Granite Construction Incorporated (GVA) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Granite Construction Fourth Quarter Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference maybe recorded. And now I'd turn the program over to Jacque Fourchy. Please go ahead.

Good morning, and thank you, for joining our fourth quarter and year-end earnings conference call. I'm here today with our President and CEO, Jim Roberts; and our Vice President and CFO, Laurel Krzeminski. Before we get started, I'd like to remind you that this conference call does contain forward-looking statements that should be considered in conjunction with the cautionary statements contained in our earnings release and in our most recent SEC filings. Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. Granite assumes no obligation to update any of these forward-looking statements or other information. Please see our filings with the SEC, including our most recent annual report on Form 10-K for a discussion of the specific risk factors. And with that, I'll turn the call over to Jim.

Thank you, Jacque, and good morning, everyone. During today's call I will present an overview of the quarter and the year and share some of the initiatives we are focusing our efforts on in 2012 and beyond. I will then turn the call over to Laurel who will take you through the financials in detail. Overall I am very pleased with how our business performed last year in spite of the continued macroeconomic headwinds. We were successful in achieving many of our operating goals for the year while continuing to build a stronger company, thanks largely to the hard work and dedication of our people across the country. We successfully grew backlog in both of our key Construction segments, maintained a solid balance sheet and continued our efforts to reduce our overall cost structure. We also closed out 2011 strong due to mild weather in the west, as well as the extraordinary execution of our teams who have brought home excellent results throughout the year. The balance between our 3 segments: Large Projects, Construction and Construction Materials reinforces that our business model is working. We also continue to grow as a company, not just top line growth, but in the ways that come with managing through a downturn. We have made significant strides to cost control, production efficiencies, asset optimization, IT systems and overall strategic positioning that I believe will allow us to grow our business and bottom line for years to come. And we are not stopping there. It is clear that we must also be better than our competition. We must look at new markets and we must differentiate ourselves from others in today's highly-competitive environment. To accomplish this, we have renewed our focus on growth and are excited about the future for Granite. I'm very proud of the work that we have done to produce a strong growth strategy, which provides a roadmap for our company and ensures that all parts of our business are working together. Specifically, we are focusing on several key initiatives including growing both our Large Projects and vertically integrated businesses as well as diversifying our business model and continually optimizing our asset portfolio. While all the components of the plan are not new, we are allocating significantly more time and energy on implementing our growth strategy. As it relates to our Large Projects business, despite funding uncertainties that plague many of our owners, we had a significant amount of highway reconstruction, transit, tunnel, marine, airport and bridge work to bid this year. We're also quite optimistic about the short and long-term growth potential for this part of our business. In addition to being strategic and disciplined with regard to the projects we bid, we are taking a more proactive approach to business development, to strategic partnerships and to opportunities to broaden our public private partnership efforts. We are also focusing on growing our vertically-integrated business, both geographically into targeted markets and in our current business locations as well. We continue to focus on hot-mix and warm-mix asphalt as the cornerstone of our vertically integrated business which allows us to optimize assets in both our Construction and Construction Materials businesses. We are also utilizing our vertically integrated businesses to help compete in Large Projects. Many Large Projects we are currently pursuing are in the same geographic area as our vertically integrated businesses, which allows us to combine resources, local knowledge and relationships to be uniquely qualified and create a competitive advantage for these projects. We intend to further diversify our business model by leveraging our existing capabilities and skill sets to penetrate priority growth markets. We are seeing success in the federal government market and are encouraged by opportunities in other markets such as power, water and wastewater, rail, mining and oil and gas. Last, but not least, we are spending considerable effort on optimizing our business portfolio. The divestiture of our real estate asset is 1 aspect of this effort. We are also committed to being more diligent in terms of our underperforming assets, specifically those that do not meet our financial criteria and other performance metrics. We intend to further optimize our portfolio by diversifying into new markets through acquisitions. With all this being said, let me be clear. Our priority is to execute on these initiatives while effectively managing risks and maintaining a conservative capital structure and strong balance sheet. Okay, let's shift gears a bit and address the current federal funding situation. As expected, we are closely monitoring the flurry of activity in Washington as it pertains to the reauthorization of the Federal Surface Transportation Bill. It appears that both the House and Senate are committed to getting a bill passed in early 2012. However, given the vast differences between the 2 bills, we are cautiously optimistic that a compromise will be reached before the March 31 extension expires. While neither the House nor Senate bill is ideal, the belief is, that if both bills can get passed through the conference there's a greater possibility that the 2 sides can come to a compromise. If we do not get a House and Senate Bill to conference soon, we are likely to lose the chance to get a reauthorization bill passed this year and would face continued short-term extensions. It is our belief that both a lack of increased funding, coupled with continued short-term extensions as we have seen over the last 2.5 years, will communicate a lack of willingness to invest in our infrastructure, arguably the key component to competing in the global market place. I truly hope that Congress acts appropriately in the next 40 days. With regard to state budgets. We are pleased that the Governor's recently proposed budget for California avoids any cuts to transportation infrastructure. As passed by the voters in 2006, Proposition 1B designated $15.6 billion for State Highway uses. There's approximately $4 billion that remains to be sold and appropriated to projects by the legislator. Overall, state revenues across the country have begun to rebound and state budgets appear to be stabilizing. We are hopeful that these positive indicators will bring more certainty to the public infrastructure market, despite the lack of visibility at the federal level. With that, I will turn the call over to Laurel.

