Granite Construction Incorporated (GVA) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Granite Construction Incorporated First Quarter 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the call over to your host for today, Ms. Jacque Fourchy, Vice President of Investor Relations. Ma'am, you may begin.

Good morning, and thank you for joining us today. I'm here with our President and CEO, Jim Roberts; and our Senior Vice President and CFO, Laurel Krzeminski. I would also like to introduce the newest member of our Investor Relations team, Ron Botoff [ph]. Ron will be dedicated to IR and will take over many of the day to day IR responsibilities, including getting to know many of you. I'm sure you'll find Ron to be a great addition to our team, and hope you all get to meet him soon. 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'll turn the call over to Jim. Jim?

Thank you, Jacque, and good morning, everyone. During today's call, I will provide an update on the integration of our Kenny acquisition, an overview of our markets, and I will review some of our current Large Projects and Large Project opportunities. Laurel will then take you through our first quarter numbers, as well as our guidance. First, I'm pleased to report the integration of Kenny is going very well. Kenny has proven to be a great fit for us and demonstrates the commitment to our strategic plan to grow our company. Our expanded capabilities and geographic reach has been well received by both project owners and joint venture partners. As a team, we are successfully working together to expand our collective presence in the power delivery, water, and water infrastructure and tunneling markets, all of which have very attractive short and long-term fundamentals. Our teams are pursuing numerous projects in 2013 that leverage the combined capabilities of the company. I am very pleased to see that these new synergies already are creating opportunities, as we have submitted several bids with new customers. I look forward to updating you on our integration progress and benefits as we continue to open doors with new owners, new partners and expanded markets. We are pleased to enter 2013 with a solid backlog of Large Project work that will provide long-term earnings potential for our business. Notably though, Granite's short-term results and outlook have been impacted negatively by the competitive environment in certain markets related to our Construction and Construction Materials businesses, particularly in California. As our Construction season moves into full swing, our teams are bidding a high volume of work for various public and private customers. We are encouraged that certain parts of the country are experiencing an increase in private sector work…

Thank you, Jim, and good morning, everyone. Revenues in the first quarter were $379 million compared with $310 million in the first quarter of 2012. Net loss per diluted share was $0.57 in the first quarter compared with the prior year's net loss of $0.31. Gross profit margin for the quarter was 8%, in line with last year. Total contract backlog at the end of the first quarter was $2.4 billion compared with $2.1 billion last year. We booked our $733 million portion of the Tappan Zee Bridge project in the first quarter. In addition, we anticipate booking our approximately $300 million share of the IH-35E project in Texas later this month. Looking at the segment detail. Construction segment revenues were $177 million compared with $118 million last year. The increase is primarily associated with Kenny, which contributed $53 million in the quarter. Gross margins were in line with last year at 7.5%. Impacting the first quarter 2013 gross profit is approximately $2 million of amortization of Kenny acquired backlog. Large Project Construction revenues were $172 million compared with $164 million last year. Kenny contributed $10 million to Large Project revenues. Recall that Large Project revenues can vary widely quarter-to-quarter depending on the stage of project progression and the timing of profit recognition. In the first quarter of 2013, gross margins were 13.2% compared with 13.6% a year ago. We did not have any new Large Projects reached the profit recognition threshold this quarter. Revenues for the Construction Materials segment increased 15% to $30 million. The gross loss on Materials sales was $6 million, similar to last year, which is not unusual for the first quarter. Selling, general and administrative expenses totaled $58 million compared with $45 million a year ago. The increase breaks down as follows: more than half…

Thank you, Laurel. Before I turn it over to Q&A, I want to reiterate that while we are facing some short-term challenges, we are very excited about the positive direction of our business. What I want to leave you with is this: First, we expect to grow the top line of our business by at least double digits in 2013. We continue to implement our strategic long-term plan and are very happy with our continued progress. We have a solid Large Project portfolio and significant opportunities to grow this part of our business. We have tremendous opportunities to grow the Kenny business mainly in power, underground and tunnel markets. And we have confidence that the combination of a recovery in the private Construction market and our targeted actions will help drive significant long-term operational and financial performance in our vertically-integrated business. The fundamentals of our business remain extremely solid and our future is very bright. With that, we will open it up for your questions.

