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Granite Construction, Inc. (NYSE:GVA)

Q1 2009 Earnings Call

May 05, 2009 11:00 AM ET

Executives

Jacque Fourchy - Investor Relations

William G. Dorey - President and Chief Executive Officer

LeAnne M. Stewart - Senior Vice President and Chief Financial Officer

James H. Roberts - Senior Vice President and Granite West Manager

Michael F. Donnino - Senior Vice President and Granite East Manager

Analysts

Richard Paget - Morgan Joseph & Co Inc.

Vance Edelson - Morgan Stanely

Todd Vencil - Davenport & Company LLC

John Rogers - D. A. Davidson & Co.

Avram Fisher - BMO Capital Markets

Operator

Good morning. My name is Marley and I will be conference operator today. At this time I would like to welcome everyone to the First Quarter 2009 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

Ms. Fourchy, you may begin your conference.

Jacque Fourchy

Good morning and thank you for joining our first quarter earnings conference call. I'm here today with Bill Dorey, President and Chief Executive Officer; LeAnne Stewart, Senior Vice President and Chief Financial Officer; Mark Boitano, Executive Vice President and Chief Operating Officer; Jim Roberts, Senior Vice President and Granite West Manager; Mike Donnino, Senior Vice President and Granite East Manager; and David Watts our Chairman.

Today's call is being webcast live and recorded. The replay will be available on the Granite Investor Relations website, immediately following the call, and will posted until the close of business on May 5, 2010.

Following our prepared remarks this morning, we will as usual start the Q&A session. Please be aware that your questions along with your answers will be included into our live transmission and any future use of the recording.

Before we get started, I would like to remind you that this conference call may contain forward-looking statements. They should be considered in conjunction with cautionary statements in our earnings release and in the company's most recently filed SEC reports. We do not intend to update any forward-looking statements made during this conference call.

With that, I will turn the call over to Bill Dorey. Bill?

William G. Dorey

Thank you, Jacque and good morning, everyone. On today's call I will discuss our operating results for the first quarter of 2009, and provide some perspective on our markets and the outlook for our business I'll then turn the call over to LeAnne to review our segment results.

Overall, I'm extremely pleased with our first quarter performance. Excellent execution on our diverse project portfolio drove solid performance despite today's economic challenges.

First quarter net income per diluted share was $0.23 compared with the prior year's $0.34 per share, revenue was $347 million compared with $455 million in the first quarter of 2008. Gross profit as a percentage of revenue for the quarter was 20% compared with 22% in 2008 and operating income was $17 million compared with $38 million last year.

In the West public works bidding environment is becoming very active compared with what we were experiencing just a few months ago, bidding activity is ramping up. While this is typical for the start of the construction season, we are also beginning to experience the effects of the stimulus money.

Projects that did not have funding or they had only partial funding are now moving forward. This is very encouraging particularly in the state of Utah, where the state's infrastructure program had been put on hold pending resolution of the stimulus bill and in California, which had dramatically slowed it's bidding activity prior to a resolution of its budget and the subsequent bond sales.

While there is work to bid across our system in the West, a great deal of unused capacity remains in the marketplace and the competitive -- continues to affect our hit ratio and margin expectations. This is particularly true in the traditional smaller branch projects and in our construction materials business.

We believe that larger projects present the most encouraging opportunities for revenue and margin growth in the West. As a product of our realignment in 2007, we have built a very strong large project group in the West that is now integrated into our existing branch network.

We are pursuing a steady list of large project opportunities that require significant operational horsepower and financial muscle. I am very optimistic that this segment of our business will be an important bridge to carry us to the point at which the general economy that supports our traditional business in the West recovers.

Over the longer term I believe these larger projects will be additive to our traditional branch business.

Turning to Granite East, I am delighted to announce that we have executed a contract with the Houston Metro to lead a construction team on the expansion of the city's light rail system. This is a significant project for the city of Houston and a very important one for Granite. It is valued at $1.3 billion, of which our portion is 34%. Mike Donnino and his Granite East team have worked diligently to bring this complex procurement process to a win-win conclusion and we are very pleased to add this project to our portfolio.

I would also like to address the recent announcement we made regarding the World Trade Center project. Last month, we along with our joint venture partners, mutually agreed with the Port Authority to modify our existing contract with the work on the transportation hub. This change will have little or no impact on our current backlog.

Going forward, instead of negotiating for the work with one team, under the terms of the existing contract, the Port Authority will put work packages out for a public bid. We're honored to be part of this project and we look forward to bidding on future work.

Looking ahead, our bidding pipeline in the East remains full, we're tracking more than $4 billion worth of projects that are expected to bid between now and the end of 2009. This list includes a mix of highway, rail, airport, bridge, and tunnel projects throughout our home markets in the East. We're excited about the opportunities to profitably grow this business by being highly selective regarding the work we bid, diligent in the way we evaluate risk and efficient in executing on our projects.

Let's now talk briefly about federal transportation funding. As I mentioned we're starting to see stimulus work coming out to bid between now and the end of the year we'll bid on many projects across the country which will be either fully or partially funded by the American Recovery and Reinvestment Act.

In California, the state's treasure has sold approximately $13 billion in general obligation bonds over the past two months in two offerings. Both sales exceeded the state's expectations and were positive advance for California and for our industry. The proceeds from these sales along with the stimulus funds should provide the necessary funding to restart the proposition 1B program, and continue funding other public works projects throughout the stay.

Now, I will turn the call over to LeAnne to provide more details regarding our first quarter.

