Tutor Perini Corp (TPC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation second-quarter 2013 earnings conference call. My name is Jenada and I will be your coordinator for today. At this time, all participants are in listen-only mode. Later, we will be conducting a question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Jorge Casado, Director of Investor Relations. Please proceed

Good day, and thank you all for joining us. With us today are Ronald Tutor, Chairman and CEO; Robert Band, President; and Mike Kershaw, Executive Vice President and CFO.

Before we discuss our results for the second quarter, I would like to remind everyone that during today's call, we will be making forward-looking statements, which reflect our current analysis and of existing trends and information. There is an inherent risk that actual results and experience could differ materially. You can find a discussion of our risk factors, which could potentially contribute to such differences, in the Company's Form 10-Q, which was filed earlier today, and in the Company's 10-K, which was filed on February 25, 2013.

During this call, we may discuss certain non-GAAP financial measures. Reconciliations of these amounts with the comparable GAAP measures are reflected in our earnings release, which is posted in the Investor Relations section of our website at www.tutorperini.com.

With that, I will turn the call over to our Chairman and CEO, Ron Tutor.

Thanks, Jorge. Good morning and thank you for joining us. I will provide an overview of the Company's recent developments, performance, and discuss our civil building and specialty contractors markets and opportunities. Then I will turn the call over to Bob Band to take you through the management services market. Then, Mike Kershaw will discuss the details of our financial results for the quarter.

We had an excellent second quarter, which included a large volume of new awards that drove our total backlog to $6.6 billion. What that does not include is our 50% share of the $1 billion California high-speed rail, the contract of which I executed earlier in the week. And we expect to have a executed copy returned either today or Monday. This is 12% year-over-year higher than our highest level since 2008. And of course, this only includes approximately $300 million of the $730 million South Tower at Hudson Yards, which I have described in the past as a CM at risk with the exception of our self-performance share of that project, even though we will be earning our profits on the entire $730 million.

I would point out that our civil segment backlog climbed 39% year-over-year, due to the approximate $1.3 billion of new awards, not including high-speed rail, but including the $840 million San Francisco Central Subway project, which we have started work on in July; the $103 million City Island Bridge replacement project in New York; and our share of a $61 million joint venture at Stewart Airport runway. In addition, so far in the third quarter, our London subsidiary was awarded a $130 million contract for a major highway project near Green Bay, Wisconsin, and our civil group a $30 million contract for the rehabilitation of the Harlem River lift bridge in New York.

Our recent large civil awards attest to the fact that our civil segment is not only our highest margin segment, but the portion of our business that continues to fuel our growth, providing a strong foundation for higher revenue and improved margins for the years ahead, given that the significant projects are three and four-year contracts, which will drive that revenue over that period. Our building segment's new awards include the $143 million concrete form work and placement work for the South Tower at Hudson Yards, and $100 million George Washington Bridge bus terminal renovation project.

The specialty contractors group booked approximately $300 million in new awards, including the $56 million electrical contract for work in the South Tower at Hudson Yards. As an aside, I'm in the last throes of concluding a letter of intent for the $700 million civil work platform at Hudson Yards, upon which the balance of buildings will be built. We are working on that contract as we speak. We believe that letter of intent will culminate on a contract executed some time by mid-September. The work is progressing under that letter of intent, and will conclude in July of 2016.

I'm pleased to report we are expecting the third quarter to be another very strong quarter of new awards, because we anticipate very shortly booking our portion of the California high-speed rail. And as I spoke previously, the Platform and North Tower contracts for Hudson Yards. These projects totaling in excess of $1.3 billion in value will, again, add significantly to our work over the next several quarters.

Our civil segment is preparing itself for a very busy second half of 2013, as the tunneling work on the Alaskan viaduct recently turned under and has commenced full scale. San Francisco sub-rate started in July, and that $840 million job is well underway and we anticipate revenue ramping up in 2014.

The volume of pending awards at the end of the second quarter continued to be strong at $4.9 billion. These pending awards include more than $3 billion in additional components of Hudson Yards, $500 million which I spoke to in California high-speed rail, and various other educational hospitality, government, and bridge jobs. As mentioned, high-speed rail Hudson Yards platform and Hudson Yards North Tower are expected to be booked in this, the third quarter.