[Operator Instructions] Our first question comes from the line of Jack Kasprzak of BB&T Capital Markets. John F. Kasprzak - BB&T Capital Markets, Research Division: Jim, on the Construction side, the comments on the competitive environment have been consistent for the last few quarters. But your backlog there is up 19% year-over-year, based on your margin guidance, it would imply that pricing, certainly not getting worse, stable, if any -- at worst, it's stable. And so do you see with the growth there, a path where we're finally going to soak up some of the capacity and finally get to a point in the next few quarters where you can start to push price a bit?

Jack, I'll tell you, I would certainly hope so. And I think, you're right, relative to the backlog is solid in Construction. Pricing is probably static with previous quarters. But what really drives pricing in the Construction business is looking out ahead and seeing what else is out there. And we are seeing a private sector, and I'm going to suggest again, very similar to what I said last quarter, towards the end of the year, I'm hoping that, that will help drive some pricing changes. And because we are seeing some permits, we are seeing some action on the private sector, and as that happens, it will maneuver some of those public competitors back over to the private sector side, and hopefully, begin to drive prices a little higher in the Construction segment, and obviously, the gross margins as well. So I think your analysis is correct. As I said previously, Jack, it's kind of about the timing of this. I have mentioned previously, I think it's going to hit positively towards the end of 2013, and obviously, we'll continue to update you as we get the feel of what's really going on in all the markets overall, but that's still kind of where we see it, Jack. John F. Kasprzak - BB&T Capital Markets, Research Division: Okay, that's fair. Second question on SG&A and Laurel gave us some good detail there. And as far as what happened in the quarter, when you look at your guidance, and if I just spread it even there with the final 3 quarters of the year, it implies a little bit of a reduction in terms of SG&A dollars perhaps by quarter versus what you reported in the first quarter. Is that a -- is this a situation where the run rate into next year could be a little lower? I realized we just started this year but just thinking ahead without putting some numbers on it, in a situation where maybe the run rate could be lower next year versus this year due to these one-time items?

Yes. So we expect for this year, the run rate to be about equal to last year, maybe a little bit less. We do have some one-time costs associated with the Kenny integration, as you know, that might go over a 2-year period, but we're looking at whether we can accelerate any of those into this year. Sometimes, we have higher costs in the first quarter depending on how -- where we utilize all of the people due to the seasonality of our business. So yes, like I said, the total year, we expect it to be in the range of about what it was last year as a percentage of revenue. Obviously, it will go in absolute dollars because of Kenny.

Yes. Actually, I think that the one thing to look at in the guidance, Jack, would be a little of guidance of $210 million to $220 million on the SG&A. It's really the numbers to think about relative to the run rate for SG&A. The first quarter is typically almost always higher than any other quarter. So I would focus more on the guidance than on the first quarter.

Our next question comes from the line of John Rogers of Davidson. John B. Rogers - D.A. Davidson & Co., Research Division: A couple of things. First of all, in terms of Kenny, is it still assumed to be essentially breakeven for Granite this year?

The answer would be yes. And it's very early. They have a lot of the term work just like the -- a lot of the Granite business, so we'll update you on that as the year progresses but I would not change our original statement of breakeven for 2013, John. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. And then, Jim, in terms of the guidance, especially for the Large Project work with margins what they are, and I realized it looks like there's a lot of work that's going to hit the 25% threshold in 2014, what portion of your revenue that you're expecting this year is breakeven? Or sorry, where the profits are deferred for now?

Boy, I'm looking at Laurel. I don't know if we have that calculated off the top of our head, John, we can certainly get that for you. As to all the projects we're going to be building, I'm assuming what you're suggesting is how many projects anticipated revenue we're probably going to have in 2013 that will not meet recognition, that will be a 0 margin. Is that the answer, is that the question you're answering, John, or you're asking, John?

Our next question comes from the line of Jerry Revich of Goldman Sachs.

