Q3 2019 Earnings Call
Good morning, My name is Emma and I'll be your conference facilitator today at this time I would like to welcome everyone. The granite construction Investor Relations.
2019 conference call. This call is being recorded all lines have been placed on mute to prevent any background noise and after the speaker's remarks, there will be a question and answer period.
Asked a question. Please press star one. Please note we will take one question and one follow up question from each participant today. It is now my pleasure to turn the conference over to your hedges.
Investor relation sleep leasing Curtis ma'am the floor is yours.
Thank you Hello, and good morning, everybody wanted welcome you to the granite construction incorporated third quarter 2019 earnings conference call I'm pleased to be here today, with President and Chief Executive Officer, Jeff, Robert and Senior Vice President and Chief Financial Officer Junkie showed the sorry.
Please note that todays earnings presentation references flights available on the events and presentations page of granite Investor Relations website, investor Dot granite construction dot com.
We begin today with an overview of the company's Safe Harbor language sound like a discussion today may include forward looking statement.
Forward looking statements our estimates, reflecting the current expectations and best judgment senior management regarding future events occurrences growth demand strategic plan circumstances.
Activities for format outcome guidance backlog committed at awarded projects and result.
Accurate actual results could differ materially from statements made today. Please refer to grant. Its most recent 10-K intend to filing for more complete description of risk factors that could affect projections and assumption.
The company assumes no obligation to update forward looking statement, whether the result of new information future events or otherwise.
Certain non-GAAP measures, maybe discuss during today's call and from time to time by the company's executive.
These include but are not limited to adjusted EBITDA adjusted EBITDA margin adjusted net income or loss adjusted earnings or loss per share.
Committed and awarded projects backlog of all result.
Please note that some metrics now may reference or excludes nonrecurring acquisition related expenses and onetime integration costs.
Reconciliations of certain non-GAAP measures are included as part of our earning press releases and company presentation, which aren't bad which are available on our Investor Relations website.
Now I would like to trying to call over to granite construction incorporated President and Chief Executive Officer, Jim Robert.
Thank you Lisa and good morning, everyone I want to thank you all for joining us [laughter] beforehand. The contribution to review our results in detail.
First touch on progress made in challenges remaining at our heavy civil operating room.
We'll also discuss how our core businesses are capitalizing on well funded infrastructure markets grow or end market focused business.
As we get started I also want to acknowledge some positive accomplishments to reflect the strength and the value ranch strong core values and the brand its people culture.
The second consecutive year ran it doesn't recognize and certified as a great place to do.
The certification is a rigorous data driven methodology developed by Great places to work that is based on validated employee feedback we're very proud to once again be certified as a great place to work affect me powerful partnership was the one we have with our employees everything are granted begins with our people [laughter]. We also recognize and deeply appreciate granite.
Poised for continuously improving safety performance 2019 is once again showing to all employees turn reached new heights, when taking care of one another we're rapidly approaching another record year with our year to date safety incident tracking at the lowest rate in the history of the company.
Even more impressive. These results include the businesses. We acquired last year were safety performance has improved dramatically, helping this portion of the company reach industry best standards in just over the years car.
We're also very proud what else would be won first place in the heavy civil highway category for over 3 million worker hours.
Associated General contractor of California is construction safety Excellence Awards. This is the second consecutive year. The granite has been recognized for this prestigious award.
I congratulate our teams corner safe work. These positive outcomes report, we are as a company [noise].
And I also want to walk on Jorge Posada took right Jorge joined US recently, as vice president of diversity and inclusion.
This new agree to position reflects our commitment to support ran its guy I believe that diverse backgrounds perspectives and experiences enhance creativity and innovation.
We are confident that or his work would be an important contributor to the evolution of grants culture and future success.
Moving now to our operational performance for granite third quarter results reflect divergent trends. One is very positive trend was strong for operational performance and healthy markets. We anticipate this trend will fuel improved profitability and cash flow for the foreseeable future in our view up to 2023 and beyond.
In contrast, our heavy civil operating group continues to be challenged particularly coming off the heels of our strategic review.
While we are not alone in the industry in wrestling with the risk imbalance that is pervasive on large fixed price design build projects. We are laser focused on turning around the performance of this business.
What's the strategic review of our heavy Civil group now complete we are taking immediate action to reverse this trend.
This business is not operating at an acceptable level and our decisive actions will right size this business with the overall organization.