LeAnne M. Stewart

Thank you Bill and good morning, everyone. As I'm certain you know that our financial statements looked a bit different this quarter. This was the result of adopting a new accounting standard that changes how minority interest is represented in the financial statement. The adoption of this standard result in no change to operating results.

But rather might apply to the presentation, of minority interest which is now referred to as non-controlling interest. If you'd like further information on this change don't hesitate to contact me after the call.

Looking at the first quarter in Granite West revenue for the division, was 197 million compared with 240 million a year ago. Gross profit as a percentage of revenue was unchanged at 17%. Operating income increased 2 million to 7 million driven by a reduction in general and administrative expenses.

Contract backlog in Granite West at the end of the first quarter was 743 million, compared with 869 million last year, due primarily to a reduction, in private sector work and a competitive public works environment.

Our material business continues to fell the impact of a decrease in demand particularly from third party customer.

In the first quarter, material sales decreased to 30 million compared with 52 million in the first quarter of last year. Gross loss on material sales was 2 million in the first quarter of 2009 compared to a gross profit of 3 million in the first quarter of 2008.

Turning to Granite East, revenue for the division was 150 million compared with 214 million in 2008. Gross profit was 23% compared with 27% a year ago. Operating income of 28 million compared with 52 million last year.

Granite East results in both the first quarter of 2008 and the first quarter of 2009 were positively affected by the recognition of settlements related to outstanding issues on two separate projects. As you know these settlements can add variability to our performance, but there are normal part of our large project business.

Total contract backlog in Granite East at the end of the first quarter was 827 million compared with 1.1 billion at the end of the first quarter last year.

Not included in first quarter backlog is our approximately $430 million share of the $1.3 billion Houston Metro light rail contract. We'll book this award in the backlog as we receive notices to proceed, we expect to receive the first notice in the second quarter.

Turning to the balance sheet, our financial condition remains very strong. Cash and short-term marketable securities totaled 413 million at the end of the first quarter compared to 346 million at March 31, 2008.

We're intentionally being more conservative with our cash as a result of the current environment and we anticipate continuing with this strategy until the volatility in today's capital markets subsides.

We continue to focus on reducing expenses and improving operational efficiency throughout the company. General and administrative expenses during the first quarter were 54 million compared with 61 million a year ago.

Lastly turning to guidance, we currently expect Granite West 2009 revenue to be in the range of 1.6 to 1.9 billion with a corresponding gross profit percent in the range of 14 to 17%.

In Granite East, we expect revenues in the range of 675 to 775 million with a corresponding gross profit margin percentage in the range of 13 to 15% in 2009. We expect non-controlling interest for the total company to be in the range of 25 to 35 million for the year.

I'll now turn the call back to Bill.

William G. Dorey

Thank you, LeAnne. Before I turn the call over to our moderator for questions, I would like to talk a little more about our guidance for 2009 and more importantly, our outlook for 2010.

In terms of our guidance, it is essential to understand that it is still very early in our construction season, particularly in the West, the portion of our Granite West, afford the Granite West to fill this year is just now coming out to bid, which is later in the year than normal.

Additionally, we are optimistic that we will book several large projects in the West. They will not contribute to profitability this year. The bottom-line is that we -- that although we anticipate 2009 to be a challenging year for both our construction and construction materials businesses in the West, we are very optimistic about the opportunities we are targeting and the potential that work could have on our 2010 operating results.

I believe it is the larger projects that present the most encouraging opportunities for revenue and margin growth during this business cycle.

Now, I'll turn the call back to our moderator. And we'll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your question comes from the line of Rich Wesolowski (ph).

Unidentified Analyst

Good morning, how is it going?

William Dorey

Hey, Rich.

Unidentified Analyst

One question probably off guard on that, the West construction margin, it appears to me that the quarter resemble thought the 2008, in that you reported a good base of profitability and then on top of that you benefited from reestimations of jobs going better than planned, can you discuss that phenomenon is it just one or two that are helping or is it more widespread and maybe to whatever extent that performance is assumed by the guidance.

James Roberts

Hey Rich, this is Jim. Good morning. The comment about the adjustments in the project in the construction results it's a pretty typical issue for our construction work and you're seeing a table literally in the 10-Q that shows the differential in increasing gross profit. So what you're seeing is pretty what we will considered to be standard adjustments when we've relooked at our forecast, the work that we've built in the first quarter, we're building it better than anticipated and a work that we did at the end of last year we're building better than anticipated. So that's why you're seeing adjustment and you continue to see those adjustment every quarter positive or negative as we continue to built the work. So I would just call it pretty much standard operating changes.

Unidentified Analyst

The margin guidance that you had given for 2009 I assume requires only that you reach your anticipated margin and not the extra that you've been getting recently?

James Roberts

Well, the guidance is a combination of what we anticipate, the backlog we have and with the ongoing work that we call our term business going forward. So it is as anticipated net guidance is in a line with our actual forecast, yes.

Unidentified Analyst

Excellent. Thanks a lot.

Operator

Your next question comes from the line of Katherine Thompson (ph).

Unidentified Analyst

Hi, great, thank you. First question on the World Trade Center project, I know you changed the contract against that, is our understanding that there is certain cost that will run with the pool partners that were included in this project. How do you intend to change your bidding activity or your bid for projects with the World Trade Center and if you could give any more color on the commentary about cost to the run the project specifically that would be very helpful?

Michael Donnino

Hi, Katherine, this is Mike Donnino I'll try to answer your question. The World Trade Center project is essentially a design build project and since we've started the project, the scope of the project has changed quite a bit with respect to the different stake holders on the site.