Jim, can you just say more about the competitive bid environment on projects today? I know you're optimistic about improving bid environment towards the latter half of the year, can you just give us an update on how that environment stands today on projects that you're bidding? And maybe you can answer that by giving us a sense for how your anticipated gross margins on projects that you're bidding today compared to projects that are in backlog directionally.

Well, Jerry, I think that our market is kind of static. And I say that because if you look at our guidance for Construction margin, it's up a little bit from last year. We had some lost jobs last year that brought it down a point or 2. We anticipate those lost jobs not occurring this year. We're doing a very nice job building our work so far this year in 2013. So the market's probably the same. I think what we're doing in our guidance is building the work at a little higher quality level. And I say that there is a lot of activity in the $75 million in under work, which is our Construction work, very active right now. We are getting our share of the work right now but with similar margins to what we have been getting over the last 12 months. My hope and what I mentioned in my discussions earlier was that as we see this private sector begin to kick in and there is light at the end of the tunnel, there are permits being pulled, that towards the end of the year, we have more opportunity to increase the margin on that work.

That's perfect. And Jim, in terms of just overall activity levels at this point, obviously, first quarter had very tough weather comps really across the country. I'm wondering if activity has picked up in April, particularly for nonresidential Construction.

Well, it always does for us. Yes. I would pretty much put it into a maybe a little different format. We really do a lot of things in the first quarter in our Construction business and our Materials business to get prepared for the year. And I don't like to use weather, because in the West, I think we actually had a reasonable weather on the smaller -- in areas where we have our smaller work. But we do a lot of preparation. So yes, April is when we really begin to build our work and start really into the materials sales program, it's April and May, in most of our markets, specifically the markets in the northern half of the country. Does that answer your question, Jerry?

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

First question, we've heard about pockets of the U.S. where there is skilled labor shortages, specifically, with all the bridge work going on in the New York area, with the Tappan Zee and Goethals and the Bayonne, do you expect any kind of strain on specialized labor?

Not at this time, Nick. I think the overall infrastructure volume is down in the country, and I don't see labor being an issue today. I think it was an issue maybe 4 or 5 years ago, when we were really in the height of the buildout but not today.

Okay, that's fair. And then switching gears to the Construction Materials side of the business. Are you starting to see any better pricing kind of consistent with the comments out of some of those large public aggregate companies that have recently reported?

Yes. On the aggregate side, actually, we did have a slight increase in the first quarter, I think somewhere between 3% and 5% across-the-board in our pricing, our average pricing, so that is a good sign, Nick, so the answer to that is yes. I think the real issue is, that you'll really be able to tell about pricing and volumes when the seasons really take off in the West, which really begins in about, like I said, mid-April, and we'll be able to get a better feel for it during the second quarter call.

Okay, that's helpful. And then my last question is going to be on SG&A. And how much of the increase that's implied by guidance is from just additional bidding, right? Because this is certainly an unusual year in terms of the amount that you're bidding, so how do we think about that relative to Kenny, relative to the core business?

It's a few million dollars higher. It's not as compared [ph] with the pre-bid costs, it's not significantly higher year-over-year.

I mean, we've been bidding a very high volume of Large Projects the last -- in 2012 as well. This is probably the second year of us moving into that higher level of volume in Large Projects. There is more and there certainly is a more SG&A with the addition of Kenny, which Laurel commented on during her comments to begin with. But we're geared up now to do a lot of that Large Project volume bidding.

Our next question is a follow-up from Mr. Rogers at Davidson. John B. Rogers - D.A. Davidson & Co., Research Division: That is the question I was asking earlier. But the follow-up question I have was, in terms of the state budgets, especially in the West, Jim, what are you seeing there? And do you have a rough breakdown now of what your mix is between private, public work? And what you're kind of expecting this year especially...