Management of our heavy Civil group operations now was led by 28 your branded veteran Dave Richard She was headed are highly successful northwest operating group since 2013.
Dave's immediate effort will be focused on assessing risk and opportunities in or heavy civil operating portfolio.
He and his team will lead the charge and operational assessment extensive bid scrutiny additional forecast review and incremental assessments of strategic fundamentals and considerations the potential projects of scale in our opportunity set.
Oh Larkin he took over the California group in 2017 today leads our construction materials operations Kyle's more than two decade career granted has resulted in a proven record of consistent strong performance in leadership in all areas of the vertically integrated businesses. His responsibilities include oversight of the California thing.
North West group and power tunnel and federal divisions.
It will take some time the alignment of operational capabilities with strategic opportunities a scale will be integrated into how we approach our entire portfolio with all our businesses using an operating from the same playbook.
David Kyle will lead the upper to align granites operational teams proving ground of processes and tools to drive consistent profitable results. We believe their leadership experience is key to align our operations and drive improved results using proven practices followed in our successful vertically integrated construction materials model.
Our strategic review of the heavy civil business highlighted that changes we introduced into this part of our business more than two years ago have not fully mitigated the challenges that apply to us for some time.
While we believe the projects at scale have significant strategic value granites portfolio, we must be mindful that balance these opportunities in alignment with our existing capabilities and resources, our strategic review, which resulted in a narrowing of our market focus, including some very real practical geographic and owner related.
Considerations, we have ceased bidding large design build jobs in markets that lack competitive strategic granted advantages such as New York, where clients and contracting methods do not currently allow for builders and clients to share risk appropriately.
While dispute avoidance is a primary focus and current and future opportunities. We are taking action to enhance our existing dispute resolution process is to capture value and mitigate risk.
We also have overlay risk and scope reduction parameters for the heavy civil group, which include project scope limitation below $1 billion and targeting below $500 million reduction a pure design build and elimination of three p. fixed price projects reduce project duration, primarily targeting projects, a four years or less.
Yes.
Tension a regional or geographic project alignment to footprints. We're grant it has an established presence.
We've implemented refined estimating a risk mitigation approach to project pricing.
And finally, we're limiting work to no more than 15% of our overall company revenue.
Ran it has written its nerdy century long history by consistently balancing resources opportunities on risk and we believe a key component of our future success again will be consistent profitable performance on projects at scale.
We put the existing framework for the resolution of changes in disputes on project upscale does not work. We believe owners are not acting in good faith on there's some they are not timely and unfortunately, we had our industry partners could not have anticipated having to price this incremental risk into projects in the third quarter and for most of the past couple of years.
As many of the heavy civil project issues were due to unanticipated costs to respond to owner demands on the job.
The increase disputed contract cost abroad, well beyond any reasonable expectation at the time, we entered into these contracts in many cases. This this translated into withheld compensation. Despite successful completion of projects and project milestones the gap between revenue associated with disputed work a recognition up costs is that.
Her whitening, we're vigorously pursuing claims with the owners, but the process to cover reclaim recover claim revenue significantly lags the cost recognition process one of the most unfortunate things for this business is how the claim process amplifies the project losses due to timing misalignment between revenues and costs.
Yes.
It's also carries over door outlook, which together, we'll share with you shortly and which we hope proved to be conservative with opportunities in the area of dispute resolution.
Now before I hand, the call to together with our results.
Meet spent a couple more minutes talking about the trends that allowed us to generate positive earnings in the quarter.
Strong backlog and Sunshine combined and a successful recipe in the third quarter, yielding the strongest performance by our vertically integrated business in well over a decade.
The positive environment continues to fuel our long term outlook for growth and profitability.
Most importantly, broad based demand remains strong across geographies and end markets.
Solid private market activity and public funding friends are supporting incremental investment across key grant of geographies in California, the west and the Midwest.
We continue to target a range of at least a billion dollar to project bidding activity per month with about three quarters of project sizes below $150 million through the third quarter, we finished with $4.7 billion and committed and awarded projects or cap up more than 44% well over $1 billion from last year.
Today, our backlog composition is shifting to shorter duration lower value contracts as result of our stepped up diversification and risk reduction strategy.
With a steady flow of billions of dollars a value creating opportunities expected over the next few years, we understand we must improve performance and reduce the operational distraction that recurring heavy civil group underperformance has created on the entire organization.