The pipeline of prospective large-scale civil and building opportunities remains strong. We expect any day qualifications to be brought forward for the next billion-dollar phase of California high-speed rail, which will bid in the first quarter of 2014, with the same team in Tutor Perini as its managing partner; the LaGuardia Central terminal building replacement, for which we have prequalified as one of four teams, and approximately $2 million as the managing partner of construction; and various other significant projects that we are in the midst of discussing and proposing.

Our civil segment continues to deliver strong results, while its second-quarter revenues were down slightly. Compared to last year, the segment's profitability remains strong. And we expect our civil revenue volumes to increase consecutively in the third and fourth quarter, and significantly in 2014, with a ramp-up of all the aforementioned projects.

Backlog for the civil segment at the end of the second quarter was 2.6%; as I stated earlier, up over 39%. We continue to estimate the size of prospective opportunities that we bid in the next 12 months to approximate $11 million -- excuse me -- $11 billion, including $3 billion in various bridge projects; $2 billion in New York City civil work; and $2 billion related to the LaGuardia project.

Our building segments and margins are also expected to continue growing over the next several quarters, driven primarily by the additional phases of the Hudson Yards projects, and what we see as the significant growth potential in our South Florida office. Our building business is experiencing the recovery that we had hoped and predicted. And we expect a reasonable level of profitability for 2013 and even more in 2014, when our large awards will begin to generate revenue. Building segment backlog declined 6% year-over-year to $2.1 billion, but was up slightly sequentially as a result of the Hudson Yards South Tower contract awarded in the first quarter. We are currently looking at $8 billion of prospective projects nationally in the building segment, focusing mostly in areas outside of New York, with the exception of the pursuit of the continuing work at Hudson Yards.

Our specialty contractors continue to play an important role in complementing our civil and building segments, most recently demonstrated by the awarded $56 million South Tower electrical subcontract, and the fact that in the Platform contract, it appears that a significant amount of the work not performed by Tutor Perini Corporation will be performed by our major subcontracting subsidiaries. Backlog for the specialty contractors segment at the end of the second quarter was $1.6 billion, up 8%. And that specialty segment has an active pipeline of new opportunities totaling in excess of $3 billion over the next 12 months.

Overall, our backlog mix this quarter was approximately 31% building, 40% civil, 24% specialty, and 5% management services. New contract awards and adjustments to contract during the second quarter added approximately $2.1 billion to backlog. The Company is performing well, and I am pleased with our strong backlog and the expectation for continuing backlog growth and contract awards. We continue to be one of the major contractors in the United States that we feel is uniquely qualified with the right combination of experience, capabilities, and the financial capacity to successfully bid and execute the mega-scale civil and building infrastructure projects, that seem to be the tendency in our industry, to being brought together.

Thank you. I'd like to turn it over to Bob Band to discuss management services. Bob?

Thanks, Ron. Management services will be transitioning out of the war zones throughout 2014, but we are currently still performing work in Iraq and Afghanistan. We will continue with our 10 IDIQ contracts in the US Departments of State, Defense, Homeland Security, and the Interior, both in the US and overseas. These contracts produce a steady stream of project opportunities.

Recently, we were awarded -- among three large businesses, awarded an IDIQ contract for the US Department of State, which has now cleared a protest by an unsuccessful bidder. So that contract is signed. Federal sequestration continues to slow the bid proposal and award process, as well as the pace of contract modifications on existing work. The $122 million task order in Southern Iraq under the US Department of State containerized housing contract will be completed in the fall of 2013, although we have continued to receive modifications for additional work there.

In Haiti, we completed a $15 million US aid electrification project in July, and President Michel Martelly of Haiti was present at the ribbon-cutting ceremony. In Afghanistan, a $110 million contract to upgrade the Southern Electric power system consisting of power transmission and distribution facilities has been delayed, due to pending scope and funding modifications related to security. Also in Afghanistan, the $130 million irrigation and watershed management program for USAID is well into its first year, is fully operational, and if fully funded, will extend through 2017.