Well, let me talk about the state budgets to begin with. So a lot of the state budgets are a derivative of the Federal Highway Bill. And I was just reading some information on California, for example, it's pretty static from the federal side, but it has been reduced because they had some California propositions that are coming to a close, whereas, other states have been able to add back in some sales tax overrides, as well. So every state is a little bit different. The federal portion of all of these states is pretty static and has been the same for the last 3 years. So what I see is kind of a transition going on in a lot of these states. There's a transition to more county, city, regional transportation authorities, metropolitan transportation authorities are picking up a higher percentage of the overall bidding volume that we work on and the Transportation DOTs are kind of static. So I mean, we have a rundown of every single state, as to what their budgets are, which we can certainly talk offline about. But I think the key ingredient, John, is what all the other agencies are doing in addition to the DOTs. John B. Rogers - D.A. Davidson & Co., Research Division: Okay. So if you were to lump that together, so to speak, the state and local, is the total, is that spending going up significantly or?

Well, then I would say that we're seeing a lot of this TIFIA money that's rolling into. But these Metropolitan Transit Authorities is escalating the overall value of the work. I don't know if I have the answer for you state by state, if that's offsetting the downside of the DOT, but certainly, a reasonable question that the answer can be calculated. John B. Rogers - D.A. Davidson & Co., Research Division: And private versus public?

We're starting to see private pick up. We -- and I don't have the numbers right in front of me. Laurel might have a better understanding of the percentages than I do. But typically, we've been in the last couple of years a 95% public, 5% private. Certainly, with the addition of Kenny, which had actually a large portion of their work in the private side. I think we've gone closer to the 90-10 range. And I think you're going to see us probably migrate more into the 85-15, 80-20 range this year. As we see the mining work pick up, which we have some mining work that's going well. The power delivery work is mostly done with private entity or private entities. We are seeing a pickup in the development work which is a positive environment. And then the other area, private sector that we've increased our play on, is in the oil and gas sector. And dealing with some of the large refining companies as well. So I think you'll continue to see us slowly through the end of year, maybe get to the 85-15, maybe even 80-20, depending on what our hit ratio is.

Our next question comes from the line of Michael Dudas of Sterne Agee. Michael S. Dudas - Sterne Agee & Leach Inc., Research Division: Jim, 2 questions. First, maybe elaborate a little bit more on your prepared remarks on what you're doing at the Construction business, in optimization, staffing, capital. Is there a level of business run rate that you're anticipating or targeting in the next 3 to 5-year cycle that you're almost to the point where you're at from a staffing or asset basis or is there a bit more to go?

Okay. So first of all, we operate in a whole host of different markets. So every market is substantially different. And when if I want to lump the whole thing, and it's kind of a little early in 2013 to get too much information on 2013, but in general, Mike, we are actually looking at some really nice opportunities in optimizing our assets. Number one, we have continued to divest of underperforming assets in a very detailed program, and that is working, a little slower than anticipated, but we are divesting of assets that are not producing at what be considered to be a reasonable rate of return. We have consolidated and moved some offices together over the last couple of years. We'll continue to look at that. And I think we're going to get -- tend to have a little bit of a -- in some of our markets that are yet to be determined if the private sector is going to come back strong or not, we'll probably have another several months before we determine to make any significant changes in those individual offices. So I would suggest to you, by the end of the second quarter, we'll probably have a pretty definitive program set for 2013. But we are constantly trying to analyze the size of the asset base with the market going forward. And that's the number one thing we've been working on. Michael S. Dudas - Sterne Agee & Leach Inc., Research Division: Right, I appreciate those thoughts. My second question is, can you remind us what will dictate going forward, share repurchase opportunities from your level given what you did in the first quarter, and how the year is shaping up?

Well, we always look at share repurchase, and we actually have a position in place today and some size left in that additional or original request. We look at it -- as a board, we look at it continually. And utilizing our cash for the best short and long-term needs of the company. Today, we'll look at it for the year, and we'll analyze it at the next board meeting and the following board meeting. Today, right now, we believe the best use of our cash is to invest back into the business through CapEx and acquisitions. But I -- what we always look at it with the board to determine if the buyback is within the best interest of the company. Michael S. Dudas - Sterne Agee & Leach Inc., Research Division: And the range on capital that you gave for it this year, is that dependent on win bidding success or just timing?

On cash flow? Michael S. Dudas - Sterne Agee & Leach Inc., Research Division: No, just capital expenditures like what you're -- expenditures.