With that I'll now turn the call over distribution to discuss our financial results and our outlook for litigation.
Thank you Jim and good morning, everyone results in the third quarter into our 2019 have been hampered by heavy civil operating group apartments, which math strong profitable market conditions and business performance in our construction materials businesses.
Favorable weather provided our teams with the runway needed to work efficiently this quarter and we made up a lot of ground loss to wet weather to me as a result, grannis consolidated third quarter 2019 revenues were 1.1 billion up more than 3% year over year and year to date revenues were 2.5 billion.
Also up modestly compared to last year.
With the progression of these large complex heavy civil projects. This year, we encounter significant unanticipated issues, requiring additional cost to perform owner of acquired demand.
Third quarter 2019 earnings per share were 43 cents compared to earnings per share of Dollarsseventeen last year year to date loss was $2.39 per share compared to earnings of 84 cents per share in the prior year.
Quarterly and year to date 2019 results also include acquisition related expenses of 7.1 million and $27.2 million respectively.
Third quarter 2019, gross profit was 91.4 million compared to $244.5 million last year.
On a year to date basis gross profit was $79.5 million down from $281.1 million in 2018.
With last year's acquisitions now more than a year behind us we continue to align cost structures selling general and administrative expenses increased 3.8% year over year to 72.4 million into third quarter of 29 team with S. DNA as a percentage of revenue steady at 6.7%.
[noise] granted have increased 44.5% to $4.7 billion, which includes approximately a billion dollars of negotiated work related to project procurements in the past 12 to 18 month.
Today, the trend in composition and quality of our cap is evolving with a greater mix of smaller that's valued granite led negotiated word combined with the geographical in end market diversity.
Remember, we know some form over 4000 jobs annually and the average size up by project in our backlog is about $2 million now, let's dive into segment results this quarter.
In the third quarter. The transportation segment revenue was $598.6 million down about 2% from 610 million 0.8 in 2018 on a year to date basis revenue was $1.34 billion down about 9% from last year due to a reduction of heavy civil.
Revenue and like whether through May quarterly gross profit was $13.6 million compared to third quarter 2018, gross profit of $71 million, which included $69.3 million and 8.2 million of heavy civil operating group losses, respectively.
On a year to date basis gross loss was $65 million compared to last years gross profit of hundred $38.4 million, which included 214 million and 14 million of heavy civil operating loss group losses, respectively.
Transportation cap ended the September 2019 quarter at a $3.7 billion, which notably includes our billion dollars portfolio of negotiated work.
In the water segment third quarter revenues increased $235.9 million compared 224.3 million in 2018.
On a year to date basis revenues were $348 million up more than 50% from last year, primarily driven by 2018 acquisition.
Water segment gross profit was $15 million down from $24.1 million in prior year.
Year to date gross profit was $34.4 million down from 41, plus 41 million in 2018 during the quarter and in 2019 segment gross profit was negatively impacted in a business. We recently divested.
Water segment cap totaled 245.3 million as of September 30, 2019.
Specialty segment revenue grew nearly 18% year over year to 224.5 million in the third quarter with a year to date revenue of $540.2 million up more than 17% from 2018.
Revenue performance reflects a robust private market activity and site preparation power and mining markets and the impact of acquisitions last year.
Third quarter 2019, gross profit was $38.3 million up from $28.1 million last year with gross profit margin performance expanding about 240 basis points.
Year to date gross profit was $75.4 million compared to $65.3 million last year with gross profit margin inline with last years at 14%.
Specialty cap totaled $746.6 million at end of September 2019.
In the third quarter of 2019 material segment revenue was wondering $29.1 million down slightly from last year on a year to date bases revenues were $268.4 million down about 3%. The modest year to date decline is attributable to wet weather experienced through may of this year across the western.
The United States that delayed what was already pent up demand in the market.
Third quarter 2019, gross profit was $24.5 million compared to $21.3 million last year with gross profit margin of 19% up from 16.4% in 2018.
Year to date gross profit was $34.7 million compared to $36.3 million last year with gross profit margin of 12.9% down slightly from last year.
Mild weather finally gave our vertically integrated business the opportunity in our teams knocked it out at the park this quarter with volumes key in the materials business and with positive operating momentum carrying into October mild weather is allowing our teams to drive efficiency gains to the business and to the bottom line good weather and.