Thank you, Jim and good morning, everyone. For the fourth quarter, net income per diluted share was $0.48 compared with the prior year's net loss of $1.32. The fourth quarter of 2010 included a $107 million pretax restructuring charge. As we discussed, although the majority of the impairment charges were taken last year, we continue to execute on our Enterprise Improvement Plan and anticipate future restructuring charges in the range of $1 million to $9 million. The timing and amount will depend on our ability to negotiate sales of certain assets at acceptable prices. Revenues for the quarter were $540 million compared with $417 million in 2010. Gross profit margin for the quarter was 15% compared with 11% in the fourth quarter last year. During the quarter, we began to recognize profit on the Houston Metro Light Rail and State Route 520 projects. Total contract backlog at the end of the year was $2 billion compared with $1.9 billion last year. New contract awards for the fourth quarter include the remaining portion of the Houston Metro contract, with our portion totaling $242 million and a $168 million highway project in Texas. Selling, general and administrative expenses in the fourth quarter totaled $43 million compared to $40 million a year ago. The fourth quarter 2010 included savings associated with the mandatory holiday shutdown and lower incentive compensation expenses. Turning to operating segment results for the quarter. Construction segment revenue increased 21% to $259 million. Gross profit margin was 14% compared to 12% for the same period a year ago. Construction segment backlog at the end of the year was $514 million compared with $465 million last year, reflecting a healthy bidding environment and our efforts to be more competitive on bid day. Moving to the Large Project Construction segment. Revenues were $212 million during the quarter, up from $155 million in the fourth quarter of 2010. Gross profit margin was 16% compared to 11% the prior year. The margin expansion was driven largely by 2 projects that reached profit recognition, as well as strong performance on others. Large Project Construction backlog was up slightly to $1.5 billion compared to $1.4 billion last year. As Jim noted, Large Projects are an important part of our growth plan including our strategy to more proactively leverage our capabilities, business development efforts and strategic relationships to grow this part of our business. Currently on our radar screen is in excess of $15 billion in Large Project opportunities that we anticipate bidding over the next 12 months. Revenue for the Construction material segment increased 19% to $56 million primarily due to unusually dry weather in the quarter. Weather also helped to drive the increase in gross profit margins for our Construction materials from 5% in Q4 2010 to 11% in Q4 2011. Our effective tax rate for the year was 26.1%. Lastly, we ended the year in excellent financial position with $407 million in cash and marketable securities and no borrowings outstanding on our credit facility. Our cash position includes $75 million associated with consolidated joint ventures. With that, I'll turn the call back to Jim.

Thank you, Laurel. Before moving to the Q&A I would just like to share a few final thoughts. As I said at the outset, 2011 was an important year for Granite and one in which we asked a tremendous amount from our people. I'm extremely proud of what we've been able to accomplish and I'm very excited about the long-term outlook for our company. Not only are we entering 2012 with a quality backlog of work in many of our markets, we have a plan that will improve the diversification of our portfolio and provide long-term opportunities for our company and our people for years to come. So with that, I will now turn the call over to the moderator, and we will be happy to take your questions.

[Operator Instructions] Our first questioner in queue is Jack Kasprzak with BB&T.

First question is on SG&A for 2012. Obviously you guys talked a lot about this during 2011 and your goals there to get it down and you're clearly successful, but for 2012 can you talk about your expectations for SG&A given the moves you've already made?

Jack, this is Laurel. We believe we've made the majority of the cost cutting efforts that we've identified. We're focusing on growing our top line and we don't want to grow our SG&A at the same rate that we grow our top line. So we're diligently working to make sure we keep our SG&A under control.