Capital expenditures.

Yes, it's pretty typical for our business from the turn standpoint.

Yes. What we do, Mike, is we actually do a detailed capital expenditure program. Towards the end of the previous year, we go through a process and agree, at that point in time, to buy mostly, and I'm going to say, rolling stock and plant equipment, that is for the long-term needs of the company, not just the short-term needs. If we have more success on the bidding side, and mostly Large Projects, we tend to finance some of that inside the projects alone. But the CapEx really is for longer term needs of the company, not just the fluctuation and short-term results.

Yes. I think it's important to point out on that, that if we don't consolidate a joint venture, then it's not going to show up in our capital expenditures. As Jim said, it's going to be funded through the project. And that's the direction we've been taking for the majority of the joint ventures most recently.

Yes.

Our next question comes from the line of Sameer Rathod from Macquarie.

Just 2 quick questions. How should we think about the revenue ramp in some of these Large Projects throughout this year or the next couple of years given the longer duration?

Well, I think this year, we've given guidance on the revenue for the year, which is similar numbers to what we saw last year. And I think over time, you're going to see it methodically ramp up, Sameer, that's the intent. We had a pretty good ramp up the last couple of years, but we think we can maintain that or increase that methodically going forward. So again, there is a little bit of a timing issue there, but our intentions are to consistently grow the Large Projects part of our business over time.

Okay. Okay, that's helpful. I know it's a little early to talk about 2014 but given that some of these projects don't hit profitability until then, is it fair to say 2014 should be more profitable in Large Construction compared to 2013?

Well, let me put it this way. We have some very Large Projects that we anticipate meeting the threshold for recognition in 2014, which should equate to higher margins in 2014 than 2013. Yet to be determined on what additional work we get to support it, yet to be determined on the quality of the finished product for this year, but we're situated very well for 2014 with Large Projects right now.

Our next question is a follow-up from the line of Jack Kasprzak of BB&T Capital Markets. John F. Kasprzak - BB&T Capital Markets, Research Division: I don't think you gave in the quarter, in Q1 revenue less than 25% complete this year versus last year if you have that.

Yes, it's about half of what it was last year at this time. I think we were around 20 last year and we're around 10 this year. John F. Kasprzak - BB&T Capital Markets, Research Division: And I just wanted to -- did you guys say that Kenny was -- I think you said it met your expectations. Was it breakeven in the quarter? I know you expect it to be breakeven for the year, probably breakeven in...

It was a slight loss in the quarter. John F. Kasprzak - BB&T Capital Markets, Research Division: Yes. Because it's seasonally slower periods, so you have the full SG&A low but not as much revenue so that's probably straightforward, right?

Well, there's other things associated with that as well, Jack. Certainly, we have some of the amortization of the acquired backlog, that is in there as well, we have some integration expenditures in there as well. So but yes, a slight loss in the quarter would be the way to look at it.

Your next question is a follow-up from the line of Jerry Revich of Goldman Sachs.

Just a follow-up on your prior point on capital allocation, can you just characterize for us, how you see the M&A pipeline and environment at this point? And to the extent that you're comfortable commenting what type of businesses would make sense as bolt-ons to your portfolio at this point?

You bet, Jerry. We're continuing to actively pursue the M&A side of our business. It's a very substantial portion of our strategic plan. We are continuing to look into the diversification of our core businesses, which would be into the oil and gas, water, water infrastructure areas of the business. And we are also looking at geographic expansion of the vertically integrated business, which is, in a line of what we have mentioned as our strategic plan. And I think it's important to note that we're very comfortable with where we are with Kenny, and we are actively pursuing our strategic plan to continue to grow the company right now. John F. Kasprzak - BB&T Capital Markets, Research Division: And how would you characterize the pipeline, where you do due diligence?

Lots of opportunities, Jerry. We continue to analyze a lot -- there are very few that make it through our filtering process, but we continued to have several that make it through the first phase and second phase. Again, as you can anticipate, we're very, very choosy as to which ones we spend diligence efforts on. And we're not at that stage today but we do have several in the pipeline that are of strong interest.