Our $9.6 million contract with the National Park Service for the earthquake repairs to the Washington Monument is well underway, with completion targeted in early 2014. Recently, we attended the lighting ceremony where the entire monument was illuminated from the lighting on our scaffolding system, much to the delight of tourists and residents in Washington, DC.

As a result of the increased focus recently on US Embassy and Consulate Security, we see new potential project opportunities developing for the US Department of State under our recently awarded IDIQ contract, with RFPs anticipated in late 2013. Also -- we also see and have qualified for three new US Embassy-related construction projects, which should bid in the second half of 2013. Tutor Perini has a strong resume of Embassy security upgrade projects, having been performed at more than four dozen locations worldwide over the last 30 years.

In addition, we anticipate foreign military sales project opportunities supporting hardware sales, primarily to Saudi Arabia and Iraq. The U.S. House and Senate have recently agreed to a defense budget for Guam of approximately $230 million, which is awaiting reconciliation. This funding will provide a much-needed boost to the construction industry on the Island, and will provide additional opportunities for our Black construction business located there. Black construction continues to pursue work throughout the Western Pacific region. They are working on the $75 million North ramp parking apron project at Andersen Air Force Base, and are about 60% complete on that job.

Black is about to start an $11.6 million wharf improvement project at the Naval Station Guam. The Company continues making good progress in Diego Garcia on a $10 million Navy maintenance dredging contract. And they are also pursuing a multi-year $95 million IDIQ for contract work also on Diego Garcia. Earlier this year, Black successfully completed a $32.7 million runway reconstruction project in Kosrae, Micronesia, and is looking to participate on a similar sized project for the state of Truk, which should bid in the first quarter of 2014.

Now, Mike will give you the financial details.

Okay. Thanks, Bob. As Ron mentioned, we had a strong second quarter, with revenue growth driven primarily by our building segment. Our revenue in the second quarter of this year was up 7% to $1.05 billion versus $985 million for the same quarter last year. I'll go through in segment detail what drove that. But our gross profit in the second quarter was up 22% from last year's $87 million to $106 million this quarter. And our margins in the second quarter grew from 8.8% last year up 130 basis points to this year's 10.1%.

For SGA, it's virtually flat between the two years, with some increased stock compensation expense this year, some timing of some of our professional services, which were offset by reduced stock compensation. As a result, excluding our goodwill impairment charge, income from construction operations was at $39 million, which is up 76% from the second quarter of 2012's $22 million. That drove our operating margin up 140 basis points from 2.3% in the quarter last year to 3.7% this year, and net income from $7 million last year to $15 million this year -- all of those excluding our goodwill impairment charge. Our diluted EPS this year was $0.32, up 100% from last year's adjusted diluted EPS of $0.16.

So overall, our second-quarter results were as expected, and continue to reflect the directional trend that we've anticipated. As expected and as is typical in our business, our earnings for 2013 are weighted towards the second half of the year. And, of course, our backlog volume is understated a little bit by the Hudson Yards project information that Ron provided earlier.

Moving on to a segment by segment look, revenues in building this quarter were $402 million, up 22% from last year's $330 million, and down a little bit from last quarter. That increase for this year is primarily driven by hospitality and gaming projects in California, Arizona and Nevada. Our income from construction operations this year is $3 million versus a loss of $14 million last year, which is driven by the increased revenue that we discussed; some unrecoverable costs that we had last year, related to an educational facility in the South; and decreased G&A this year, due primarily to staffing reductions and the higher levels of activity that we've got. That drove our operating margin to 0.8% versus the 4.4% loss for last year.

Civil segment, the revenues are virtually flat between the two years. And we have some reduced activity in mining and civil projects in the Midwest this year, mostly offset by our progress earned on our tunnel project in Washington, and several mass transit and transportation projects on the East Coast. Our income from construction operations is up 13% to $29 million this quarter versus $26 million in the same quarter of last year. That increase is due primarily to increased higher-margin pipeline work in the Midwest, partly offset by the unfavorable volume that I discussed above, and some cost estimate adjustments associated with some of our smaller Midwest mining and civil projects. But our overall operating margin for the civil segment is up 110 basis points this year at 9.1% versus the 8% of last year, which continues to reflect the healthy profitability of that segment.

