Granite Construction Inc. Q2 2008 Earnings Call Transcript

Aug. 4.08 | About: Granite Construction, (GVA)

Granite Construction Inc. (NYSE:GVA)

Q2 2008 Earnings Call

July 31, 2008 11:00 am ET

Executives

Jacque Forshie - Director IR

Bill Dorey - President and CEO

Jim Roberts - SVP Granite West Manager

Mark Boitano - COO and EVP

LeAnne Stewart - SVP and CFO

Mike Donnino - SVP Granite East Manager

Analysts

Bob Labick - CJS Securities

John Rogers - D. A. Davidson & Company

Richard Paget - Morgan Joseph & Company

Jack Kasprzak - BB&T Capital Markets

Todd Vencil - Davenport & Company

Avi Fisher - BMO Capital Markets

Joe Ritchie - Goldman Sachs

Brian Rafn - Morgan Dempsey

Operator

At this time, I would like to welcome everyone to the Granite Construction Earnings Call. (Operators Instructions)

I would now like to turn the conference over to Miss [Forshie] Director of Investor Relations. Please go ahead, ma'am.

Jacque Forshie

Good morning and thank you for being with us today. I'm joined by 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, Granite West Manager; Mike Donnino, Senior Vice President, Granite East Manager and David Watts, our Chairman.

Following our prepared remarks this morning, we will turn the call over to your questions.

Before we get started, I would like to remind you that this conference call may contain forward-looking statements and 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 undertake any duty to update any forward-looking statements.

Now, let me turn the call over to Bill Dorey. Bill?

Bill Dorey

Thank you, Jacque, and good morning, everyone. On today's call, I will discuss our second quarter results and update our outlook for 2008. I will conclude with a brief discussion about our safety program, which is an important element of our strategic plan.

Last night, we reported second quarter diluted earnings per share of $0.68 on revenue of $694 million, compared with the prior year's $1.05 per diluted share on revenue of $771 million. Gross profit as a percentage of revenue for the quarter was 16%, and operating income was $45 million compared with $67 million in 2007.

Although we did not match our 2007 record-setting results, I'm pleased with our second quarter performance. We are booking new work, particularly in the West, and we are executing well throughout the Company. I believe this is a testament to the strength and versatility of our business model.

Looking at our results by segment, several of our branches in Granite West continue to be impacted by the downturn in the private market. Gross profit as a percentage of revenue for Granite West decreased to 18%, compared with 20% in the second quarter of 2007.

Operating income for the division decreased to $57 million compared with $76 million a year ago. The challenging economic environment has led to competitive pricing in most of our markets in the West, as well as an increase in the number of bidders on public works projects. Our management teams are not new to these conditions and are adjusting their business strategies to succeed despite these challenges. Specifically, we are bidding more work than ever and focusing on projects that utilize our construction materials, equipment, and large project expertise.

In our materials business, sales for construction materials to third parties was $107 million, with a corresponding gross profit of 16%. Aggregate pricing remains stable in most of our locations; however, margins are being impacted by an increase in the cost to produce as a result of lower volume and higher raw material costs, particularly diesel fuel and liquid asphalt.

Now, let's turn to Granite East. Our strategy to improve bottom line results in this division is clearly working. Revenue for the division was $171 million, compared with $218 million a year ago. Gross profit as a percentage of revenue was 11%, compared with 7% in 2007. Consolidated operating income was $12 million, compared with $7 million last year. To maintain consistent profitability in Granite East, we are concentrating on efficiently executing on our backlog. On future opportunities, our strategy remains focused on careful project selection, project staffing, and comprehensive risk analysis.

Total backlog in Granite East at the end of the second quarter decreased $564 million to $953 million, compared with the second quarter of last year. Our backlog does not include the full value of the anticipated World Trade Center work or the Houston Light Rail project. We continue to book backlog on the World Trade Center as individual work packages are designed and priced. For the Houston Light Rail project, we are negotiating contract terms and pricing and hope to have significant additional backlog to report in the coming months.

The pipeline of bidding opportunities in Granite East is full. We are very pleased with the number of large project opportunities we are pursuing across all three of our Granite East regions. We have submitted proposals on a number of projects varying in size from $130 million to $1.5 billion. Typically, the number of bidders goes down as the size of the project goes up. With competition for the smaller projects increasing, we are targeting a number of larger projects where we can leverage our capabilities, financial strength, and relationship with various joint venture partners and nationally recognized design and engineering firms.

Now let's discuss our Granite Land Company. We currently have an overall project portfolio of $50.3 million in real estate held for development and sale. This is a geographically diverse real estate portfolio of properties throughout the West and in Texas. Unfortunately, due to the well-publicized deterioration of the residential real estate market, we recorded a $4.5 million pre-tax impairment charge in the second quarter related to two of our properties in Northern California. We continue to closely monitor all of the real estate projects in our portfolio, and our long-term view is that our property development business will return above average results to the Company.

For the total company, general & administrative expenses were relatively flat year-over-year. We are diligently working to reduce our cost structure, both operationally and administratively. And we have introduced a number of initiatives to reduce expenses. The savings from these initiatives will come from headcount reductions, controlling discretionary spending, and productivity improvements. Although we are making progress, we do not expect to see a reduction in G&A expense on an absolute dollar basis until 2009.

Before I discuss our outlook, I would like to highlight the strength of our balance sheet. Our strong cash position and relatively low leverage provide us with the financial stability and flexibility needed to navigate through today's business environment.