Positive business momentum aren't important ingredients to drivers through Q4 and to support our 2020 growth expectation.
While we do not yet have a clear sight line of sight on all of 20 twentys opportunities and challenges. We're confident that overall results will return to more normal levels representative of the long term earnings power of our business granites long term strategic dynamics remain intact, why we're not providing guidance for.
The remainder of the year, our preliminary expectations for 2020, our mid single digit consolidated revenue growth in adjusted EBITDA margin of 6.5% 8.5%.
We will provide an update for our 2020 earnings during our fourth quarter earnings call next February and with that I will turn the call back over to Jim. Thank you to issue.
It has become clear that the heavy civil industry. We helped lead has structural issues the ability for the industry to effectively and profitably deliver projects up significant scale remains impacted my flawed assumptions have broken practices at scale, both by construction participants and by project orders It has up to us.
Builders that as America's infrastructure company to break this chain.
We are committed to and we are taking immediate action to fix or heavy civil business from within we will avoid risk for which we are not compensated while we'll take some time our teams already have begun working to get the risk reward bounce back in equilibrium.
We are grounded in granites core values as we execute our strategy assess markets redirect resources and focus our teams on activity that creates value for all stakeholders ran it has immensely talented teams across the country and we're committed to making the necessary business changes that will enable our teams to deliver consistent profitable.
Performance and with that we'll be happy to answer your questions.
The ask a question. Please press star one please limit yourself to one question and one follow up questions and feel free to jump back into queue. If you have any additional questions.
Our first question is from Michael did with vertical research.
[noise], We said you said.
Good morning.
[noise], Jim could you elaborate further on the third quarter or charges taken in heavy civil.
There are any is a combination of legacy projects you touched upon in the second quarter, how many more you'd all that in this review that you sound in the third quarter and is that also limiting your ability to provide this near term guidance because of the review that still needs to run through the books.
Okay. So so the the work we did in over the last 90 days focused on a strategic review of the entire heavy heavy civil business.
And as we looked at it and made a bunch of determinations that you see in the press release and as discussed here. They are a product of the overall business. What we reported in Q2 and what were reported in Q3 of course, there's a combination of projects in there and all of them up made up that segment of loss.
Is the key ingredient as as we go forward and think about our performance going forward. The key ingredient for Q4, Mike is really weather and and as we look at it today shoot fluctuations in our business occur every Q4 and when we felt it was far more important focus on.
On expectations for 2020 than just one quarter out so no I would not suggest that the biggest issue that were that we have we're not talking about Q4 is heavy civil it's more relative to weather and as we look forward to 2020, our guidance into 2020 is focused on getting our heavy civil.
Business back to what I would call a conservative approach towards not contributing to the bottom line for 2020, but focusing to stabilize it and that is embedded into the guidance for 2020.
So my follow up is relative to that preliminary guidance. So.
Given what your guidance was for 2018.
Revenue and margin basis.
Coaches had the last six months on the large projects.
That guidance, usually conservative, but it's also reflective of the major changes in the large project issue that whatever anticipation of contribution that you would have anticipated otherwise you're like you're not going to see.
Correct from the perspective of both revenue and earnings. So so one of the things. We've mentioned is that our anticipation is to bid smaller work.
And and that will automatically or reduce the revenue relative to that side of the business and we are not suggesting that the heavy civil group will provide any contribution to the company and 2020 as we work through all of the tactical steps of our strategic review to get that business back into alignment.
In 2020, but what I will say is about the growth that you will see in our earnings projections for next year and our guidance is coming from the core strong operating performance part of our business, which which obviously as we can you can tell and the third quarter is operating at a very high level.
Thanks.
Thanks, Mike.
Our next question comes from Alex Reichel with B Riley FBR.
Thanks, Good morning, Jim Education.
Good morning, Alex [laughter], Jim frankly, I'm, having a little bit of a difficult time here bridging the strength in the vertical business versus the reported results and the transportation segment.
And your commentary about the heavy civil group and the losses in that segment. So I don't know if you can walk me from one end to the other [laughter], but I would love to just kind of.
Narrow in and dig down into appreciating understanding how strong that vertical business was.
Okay.
And I think that really is the core the subject matter Alex of our entire portfolio today. So so when we look at.
I'm trying to bridge the gap and I think that's a great way of looking at it for the results in Q3, certainly the losses that we reported a in the heavy civil business are the operating income of the heavy civil business and I think we reported there that there was a $69 million loss in that business.
