Granite Construction Incorporated (GVA) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Granite Construction Incorporated Third Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Jacque Fourchy, Director of Investor Relations.

Good morning, and welcome to Granite's third quarter call. I am here today with our President and CEO, Jim Roberts; our Vice President and CFO, Laurel Krzeminski. Following this call, each of us will be available throughout the day to answer any follow-up questions you may have. And also as a reminder, any forward-looking statements that are made this morning are subject to risks and uncertainties that could cause actual results to differ materially from these statements and which are further described in our most recent SEC filings. Granite assumes no obligation to update any of these forward-looking statements or other information. With that, I will turn the call over to Jim.

Thank you, Jacque, and good morning, everyone. On today's call, I will provide you with an overview of the third quarter, as well as an update on our current markets. Laurel will review the financial results for the quarter and discuss the adjustments we have made to our 2012 guidance based on our outlook for the remainder of the year. As you can see from this morning's earnings release, Granite's third quarter results reflect a continuation of the strong performance and momentum we have been seeing from our Large Project segment, offset by ongoing competitive headwinds in the Construction segment. From a seasonality standpoint, the third quarter is typically our driest quarter of the year, particularly for our business units in the West, and it was the case for us again this year. Although we were busy in all segments of our business, the competitive bidding pressures and continued delayed bid dates has impacted our ability to build backlog. Bid lists for the smaller sized public-sector Construction projects remained longer than we would like to see. As we mentioned last quarter, we are starting to see a slight pickup in residential and nonresidential work in certain markets. However, we do not expect a measurable impact until late 2013 and into 2014. I will point out that we have historically seen a positive impact from a pickup in the private sector in our Construction Materials business first, followed by improving margins in the Construction segment. I would expect to see the same type of pattern in the future. In response to the current environment, in addition to our core business, our teams are also successfully pursuing work and leveraging our capabilities in markets such us federal, power, oil and gas, water and mining. The work we are performing in these markets…

Thank you, Jim, and good morning, everyone. Let me begin with a review of the results for the total company. Earnings per share were $0.94 compared with $0.93 per share last year. Third quarter revenue was $728 million, essentially in line with last year. Gross profit increased $7 million to $101 million. As a percent of revenue, the third quarter gross margins were 13.9% compared with 12.9% last year. Selling, general and administrative expenses increased slightly to $41 million. We continue to expect SG&A expenses for the year to be in the range of $170 million to $180 million. Operating income for the quarter increased to $61 million compared with $60 million last year. Looking at the segment detail, Construction revenues for the quarter decreased $45 million to $386 million. In addition to the competitive environment, in the third quarter, we continued to experience execution issues on several Construction projects in the West. We believe these issues are now behind us. As a result, gross margins declined to 8.6%, down from 13.6% a year ago. Large Project Construction revenues increased $43 million to $256 million. As Jim noted, our Large Project teams continue to execute at a very high level. Gross profit margins increased in the quarter to 22.6% compared with 12% a year ago, reflecting improved forecast on several projects across the country. In addition, last year, we had approximately $50 million more in revenue with deferred profit in the quarter compared to the current year. Finally, revenues for the Construction Materials segment increased $4 million to $87 million in the third quarter of 2012. Gross profit was in line with last year at $10 million or 11.5%. Regarding our liquidity position, we're very pleased to announce last month that we amended and expanded our credit agreement. The new…

Thank you, Laurel. Before we turn it over for Q&A, I would like to recognize all of our coworkers, our friends and our families, who have been affected by last week's devastating storm. Our Granite Northeast team based in Tarrytown has been very busy assessing the damage to our projects in the New York area, and they are working closely with the local authorities to help with the cleanup effort in any way possible. I'm not surprised by the resiliency I'm seeing from the people of New York and all of those affected. Our sincerest wishes for a speedy and healthy recovery to all the individuals and communities who are now cleaning up from this tragic event. So with that, I will now turn it over to the moderator, and Laurel and I will be happy to answer your questions.

[Operator Instructions] Our first question comes from the line of Jack Kasprzak with BB&T. John F. Kasprzak - BB&T Capital Markets, Research Division: The guidance for Large Construction revenue came in a bit was -- can you talk about the reasons for that. Were you just finishing more work than you thought in the third quarter or what was going on there?

I think it's Large Projects itself. You're talking about the revenue guidelines for 2012, Jack? John F. Kasprzak - BB&T Capital Markets, Research Division: Yes.