Looking ahead, our outlook for Granite remains very positive. We continue to expect Granite West 2008 revenue to be in the range of $1.8 billion to $2 billion, with a corresponding gross profit margin range of 15% to 17%. Although longer-term visibility for our Granite West business is limited, as it is typically this time of the year, we are very pleased with the amount of work that is out to bid, as well as the rate at which we are booking new work. Based on our results to date and our view of the remainder of the year, we are increasing our gross profit expectations for Granite East to a range of 15% to 17% in 2008. We continue to expect revenues for Granite East to be in the range of $700 to $800 million this year.

As we stated last quarter, minority interest for the total company is expected to be in the range of $45 to $50 million for the year. Longer term, our expectations for Granite East gross margins continues to be in the mid teens.

Let's talk about the outlook for federal transportation funding. As many of you are aware, the Highway Trust Fund, which is funded by federal gasoline tax, is facing a projected revenue shortfall in 2009, if Congress does not take action to restore its solvency. Further exacerbating the shortfall is the reduction in gas consumption as a result of higher gasoline prices.

Last week, the House overwhelmingly passed a bill to authorize the transfer of $8 billion from the General Fund to the Highway Trust Fund to ensure fiscal 2009 funding levels are at least flat for 2008. The bill is now in the hands of the Senate and we are hopeful that the Senate will pass a similar measure by an equally significant margin to withstand a presidential veto. Despite this funding issue, we have not experienced a significant change in bidding opportunities or project delays. We continue to work closely with our industry associations to ensure transportation funding remains a top priority for both the current and future administrations.

In a transportation study published earlier this week, it was estimated that $225 billion per year is needed to meet the country's transportation infrastructure needs. Current spending was reported to be about 40% of that level. The need to invest in America's transportation infrastructure increases every day and we are confident that demand for our services will drive our business over the long term and help to revive our flagging economy.

Many states are also facing budget concerns. California, our largest revenue producing state, is still facing a projected $17 billion deficit. Despite this shortfall, Governor Schwarzenegger has resisted cuts to transportation funding and clearly believes construction will be an important stimulant to the state's economy. To emphasize his position, the Governor recently signed legislation to expedite $300 million in funding for transportation and housing projects in an effort to create jobs and improve infrastructure throughout the state. It is also important to note that more than half of the transportation construction funding in California is derived from county sales taxes that have been voter approved and are not part of the state budget and, therefore, not at risk of being used to balance California's budget.

Now let me address an issue that virtually every industry is facing today - controlling the rising costs of raw materials. At Granite, we are exposed to the increasing price of diesel fuel, natural gas, propane, liquid asphalt, and steel. However, our project forecasts already include our best estimate of the anticipated future escalation of these costs. In addition, some of our construction contracts include relief from price escalation for these commodities.

A unique benefit of our portfolio of smaller, shorter duration projects in the West is that we are able to re-price our portfolio regularly. On our fixed price contracts, it is our practice to solicit firm quotes from our suppliers and subcontractors during the bidding process, to mitigate our exposure to price increases.

Before we open the call up to your questions, I would like to highlight one important objective of our strategic plan… to honor our people with the safest work environment in our industry. I'm very proud of our accident prevention program, which includes formal safety training, inspections, audits, and a formal system of reporting. We've made remarkable progress to dramatically reduce our safety incident rates, and we believe the safety of our employees is essential to the successful completion of every project we build. Safety is not something we do in addition to the work. It's how we do our work.

Lastly, with our construction season in full swing, I would like to take a moment to acknowledge all of our employees who are working exceptionally hard this time of the year. My appreciation goes out to all of you for your hard work and dedication.

Now, I would like to turn this call back to our moderator and we would be happy to take your questions.

Question-and-Answer Session

Operator

(Operators Instructions).Your first question comes from the line of Bob Labick with CJS Securities.

Bob Labick - CJS Securities

Good morning.

Bill Dorey

Morning, Bob.

Bob Labick - CJS Securities

Morning. First question I wanted to ask. You appear to be winning a greater percentage of the Caltrans bids than you did a year ago at this point. And the awards are higher year-over-year as well. Is this by design or could you discuss your progress in Caltrans bids and where you think you may end up this year?

Jim Roberts

Bob, this is Jim Roberts. I'll be happy to answer that. I don't know if I have the answer relative to the percentage of Caltrans contracts higher. Certainly, we are bidding a lot more work in the West than we ever have through this time of the year. And as we increase our estimating staff and bid more work, we are obtaining more work as well. Relative to going forward with Caltrans, there is a healthy amount of work out to bid and we're pretty confident we will get our appropriate share of it. So, we're actually very, very happy with the amount of work out to bid today.

Bob Labick - CJS Securities

Great. And is this indicative of the rest of the West? I mean, for us it's reasonably easy to track the Caltrans stuff, but obviously we can't see the rest of the branches in the West. Is this indicative of where you stand in terms of bidding for the rest of your West division?

Jim Roberts

Yes, Bob, I think it is. This is Jim again. We're really making a very strong effort to increase our bidding efforts so that we can continue to build the backlog that we need. So, we're doing this in all of our western units.

Bob Labick - CJS Securities

And obviously you discussed, certain projects have a greater number of bidders on them. Can you give us a context for the margin? You've given us margin expectations for the full year. But how are current bids playing out now versus what you would have expected six months ago? And what do you expect going forward?

Bill Dorey

Bob, I wish I had the answer on that one. Every job is really different. And every one of our markets are different. So, I really can't define that, where we're headed or how we're doing on them, except for the fact it is a competitive environment and we are seeing more bidders than we have in the past. But there are certain locations that we have very high expectations for margins and other areas where we've lowered our expectations.

Bob Labick - CJS Securities

Okay. And then I'll ask one more and I'll get back in queue. Given the, I guess, recently announced Santa Paula asphalt capacity, is that for internal use? External? And could you give us a sense of how long it took you to get approval for that location? And what the expected returns are on that kind of investment?