As well as the overall, we've gone through at least one surge in construction material prices which hasn't since gone backward a little bit. So I can't really comment on the cost overrun because we had been estimating and submitting prices and negotiating work packages as they become design and as we're asked to do so.

In the future I think the Port Authority hopes to benefit from a more competitive market now with much of the commercial work slowing down. And they choose to -- design is the either complete or nearly complete and so they can break that up into what logical packages that they think they can get competitive bids on. We are anxious and looking forward to bidding on that work, and we think we understand the work well, so we are hopeful that we will get a share of that.

Unidentified Analyst

It sounds like that some of the steps the Port Authority is taking advantage of current market condition?

Michael Donnino

That's correct.

Unidentified Analyst

Is the -- the point I want to trigger in terms of aggressive bidding trends which across the U.S. is this accounted for in the value that you provided today?

Michael Donnino

Well, in our Granite East business and I would say in our large project business in general, we don't really look at short-term market trends as far as margins, we try to evaluate each job based on the scope of the work and the risks that are involved. And as you know they can be wide range of risk, from construction risk to contract risk and things like that. So we don't tend to react very much to short-term changes and what we think the margins are on the large project work.

William Dorey

Hey, Katherine, this is Bill Dorey. As I understand your question, you are asking for our guidance, reflected the current market climate, and the answer is yes.

Unidentified Analyst

Okay, yes. And that's just, because I totally understand that I'm not asking let's say the quarter-to-quarter questions, more likely you have an environment that has a longer term impact on a project and that we are doing a more aggressive bidding environment. Also, and this will be my last question and I'll hop back in the queue. Could you also give any additional color about regional trends in bidding activity in another words is California the most aggressive, are you seeing any change in trends out East. Any type of color about bidding trends that you've seen across will also be appreciated? Thank you.

James Roberts

Katherine, this is Jim Roberts. I can help you little bit in the West and one of the things where maybe I can't help you. The trends -- the individual regions are all different and literally inside of a region itself we're approaching business units in the West and from business unit to business unit its vastly different.

So we try to lump it up and give guidance relative to the overall marketplace. And everyone of the individual business unit has different bidding environments and you'd be surprised going down the road three or 400 miles you can have a totally different market. So it would be kind of difficult to find the individual reasons for you.

Yeah, I think if you wanted to just maybe put it bold on the question, prices that have, that are dependent on a lot of real estate development have been affected -- the competitive climate has been affected more there than probably prices where real estate development isn't quite as big out part of the marketplace.

Unidentified Analyst

Okay, great. And that's all and I'll just get back in queue very much.

Operator

Your next question comes from the line of Bob Labick.

Unidentified Analyst

Hi, this Jason Arsoner (ph) calling in for Bob you spoke about the California municipal bonds recently selling has been any other progress in another key states such as North Carolina on bond sales to fund transportation projects?

William Dorey

Mike?

Michael Donnino

Well, as you may recall we were conditionally awarded a project for the North Carolina Toll Road Authority. And they initially had problems with their bond sales. Our recent conversations with them as their -- they believe they worked through those issues and have -- and are working on a plan and are hopeful to make that bond sales in the near future.

And if they do then they will give us a notice to proceed on that project. That is actually for the entire Western Wake project which is more than just our contract and just two major ones and then other one coming.

So I think the answer to your question is that I think the bond market is getting a little bit better and owners are figuring out how to move forward on this to trail.

Unidentified Analyst

Okay. And G&A seemed very low, how should we think about a full year range for total G&A?

William Dorey

I think what we have said is we expect G&A to be lower relative to last year, from an absolute dollar standpoint, and I think we like to leave at that.

Unidentified Analyst

Okay, thanks a lot.

Operator

Your next question comes from the line of Richard Paget.

Richard Paget - Morgan Joseph & Co Inc.

Good morning, everyone.

William Dorey

Good morning.

Michael Donnino

Good morning.

Richard Paget - Morgan Joseph & Co Inc.

You talked about you guys were tracking roughly 4 billion in potential projects could you put that in perspective on how that would compare to maybe six months ago, or a year ago, and what's your confidence in terms of the DOTs being able to process the volumes of work coming through in a timely fashion?

Michael Donnino

Richard, it is Mike Donnino. I believe, what we've been tracking, we have a list of tracking of that is, in excess of $30 billion of projects and over last three to five years we bid on anywhere from three to six billion per year in the Granite East. And so I don't see that changing much this year.

There is several owners that are providing a lot of that work now. The transit agencies are busy trying to bid work as you probably know there's a huge program in New Orleans for flood walls, pumping stations, levies things like that.

In the Northeast, the need for their infrastructure repair and new systems like access and the tunnel project are still there. They still have funding issues. They're trying to work through but those programs are still there and I believe it seems the owners can figure out ways to get their funding in place they'll move forward.

Richard Paget - Morgan Joseph & Co Inc.

So what's the funding it is in place, I mean, do you think that they can pretty quickly release this or is there going to be a little bit of a bottle neck, given what their capacity to get these contracts up?

Michael Donnino

Well, I think on the large jobs they are prepared to move forward in most cases when they get the funding. And maybe Jim could answer on the smaller job particularly in the West, my guess is though that most of these DOTs are ready to go if they get the money.

James Roberts

Yeah, Mike, you're right on Mike. What I see Richard is that, in the West, DOTs have a significant demand up in front of them, they've been waiting for funding. And I think they're already willing and able to move forward just as quickly as the contractors are ahead off to see the processing being an issue at all.

Richard Paget - Morgan Joseph & Co Inc.