On the specialty contractors segment, revenues were up a little bit at $284 million versus $276 million last year. The significant increase this year in smaller electrical projects in the Southern US, and some roll-on projects from the Sandy-related projects in New York, was offset partially by the reduced activity in some of our other smaller electrical and mechanical projects in the New York area.

Our income from construction operations at $16 million was down 20% from last year's $20 million, mainly because we had favorable activity in the second quarter of last year on several electrical and mechanical projects in New York, that were partially offset this year by the increased revenue of favorable settlement in this quarter on a large hospitality and gaming subcontract, and reduced G&A expenses. Our operating margin of 5.6% is down 1.6%, 160 basis points from last year's 7.2%, but it is in line with our normalized margin expectations for this segment.

In Management Services, our revenue was down 18% in the quarter to $45 million from $55 million in last year. Decrease is basically due to the reduced activity on our containerized housing project in Iraq on several surety project. Our income from construction operations was flat between the two years. And we had favorable performance that Bob talked about on our aircraft parking apron project in Guam, and several other favorable adjustments to a number of project estimates that offset our reduced activity. Our operating margin was 4.6%, up 130 basis points from the 3.3% of last year.

In other expenses, our depreciation and amortization expense this year was $14 million versus $16 million last year. Our interest expense was essentially flat at $11 million between the two years. And our income tax expense of $10 million for this quarter versus the benefit of last year's $15 million was mainly due to the goodwill impairment charge. The underlying increased tax expense this quarter is due to the higher operating income, and our effective rate was 38.5%. And we're still forecasting approximately 40% for the remaining quarters of 2013.

On the balance sheet, our working capital at June 30 was $792 million, which is up 6% or $44 million from $748 million at December 2012. Our cash stands at $143 million versus $168 million last year. Our current ratio of 1.58 compares with 1.61 at December. We've had a strong forecast for focus this quarter -- or this year, actually, on cash and working capital management. And it is starting to produce good results. We generated $46 million in cash from operating activities this quarter versus a use of $7 million last year, and led to $30 million of free cash flow this quarter compared with the usage of $18 million last year.

Our total debt at the end of Q3 is at $784 million versus $737 million at the end of Q2 -- Q4, sorry. And that's all on a line of credit. Our total debt to equity ratio at the end of second quarter is 0.66 versus 0.64. And if you look out at the year-on-year increase in the debt to equity ratio, it's due to the goodwill impairment impact on shareholders equity.

With that, I'll turn the call over to Ron for closing comments.

Thanks, Mike. I'm pleased with our strong second-quarter performance and solid results, as well as the outlook for continued contracts, increases in our backlog, and the revenue growth that comes with it in the coming quarters.

Tutor Perini is continuing to win its share of major complex civil building projects. And we expect the civil markets to continue to remain strong, as we are pleasantly pleased with the increased opportunities presenting themselves virtually nationally in the building markets, as our building businesses begin to return back to some semblance of pre-2008. In addition, we are looking forward on a national scale to significant growth in 2014, particularly with respect to our building segments following the challenges of the past five years.

This concludes our prepared remarks. We will now ask that you open the call for questions.

(Operator Instructions). Steven Fisher, UBS.

Certainly nice to see the positive operating cash flow in the quarter. I know, Mike, you said you've ratcheted up the focus on that. The question is, how much visibility do you have now as to whether you continue to be positive here for a few quarters? And then I guess how should we think about these projects that are going to be ramping up? Should we assume that there is going to be more of a working capital usage?

No. I mean, I think what we're doing is monitoring cash in and cash out a lot more closely. On the ramp-up of these new projects, yes, we're pushing hard to get mobilization payments, so that that they remain cash neutral. And we're just focusing heavily on collecting the old unbilled and old receivables, and proceeding through, as you've seen recently, on settling some of these old litigation things as well, that is generating cash for us.

Steve, this is Ron Tutor. I've said it before; I'll try to explain it again. Traditionally, our major civil work does not require a lot of money to get them started. We typically are cash-positive within 90 days. Our emphasis with all our owners and the way we base our bids is the projects fund themselves. We don't put a lot of upfront money in. And historically, that has never been the problem.