Jim Roberts

Bob, you've really been digging. Bob, that's good information. We just recently… this is Jim, again. We just recently have been following through the permit process. It's still in the appeal process potentially. So, we're comfortable we will have a permit for a new asphalt plant in the Santa Paula market.

We have been working on this. This has actually started with a previous owner of a company that we acquired some of their assets and we acquired the rights for a permit in that area. And we literally have been working with the local officials to find an area in Santa Paula where a hot plant or an asphalt plant and a recycling facility would be conducive to the entire location. And so probably I would suggest, between ourselves and our previous owner, I would say it's been at least probably five years in the running here, working on trying to get that permit.

And we do think that it will be a nice facility for both internal use and external sales. So it is intended to be a fully integrated facility of recycled materials and asphalt for public consumption, as well the Granite.

Bill Dorey

Bob, just a little Granite history. I've spent, in my former life, twelve years in Santa Barbara as our local manager down there. This is Bill Dorey. And worked almost that entire period to try to figure out how to get a hot plant down in Santa Paula, so, I think you could argue that we've been working on this hot plant for about thirty years, and the opportunity came available recently and certainly circumstances have changed, some of the competition structure down there has changed over time. This is a very good opportunity for us.

It's not an inexpensive venture to get a hot plant down there, because we had to acquire some land. But we will be the primary supplier and in what we think is a pretty strong market, so we think this is quite a good deal for us.

Bob Labick - CJS Securities

Sounds great. Thanks very much and congratulations on a good quarter.

Bill Dorey

Thank you.

Jim Roberts

Thanks Bob.

Operator

(Operators Instructions).Your next question comes from the line of John Rogers with D. A. Davidson.

John Rogers - D. A. Davidson

Hi. Good morning.

Bill Dorey

Hi, John.

Jim Roberts

Hi, John.

John Rogers - D. A. Davidson

Bill, in your comments you talked about management being through a couple of these cycles before. And I was wondering if maybe you could just give us a sense, especially as it relates to the old, what you used to call the branch or the Granite West, exclusive of big projects. And where are we in terms of this relative to the… I guess it would be California and the western states spending plans? I mean, does this continue to get shrink into 2009? Or do you think we're at the low end of it?

Bill Dorey

Well, that's a really hard question. I think to try to answer any…

John Rogers - D. A. Davidson

But it's only one.

Bill Dorey

Yes. With any accuracy. You all probably are just tuned into what this cycle's going to look like than we are. I will tell you that, yes, we have been through a few of these cycles before. And certainly the last one, that we can look to and because we all remember it so vividly, because it was so tough, it was in the early '90s.

And this has some of the same characteristics of the downturn in the '90s. It started with the housing businesses falling off and not as much building being done. And clearly that's what is happening here, particularly in California and particularly up and down the San Joaquin Valley. It's not a pattern that's really all that different from the early '90s.

I will tell you that there are some builders that continue to build. And that's a little different than what we saw in the early '90s. So, there is some activity out there and thankfully for that. But I think the primary difference, John, is that in the early '90s we did not have strong public works programs to fall back on, and we have that today. And, as Jim has pointed out and we pointed out in our script, we're bidding more work than we ever have from the standpoint of dollar volume.

And that's a product mostly of strong public works programs that we can look to. And in our strategy and the strategy that we employed the last time we went through one of these down cycles is we bring capacity that would otherwise be in the field, we bring it into our office, doesn't help our G&A expense as a percentage of revenue much. But we bring that capacity into the office and we turn these guys loosed on estimating. And we bid more work because now we have more capacity to bid work. And it takes us bidding more work to get the volumes that we need.

So, that's a strategy that we've employed before it's worked well for us. I don't know how long this down cycle's going to last. I wish I did. But we're expecting that, we're geared up to go through another year in 2009 and we're preparing for that so that we can make the most out of that year as well, no matter what happens.

Mark Boitano

John, this is Mark Boitano. Let me add one other little difference, as Bill was comparing the last major down cycle, is, one of the things that became apparent to us in the early '90s that we're heavily centered in California at that point. We had 75% of our business being done in California in the early '90s. And we said at that point in time that we needed to diversify our business outside of the state. And we did that.

Today we're doing more work in California than we've ever done before, but it's only, now it's less than 40% of our total portfolio. So, that's the other really big difference that we've geographically diversified ourselves throughout the West, as you were reflecting on our, sort of our old western business. And that's in itself a big difference.

John Rogers - D. A. Davidson

Okay. That helps. Thank you.

Mark Boitano

Okay.

Operator

Your next question comes from the line of Richard Paget with Morgan Joseph.

Richard Paget - Morgan Joseph

Good morning everyone.

Bill Dorey

Morning, Richard.

Jim Roberts

Morning, Richard.

Richard Paget - Morgan Joseph

Wondered if maybe, if you could talk about the acquisition market. I mean, in a slow down it seems that some companies have been saying that sellers' expectations have come down. And I wondered whether you're seeing that in some companies that you might be looking at, both on the construction side and the materials side?

Bill Dorey

Well, I think that's a very good question and it's one that is truthfully being discussed around this office kind of on a regular basis right now. And I think that we haven't seen the expectations of the sellers come down much yet. But I think our belief is that they will. And clearly that's impacting our, I think, enthusiasm to try to make deals right now, because I think we believe that there will be opportunities down the road. And it's affecting our interest in searching for new opportunities and the pace at which those activities are occurring. I think our belief is that, if we hang on to our power and our patient, there will likely be better deals down the road.

Now, that doesn't mean that we've stopped everything, because we haven't. We have several things in our pipeline. Some of those are upgrades of existing facilities and some fill in projects that we I think talked to you about on prior calls. Those are all going forward, but the prospect to out, rustling up new opportunities and trying to drive that real hard right now, we think the best strategy would be to be patient and wait.