Yes that is all in the transportation segment.
And and therefore, what you can do it was offset that with the strong operating performance of the of the vertically integrated business and its shows that the offset with still at a positive gross profit was significant margin improvement in the overall vertically.
Integrated business. So you do the entire.
Performance issues of the heavy civil reside in the transportation sector alone does that help.
It does and what was the revenue contribution in the transportation segment associated with the heavy civil group.
Oh Boy I don't have that front I mean, I think we'd actually I can find that for you, though if you give us a few minutes lever shot and Alex I can certainly come back with that.
Perfect and then.
[laughter] Keith.
Your lack of guidance for 2019 would suggest you have a little bit old <unk> or you have less visibility on.
Maybe additional cost to perform in the fourth quarter associated with some of these large projects can you discuss a little bit greater detail.
Yeah, well, certainly I think that one of the things that we thought was important what's to guide our investors to a to a more or called prudent one year outlook versus a one quarter outlook and certain there there can always be adjustments.
In our business, but the key ingredient here was to try to get to bridge. The gap through the end to 2020 and then there's two ingredients in the third and the fourth quarter, obviously, there could be more adjustments in the heavy civil business that we're not aware up today, but the she ingredient also is that we've got a brand new team, leading heavy civil and we're excited.
What about Dave and his oversight and we're asking him to dive deep over the next couple of months to make sure that that business is set for long term value. So we didn't want to provide too much detail on that business. While Dave is doing is detailed review, but the other thing Alex it's really important here is that that as we.
Produced through Q4, whether will play a major role in our core business. We had good weather in Q3 and our core operating performance was very very strong like you said the strong as it's been an almost 10 years and if we can continue with the good whether we could have excellent results and that part of our business in Q4 as well so with the new.
Chain, leading the heavy civil group is starting today and the opportunity for the core operating performance to vary depending on whether made it feel like why provide a short term.
Guys. This when the real key to the company. We believe this to try to portray where the company's going over the next a year and longer.
Alex going back to your sorry, I got the revenue number let me just given that that's $162 million for that quarter for the heavy civil group compared to the $224 million last year.
Sorry, perfect and then one last question last quarter, Jim you update us on those for legacy projects and you talked about expectations for when they would be completed and you talked about the revenue value in backlog could you update us on those two items and then in this case.
Third quarter were there any other projects and the heavy civil group that created some of the drag or.
Did any other projects come in materially below expectations that caused the heavy civil segment to to be week.
Okay. So so two things and so let's talk about the completion of legacy projects.
They're they're on track to be completed as as planned Alex and I would suggest that all three of the four will still be done by early to middle of next year and as we mentioned one will move through the end to 2021 add that is on track.
And there was some adjustments in Q3 from the legacy projects I'm certainly mitigated tremendously from what you saw in Q2.
There's there's potential for adjustments going forward, but they were much more much minor compared to what you saw a previously and there are other yes are there are other projects inside of the portfolio that did add to the overall performance of the heavy civil group and that there was one.
Project literally one project that added to it that will be completed the ended the year or so so movement going forward, but getting them behind us as quickly as possible. Other new management team has been told to work through these expedite the delivery of them and get to behind us as much as we can.
In 2019 to look forward to 2020 as a as a positive here for the company.
Thank you.
Thank you Alex.
Our next question comes from Brent Thielman with D.A. Davidson.
Thanks, Mike.
More breadth.
Hey, Jim a thought the Alex's question.
How many of the new jobs identified we still need to work through the 2020.
So I try to get Brent can you ask that again.
The new jobs identified we took some losses this quarter beyond the legacy projects. How many of those will you continue to work through 2020.
Oh, we have is so so if you look out it you know you and certainly the Q will define it in more detail.
There will be a couple of jobs that will be going full bore in 2020 that took some charges in.
Q3, but again I don't think there are a major portion of the overall performance issues. The performance issues resided and really the one job was the biggest single issue and a host of smaller jobs combined so so the one job that was the biggest issue is completed being completed as.
As we speak and the legacy jobs will be completed by mid year at the latest next year with one legacy job carrying into the into 2021.
Okay, and then on the <unk> the water business.
Wasn't clear to me how large was the hit.
The business to from the now divested business can you can you talk to us about with that business was and how much now that you've divested how much does that take out of revenue on annual basis going forward.