Okay. So some leverage there, but dollar declines are probably over, is that kind of fair?

Yes.

Okay. And you guys have mentioned some large projects that might come out to bid, Dallas Metro, Goethals Bridge, I think a highway project in Colorado. Can you give us an update on what you're seeing there in terms of timing on those?

Jack, this is Jim. Yes, we got a whole host of work. I think as Laurel mentioned, the large project volume of work bidding over the next 12 months is probably the greatest that we've ever seen in our company that we are pursuing right now. And there are a host of them that are going to be bidding in the first half of the year, but some of the larger ones will most likely be bidding in the second half of the year. But again, I can talk about a specific one if you need, but all the ones you mentioned, Tappan Zee Bridge, Goethals Bridge, Dallas Metro Rail, a host of projects in North Carolina, Texas, California, really just -- a really robust list of work out in front of us for the next 12 months.

Okay. On the small projects, obviously this is the more -- been the more competitive area for you guys with the decline in private construction that you had to endure in recent years. So can you talk about the competitive landscape on the small projects side in the context of private construction market that might be stabilizing?

Well first, let's talk about the competitive environment, Jack. It's really pretty much the same as it has been. And I'd say the last 12 months -- I think we mentioned in the last several quarters, the list has probably shortened a little bit relative to the overall number of bidders in most of our markets and I say that because some markets still have excess of 10 bidders on projects. But I would say the competitive environment is still -- and I used the work fierce, I think, several quarters ago, it is still very competitive. We are able to compete in this environment and there is work to bid, which is good. It is mostly public works projects, but private sector is still very slow and in fact, that would suggest to you that residential market is extremely slow still. We are seeing a few of the housing starts, but not a whole lot of infrastructure starts for the housing market. So I would suggest that the residential side will still be probably looking to '12 -- 2013 for any kind of a break of any nature in the residential side. But the competitive environment really has not changed in the smaller work over the last 12 months.

Our next questioner in our queue is Michael Dudas with Sterne Agee.

First question is -- looking so far, your warm weather helped fourth quarter, how does the weather looked first quarter? It's been pretty good here in the northeast.

It's been pretty good in the west as well, actually I think it's been pretty good just about everywhere except for maybe up in the northwest where it's been a little wet, which we would expect. But it's been a January and February --we're warm in the western U.S. as well. So it's been mild weather.

Secondly, when you're talking about you're focusing on growth now in 2012 after very successfully rightsizing the company and getting it up to compete. Has the growth opportunities changed from when you -- like 2, 3 years ago when you had to pull back? Are the regions or end markets different given what you see on the horizon especially with lot more PPT opportunities that might have been thought a few years ago, Jim?

Well, I think they have changed a little bit. Our growth opportunities -- a lot of it is in the diversification of our overall market sectors, not just our Large Projects and vertically integrated business. So I would suggest to you that as we move forward, we look into the market segments where we think the largest growth is. And I've listed several of those in the call. And whether it's power, water, wastewater, oil, gas and some of those areas, so we've moved a little bit towards that market, but what we've also done is looked at geographic markets where our core business -- our vertically integrated business model we think will work as well. So we do see some geographic markets that are healthy and we can expand our vertically integrated business and then we see ourselves diversifying into some other markets at the same time. So I think it has moved in the last 3 years.

And I'm assuming the prices that you might contemplate paying for these companies has changed as well?

Well I think that -- I'm not so sure it's changed. I think that it will depend on the quality of a company that you pursue. Certainly, that's going to be based on the management teams and the history and the company's capabilities. So I think that's yet to be determined what the pricing is on these companies going forward.

But you think in 2012 we might see something come to fruition as you look at it today?

Well, I think that we will be in the pursuit mode in 2012. I mean, it always comes down if you can complete a transaction. And I would say that if we don't in 2012 I would be very comfortable saying we would in 2013.

I appreciate it. And my final question is, any updates and thoughts on opportunities and the process in project up in Guam?

Well, Guam is moving forward with the project that we have. And we are looking for more opportunities, we've been told there will be more task orders coming out, so more opportunities in Guam. It has been slow coming -- the next phase has been slow coming over the last, I'd say, 6 to 8 months, but we continually are told that there will be more to bid. So our job today is to go execute positively on the work we have and we are in waiting and anxiously waiting for more to come up to bid because the federal government is telling us it will be out to bid later on this year.

[Operator Instructions] Next questioner in queue is Brian Rafn with Morgan Dempsey Capital.