Richard Paget - Morgan Joseph

Now, when you talk about the wait and see, what kind of window are we talking? Is this a quarter window or maybe a little bit longer than that?

Bill Dorey

Well, I suspect it'll be a little longer than that.

Richard Paget - Morgan Joseph

Okay, thanks. I'll get back in queue.

Bill Dorey

Okay. Thank you.

Operator

Your next question comes from the line of Jack Kasprzak with BB&T Capital.

Jack Kasprzak - BB&T Capital

Thanks. Good morning, everyone.

Bill Dorey

Hey, Jack. How are you?

Jack Kasprzak - BB&T Capital

Fine. I wanted to ask about the California budget. If you could, Caltrans budget if you could give us an update. I think the vote was delayed into early August and is that still when you think a vote will occur? And what are the dollars shaping up to be?

Bill Dorey

Well, you know that's always an interesting soap opera, the California state budget process. I had an opportunity here a week ago to spend some time with Governor Schwarzenegger at an event that was occurring at Pebble Beach. And according to him at least at that event, he's putting a lot of heat on his Democratic counterparts to come to the table and deal with this issue. I mean, it becomes very partisan, very conservative versus liberal. It's not unusual to California politics. It should have been in place in the middle of June and it's not.

And what he has done recently is to institute I believe this is through an executive order that all state employees will earn the federal minimum wage until a budget is enacted, that services will continue, but he's going to pay all the state employees minimum wage until the congress or the legislature and the governor can come together on this budget.

Clearly, there's going to be some horse trading that will occur. And, as it relates to transportation funding, he's been pretty clear that he wants to hold that funding intact. He's based his second term on building infrastructure for the state of California and part of that second term campaign was to institute the bond measures that were passed by the electorate. And my own personal feeling is that that's the last thing on the table that he wants to try to deal.

It doesn't mean that it won't be impacted, but it is very hard to take that money today, because it has to be paid back with interest, within three years, and he can only take it a couple of times out of a ten-year period. So, it's not a very appealing source for the governor to try to horse trade with. And in addition, I don't think he has a personal bias in not wanting to see that disappear.

So, we're reasonably confident that we'll get a budget at some point. We're reasonably confident that we'll continue to have adequate transportation funding in that budget.

Jack Kasprzak - BB&T Capital

Is it. The press in the last few weeks as you can look and find very easily articles about state budget distress across the U.S. California fiscal state of emergency. I mean, just reading articles like that, it gives you a very uneasy feeling about the prospects for states in general and fiscal '09. I think California is one of those. But sounds like this is not going to turn into a situation that was analogous to I guess five or so years ago when I think you guys said on one of your conference calls back then the state was, Caltrans was basically out of business for a year. It sounds like we're not headed to something that extreme.

Bill Dorey

I don't think so. And I certainly don't think so in the short run. I think California and Caltrans has a longer term funding issue. Certainly Prop 1B is the salvation for that program over the next couple of years. But, beyond that, that program winds down at some point and I think that's going to be the next issue, longer term or overall issue for Caltrans. And the industry and the governor and Caltrans will have to dig in and figure how to solve that. But that's not immediate, an immediate problem.

Jack Kasprzak - BB&T Capital

Alright. Okay. Thanks, Bill.

Bill Dorey

You're welcome.

Operator

Your next question comes from the line of Todd Vencil with Davenport.

Todd Vencil - Davenport

Yes, good morning.

Bill Dorey

Good morning, Todd.

Todd Vencil - Davenport

Turning to real estate just real briefly, can you just? I don't think I've talked to you guys before about how you are assessing impairment on the real estate. Can you just talk a little bit about what the process is there and how you determine impairment on these two properties and maybe what stage of development they are? And additionally, did you look at all of your properties in the second quarter for impairment?

LeAnne Stewart

This is LeAnne. I can answer that and I'll try not to get too technical on the accounting rules that surround it. But, we have looked at all of the investments. We pay particular attention to the residential investments, because, as we talked about in the script, that's at least, so far anyway, the market that's been hit most significantly.

And essentially the analysis that goes on with regard to the things that we are in the process of developing, is looking at multiple scenarios about the cash flows associated with those investments and determining, based on those various analyses and what's on the books, whether there is an impairment or not.

Todd Vencil - Davenport

Okay.

Bill Dorey

I think, and this is sort of the non-accounting, maybe sales pitch, answer to your question. And that is that our portfolio is not particularly leveraged. So, we don't have big debt on our purchase of property. Clearly, the accounting rules are driving this determination of impairment. But we have California property in developable areas, which we can entitle and develop at some point.

We know that the population growth in California will continue. Any study of population growth will suggest that, and I don't have the number on top of my head, but like 20 million more people will enter the state in the next 15 years. We're going to need housing.

So, the practical implication of this write down is that these properties are now valued at a lower amount on our books. And when we do develop them and sell them and whether that's next year or the year after or year after that and we do sell them into the marketplace, the profitability associated with those projects will be higher as a result of this write down when that sale actually occurs.

So, it's an accounting treatment that we're forced to comply with. But I don't think that it is going to affect the long-term profitability. In fact, it may help the long-term profitability from the standpoint of reportable earnings down the road for these projects.

Todd Vencil - Davenport

Great. Thanks a lot.

Operator

Your next question comes from the line of Avi Fisher with BMO Capital Markets.

Avi Fisher - BMO Capital Markets

Thanks for taking my question. Bill, you're hanging out with some highfalutin' people, with Governor Schwarzenegger.

Bill Dorey

Yeah.