Yes. I think that some of that included some work that we were hoping to actually build on the tail end of this year by getting a couple of projects, which seems to be delayed now into the beginning of 2013. So really, I think our execution of our work on our books is going very well. It was just a couple of projects we were hoping to book in the fourth quarter and get revenue for that we don't see that happening. John F. Kasprzak - BB&T Capital Markets, Research Division: Got it. Okay. And with regards -- the comments on the Construction segment, several execution issues in Q3, are those related to the problems that I guess started in Q2, and can you quantify the impact in Q3?

Well, I'll let Laurel quantify if she can. But some of it is a carryover from Q2 and some of it are discrete items in Q3 alone, Jack. But I think that the way we look at it today, those jobs are basically complete now. And so we don't see them going forward, but I do -- I would say that there was some carryover on the back end of Q2, as well as some new stuff in Q3. But Laurel, do you want to quantify that?

Sure. Our 10-Q will be coming out shortly, Jack, with a little bit more details. But the net decreases in our forecast were negative $6 million this year versus $1 million last year. So, does that give you any context with the difference?

Of the Construction projects.

Right, on the Construction segment. I know of 4 projects that had download estimates. John F. Kasprzak - BB&T Capital Markets, Research Division: Okay. Is that in the quarter or year-to-date?

Quarter. For the year-to-date, the net decreases are $9 million versus $2 million last year. John F. Kasprzak - BB&T Capital Markets, Research Division: $9 million versus $2 million. Okay. And the revenue in Construction was down year-on-year, you've talked about the competitive pressures there, but it's a little worse than I have been modeling. And was there just less shorter term -- term work to go after than maybe you thought, or was that business kind of in line with what you were thinking in the quarter?

It came down a little bit. But it really comes down to how many days, how many crews, how many you got working. And we're busy. Jack, we're very busy. It just wasn't quite at the pace that we had anticipated when we talked about this a quarter ago. But hopefully, it will pick up and continue to pick up. It's more of a, do we have the backlog or not. We do have the backlog for the remainder of the year, so we'll just have to see how the fourth quarter plays out.

Our next question comes from the line of John Rogers with D.A. Davidson. John Rogers - D.A. Davidson & Co., Research Division: Jim, you gave us some of the projects that you're looking at for 2013, but I know in the last couple of months or quarters in terms of presentations, you talked about the whole bid market. Could you just update us on what that is, what that looks like?

Well, I think that you're probably, John, focusing on the large project for Reno or you want to talk about... John Rogers - D.A. Davidson & Co., Research Division: Yes.

Well, the Large Projects environment is staying robust. Whether or not it is -- I would suggest that some projects have been delayed into the beginning of 2013 and the tail end of 2012. So, but I would suggest that the overall size of the market is staying quite large. And we're seeing new projects come on board, and our list is still up about a $16 billion number right now pursuits between now and the end of 2013. So it's staying as large or larger than we've ever seen, and that's a good sign. And it kind of goes back to -- remind me on Large Projects status some alternative -- financing mechanisms that I brought up in the discussion earlier with the TIFIA loan process in place, they're upgrading and upping the overall volume available in the marketplace, and we're seeing more applications for TIFIA loans on these large, what they call, megaprojects. So the megaprojects are continuing to come out, and overall, the market size for Large Projects is staying very robust. John Rogers - D.A. Davidson & Co., Research Division: Okay. But it sounds like the first half of 2013, is that what you're -- I mean, when we should see a lot of these awards the way their -- or I guess, unless there's more slippage?

Well, I think that -- for example, the I-35 job is turning in, in the next couple of weeks. We're still waiting to hear on Horseshoe in Dallas, we're still waiting to hear on Tappan Zee in New York. We've got a series of projects that will be turned in, in the first quarter. So I think the first quarter is going to be a very busy -- a Large Project quarter.

First half.

And first half in general. John Rogers - D.A. Davidson & Co., Research Division: Okay. And then on the local business, I -- just looking at some of the numbers down in California and elsewhere, there's a big increase in terms of just the dollar value of what the awards have been over the last month or 2, but it doesn't sound like you're seeing that.

Well, I'm not so sure if I would notice that there have been a large increase in overall awards. Our projects' out to bid and we are getting our share of them. It's just competitive. We're getting work and specifically, if you're talking about California, we're getting our share of the work. It's just very competitive. John Rogers - D.A. Davidson & Co., Research Division: Okay. Okay. And then in terms of the private market, you talked about oil and gas, and industrial markets, how far away are you from a major project from a private sector client?

