way you guys post numbers, so let me ask you about your guidance. Top end of the range suggests you guys could do around $1.15 in the second half, which would be almost a 40% drop compared to the first half. Is this another easy bar to set? Or it seems like margins would have to go down sequentially significantly to kind of hit that ceiling there.

Rich, we do expect that the margins will somewhat go down. Plus, the second half of the year, we incur a disproportional amount of expense relative to incentive compensation plans and things like that, which of course didn't incur during the first half. So, yes, the second half, we are expecting to be somewhat less than the first half.

Okay. Then with your Building operating margins, that 3.4% is exceptional, and I don't think just looking at my model that it has been north of 3%. Anything in particular going on there, or was it just very solid execution?

It was just solid execution. They really wasn't any special contract write-ups or anything like that during the quarter.

Okay. And then finally, how would you characterize the casino market going forward? As you burn off CityCenter, that's a big chunk of backlog to replace. Are there any other kind of whale-sized casino projects out there in Atlantic City or elsewhere, or is it going to be kind of a larger amount of smaller projects like the Indian casinos and Native American casinos in California?

Dick, are you on the line?

Yes, I am. There continues to be a lot of interest in the -- back East in both New York and Pennsylvania that will I think generate some really large opportunities in the next year or so that we are touching with and in contact with. As well as, the ones in California, don't [poo-poo] them, because the ones we know of that we're tracking are all significant in terms of size. In Las Vegas, there continues to be interest in CityCenter 2 and the Frontier property and all of the other things that you probably read about in the paper that still are out there to be built and will be built in the next couple of three years. So all the way around, I think it looks very good for us.

And then I think in the news, there was something about the Fontainebleau Casino construction project, there was an accident. I take it you guys -- were you involved in that, or no?

No, we're not involved in that project. That was very unfortunate.

I will get back in queue.

Steven Fisher, UBS.

Good afternoon, and nice quarter. On the margins of 3.4%, it sounded like there was nothing unusual there, but you also commented that the margins might be expected to come down. Is that comment about margins coming down, does that apply to the Building Services segment as well?

Yes, it's across the board, because as I said, there are a certain amount of expenses incurred in the latter half of the year that don't duplicate themselves in the first half of the year.

So that's not at the corporate level?

No, it's across each segment, actually.

Okay, I got you. And then in terms of some of the gaming projects you just mentioned that are in the pipeline, there is clearly concerns in the market about tightening credit. What is your sense of the impact of tighter credit on these future gaming projects? How important is that credit type of financing to these projects?

Let me briefly comment. I'm not an expert in financing, so take it for whatever it's worth, but I'm not aware of any that, in near-term or in long-term, that have been canceled or delayed because of the lack of ability to raise the funds. There seems to be plenty of capital out there for gaming projects and I'm not aware of any of them that have been canceled or delayed because of financing problems.

Okay. The Iraq contracts that you had in the quarter, were those still from 2005 bookings, or was that all from the Q4 2006?

No, there was some carryover from the original work, the overhead cover work, that came in in September of '05, and there continues to be awards -- even under those contracts are add-ons, and there continue to be new awards for overhead cover. So we are pursuing that work both with the Corps of Engineers and the U.S. State Department, although the Corps of Engineers manages their work as well in Iraq.

And for the '06 bookings and then what you're adding on now, how are the margins likely to be? Could they be similar to what you're posting in the last few quarters?

It's hard to project that. A fair amount of the estimated cost is totally dependent on the security environment, and we take that day to day.

Okay. Lastly, what caused the losses on the projects in the Civil segment? Is it labor productivity or was it materials, or a combination of everything?

It's really a combination of a lot of things. There wasn't like one single project right there. There were small adjustments on several projects as we mentioned. And I would say, there wasn't any common theme throughout any of them. Some of them were just less than anticipated performance. Some of it had to do with perhaps some services that were provided by third parties and things like that.

And when where these contracts bid?

They could go back as far as three years ago.

Would you say that is the majority of them with that time frame, or there are some that have bid most recently?

No, the majority of them are two to three years out, so were awarded two to three years ago.

[Ben Warman], [Bishop Rosen] & Company.

Hi, congratulations again, great quarter. With the news being about the Minneapolis bridge collapsing, this opens up the possibility of major contracts for the construction industry about refurbishing the infrastructure throughout the country, not only bridges and highways and tunnels and pipelines and whatever. Are you in a position to take advantage of that?

Ben, first of all, the bridge rehab work is a core business of ours primarily in the Northeast in the New York metro market. So we're already in that business, and with our heavy operations in the mid-Atlantic states as well. So it does present some opportunity. It's a little hard to quantify right now exactly what that opportunity looks like.

Yes, because in looking ahead, the (inaudible) work and the backlog you have right now assures you of having adequate work at least for the next couple of years. Thinking ahead after that market have pretty much been depleted, you may need to find new venues.

Right, and that really speaks to the experience we have in a lot of the building niche markets, which include health care, corrections, transit, pharmaceuticals, high-tech, education and sports venues. So with the broad experience we have, we are really focused in the building side on where the next round of opportunities are. But as you say, the backlog and the stream of -- the pipeline of new work opportunities is continuing to be very strong in gaming and hospitality.

On the Civil side, the infrastructure, we look at that business as recession-proof no matter what the infrastructure has to be upgraded. So with the tragic event recently on that bridge, we do see that there will be renewed emphasis on updating infrastructure. We're looking forward to that.