Avi Fisher - BMO Capital Markets

Just quick accounting question. Can you just give us what CapEx and D&A were for the quarter?

Bill Dorey

For the quarter.

Avi Fisher - BMO Capital Markets

Or for the six months, so I can back into it.

LeAnne Stewart

I can provide that for you, Avi and, by the way, we will be filing the Q later today.

Avi Fisher - BMO Capital Markets

Okay. Good.

LeAnne Stewart

So, you will be able to see that. But CapEx is about $63 million.

Avi Fisher - BMO Capital Markets

That's for the six months?

LeAnne Stewart

For the six months, that's right. And I'm sorry, what was the other question?

Avi Fisher - BMO Capital Markets

What depreciation and amortization?

LeAnne Stewart

D&A for the six months was about $42 million.

Avi Fisher - BMO Capital Markets

$42 million. Following up the prior question and to get in to the project portfolio you gave was $50.3 million. Is that the net asset value of the portfolio?

Bill Dorey

Yes.

Avi Fisher - BMO Capital Markets

That's it. Okay. And I'm just going to make a comment, that excluding the write down on the land company, this would have been a first clean quarter without any major claims and would have beaten consensus significantly. So, I wonder if you can give a little color when you talked about you were looking at the res investments, the mix between residential and commercial within the land portfolio.

Bill Dorey

I'm not sure I can do that off the top of my head. Does anyone have that mix?

Jim Roberts

It's primarily residential.

Bill Dorey

Yes, I would say that it's mostly residential or certainly related to residential. And the write downs, Avi, that we've experienced have been, so far at least, I'm not trying to hedge, to cause you to think that there's going to be others elsewhere but the write downs we've had have been up and down the San Joaquin Valley, which is where we're experiencing, and I think our developer friends are experiencing, the biggest issues.

We've got projects up in Washington that we are reasonably confident that won't be impaired. And we've got projects in Texas that we don't think are going to fall into that category. Generally speaking, we're pretty confident that this is good use of our capital and a dip in cycle that will end within some period and this business will be very good for us over the long haul.

Avi Fisher - BMO Capital Markets

What's the time frame, do you have in mind?

Bill Dorey

If I was guessing, I'd say a couple of years.

Avi Fisher - BMO Capital Markets

And I promise this will be the last question on the land. What percentage of that net asset value is in the San Joaquin Valley?

Bill Dorey

Well, that's a good question. I'm going to guess here, because I don't have that. But I'm thinking no more than a third. Does that sound reasonable enough to the folks around the table? People are throwing up their hands like, I can't help you here, Bill.

Avi Fisher - BMO Capital Markets

I have to say it doesn't sound reasonable to me, though. I have to say, just from my comments. But focusing on other parts of business, that looked great, the West bookings, really impressive. Can you give a little color? Are those short cycle projects that you typically see in the branch around, booked in the second quarter or is there a mix between long and short cycle businesses?

Jim Roberts

Avi, this is Jim. The majority of the work in the West, as you know, is for short-term projects. And I would suggest to you that the majority of that is typically twelve months or less work.

Avi Fisher - BMO Capital Markets

I'm sorry. The majority of that is…

Jim Roberts

The majority of it would be twelve months or less work.

Avi Fisher - BMO Capital Markets

So, no real shift in the mix.

Jim Roberts

No, but we do have a lot of large projects that we are bidding in the West. If you remember in February of '07 we did transition some large project schemes into Granite West and we're very similar to what Bill said with Granite East, we had a lot of large projects we are bidding in Granite West as well and yet to be determined whether or not we're going to be successful on them. And that could change our mix in our portfolio.

Avi Fisher - BMO Capital Markets

But the projects that you booked in this quarter, there you largely follow the same pattern you've had in the past, a lot of twelve-month projects.

Jim Roberts

That's correct.

Avi Fisher - BMO Capital Markets

A lot of them, because you've obviously had a great booking quarter on that. And finally, the last question is, you mentioned how half the California projects are financed, not by Caltrans, but by local or municipal budgets. How does that shake out with the bookings?

Jim Roberts

I don't have that, Avi. I'm sorry.

Avi Fisher - BMO Capital Markets

I'm sorry if I'm getting too granular. Well, I thought it was a good quarter. Thanks very much for taking my questions.

Jim Roberts

Thank you.

Bill Dorey

Thank you.

Operator

Your next question comes from the line of Joe Ritchie with Goldman Sachs.

Joe Ritchie - Goldman Sachs

Morning, everyone.

Bill Dorey

Morning, Joe.

Joe Ritchie - Goldman Sachs

Quick questions. For this past quarter, you didn't talk at all about the competition that you are seeing from the residential contractors like you had in the few previous quarters. I want to get a sense for whether the competition has decreased slightly, based on what you had being seeing. Just wanted to get a sense on the trend there.

Mark Boitano

Well, Joe, I wish I could say it's decreased. They're still there. And certainly, we expect them to be there for the remainder of this year for sure. As I said, though, we are bidding a lot more work, which gives us greater opportunities. But there is a lot of competition still.

Joe Ritchie - Goldman Sachs

Okay, great. And in terms of the work that you're bidding, can you give us a sense for potentially a number of projects or number of bids that you have out this quarter relative to perhaps in the prior quarters?

Mark Boitano

Well, I don't know about the number of bids, but I can tell you, just from a real qualitative standpoint. We bid about 50% more volume in the West this year than we have in previous years. So, that means our estimating teams, they've really stepped up their game.

Joe Ritchie - Goldman Sachs

Okay, great. And, as the last gentleman just mentioned, you had a great new award quarter on the branch side of your business. Switching gears a little bit to Granite East. New awards are still coming in relatively light. I know part of that is due to the Company strategy to be more selective on those projects. But you did mention in your earlier prepared remarks that you were looking at some significant projects in Granite East. Can you give us a little bit more sense on the time line for those projects?