Yeah, I thought it wasn't a big business fret about but it was a business that had playing a our predecessor for quite some time and and although it was a I'll call. It a sizable loss for that business.
You know it was it was we'll just quantify it was less than $10 million. So so it was something that added to the poor performance.
We did have a a plan to divest it we did divested.
But we did take the charge.
Okay.
<unk>.
You bet.
Once again to ask a question please press star one.
Our next question comes from.
As you were doing it with Cowen.
Hey, guys. Good morning. This just once he's going for Joe.
Good morning.
So I wanted to follow up on the on the heavy civil loss is there any reason why it was not taken last quarter when everything else was announced or was this something that was known back then and how likely is said to persist in the in the future.
Okay. So so certainly we would have taken it if it was known in Q2.
What we found was that on a couple of these projects they never knew and I mentioned it in the discussion earlier. These were issues that we are continuing to dispute with owners and and we believe that there's a lag in the revenue and the cost portion of this we booked a cost.
In in the quarter with the anticipation that we're going to continue to pursue additional revenue as we go forward and that's a big part of our strategic plan.
Tactical steps is that we believe we need to do a stronger better job of pursuing a these dispute resolutions as we go forward. So certainly they weren't no and as we go forward as we go forward. It is important to remember that we can always have more issues, although I think or what.
Getting our arms around them in a much stronger fashion and and we believe that we're down to a dual very small group of items, but every single quarter, we have to assess issues that occur in the quarter and they can get better or worse example, you could have another owner dispute that could cause you.
I'll call a negative consequences the earnings or you can settle a dispute above what your expectations were and you can actually have a positive.
Net from it so we look at that it every single quarter and report the new events in the quarter that they were taken and they act occurred.
Okay. Thank you Jim that's that's helpful and just sort of the for the follow up on the revenue growth outlook. You guys started the year with a low teens growth outlook, which was then brought down to high single digits and now we just got to 2020.
Tony Tony outlook of some mid single digits could you just give us some color as to why this outlook has been coming down, especially with the supported funding environment that you guys are seeing.
Certainly certainly social lumber key ingredients is that that we expect nice growth inside of our core operating business of our vertically integrated construction materials business, which also by the way is driving some of those really good specialty numbers.
Got you saw the quarter, 17% margin. So so that business will grow nicely in 2020, because as we look forward the markets are strong very healthy.
And you'll see that on the higher end of any growth expectations, what you're going to see as part of our strategic plan as a reduction in the heavy civil business and so therefore, when you offset the nice growth on a core part of the business with a reduction in the size of the heavy civil business. That's why we came up with.
The newer the newer lower overall number but it is really a combination of high growth in the core part of the business and lower growth in the heavy civil business.
Which.
We believe it will help obviously optimize our value by minimizing the size of the heavy civil business at one of the the key steps in our strategic review was to lay a guideline out there as to how large that heavy civil business would be relative to the overall size the company.
As you noted and hurt us we expected to be no more than 15% of our overall company revenue so you'll see that come down over time.
As we try to risk adjust our overall portfolio and I think that's a key ingredient as you look at the company going forward.
Following the core vertically integrated business and reducing the size of the heavy civil business. Yeah, I would say that are heavy civil how you know the charges that a that we took two years. According to data on the year to date bases is about 5% drag on our revenue for the year, while the our vertically integrations have grown.
Almost about double digits a in Q3, so you know the macro environment than our western operations is very strong and we are seeing that double digit growth in that environment, where youre seeing a drag is on our heavy civil right and that's playing drag for 20 pathway based on it based on our strategic review and and.
Focusing on getting that business the de risks that overall business within the company.
That makes sense. Thank you.
You bet.
Our next question comes from Jerry Rubbish with Goldman Sachs.
Yes, hi, good morning, everyone. Jim can you talk about the overall a big environment.
Obviously department of transportation budgets looked pretty robust, but we've seen slowing bid awards in California, and Texas and I'm wondering if you just comment on what you're seeing a is that a slowdown in the awards impacting your bookings rate and what's your take on the seeming disconnect at least over the past couple of my.
It's a really strong budgets and the pace a bit awards analytics.
Yeah, Jerry I think that's a good question relative to this was very lumpy what we've seen in the deal cheese is as they as they build their their annual budgets for the upcoming fiscal year.