Question, you guys talked about -- Jim, you referred to the pipeline being about $15 billion bidding very robust. How much of that would be design build?

I would say probably at least half of it. There are some very large jobs that are not design build, so the number of jobs is probably at least half, a couple of large projects may not be design build, they may even be a concessionaire-type approach. But at least typically with our Large Projects, at least half of it is design build.

Okay. Have you seen the same seasonal first quarter pattern where some of the local and regional contractors bid up very quickly to build their backlogs and then you guys kind of step back and cherry pick a little more, is that played out in 2012 the same?

Well, I think that -- I'm not for sure, that's how it used to be, Brian when we used to follow the program years ago that you'd sit back and wait. I don't think that's been the market the last couple of years. I think the market has been competitive for all 12 months. But I would say that I haven't really seen a change in the level of competitiveness in the first 2 months. It's the same as it was last year, so I think everybody ended up putting their cards on their table couple of years ago and the seasonality of the competitiveness is kind of gone away.

Okay. Would you say -- using your term, Jim, fierceness, would you say that the fierceness on bid day relative to projects in 2012 will be as fierce as 2011 or do you see any softening at all?

I think it's too early to tell. If you look at the amount of work out to bid, it looks pretty good overall for this fiscal year, but I think that these companies built a lot of capacity in the past. I would not suggest that it's going to get any less competitive. But I do think there is a good environment for quite a bit of work out to bid. But I do think it's going to stay pretty similar in the level of competitiveness that we had the last, probably 18 months.

Okay. And then on CapEx. What are you guys looking at when you talk about asset optimization there, when you look at how annoying the 2012, 2013 coming out of this kind of downturn, where are you relative to equipment, backhoes and dozers and earthmoving equipment? Are you building an inventory, are you -- you're fairly comfortable with the assets that you have, are you renting more? Give us a sense on the fleet side.

Well, I think that, that's the stuff we love obviously, Brian. I mean you're talking about our tools that we use every day. I think that what we've done the last couple of years is we've refocused a lot on our internal or IT systems and spent a big part of our CapEx upgrading our IT systems, which we're very excited about going forward. And I will think that you'll see in 2012, we'll maneuver back towards the majority of our capital expenditures going back into our field tools and our equipment for construction and our plant's business that will allow us to really be more efficient in those areas. So yes, we will probably be buying more of the normal construction and materials equipment than we have in the past year or 2.

Okay. Jim, you mentioned too about looking at wastewater, oil and gas, power. What specific type of different projects might you be looking in those newer areas versus your standard highways, bridges, toll roads and stuff you've done in the past.

Well, I think there's 2 ways to look at it. From the granite perspective, with our core business forces we have today, we are teaming up with companies in those sectors to perform the civil work, and successfully creating partnerships as I mentioned to do that. But I'd also see us, Brian, migrating into the acquisition of really acquiring companies in those areas where we would be the general contractor performing all of the work not just the civil. And so I think that currently today teaming up on the civil side as we migrate towards our growth plan more overall acquiring in being general contractor in the entire sector.

Okay. And then you talked, Jim -- and I've asked this in the past, you're talking about being more -- more mobility relative to moving crews across the country or in geographic areas, staging people. Are there any more incremental SG&A costs, putting workers up in hotels or -- and as you're moving that mobility of labor around the country?

First of all, mobility is -- Brian, it's absolutely key. And you're right on, relative to what we've talked about. And the key ingredient for us -- and we work on this constantly in Granite, to share our resources from coast-to-coast. And most of the time we would share them, in putting people up and housing and all that on Large Projects. And if we do that it's really not an SG&A portion of our business, it's really a direct cost to the individual projects. But we also are asking our employees to move throughout where the best opportunities are on the long-term as well. And that additional cost to move those employees could be considered SG&A, but the majority of our employees today that move and we're constantly asking them to move every couple of years from project to project, really most likely be project-charged.

Okay. So from that standpoint is the more onerous problem, Jim, is that human component of getting your people accustomed to having to relocate and is that more important or more critical than the element of what it would actually cost monetarily?