Okay. And then real quick, what should we expect on tax rate going forward?

LeAnne Stewart

You can expect this perhaps to be around 28% this year.

Richard Paget - Morgan Joseph & Co Inc.

Okay, thanks. I will get back in queue.

Operator

Your next question comes from the line of Vance Edelson.

Vance Edelson - Morgan Stanely

Thanks a lot. Just in terms of the timeline going forward you are starting to see stimulus work coming to bid and more of a financial impact to 2010, I'm just wondering considering the large project nature of the projects that seemed the most exciting could you walk us through the longer term timeline on these projects that could run for several years therefore adding the growth for years to come and is it possible that we won't even see a majority of the related revenues in 2010?

Michael Donnino

Vance, this is Mike Donnino again. It really depends on the project and they are all a little bit different but in general the large projects, the multi hundred million dollar ones and higher, they tend to be three to five year jobs. They ramp up, it takes generally the second year before we start recognizing profit and loss just due to either the size and/or the design built nature of them.

Once you get into the flow of the revenue usually ramps up and stays pretty, heavy and then tails off at the end, it just depends on the project. The Houston project for example, isn't -- the schedule isn't completely set but its scheduled to be four to five years depending on when notices to proceed come, and the revenue will come out accordingly.

Vance Edelson - Morgan Stanely

Okay, that's helpful. And could you provide a little more detail on the commercial and residential, so I understand -- I didn't hear too much on that is that business still slumping or are there any signs of stabilization, what are you seeing on the margin right now, in terms of activity?

James Roberts

Vance, this is Jim Roberts. Let me if I could just a second back up and talk about those large projects just as Mike did for the East a very similar environment is happening in the West. We've built up a large projects to groups due to our realignment in 2007, and we are bidding quite a few large projects in the West as well.

And Mike is absolutely right that really what you see is the first year is a really good organized year and the second and third years are typically ramp up years. We have bidding a lot work this year and we think will create value for Granite West in 2010 and 2011 and then having that move forward from that point on.

So we're pretty excited about large project business in the West as well. Back to the commercial and private it's pretty slow, there is not a lot going on to be very honest we still think that the tight credit markets are having a strong downturn in that market and I think that what you're probably seeing in our press release is that affecting our material business which is really tied to the retail market for commercial and residential work. So we think that will be slow throughout 2009.

Vance Edelson - Morgan Stanely

Okay. And a final follow-up also on that the G&A reductions that you mentioned earlier, the level that you've brought it down to the 43 million a quarter. Are there more cost reductions in the works or should we consider the 43 kind of the bare minimum upon which we might see growth from here can you answer that?

James Roberts

We are continuing to work on process improvement and other strategies. to help us become more efficient and keep that overhead factor as low as possible. I'd be reluctant though to just take our first quarter and multiply that times for. We did have a bad debt recovery in our first quarter that is reflected in our lower overhead range. So the overhead numbers were affected by that bad debt recovery a little bit. But we do intend -- we do expect to be lower for the year than a year ago.

Vance Edelson - Morgan Stanely

Okay, that's great. Thanks a lot.

Operator

Your next question comes from the line of Todd Vencil.

Todd Vencil - Davenport & Company LLC

Thanks guys. Good follow-up on that. How much was that bad debt recovery you guys had backing out of Q&A?

James Roberts

I think it was about $4 million.

Todd Vencil - Davenport & Company LLC

Okay.

James Roberts

Excuse me, $3 million.

Todd Vencil - Davenport & Company LLC

Okay. And on Houston that charges sort of Port Authority (ph) on how this project works I guess. I think you expected the notice to proceed that you think you're going to book in the second quarter to be in and how are those notices to proceed going to kind of face through in terms of size and timing if you have an idea on that?

Michael Donnino

Yeah, Todd, this is Mike Donnino again. While we -- the order hasn't decided yet. We've heard that the initial notice to proceed will be anywhere from maybe a third of it up to possibly half the volume.

It little bit depends on their internal funding and then what they foresee for their total funding of the entire package. And then there is a possibility that there could be -- we think there will be two but there could be more. But I believe once they get started that the subsequent notices to proceed wouldn't necessarily delay the project any but hopefully they will get them in the time we mange so we can, execute it on the original schedule.

Todd Vencil - Davenport & Company LLC

Got it. And just follow-up question just on that $60 million settlement adjustment that you guys had in the quarter you talked about what when into that and I guess I am thinking, I mean, I realize, it's overall sort of better performance but, what kind of impact might sort of lower diesel, that sorts of cost you've had on that, just help me understand, maybe what drove that in additional to you'll really get to have?

Michael Donnino

Well actually I wish I could claim that, credit for that, but that was a -- it was actually a settlement for outstanding issues on a major project and it was just a net result for things that had been written off in previous quarters and years.

Todd Vencil - Davenport & Company LLC

Is it things like changed orders that you finally got that--

Michael Donnino

Yeah, change orders, and changing conditions scheduled things like that.

Todd Vencil - Davenport & Company LLC

Got it. Okay, thanks for that.

Operator

Your next question comes from the line of John Rogers.

John Rogers - D. A. Davidson & Co.

Hi, good morning.

William Dorey

Hi, John.

John Rogers - D. A. Davidson & Co.

Couple of things, Bill, just relative to the comments about the large projects opportunities out there. These projects, are these fully funded at this point or are they dependent on additional bond issues, federal highway program or it is just a matter getting them most jurisdictions to get the packages together--?