Mike Donnino

Sure, I can do that. This is Mike Donnino. We've got in our pipeline for say the next six months about $3 billion worth of projects we're looking at, excluding the remaining work at the Trade Center, as well as the Houston project. Of that $3 billion, about a third of that has already been submitted and is in some kind of an analysis process with the owner. So, we should be finding out where we're at on some of that project in the well certainly within the next month.

About a third of that will bid between now and the next, say, four months, four or five months. And about a third of that $3 billion has been slipping and it's probably a little farther out, maybe first quarter even. So, we do have a pretty full pipeline to bid. And it's spread out between stuff that's already in and we are kind of waiting on, as well as stuff that we're currently working on to submit the rest of the year.

Joe Ritchie - Goldman Sachs

Okay, great. Just one last follow-up question to that. What's been your track record in terms of percentage of projects that you've won relative to the number of bids that you have out there?

Mike Donnino

That's really difficult, because the big jobs skew things so much. As far as volume, we're on track to bid about what we did last year, which is $2 billion. In fact, it'll probably be a little higher than that. And of course that's down from the previous two or three years, when were up as high as $5 billion. You know, around numbers it's been about a quarter to a third, but it really depends on the mix of joint ventures and sole performed type projects. So, it's very hard to put a pencil to that.

Joe Ritchie - Goldman Sachs

Okay. Well, thanks for taking my questions today.

Mike Donnino

You bet.

Operator

Again, ladies and gentlemen, please limit your questions to one question per, entering the queue. Your next question comes from the line of Brian Rafn with Morgan Dempsey.

Brian Rafn - Morgan Dempsey

Question for you on the Granite West side. If you look at the capacity absorption of materials, equipment and labor and the loss of the residential construction turn business, is that absorption of your construction capacity, is that being offset by the Caltrans public works projects that are coming up?

Jim Roberts

Wow, that's a mouthful there. I'm trying to digest that one a little bit, Brian. I think that certainly the public sector work is helping to offset the lack of private sector work. So, in the short term, the answer is yes. Caltrans is certainly helping as well as the other state public sector works to allow our capacity and our equipment to keep working.

Mark Boitano

Yes, Brian, this is Mark. Keep in mind that the largest percentage of our work has been public works. So, from that amount of materials, labor and equipment that was dedicated in the private sector, it was a pretty small percentage, prior to the current economic climate that we're looking at.

Brian Rafn - Morgan Dempsey

Sure. Sure. Let me ask you then, from a profitability or a margin recovery, is it better to manage a portfolio of thousands of small turn business contracts or is it better to consolidate that in tens or dozens or hundreds of 50 to 100 million design and design build contracts?

Mark Boitano

That's interesting. We've talked about that a lot. Certainly we believe in our business that the portfolio of all the jobs creates the most value for us. So, I'll stick to our script on that one suggesting that, whether it's the smaller driveways or the large work, it's really the diversified portfolio that creates value for us.

Brian Rafn - Morgan Dempsey

Okay. You guys also mentioned, too, on headcount reduction. You guys have talked in the past. How does that square versus we need to build and maintain our bench strength? We've heard that for years. Is this cost containment, a provision of maybe deteriorating markets or the perception of trepidation in the construction area? Can you give me a sense on that?

Bill Dorey

Well, I think that's a really good question. And it's one that, first off, it's not an easy question. And it's a question that we have struggled with over the last twelve months here. And I think some of the background, maybe just for all the folks listening.

We as an organization have gone through about 15 years where every single year we've had increased revenue. And, as a result, we have followed that revenue with additional support from a G&A standpoint to try to keep up with the growth that we were experiencing as a company. And that topped out in 2006 and dropped off in 2007. You're all aware of that. And that drop off down into that $2.6 billion range or thereabouts has continued into 2008.

And through that period where we were building revenue, we were struggling, really, to keep up from a G&A standpoint, keep the business under control. And as that equation has shifted, it took us a little time to, slow down that growth of G&A. And, clearly, we find ourselves in a spot now where G&A arguably has reached a point where it's higher than it should be and we're trying to deal with that now, to try to pull it back.

And we've got a whole host of initiatives that we're working on to try to take that cost structure that we've built, support cost structure build, and align it with the business that we're currently facing. And, as we said in our prepared remarks, we don't expect that you're going to see or will be able to see a reduction in that G&A expense in 2008.

But most of the initiatives that we've instituted this year have a cost associated with them relative to early retirement knocked out and a some things like that to help facilitate some of these initiatives and we'll stand that cost in 2008. And the plan here is that we'll get that behind us and we'll be in a better position in 2009. Does that answer your question?

Brian Rafn - Morgan Dempsey

Yes, sure. Just one more question. The discussion relative to getting the private sector into the infrastructure equation and, removing some of the federal government, you guys specifically talked on the heavy civil side, specifically in the East, about avoiding specific types of projects and specific types of owners and staying out of trouble and getting good bid day margins. Does introducing the private sector, does that bring in a whole portfolio of new owners that you have no experience with, that perhaps introduces more risk going forward and getting to know them, if that is truly the way the course of financing goes in infrastructure?

Bill Dorey

Now, when you talk about, let me make sure that we understand the question. When you talk about the private sector, are you talking about the home builders or what are you talking about…

Brian Rafn - Morgan Dempsey

No, no, no, no. I'm talking about from the standpoint of funding highway projects from the federal government and they're using, we've heard, certainly the infrastructure bank is one term. But, you guys have really looked at and you've mentioned it. You said there are specific owners you will not do business with anymore. Does this joint venture alliance, getting more private sector money in infrastructure, does it mean that the private people in now, the owners, do they just get larger? Are you bringing in more people than perhaps you have no experience with that you have to

Bill Dorey

Mike, you want to try that?