We know that the budgets have increased nicely from the 2018 19 fiscal year to the 2019 20 fiscal year, but what we have seen is that they tend to lump them into quarters based on when the projects have been designed and are ready for procurement. So so we did see a as as noted that they were a little slow.
In Q3 in the state of California, but that means that the additional bidding environment is gonna be really strong as we go forward because they have already budgeted the full increase for 2020 to 2021. So I think you're just going to see a little lumpiness from quarter to quarter, Texas is the same way the state of Washington has the same way which is.
A huge state for granite.
And they the overall year is not on a I'll call. It a very even keel, it's very lumpy quarter for.
Yes.
Okay. That's.
Important Jerry just let me if I could the key ingredient to granted when we look at or the amount of work that we bid on it on a monthly basis, we're still bidding today about a billion dollars a month.
And that we haven't seen that that ever historically in the company and the key there is that we have slowed down the heavy civil business. We've got about I think 1.3 billion. We're bidding for the remainder of 2019 in that part of our business, but the day to day part of our business.
The jobs less than 100 million has really just rocketed up to the new levels and so our hit rate going up.
You'll see our cap going up even with the deal cheese in the last quarter slowing down a little bit. It's the specialty work gets the it's the mining work, it's the commercial and residential mostly commercial industrial business has really boomed and that's why you're seeing the specialty business do so well at the same time so the combination.
Of our day to day smaller work is very very healthy I don't see that changing.
Going forward I see it being very strong and 2020 and I think the key ingredient to our guidance is that although I think there there could be a disappointment relative to the overall growth of the company. It is focused on growing the right part of our business.
The high performing part of our business and slowing down getting our arms around the heavy civil business going step by step with new management and getting that arm around us. So that we can perform at a consistent higher level and that business as we go forward.
And on that.
As you look at the heavy civil backlog or no color billion eight or wherever the digested the quarter what the portion that backlog is project will.
After your strategic review can you just give us a sense because you're very clear about identifying the vintage of project. So you are concerned with that I Wonder if you just help us get a sense for what proportion that backlog.
We should be thinking about as book after the strategic changes being made a low risk.
Okay, maybe just one more time the amount of the overall backlog in our heavy civil group is about 1.6 to 1.7 billion.
And you're asking to break that down to further Jerry what does it exactly would you like to here.
Sure. So you are clear that big contracts, so youre concerned with where projects that were booked.
Between 24 team in 2017, if I remember the exact answer to your concern would so I'm wondering out of the remaining backlog. So we have now considering reporting to put some these projects in 6 billion seven what proportion of that has been booked under the new parameters that have lower local cases.
Okay. So it's kind of some trouble last time.
Okay. So we've got I mean at one way to look out it is that that out of the overall portfolio I would suggest about.
Oh 700 million of it has been booked in the last couple of years. So so with a portion of it being the legacy projects and the remainder of it being the interim from 2014 to 2017. So if you want to look at it from the perspective of I think we've got a.
Couple of hundred million still to burn on the legacy projects you've got about.
700 million into new work since 2017.
And do you have got the remainder of would be.
Built between 14 and 17, so the the key ingredient is above the 1.7.
700 million it as of the new is brand new that we believe is under the new oversight the new expectations and what we did as when we projected out our earnings we took the entire portfolio into 2020 and said it will not create value for the overall grant of portfolio.
Ill.
And that would be because we would be read finishing up the older jobs and 12 to 14 jobs, we have a job or two and the 15 to 17 category and then the new 700 plus million from 17 on will begin in 2020. So that's kind of the breakout 300, and then maybe use.
The 700 would be 14 to 17, and then 700 beyond it.
Okay.
Appreciate the color and then as part of the strategic review I'm wondering if you could just talk about or whether you evaluating other parts of the portfolio clearly, but the water day to day. That's truly is one piece maybe it was completed previously but any other pieces that you've thought about and you know specifically we've seen pretty.
Pretty healthy valuations for some heavy materials businesses in the market given the low interest rates and I'm wondering.
If you can talk about other parts of the portfolio review as it stands now.
Sure. So the focus Jerry over the last 90 days, what was the heavy civil business trying to get it back in alignment with a with a risk reward and equilibrium, so but relative to the water business that we had we when we did our initial review and our work over the last year during the integration.
We did further perfect our expectation that there were certain parts of the business that we're going to divest and what we did in the third quarter. Obviously was divest on one portion of those the overall granite strategy is absolutely focused on growing our vertically integrated business and that hasn't changed now we've been distracted and rightfully so with.