William Dorey

I think it's a mix bag, John. I mean, certainly some of the transport has been affected by funding and considerably could be continued to be affected by funding. But, one of the things that I think its so interesting about the business model that Granite has, is that we work for hundreds, hundreds of different agencies across the country from transit authorities to the corp. engineers, the military to the various DOTs and so if a particular agency has a funding issue it really doesn't spread beyond often times doesn't spread beyond that agency and as other groups in federal agencies state and city and county agencies, they don't have funding problems and we have the ability to follow where the money is. And we've said in Granite and you heard Mike talk about in the East where we have $4 billion work that we think we'll bid on this year we expect that -- that is funded and--

Pardon me?

John Rogers - D. A. Davidson & Co.

That a four out of the 30 that you referred in terms tracking?

William Dorey

Right. And in the West we have a similar issue where you literally have more large work that we can prepare proposals for that are funded and ready to role. As we're going to get them off--

John Rogers - D. A. Davidson & Co.

Right.

William Dorey

It's a competitive climate certainly but we are pretty optimistic that with any kind of reasonable hit rate that we will land some of that work.

Michael Donnino

And John let me add one other comment, it's Mike Donnino. Even when some of the agencies have had some funding problems there have been several sates that have developed in their total jurisdiction after sales taxes that then allow those agencies locally to fund projects that might have been in more difficult scenario, than funded by the state jurisdiction.

So even though there has been problems from time to time, with certain agencies it's interesting that it developed a scenarios, that helped them to really get over the problems at a broader level and handle it locally. So it's not always moving sort of constantly moving target in terms of where the money comes from but it seems to get to the goal line so.

John Rogers - D. A. Davidson & Co.

So is this surge or bulge of work that's coming through, is this just a function of the way -- coincidence of schedules the way they've come together, as opposed to stimulus money or--?

James Roberts

Yeah, John, this is Jim Roberts. I think the real key here is that the pent-up demand for infrastructure improvements through the U.S. and what we're seeing is that although there is the bulge we don't see long-term really changing. We think that this just as demand has started to change and people are looking at different ways to fund up the needs that they have in their infrastructure improvements so we think these large projects are actually going to continue on the next several years. So I wouldn't call it a bulge, I would say that it is just kind of a new level of demand in this kind of work.

John Rogers - D. A. Davidson & Co.

But it higher Jim than it has been over the last couple of years, is that fair?

James Roberts

I'm not sure. I'd say that our large project opportunities over the last several years have been pretty robust. What we haven't had is we haven't had the infrastructure in the West to pursue as much work as we currently have. We've had that infrastructure in the East but we've not had in the West and we've that over the last couple of years and I think that's the one of the more exciting elements of our business today to try to figure out how to make that additive to our existing branch wide business we have in the West.

William Dorey

And as I said in our prepared remarks we expect that large project work to asset the bridge to some degree in the West until the general economic climate for the day-to-day starts to improves.

John Rogers - D. A. Davidson & Co.

John, let me just add to that this is Jim again. I think the reason that you haven't heard us chat about it as much as we are now. This is because we are pursuing it as strongly as we are now. And that's what Bill says, we built up this team is now able to pursue it.

So we're more focused on the large project environment than we ever have been. And as you get more focused on, that you see more opportunities and that's what -- today as we a lot of opportunity. It was probably there before but now are ready to grow attack and then do what we can to try to procure the work.

John Rogers - D. A. Davidson & Co.

Okay. Because that I mean I look at it last couple of years especially I can more in the East. I mean your backlogs have declined there but if the markets still the same, you're just saying you're going after it more aggressively now that you've got the operations?

Michael Donnino

Yeah, keep in mind we purposefully slowed operations down in our large projects, while we were kind of regrouping. So where we group now we are ready to role, and as a result we think those opportunities, there are plenty of opportunities out here in front of us.

John Rogers - D. A. Davidson & Co.

Okay, great. Thank you.

Operator

Your next question comes from the line of Avi Fisher.

Avram Fisher - BMO Capital Markets

Hi, good morning, thanks for taking my questions. How much was the border sense work in the quarter?

James Roberts

I don't have that answer in front of me, to be honest with you. We can certainly get back to you at a later time.

Avram Fisher - BMO Capital Markets

Okay, I'll try to follow-up with you after the call. What was -- can you give a little color, on what aggregate mix, volume and pricing was?

James Roberts

Color, the color will be not real bright but I would give you as much color as I can, certainly the volume on the aggregate side, came down quite a bit I think you noticed in our Q.

Avram Fisher - BMO Capital Markets

Haven't seen the Q yet, I don't think it's been published yet.

James Roberts

All right you can check in the press release.

Avram Fisher - BMO Capital Markets

Okay.

James Roberts

The press release showed about 43% reduction in revenue from the same time period in '08. And that is indicative of just lower volumes in general. I just think you know our pricing for the first quarter for material has actually sold did not go down. But I will tell you--

Avram Fisher - BMO Capital Markets

Relatively flat?

James Roberts

Yeah, fairly flat, but I will tell you that, the market price today is really forcing some reduction in pricing.

Avram Fisher - BMO Capital Markets

Yeah.

James Roberts

And so as we go forward, I think we're going to see a slight reduction in pricing although we didn't see it in the first quarter.

Avram Fisher - BMO Capital Markets

Yeah, I was been wondering how long, sort of is there -- continue to show declines in shipments and maintain your price, so when you're saying it's just starting to season pricing--?

James Roberts

We are -- we are bidding going forward. Yes, we still have a quite a bit of backlog materials coming in previously quarter jobs that has higher pricing.