Most of our cash flow issues stem from collection of payments as we get toward the end of projects, like classically, Hurricane Sandy -- where we've been done for five months and they still owe us $15 million or $60 million. And at one time, they owed us $70 million, even though it was time and material. MGM, Planet Hollywood, where we've a court award, we still having collected the money. It's very seldom the negative cash is generated from the startup of work. It's unfortunately usually those few owners that don't pay us at the end or on a timely basis.

Yes, the other area that we grapple with is on the specialty side with -- because they are -- they collect their monies in arrears. So that's the other one that we've got a lot of focus on.

All right.

I see. That's helpful. In terms of the California high-speed rail, I'm glad to hear that you signed the contract. So it sounds like there's no chance it's not going into your third-quarter backlog. And the question then is, so when do you actually break ground and start doing work? And is there -- what are the chances that there is interveners that try to stop it?

You know, I can't say with 100% certainty, but my experience and my knowledge of it with, I'd call it, 95% plus, there's really legally not -- God forbid, I'm a lawyer -- I don't believe that there's anything that's going to stop it, despite all of the language. We are expecting an executed contract back today or Monday. We have rented space. The owner has moved a big staff into Fresno. We expect to commence with engineering immediately. And my guess is, we'll be on the ground on a small scale basis in January and probably ramping up to a major construction effort by March or April next year.

Okay, great. Thanks, guys.

(Operator Instructions). John Rogers, D.A. Davidson.

A couple of things. First of all, just so I'm clear, Ron, the Hudson Yards awards -- the Platform, that's essentially a civil project?

That's correct. With a civil set of margins, of course, significantly higher than the building. And what it is, is we have a fee structure that is more consistent with the civil side than the building side. And we are virtually self-performing probably 80% to 90% of the contract, with either Tutor Perini corporate civil staff or the wholly-owned subsidiaries, namely our drilling subsidiary, our electrical and mechanical subsidiary. So, virtually the entirety of that job will flow through TPC civil and its contracting segments.

Okay. And then just on the civil market in general, and you've got a lot of projects that you've added or are coming in. Could you talk for a minute about the margin expectations with a lot of this work? Because I know a couple of years ago, we were talking about margins getting back up into the low double-digit range. Is that still possible? I know not this year, but in the out years?

Well, when we look at the billion-dollar contracts, we, as a company, irregardless of the market, I don't believe we've ever entertained anything less than low double digits. Now, that may not always make us the low bidder. But typically, in major civil work, the profit you bid does not make you low. It's the cost you achieve in the estimate. So, I've never supported the theory to get work, you cut the fee. If you're aggressive in your costs and you're really good at the work -- because, remember, you're always a victim of the cost you produce, then that's how you get the work. And there is low double digits is, to me, the minimum that all civil contractors should work on.

Well, then, how far away are we from actually seeing those kind of margins?

Well, you know that's interesting. I think when you bid the billion-dollar type work, if you look at the limited cross-section of bidders that can and do bid them, and you set the foreign contractors aside -- because their approach is somewhat confusing -- I really believe that ourselves, Kiewit, Granite, those few large US-based -- and I'd include Walsh in that -- civil contractors, I really believe none of us have ever reduced our fees to anything less than that low double digits.

What the foreigners do -- and God bless them; we've joint ventured with many of them, listened to their philosophies, and then watched them perform the work -- I really can't be concerned about what they do. It's what we do. And at the risk of saying something negative, we'll just let it go at that.

Okay. And then just last question. In terms of the LaGuardia work, what's your expected role in that joint venture? (multiple speakers) Are you with the contractor?

We're the managing partner and the lion's share of the contracting joint venture. And we are -- and obviously, we play a very significant role in pulling the entire venture together, including the designers, the financiers, everything, the operator. Make no bones about it. Tutor Perini has been the lead in that from the beginning.

Okay. Thank you.

And this concludes the Q&A session for today. I would now like to turn the call back over to Mr. Ron Tutor for any closing remarks.

Well, that was less questions than the norm. So I don't know whether that's good or bad. But thank you, everybody, for joining us.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.