Our next question is from the line of Brian Rafn of Morgan Dempsey.

Can you talk a little bit about, historically, you guys over the years, the turn business has been 60%, 65% of the business, California is still kind of tough, are you seeing any better reflation in the local turn business in other areas outside of the West that you guys can take advantage of?

Okay. So I want to, maybe, make sure I approach that properly, Brian. Are you talking about the Construction, the vertically integrated business work outside of California? Are we seeing it come back faster? Can you really restate the question?

Yes, yes. I'm just getting a sense -- and I guess maybe it's a broader issue, and maybe I should restate. If we were running some housing markets, the 2.2 million units, we got down to 315,000 in the January, February of 2009, we're back to 880, 900 something, if that business doesn't come back on the residential side, and so you know local issues, dampened economy, weak local tax structure flows, I'm just trying to think, maybe a better way of asking the question is, how will Granite change if structurally going forward, the heavy civil business is much more prominent today and continues to be that? And I'm going back to kind of your Analyst Day back in Utah a couple of years ago when you did that kind of flip, how would that change granite going forward? Maybe civil is going to be the largest and it's here to stay or even a larger part of the mix. I'm just -- if we don't see the resurrection of the branch business back to its old historical levels, how does that change kind of your operating plan going forward?

Well, let me just talk strategically what I think is the right direction for the company. And really, Brian, it's focused on a risk portfolio. As we look at or as I look at our business model going forward, I think that the overall risk management is just as important as the size of the business. So as we have grown the Large Projects business over the last couple of years and have not grown equally the vertically integrated side, it changes the risk complexities of the company. What we were able to do very positively with the Kenny acquisition is to raise the -- really the Construction segment. The majority of the Kenny work is in the $75 million and under range, the lower risk portfolio type work which raises that portion of the business. So I want to keep the mix in alignment so we don't have a riskier overall portfolio. I also see, if indeed, we don't see private sector resurrection as you put it, that there are other vertically-integrated markets that will grow without just the private sector resurrection. I think California does need that, in order to get that business back on track. But when we targeted our vertically-integrated geographic expansion, we targeted several states that we saw had substantial DOT programs over the next 5 to 10 years. Those could grow with a lower risk portfolio without necessarily having the private sector come back. So we'll look at Kenny-type work, water. We will look at oil and gas. We will continue to look at the geographic expansion of the vertically-integrated business. All of those will be more in the Construction segment than Large Projects. Now with that said, we do think the Large Project business is sizable. We think we have a very good opportunity to continue to grow that. And therefore, part of our goal and our strategy is to grow the Construction segment simultaneously.

Yes. Okay, okay. Jim, the Kenny acquisition, is there a way for you guys, one, leveraging that and driving it out geographically, expanding and/or, are there kind of cross-selling abilities with meeting new customers, new clients, new entities that you can then bring through those relationships some of your legacy Highway transit business construction?

Brian, that is our plan. You just absolutely reiterated our plan. So both -- if you look at the Kenny business and you look at all parts of it, the private -- the power delivery business, the underground business, which a big portion in their business is in-liner business which is a very high quality business, and the tunnel business, our strategic plan is to integrate those and cross-reference in a matrix organization with the Granite geography to move the power tunnel and underground into our local geographic markets, of which we have a very, very strong relationships with all of the owners. We are already seeing that. We've actually worked our power -- the power group from Kenny has actually brought on some Granite employees onto their team, and they are working all the Granite regions to expand power in those regions. We've actually had a couple of very already wins in the underground part in our Utah business, the underground division of Kenny, bid work with the Utah business. So what you're suggesting is exactly what we are doing with the Kenny business.

And I'm showing no additional questions in queue, I'd like to turn the conference back over to Mr. Rogers for any closing remarks.

Okay. Well, thank you everybody for your questions. We're certainly going to be around later today if you would like to ask myself or Laurel or Jacque, any other questions. But I want to close by thanking our employees across the country. They are the primary reason we have been successful in the past and they are absolutely the key to our future. So again, all of us will be available for the rest of the day to answer questions. So thank you, everybody.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect, have a great rest of the day.