Avram Fisher - BMO Capital Markets

Got you. And with respect to last one, I think one of the first questions was talking about the West margins and the benefit from adjustments and the expectations that it will, the normal ins and outs of benefits, last year I think it had about 64 million or about 16 million per quarter is that normal, is that the normal? I'm trying to just sort of estimate what the normal is going forward, I know when 1Q will be in the Q but what's the normal that we should look for?

James Roberts

Okay, can you restate, I'm not for sure I understand the--?

Avram Fisher - BMO Capital Markets

Sure. In terms of West margins were very strong this quarter. I think earlier in the Q&A you or LeAnne indicated that it was because of some project adjustments either to running projects better than expected. I think the question was sort of to quantify that and the answer was there was a sort of normal, the normal ins and outs, so I'm trying to quantify what normal is?

James Roberts

Okay. So I think that let me answer that relative to the adjustments. So we had some adjustments in the first quarter in the projects at the end of projects and so but I think what I was trying to say Avi is that we will continue to have adjustments in the forecasting up and down in our projects that you're going to expect every quarter. Whether or not we'll beat that magnitude that you saw in Q1 I can answer that because I don't know what's going to happen in the next several quarters, but those adjustments are just standard that you can expect on a quarter-to-quarter basis.

Avram Fisher - BMO Capital Markets

And there I ask what it was if the quarter there was project adjustments closing my eyes and hoping that I'll ask after this?

LeAnne Stewart

It's somewhat to the thing Avi every quarter in both Granite East and in Granite West we reforecast -- we've never reforecast after a month?

Avram Fisher - BMO Capital Markets

Right. And just what will be the net number that will show up in the Q?

LeAnne Stewart

About 50 million.

Avram Fisher - BMO Capital Markets

Okay, I know it's a lot of different things, you've been talking a lot about the large projects going after the larger projects and I am kind of curious what you view as your capacity in East and West for large projects. It looks like your peak backlog was about the 1.8 to 2 billion range. What kind of capacity do you have for those projects?

William Dorey

Mike why don't you speak for the East and Jim you speak for the West.

Michael Donnino

Well, I think if you look back at our history and before the split we are revenue in the large projects in the old HCV (ph) and now in Granite East peaked at $1.1 billion range I believe and we feel like we can get back to that and we have the structure in place to get back to that level and we're certainly prepared to grow that if the opportunity is there and we need to.

James Roberts

Avi, let me account that for the West. I think that we're certainly not at the level that might seen in the East Asia. We're slowly ramping up to make sure that we are very cautious, in the way we ramp up that business, we performed about a sort of 46 million of revenue last year in large projects.

We define large project in the West as anything over 50 million we see that ramping up, it could easily get to twice that over the next several years. And I think that's kind of in the environment maybe 15 to 20 % of our revenue, could come from large project business, maybe a little bit more.

But we're going to fully ramp that up along with the rest of our business to keep it in alignment and keep our portfolio businesses pretty much focused maybe no more than 25 % large projects.

Avram Fisher - BMO Capital Markets

Okay 15 to 20% West revenue is no more than -- copy that to 25?

James Roberts

For the moment with our strategic plan that will be in alignment with the plan itself.

Avram Fisher - BMO Capital Markets

And that's less 25% of West revenues?

James Roberts

Correct.

Avram Fisher - BMO Capital Markets

Okay. And--

James Roberts

And that would be additive assuming that we get a recovery in the general climate.

Avram Fisher - BMO Capital Markets

I think, you are kind of anticipating just to my next one which I think will be final your question which, what you give up, its only think that you give up by going after the larger projects and gain also? What are the pluses and minuses of sort of going after the larger projects? Do you give up going after the smaller projects?

James Roberts

I think as Bill mentioned in his opening discussion that we consider the large projects in the West to be additive. We're very focused on making sure that if they are absolutely additive. For the main part of business, the branch business that you have seen for years is going to continue to operate as it is. We have added a large group of people in our corporate office here if it helps facilitate the development of large projects in the West so that we do not detour the individuals that are working on the bread and butter work in the branches through those large projects.

So we're looking -- we think we can actually help our large projects -- our bread and butter jobs in the branches by adding in materials, business in these larger projects. So, I would not suggest that we would be moving off of our plan with our branch business at all.

Avram Fisher - BMO Capital Markets

Okay. All right thanks. I'll follow up with you after the call on that border for tour (ph) Thank you.

James Roberts

Okay thanks Avi.

Operator

Your next question comes from the line of Brian Rafin

Unidentified Analyst

Good morning, everybody. Question for you on the ... with the decline I think in the commercial residential turn business as you guys, your bread and butter business in West and the fact that a lot of the regional highway construction companies tend to bid that pretty fast. As you start to focus on the larger projects some being designed build, is there a natural barrier to entry in complexity that some of these smaller regionals can't bid over the next few years?

James Roberts

Brian, Jim again. Yeah, exactly there is. Certainly as you get into the design build, several hundred million dollar job range, it limits the competitors that we have that are capable of bidding that work, both financially and just capabilities relative to building a work so it is a different group of competitors and we've seen that in East, and we are starting to see that in West.

Unidentified Analyst

Okay, okay. Let me ask you, given what you described, I think a 43% decline in revenues on the aggregate stone material quarry side, does that decline in business run rate, does that give you guys any greater ability to either permit to Greenfield develop new quarry sites or to may be acquire new sites or even to develop some of the branch business in the East.