I think it's both. I think that -- probably in the last 20 years there's been a group of people in the industry that have moved, and that's common place and that's part of what they expect. And there's another part of the industry that has not had to move. And as each of those geographic marketplaces changes, the healthiness of that marketplace changes, more people are being asked to move today than they used to be. And the big issue is -- so that's a mindset issue. And I think that, that's -- it's getting better, people are understanding that they do need to move if opportunities are better somewhere else, but on the financial end, Brian, you certainly have the home ownership issue, which a lot of people bought their homes in the last 5 to 10 years and when they are underwater on their homes, they certainly struggle financially to try to be able to move and we're trying to create opportunities to help them move, and in some cases, it's just a burden that's just too large for either side of the equation to take care of. So there is a financial issue in some cases overwhelming and then there's the emotional issue of moving, but I think emotional side, people are really starting to tackle with, we need to cooperatively move on the financial end. Certainly I think most people understand this, housing market has put an undue burden on a lot of people.

Yes, okay. And then just one final. What's kind of -- would you say there's been any delta change plus or minus in your capacity utilization at your quarry plans, your hot mix, anything on the material side? Or is the utilization about the same?

Well, the utilization is almost identical, actually if you go back and look at our production on asphalt and aggregates and our overall volume, which you saw in the press release last night, it's almost identical from 2010 to 2011, which is substantially less than obviously our capacity. So utilization is about even from 2010 to 2011. And I constantly am hoping for the fact that, that will increase as we see the markets comeback. Because we have a lot of expansion opportunity in our Materials business.

Our next questioner in queue is Morris Ajzenman with Griffin Securities.

Question looking at next few quarters versus last year. Gross margins clearly were under pressure in the first couple of quarters last year for the reasons we all know about, with some of the Large Projects now having -- revenue recognition and the weather remain favorable, can you give us any sort of help on where you see margins moving to on a year-over-year basis over the next few quarters? Just some sort of thought and guidance on that discussion.

Morris, I think that's probably a little premature to discuss any kind of guidance for 2012. I would suggest to you that we typically provide guidance during the first quarter call and certainly we want to make sure we're comfortable even if we give guidance at the first quarter call. So I would just probably opt right now to suggest to you that we'll probably wait another quarter before we get any kind of guidance margins or revenues.

All right. But then I guess the takeaway is clearly from the discussions that you're much more optimistic than you were last year at this time, albeit looking to grow the business and I guess there's some comfort then that the profitability of the businesses bode better than last year in a broad statement. Is that at least a fair sort of a review?

I think maybe a fair statement would be, we're excited about the backlog we have. I think it's very good backlog, but I would not put a discussion into play probably relative to last year's numbers or anything, but I do think the backlog in the position we're in today is very good, Morris.

Our next questioner in queue is Craig Barney with M.D. Sass.

Another question on margins. Strong margin performance across the board, can you quantify how much the large construction projects that hit their profitability threshold helped in Q4? And maybe when you look into 2012 how that might trend?

Morris (sic) [Craig], I think that -- just looking at the year, last year when we entered this year we had about $150 million of Large Project revenue that didn't have any profit on it. This year, it's slightly under $50 million, so just to give you something to look at from a relative perspective.

Yes. We had a couple of jobs that hit in the fourth quarter. Our large job in Houston and the large job we have up in Bellevue Washington, both hit profit recognition in the fourth quarter. And that certainly -- but it was planned and expected and people knew about it. But I think, again, as Laurel said, we probably have less of those projects that will meet the 25% threshold in '12 on our books right now than we had in '11.

Okay, that makes sense. So then, is it possible to talk about the sustainability of the margins and more specifically the large Construction segment?

Yes, I think that we've constantly said over the last 3 or 4 years that we expect to be in the mid-teens on average and we will have -- the road will be bumpy, there will be years where it will be above the mid-teens and there will be years when we're below the mid-teens. We were in the mid-teens section this year. I think that's where that market is and that's where that market deserves to be. So I would suggest that -- we're going to continue with that projection going forward.

It's over the life of the projects, Craig, not necessarily in a fiscal year where we see those mid-teens.

Yes. It could be up or down in any given year, but over the life of our projects, remember that the way the projects work sometimes you'll have an abundance of 25% threshold jobs, other times you build a bunch of workload you never reach the threshold. And so really it's all a timing issue. So really we've always asked our stakeholders to really look at the Large Project business over the long-term and not a quarter-to-quarter or year-to-year issue.

Presenters at this time, I'm not showing no additional questioners on the phone line queue, I'd like to turn the program back over to Mr. Roberts for any closing remarks.

All right. Well, thank you, very much. And thank you for all the questions. And we'd like to once again thank all of our employees for their tireless effort this past year and their remarkable commitment to Granite. And for our investors, we thank you for your continued interest in Granite and if you have any additional questions please do not hesitate to get in touch with all of us. And have a nice day, everyone.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may disconnect at this time.