Mike Donnino

Yeah, this is Mike. I think I can help to answer that question. I think it does create some new owners. What we're trying to do is stay in the role of a design builder and try to structure our contracts. And there's a bunch of them out there that we look at and we spend a lot of time and manpower analyzing and trying to get right. So, we're willing to take the typical design build type risk and let the private owners or the concessionaires take the finance risk and the development risk and that kind of thing.

There are a lot of different models out there and they range from straight design build up to things that get a little bit fuzzy around those terms. But, most of the new owners have similar type organizations where they have an engineering firm or somebody acting as their construction management or project management type team. So, in one sense, we're dealing with similar organizations and, in another sense, we're dealing with new owners.

So, we are seeing that a lot, though, and hopefully it creates more funding and more opportunities for us, but it definitely adds to the challenge of contractual risk and owner risk.

Brian Rafn - Morgan Dempsey

Okay, thanks. Great quarter. Thanks.

Bill Dorey

I'm going to add something to this. I think this is something maybe our audience doesn't appreciate about the skill sets that we have here. We have internally, and through relationships with investment banking companies and so forth. We do have the skill set and the opportunity to participate in projects, where it is the contractor's responsibility to help bring a financing idea to a project to make it happen.

Couple of good examples of that, one is a little bit old, but the Las Vegas Monorail. Kent Marshall, who is an employee here, who has a project financing background, was very instrumental in orchestrating the financing package for that project. It allowed it to go forward. And as a result, it was a project that we were able to negotiate.

It wasn't any of our money, but we were instrumental in facilitating the idea and the financing package and working with, in this instance, the ultimate owner to make that project a reality. We're doing the same thing to some degree in the Houston Light Rail project, where we have been working with the bankers, the private banking industry, to build a financing package and present a financing package for that project that the owner in turn is using, is adopting. It's one of the primary reasons that we, Granite, is in this project as a contractor because we helped the owner figure out how to finance the project. Once again, it's not our money.

So, we think that it's a skill set that we have and certainly some of the other major players around the country have it as well. But, it really is something that most of the regional contractors that we compete with don't have. And we think it's something that will become more and more valuable as we go down the road.

Operator

Your next question comes from the line of John Rogers with D.A. Davidson.

John Rogers - D.A. Davidson

Just following up on some of the comments about Granite East and the little bit higher margin assumptions that you've got this year. Is there anything in the schedule relative to the projects hitting 25% thresholds that are notable? And then secondly, any update on any of the disputes or claims, some of the larger ones, and dates on when we may see some resolution?

Mike Donnino

Yes, John, this is Mike again. Let's see if I remember. I'll answer the second question first. Of course we settled the major claim; I believe it was in the first quarter, and that was like 22. And we have some other, I'd call them major, not to that extent, that we don't really have any schedule for when they will hit or not. As we've said before, settling these things and even creating them is part of our business now.

And I would ask that you consider the longer term when you look at things as far as margin and stuff like that, because obviously the first quarter had a big boost from that and the second quarter didn't. So, it looked like we went downhill. But, the settlements are generally paybacks for things that happened in previous quarters in most cases. And we do still have quite a bit of that out there and we do expect to see that in the coming quarters.

What was the other question, John?

John Rogers - D.A. Davidson

In terms of projects hitting 25% thresholds.

Mike Donnino

Yes, we do have one major one that is expected to hit in the fourth quarter, that's the ICC project in Maryland. It's going to be close, but we expect it to hit in the fourth quarter.

John Rogers - D.A. Davidson

Okay. Great. Thank you.

Operator

Your next question comes from the line of Todd Vencil with Davenport.

Todd Vencil - Davenport

Hey, guys. Thanks. Just some housekeeping. Can you weigh in on what you think the tax rate and DD&A and capital expenditures are going to be this year?

LeAnne Stewart

This is LeAnne. I think you can expect that the effective tax rate that you're seeing right now won't change significantly throughout the rest of the year.

Todd Vencil - Davenport

Okay.

LeAnne Stewart

So, that's directionally correct.

Todd Vencil - Davenport

Okay. So, it's sort of more like the second quarter or the first half?

LeAnne Stewart

More like the first half.

Todd Vencil - Davenport

Okay. And then on D&A and CapEx?

LeAnne Stewart

On CapEx, I think that what we would say is, we had a budget for 2008 of about $180 million. We don't expect that we will spend all that this year. You know, with the economic downturn that we're experiencing, we're being careful about where we spend money. But there's certainly some investments that need to be made and we need to continue to invest in for the longer term.

Todd Vencil - Davenport

Okay. Alright. Thanks a lot.

Operator

Your next question comes from the line of Brian Rafn with Morgan Dempsey.

Brian Rafn - Morgan Dempsey

Guys, on some of your region, everyone's talking about the pressure on state budgets. Are you guys seeing any regional strength coming out of the oil patch, Texas, Oklahoma, Louisiana, from the standpoint of those economies down there that are levered to oil and gas or that are booming?

Bill Dorey

I guess my answer would be we're not seeing it, because I don't think that's a market that we campaign particularly. So, I would say, as it affects us, the answer is probably no.

Mike, anything you want to add to that?

Mike Donnino

I'd say that's probably true, although I think it will affect where transportation dollars go in the future, the local taxes and things like that, provides more matching money and that will give more federal dollars eventually.

Brian Rafn - Morgan Dempsey

Okay. Question maybe for Bill. What do you see horizon-wise going out, your plans from the standpoint of vertical integration for materials, gravel pits and that thing, for Granite East?