James Roberts

Brian it's a good question. I think that we think there's as an opportunity there to really probably get into the acquisition mode a little bit as time progresses, as the earnings of maybe materials businesses or smaller businesses starts to decline and has declined over the last 12 months and going forward maybe for another 12 months or so, but we haven't seen a lot of opportunities yet. We have not seen any easing in the permitting at all. Environmentally speaking, I would suggest you that permitting is getting more difficult as we go forward, but I would say that we will hope that it does create acquisition opportunities going forward.

Unidentified Analyst

Okay, okay, fair enough. And then one final, just anything granite land, give me sense status.

William Dorey

Let me respond to that, this is Bill Dorey. There's been a little change from what we reported in our last quarter with regard to the land company. There is little or no activity. We are not out seeking new deals at this point. We are not actively selling much at this point and we record revenue and profit when we sell projects, when we develop those projects and we actually sell them.

And there are not a lot of buyers out there right now. So, what we're doing in our land company is simply moving our entitlement process forward on the various projects that we have. We're moving the process forward on almost all of them at this point and a lot of them I think as we've said in prior calls are actual date to take (ph) some of these projects to sale, is out in 2010 or 2011.

So we're hopeful that by the time we get them entitled and then we get them ready to sell that there will be a market there, but we're hunkered (ph) down in our land company to some degree at this point.

Unidentified Analyst

Okay. May I ask one more just on the, what are you guys seeing? You guys talk for years about bench strength and what are you seeing in these markets relative to the mobility of trade people, expeditors that is are you having a lot of people come to you looking for jobs? Is the employment pretty tight? Because guys talked and about excess capacity in the industry?

William Dorey

I think it depends on where you are in our system. I mean if you consider the environment we're in and the Eastern part of our business, we expect with the had be a booking Houston prospect their Western Lake being funded, we'll probably going to need people in that environment and the truth is if there are opportunities from folks in the West where we are a little slower currently move East to (inaudible). So, we probably need people in our eastern business and I would say just generally speaking in the West, we'll probably need work more than we need people at this point.

Unidentified Analyst

Okay, so that comment Bill, do you have within your ball panel of labor, is it normal for people to relocate across state lines, I mean is that mobility common?

William Dorey

Well the answer is yes, but it's becoming a little West prevalent as people have two income families and that sort of thing it becomes more problematic for people just to pick up and move and follow their work but clearly, in a large project environment, we have people that move around the country and follow the workforce.

Unidentified Analyst

Okay. Thanks guys, I appreciate it.

William Dorey

Thanks

Operator

Your next question comes from the line of Sameer Lathad (ph).

Unidentified Analyst

Hi, good morning

William Dorey

Good morning

Unidentified Analyst

Just ... most of my questions have been answered but could you talk a little about recessions and the safety look (ph) and the possible impacts they can have in the six to nine months?

William Dorey

Your asking about the surface transportation bill.

Unidentified Analyst

Yeah. So, it's my understanding there'll be about $8.7 billion of recessions (ph) this year, does that normally impact your business at all?

William Dorey

Sameer I think you talk, when you say recessions, are you talking about the bad debt we have are under-funded highway bill for 2009 and how that could affect our work out in front of us?

Unidentified Analyst

Yeah.

William Dorey

Well, look I think, I look at it this way. You've got an administration that is actively having been the champion for stimulus bill, to put people to work, particularly in the construction and transportation industry. I can't imagine did that that same administration would allow the current transportation funding to expire. I think more importantly, there is the six year extension of the transportation bill which is due to expire in September and that will need a re-enactment.

And what is happening in Washington is, Congressman Oberstar who is the Chairman of the Transportation Committee in the House, is likely in the next couple of weeks, going to suggest, publicly suggest, that the transportation bill should be doubled, should go from 250 million to something like 450 to 500 million. He has not however, my understanding is, he is not however going to suggest how it should be funded and I think that will prompt quite an interesting debate in Congress relative to what the next six-year transportation bill will look like in this country and how it will be funded.

I think that's very, very important to the industry and I suspect it's something that, and no doubt you all are watching quite closely.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Zac Efrick (ph).

Unidentified Analyst

Thanks, all of my questions have been answered.

Operator

Your next question comes from the line of Richard Paget.

Richard Paget - Morgan Joseph & Co Inc.

Just a quick follow up on the large project opportunities. How many of the bidders are you seeing come to the table on average with some of these projects and may be if you could compare that to the smaller side of the market and give us a sense of the competition there?

William Dorey

Richard I can tell you in the West that the smaller projects are typically exceeding 10 bidders today and I would say that would be in the $10 million and under type of projects which we bid everyday. The large projects typically are in the range of three to no more than five typically or in that area. If you do get a non-designed built job or read job as we put it, you could have in excess of may be six or seven bidders but on the designed build, more complex larger job, typically less that five, typically closer to around three.

Richard Paget - Morgan Joseph & Co Inc.

Okay. And you define that is 300 million and above?

William Dorey

I would say a couple of 100 million and above design build. That's very ... the complexity of design built adds to the difficulty and seems actually qualify to bid the work. Typically owners will allow you to turn in qualifications and they'll limit the number of bidders at a certain point in time in the qualification process, because it is a long drawn out process and a very expensive process to bid the design build work and so they typically limit it to three to no more than five bidders.

Mike you want to elaborate on that?

Michael Donnino

Yeah I'd really just echo what you said and then the bigger the job obviously the smaller number of bidders on the four or five hundred and up generally its three at the most and sometimes two.

Unidentified Analyst

Okay thanks that's it for me

Operator

Your next question comes from the line of Katherine Thompson.