Yes, I believe if I heard right on the news, Congress already appropriated $100 billion for infrastructure renewal. Is that right?

I'm sure that number will change a dozen times. That's a proposal.

Okay, thanks a lot.

Avi Fisher, BMO Capital Markets.

You said on the call $123 million roadwork in DC and Baltimore. You said that has not shown up in the bookings yet?

Right, that's not in the backlog. Those were low bids, and it typically takes 60 to 90 days to convert a low bid to an award.

So potentially, third quarter, if not [fourth] quarter definitely?

Right, right.

And would that sort of be the bulk of the new bookings in the Civil segment for the second half of the year, as far as we're looking right now?

Actually, there's a fairly substantial or robust pipeline of work opportunities in Civil, especially in the mid-Atlantic states and in the Northeast. So there is a number of substantial bids planned for the second of the year, the remainder of the year. So with a little luck, we could have some good results to report.

Okay. Any sense on the magnitude, or do you kind of double that $123 million?

No, I'm not going to project the magnitude.

Okay. On the Management Services side, same question on the bookings. What kind of magnitude of bookings might we be able to expect for the second half, something similar to the second half of last year as well?

You know, that's somewhat on predictable. We have a number of proposals that have been submitted. Typically as the U.S. government approaches the end of its fiscal year, they react to a lot of these proposals and make a flurry of awards. Whether we will get a bunch of those or not, we just have to wait and see. There are some additional proposals to submit in August and September. So it could be that, by September 30 or early October, we do have our additional work in Management Services. But like all proposals, you have to wait to get selected.

Right. Just getting back to Civil for one second and those adjustments you were talking about, I think Mike said some of those awards go back three years. Does that imply that most of the projects where you have these adjustments are almost complete, or substantially complete?

They're in various stages of construction, Avi. I would say only one of them was really at completion. The rest are still in the -- probably greater than 50%, but less than 70% complete.

And at least for my understanding, that is usually the time when, of there are going to be adjustments, there are going to be adjustments. Any sense of the magnitude going forward?

We think it's zero going forward.

Hopefully. Thanks for taking my question.

[Donald Stipe], a private investor.

Can you tell me how many thousand shares of insider trading took place in the last month, and how does this compare to the previous month?

I can tell you that none took place in the last month. The insiders have been blacked out, as is typical for a public company. We don't allow executive officers or directors to trade from a period of 10 days prior to quarter end until three days after -- the third business days after our earnings announcement. So, there may have been some shares that were traded, but those were all done in accordance with a 10(b)-5 program and really was a very slight number between. There was a couple of executive officers that have 10(b)-5 programs, and I think they may have sold in each period like 22,000 shares or 23,000 shares.

Thank you.

Steven Fisher, UBS.

Can you just comment on what your capacity looks like at Rudolph and Sletten? Do you think they can continue to add bookings at this level of around $300 million on an ongoing basis for the next several quarters?

Well, from the knowledge that I have of what opportunities they are looking at and the capacity issues they are facing right now, I don't know that I would be that concerned about continuing the level of bookings that they have had in the last quarter or two quarter because they are really pretty level and they seem to be looking at a lot of new opportunity. And they're really, the only restraint they seem to have is the ability to staff them appropriately. So I think you will continue to see them book as much as they can absorb.

And the type of work that they're booking say in this quarter, is that for work that starts right away, or is it for work that's a little beyond -- down the road a little bit?

Yes, I think all of that work actually was underway right now, I believe. I remember that list being -- I know the casino work is underway and the office building and the L.A. hospital both are underway as well. Yes.

Okay, and then in terms of, Mike, the cash, if I could just clarify -- did you say $340 million?

Yes, $343 million.

$343 million, okay. And any comments, I don't know if I missed it, but thoughts on acquisitions or buybacks or dividend and any kind of timing?

Well, we're currently screening for specific acquisition opportunities with the use of consultants as well. In terms of dividends and buyback programs, that's a -- we talk about that at Board meetings, but at the moment, there are no actions on those. However, we do have a Board meeting in September. But in terms of acquisitions, yes, we have some specific objectives in mind.

But do you think we might see some activity as early as this year, or more likely in 2008?

More likely in 2008 at this point in time.

Thank you.

Brent Thielman, DA Davidson.

Good afternoon, congratulations on the quarter. Just a quick follow-up to the question on acquisitions. Would you look at something sizable to Rudolf and Sletten, or are you looking for something smaller?

At the present time, Brent, we have targeted a line of business that would lessen the dependence on military work for the international operations. So we have some specific targets in mind. In terms of looking at an acquisition of Rudolph and Sletten's size, it would depend on the opportunity. It would have to be a very special opportunity.

Sure. And then I guess just a follow-up, you talked about the hospitality markets being very strong now outside of Las Vegas as well. Could you just touch on what you see in the Building segment as really the strong contributors or opportunities there in the future, outside of hospitality?

Outside of hospitality?

Right. I guess just sort of a characterization of the market (inaudible).

I am so involved with the hospitality and we're so overwhelmed with the amount of opportunity there (MULTIPLE SPEAKERS).

I think Rudolph and Sletten's market for health care, biotech, some corporate campus work and some office campus work is still strong. And certainly, James A. Cummings work in Florida for school construction and somewhat public works construction, but in the Building segment, it appears to be holding up very well as well.

Great, thanks, guys.

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

Well, thank you everyone for joining us on this great quarterly call and we hope to see you all or hear from you all again next quarter. Have a great day.

That does conclude today's conference. We do thank you for your participation.