Well, we've got several -- it depends on what major means. We've got several projects in the $20 million to $50 million range today in the energy market, in the mining market, in the refining oil and gas market. So we're seeing some, I wouldn't call, megaprojects, but they're fairly large construction projects. We have several of them going today. John Rogers - D.A. Davidson & Co., Research Division: And is that generally site preparation work or...

Well, it's still the work. It could be utilities or it could be structural concrete as well. It is mostly our heavy civil-type work though, John. John Rogers - D.A. Davidson & Co., Research Division: Okay. And is there a chance, I mean, that we could see something larger or more significant in the private sector? And I mean, are you pursuing those types of opportunities now?

Yes, I would suggest to you that, yes, we are trying to play a larger role with larger projects in those areas.

Our next question comes from the line of Nick Coppola with Thompson Research Group.

Looking at Large Project Construction margins, they were obviously really strong. Is there anything unusual you can call out there, without the queue? Were there less projects, kind of below the profit threshold relative to prior quarters? Anything that you could kind of point out there will be helpful.

Well, I think there's a -- you've mentioned a couple of things there, Nick. And, yes, there were less projects that had not reached the 25% threshold, but I don't think that's the most significant issue. The most significant issue is that the execution on these projects is going very well. And I said that in my discussions earlier, the estimates are good, the risk analysis is excellent, our execution is going well. And as the execution continues to go well, they continue to create a lot of opportunities for the company. So I would call it more of just really positive execution than any other issue.

Yes. I mean, and it's still well above the kind of the mid-teens, what you typically expect though, right?

That's correct, I would say, long term. And we mentioned this, and so now is a good time where the returns are above the mid-teens and there's quarters where the returns are below the mid-teens. But yes, we believe Large Projects continually year over year over year should be in the mid-teen level returns.

And then can you talk a little bit about the seasonality of revenues in Large Project Construction? Because looking at kind of the midpoint of guidance, you're looking like -- it looks like there's going to be some sequential growth in Q4. I guess typically, there's -- more typically, there's a decline. Is there anything kind of going on there, or does that just kind of slow the projects?

I think it just depends on where the projects are all located and what stages they're in, Nick. Our projects are going strong. I think if you a have good weather in the locations where the projects, Large Projects are located, they'll continue to perform at a high level during the fourth quarter. And obviously, if weather sets in, in some places, it will impede the progress of those jobs. So they're all over the country, though. So it's not as weather driven as the Construction and the Construction Materials business.

Yes. And I think, Nick, it's the portfolio and where we are in progression of the project. And we happen to have a lot of Large Projects right now that are in the sort of sweet spot of progression. So, anyway. As far as I mentioned on the script, we had $50 million more last year in deferred revenue for the quarter and $100 million more year-to-date of projects that didn't -- revenue that didn't have any profit on it, just to give you some context for those numbers.

And so it does have some -- having less will bring that -- that overall return up for the quarter, up a little more because of less projects below the threshold, but I don't think that's the major driver.

Okay. And then just one last question. I wonder if you could talk a little bit about, I guess, dedicated sales tax for transportation projects. So Arkansas voters approved the statewide sales tax and also you got a county in North Carolina and South Carolina that did something similar. Do you think we can get any traction on that as a way to increase highway spending?

Well, I've been going through some of those public works ballots this morning and actually it's kind of -- I wish we could get momentum. As I look, there is some that passed, some that failed. I think it really comes down to a quality-of-life issue in those locations. And I think it's going to end up being that the local areas are going to have more of the burden put on them, but they've got to feel the pain before they're willing to pass it. And so as I look down my list, yes, there were many of the tax override measures that passed. So that's a good sign that some of the local environments do understand it's going to end up being more in their court going forward to handle their local infrastructure measures.

And I think if we can get the 2/3 majority vote lower that threshold reduced, we would see a lot more of these pass. It's just that it's a tough hurdle to get over in this environment today. So that's a push right now to get that threshold lowered.

[Operator Instructions] Our next question comes from the line of Sameer Rathod with Macquarie.

So you talked about delays in some of your larger projects and the bids, I guess outstanding. Is there a common thread why projects are moving to the right? I understand there's always some slippage, but I do look at your portfolio of bids, is there something that's common between all these projects that are slipping or no?

Well, I don't think there is any commonality, but I think that if there was anything that -- with the overriding, I think it's getting all the financing and funding in place for these projects. And I think that with some opportunities today, as I mentioned with the TIFIA increase, the $750 million next year and $1 billion the following year, I think some of these more local agencies that have these megaprojects are now getting in line for TIFIA assistance and waiting for responses, because they see a better opportunity for funding or financing their projects. So that could be a reason for some of the short-term delays today, and I think that's actually positive because what that will end up doing is getting more of these opportunities out on the street once they figure out the new TIFIA process. So other than that, I don't think there's any commonality in terms of why they're being postponed.