Bill Dorey

That's a very good question. I would answer it probably this way. The easiest geographic expansion for us to do is to continue to grow in the West and that it has been our focus for several reasons. One, because we have the infrastructure here in the West to support that kind of growth, we can bolt these vertically integrated businesses on in the West and for us to try to accomplish the same thing in the East, we really don't have the infrastructure in the East to support it, nor do we feel that we can adequately support it from the West, because of just the distance and geography.

So, if we were to move to the East and try to acquire a vertically integrated company that mirrored the model that we operate in the West, if we tried to do that in the East, it would need to be a sizeable business that had critical mass to where it could, to some degree, stand alone.

So, it's a little bit more of a challenge and we have to be… it would be expensive. I didn’t say that we wouldn't do it. And we have begun to do some market work to prepare for an opportunity if it came our way. We have had some conversation with companies in the East, but we've never been in a position to where we felt like we found the right deal at the right price at this point.

Brian Rafn - Morgan Dempsey

Okay. One question, just asking out of ignorance, when you talk about putting firewalls, Proposition 1B, and not borrowing from the Highway Trust and that type of thing, relative to California, when you're talking about these seasonal wildfires or earthquakes, do those type of situations, how are they funded? If some of the comments over the fires that, talking about how these states are paying for the fire fighting and that, is that a pressure issue or an emergency issue to tap into the Highway Trust Funds?

Bill Dorey

Well, I think it is, but I don't think it's… I wouldn't characterize it as a direct. It's not directly associated with trust fund but the state’s spent I don't know what the number is but $100 million or thereabouts I suppose, maybe more, to fight these fires. They had firefighters from all over the place that came to California to spend time in the woods with axes and trucks and so on. And that was likely paid, and I know that it's absolutely likely paid out of the general fund. So, now the general fund becomes more out of whack from a balance standpoint and they're going to have to balance this budget at some point.

So, in that regard, I suppose it does put pressure on anything… on everything, frankly, including transportation funding. I don't think that's the tipping point here in this debate. I think the real tipping point is how much Governor Schwarzenegger wants to defend, what has been one of his primary campaign focuses, and that is to rebuild the infrastructure in the State of California. And that's been paramount in his second term and he does not seem to want to give any of that up and we're hopeful that he doesn't.

Brian Rafn - Morgan Dempsey

Okay. One more for you. The expiration of SAFETEA-LU, I think September 30 of '09, the $286 billion funding are from the federal government and talking about maybe a $400 billion, with the craziness, the duration, the difficulty with passing the last one, do you guys expect, there's been certainly more expectation, there's been certainly more talk about infrastructure. Does that give a sense of urgency, do you think, that Congress not to muddle along like it did on SAFETEA-LU? Or, give me a sense of what you guys are seeing?

Bill Dorey

Well, I think that's another interesting question. It probably doesn't have a clear answer. You know, it's interesting. When the bridge fell down in Minneapolis, you did hear on CNN and through, with politicians, some increased concern about the state of our infrastructure in this country. That's absolutely real. There's no question about that.

I've not heard a lot about it in the presidential campaign so far. Although I think it is probably beginning to become clear that a McCain administration would be less favorable to stepping up to the plate and funding what is really necessary to address aging infrastructure in this country. My sense is that if Obama were elected, it probably would be a better chance that, between he and Oberstar and some of the folks that are on the Transportation Committee, the Democrats that are on the Transportation Committee, that they might step up and deal with it.

So, that's about all I know. I mean, I think there's more sentiment from the Democrats to try to deal with it than the Republicans. But either way, it's a problem that's not going away and I think the public is not going to let the politicians off. But, you know…

Brian Rafn

Okay. Good. Thanks. Appreciate it.

Operator

Thank you. There are no further questions at this time. I will now turn the call back over to the presenters for closing remarks.

Bill Dorey

Okay. Well, I really appreciate you all joining us this morning. This has been a good call and it's been… we've been happy that you were interested and tuned in. I'd like to maybe end with a couple of just summary remarks.

We're doing really pretty well. I mean, there's no question we're battling an economic environment that has changed relative to a couple of years back. But I think, as a management team and as a company, we're feeling pretty good about the way that we're handling the situation. We're getting a little help from some of the propositions out in the West.

But most of what you see in our results is because our teams have made the adjustments necessary and, as Jim has said, we've made the commitment to bid just about everything that comes along. We're getting our share of it. We're trying to hold our margins up. And I think that's being reflected in our performance through the first half of this year.

Our materials, no question, has slowed down a little bit, but nevertheless we're doing okay with it and I do expect the second half of the year will be stronger certainly than the first half from a materials standpoint. The funding issue, as we had a lot of questions on funding through this call, I think those are real concerns. But as we've suggested, we do think that there's a lot of public sentiment and there's a lot of sentiment within our elected officials to try to deal with this problem. So, I don't think it's going to get ignored, either at the state level in most states or at the federal level.

Our large project pipeline is full. We said that in our scripted remarks. We've had a pretty significant turnaround in that large work from the standpoint of recognizing losses, where we had like, I think, 13 quarters in a row where we had bad news in our large projects. And now we've had five or so where mostly the news has been pretty upbeat. So, I think we clearly turned that business around we're really pleased with that.

We are dealing with our overhead and our administrative structure, but we do have some initiatives in place that have been started this year. We do expect that those will be evident certainly in 2009 for those of you who pay attention to that. And it's something that's important to us and important to, I think, the long-term health of the company. We are dealing with that.

I think, generally speaking, we have adapted our business to the environment that we're in and we're doing pretty well with it. And we're really happy with that and we're pleased that you all have taken an interest in our company. We will be around this morning, so if you have questions, we'll be here. Thank you.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!