Unidentified Analyst

Hi, I just wanted to follow up on some of the commentary on the wipe out and quarter (ph) program and less. One thing I wanted to just get on and tend around it appears that you're saying you did a project at a certain level, at a certain pricing discipline and you're getting upside on these project. Just for modeling purposes we're trying to understand how we should think about forecasting over the one two fiscal years how should we think about these contingencies and can you provide all these write-ups having this quarter is this accounted for in the guidance for fiscal '09?

James Roberts

Yeah, Katherine this is Jim again and I think we were talking about the write-ups in Granite West earlier and I think the way to look at that the best way to look at in your forward-looking models is to utilize the fact that our guidance that we gave in the press release and Bill and LeAnne's discussion really includes write-ups and write-downs we have both write-ups and write-downs and when we did job it don't always goes necessarily as exactly as planned and so what you see in write-ups actually you'll probably see some write-downs it's really the combination of the two. But it is included in the guidance that we gave you.

Unidentified Analyst

Okay. Have you seen just overall I know that Granite East have been a little bit more strategic bidding for projects going after more profitable projects in the past and that's kind of subsequent prices impact on their margins. Have you seen any change in the Granite West bidding activity other than the obviously going back to large projects is that we should be aware of?

James Roberts

Well, I think as I said it earlier, Katherine, this is Jim again. The smaller projects are certainly very, very competitive. So while that would mean that, we're being more aggressive in our bidding environment on the smaller projects and we're biding a lot more of them as well. So I think that from a strategic standpoint, you could assume that we would be more aggressive which means that margins are lower than they were in the past on a large -- smaller projects and as we said the larger projects we do see creating a very nice opportunities for margin.

Unidentified Analyst

Great. Thank you very much.

Operator

Your next question comes from the line of Avi Fisher.

Avram Fisher - BMO Capital Markets

Thanks for letting me have a quick follow-up. Last time there was pent-up demand in construction with -- while after the 2001 recession and the backlog of large projects grew for you as also a number of other contractors and across the board every one experienced some level of unprofitable projects. And so when I hear about this mixture my heart sort of skips a beat I get a little anxious, I'm trying to get a sense what can sort of put comfort has anything changed or is there -- will some of these be unprofitable than rather just sort of easing out of construction? How to -- what's done to sort to mitigate that down the road? Thank you.

William Dorey

Let me take that one. Avi you've listened -- you've been following Granite for a long time so clear you watched the cycle we went through in some of this large work and you heard us talk about it I think pretty candidly as we went through that cycle and talked about some of the changes that we were making in our process. We're not trying to go back and list the various changes. I can tell you generally speaking, we have become way more selective. There's way more process in our system today regarding what we build, how we assess risk, how we price risk, how we decide to bid something and how we discuss the team that might be available to actually build the project if we're successful than ever before.

And a lot of the steps that we've been doing over the last four years really has precipitated the kind of performance that you're seeing now in our large projects both in the East and in West. And I don't expect that to change, we have made pretty dramatic shifts in the way we approach this work, I think the marketplace will support different view point and quite honestly the entire industry has learned a lot particularly around design built over the last several years.

So I don't expect to go back to where we were.

Operator

Your next question comes from the line of Michael Correli (ph).

Unidentified Analyst

Hi, good morning.

William Dorey

Good morning.

Unidentified Analyst

Could you give us a little more color on the G&A reduction I know there was a -- you talked about $3 million one-time benefit just trying to figure out what is kind of sustainable level of reduction and what went into that reduction in the quarter?

LeAnne Stewart

Yeah, I can speak to that Michael there was a number of things that went through there this quarter. There was a reduction in traveling, and payment expense is an example, there was a reduction in some severance related compensation related expenses.

Generally, there was a reduction or a recovery in bad debt expense. Lots and lots of really little thing not a lot of things that stand out on their own as being particularly noteworthy. I think we too are trying to figure out what a better reliable longer term estimation of D&A as an organization.

I'll tell you I think we saw lots of opportunities to become more efficient, more effective. So I expect for you guys to be able to see continued improvement on a growth of dollars sort of level. But we're obviously being challenged by the top-line revenue number as well when you look at it from a percentage perspective.

Unidentified Analyst

Okay. And then in the guidance I mean obviously you're not giving an earnings guidance some revenues and margins and some decent size ranges which could really range by like almost $1 a share in earnings, is there any thoughts about tightening that range over time?

LeAnne Stewart

I think our hope is that as the year progresses, then we have more visibility into what the rest of the year is going to look like. We can tighten up those ranges.

Unidentified Analyst

Okay. And when did you plan on filing the 10-Q?

LeAnne Stewart

This afternoon.

Unidentified Analyst

Okay, great. Thanks a lot.

Operator

At this time I will turn the call back over to Bill Dorey.

William Dorey

Well, thank you for your questions. And to summarize, the session this morning here is a great newer board out to bid right now and both provisions including work, there is either partly or fully funded by stimulus money. There is also a great deal used capacity pursuing the smaller work.

We expect to grow our large project backlog in both Granite East and Granite West in 2009. Our financial condition is very strong we intend to keep it that way. And I'm optimistic about the long-term demand for services we provide and the opportunities for our business.

And finally, I would like to acknowledge our people and the work they do every day to deliver excellent results in these difficult times.

Thank you all for joining us this morning as always we appreciate your interest in Granite Construction. If you have additional questions please don't hesitate to get in touch with us. We will be in Watsonville for most of the day. Thank you again and have a great day.

Operator

Thank you. This does concludes today's conference call. You may now disconnect. Speakers please hold.

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Source: Granite Construction Q1 2009 Earnings Call Transcript
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