Okay. Next, I guess post-election, I think Obama has been pretty vocal in terms of infrastructure. How do you think policy can change or will change in the next 4 years, and what impact do you think that will have on your business?

Well, I wish I knew, and I don't. There is no doubt that he has been pro-infrastructure and he has proposed some very nice funding opportunities. But I am not a political pundit, and I'm not -- and I really don't know where it would go, but I can suggest to you that there needs to be a significant funding discussion in the next 12 to 18 months, before MAP-21 is completed in September of 2014. And I think it's going to take place. I think this is a good opportunity now to really bring up some key infrastructure funding opportunities. And I say that because what we've been dealing with so far are more financing issues. And the key ingredient, I've said this several times, historically, is that it is about funding. Financing is good to get the megaprojects on board and everything, but to get the overall infrastructure back where it needs to be, it's going to be a funding mechanism. And I think you're going to see the next 12 to 18 months, and that will be at top of the list.

Okay. And my last question is on Tappan Zee. It seems like you guys, your consortium was selected for final negotiation. I mean, what are the final hurdles before you can book that project? And could you remind us how big an award this could be?

Well, let me suggest this. That project is still in the bidding phase, the analysis phase by the owner. So I think it would be probably best that we don't comment on a project like that while it's in a phase with the owner being analyzed today, and there's a lot of information floating around in the media, and I will just leave it at that for the moment and let the authority do its work.

Our next question comes from the line of Gregory Macosko with Lord, Abbett. Gregory M. Macosko - Lord, Abbett & Co. LLC: Just with regard to delays, et cetera, Tappan Zee, whatever, do you see that the hurricane, the storms in the Northeast, are having any affect on your Large Project business up here?

Well, I think it does have some effect. I mean, most of our projects are pretty well enclosed. I will say the World Trade Center certainly, we are in a observation mode there and gathering up information to determine the damage done there. We have a large coming project that seems to have come out very well from the storm. And most of our projects are well contained. There will be some slowdown and some cleanup as we try to get our arms around any of the damage that may have occurred with any of our projects. But we'll get back on board and get them to the point where they're moving ahead here in the next month or so as soon as they cleaned up and the analysis is completed. Gregory M. Macosko - Lord, Abbett & Co. LLC: And with regard to the Construction side, are you -- just help remind me that, are you well positioned relative to the work that might be done in New Jersey or along the coast at all? Is that -- will you be looking at that, bidding on that kind of work?

Well, absolutely. If it is work that is in alignment with our infrastructure teams in the Northeast, we will absolutely be bidding that work. And I would like to suggest first that we'd like to sit back and help with the cleanup first, and then wait and see what kind of overall infrastructure improvements are going to be needed. And of course, we would like to take part in that if it's at all possible. Gregory M. Macosko - Lord, Abbett & Co. LLC: Okay. But you feel like you have the capabilities on the ground to serve a pretty broad area of where the damage has occurred?

Oh yes. In fact, as a nationwide company, if we needed to, we could bring in help from other places as well, if that was needed to help with the local efforts.

Our next question comes from the line of Min Cho with FBR Capital Markets. Min Cho - FBR Capital Markets & Co., Research Division: Actually, most of my questions have been answered. I just have one final one regarding the TIFIA opportunity. When do you expect to see some significant positive impact from on that? Obviously it sounds like it's going to take a while to just figure out the entire kind of funding process. But have you started to see some of the impacts or when do you think that will occur?

I think we have actually started to see the impact today. My feedback I've gotten from our teams on the ground is that a lot of the projects that we are pursuing have already applied for TIFIA applications and are waiting to hear back, and that's a good sign, because there are projects that are right in our wheelhouse and I'm looking at about 10 of them on the list today that have already made applications. So with the increase in the loan amount, I think this is going to be a great catalyst for 2013 and 2014.

I'm showing no other questions. I'll turn it back to management for any closing remarks.

Okay. Great. Well, I want to thank everybody for your time today. Before we close, I would like to thank our employees for their dedication and their commitment to Granite. To everyone on the phone and the webcast today, we appreciate all of your interest in our company. And if you have any additional questions, as always, please do not hesitate to call us. Laurel, Jacque, myself are all available. Thank you, and have a great day, everyone.

Ladies and gentlemen, this does conclude today's conference. You all may disconnect and have a good day.