Heavy civil business to work hard to get that back into alignment, but our key growth strategy is to expand our investment in our construction materials business going forward.
And and as we've said strategically when we get this heavy civil this business back on track, which we are working to do immediately we will continue we'll continue to see us invest in geographically diversify our vertically integrated business consisting of a large portion of that obviously is our materials business so that.
We agree with you that that part of the business is very healthy you saw a 19% margins.
In Q3 that business relative to the granite portfolio strictly needs good weather to keep that business plugging along at a nice pace. It it's very healthy and we don't see that changing for quite some time because most of the markets that we reside in today have a very nice long term focused investment approach.
And we think the funding is there for quite some time.
I appreciate discussion thank you.
Okay, Jerry Thank you.
Again to ask your question. Please press star one.
Our next question comes from Alex renewal with B. Riley FBR.
Thanks, Jim can you remind us what you have remaining under your share.
Buyback authorization and if there's any limitations in the near term on that.
Just want to go ahead, yeah, I mean, we have a 200 million dollar where they authorizations in place.
As of the second quarter, we had about 190 million available we did buy some shares during the third quarters and we will continue to be opportunistic and monitor what happens with the market. So we certainly have an opportunity to be in the marketplace.
How many shares did you buy in the third quarter.
I want to 300000 shares.
Okay.
And it. In addition management also did go into the market management, and an Anda Anda directors right yeah.
Thank you.
Our next question comes from Jim brilliant with century management.
Hi, guys.
Hi, Joe Yeah, just a couple of clarification. So on the on the heavy civil side Youve, obviously run some additional costs.
Without receiving the offsetting revenue.
Just from an accounting standpoint until you have this dispute resolved.
What's that what's so so which we can see you know you lost 69 million in the quarter, but it didnt habit.
The respective cash impact.
But you mentioned that you're going to.
Press harder on dispute resolution. So what will you be doing now that you haven't been doing in the past the close the gap between additional costs.
And.
Recognition of revenue when you get the discrete resolved.
You know Jim I think that is absolutely a key question and a key portion of our plan going forward. So several things because you're right I mentioned in the discussion that its widening the amount of amount of disputes versus what we can actually book in terms of revenue. So so what we've done.
It is on some of our big disputes that one of the biggest I'd been personally involved in it.
Ben on the East coast working in the middle of it with with the upper echelon of the one of our major owners, we've actually had a ceos of our of our group all meet with.
The upper echelon of a major customer to expedite and we haven't agreed path forward now on one major.
Dispute, we're also focusing with with full time dispute personnel leadership from granite and our partners on the on the joint ventures, we are catching full time people to the jobs, whereas before the management team and the external.
Illegal help would really drive work with the owner or we've changed that.
We put full time people on the projects to expedite the worked out of these disputes secondarily on the new jobs that we have.
On the new jobs, we have today that we've gotten in the last year were putting full time contracted administrators on these jobs to focus on dispute resolution upfront.
Instead of waiting for what we consider a bad practice in the industry, whereas when disputes occur notify and you resolve them at the tail end of the job because that's an option allowable under contract that's what's happening today, Jim on the projects that we're in so as we get to the end here certainly we expect resolution with the potential.
The opportunity to enhance our earnings on our cash flow, but all new projects. We now have full time resources focused on contract administration to make sure that we don't get put in this position again.
[noise] and and what is the cash that has yet to be collected as you resolve these disputes.
So so obviously, it's quite large gem and we don't talk about the actual numbers because of the significance of the work we're doing with the individual owners, but but yes. It's it's it's huge I mean, there's.
All say hundreds of millions involved.
And and based on what you said earlier some of that is.
Year end, a large portion of that is.
At this time next year.
Well I don't I can't put a date on the resolution in fact, there was there was that same discussion that I had I remember in Q2.
No. They asked was well how much of this or you're going to collect in Q3, Q4, and and I would tell you that do that as we progress through Q3, we worked hard.
To get more of these claims well defined these disputes well defined we've worked hard on cash flow with the owners and obviously, we didn't come to come to conclusion in Q3 with anything significant at all so if things could happen in Q4 that could happen in Q1 Q2 Q3 next year, we can't put a timeframe on it with the owner.
Because we're still in negotiations as we speak and remember there was more than one job. We have one that is very large we have another one that's quite large as well and we have a host of others and I would not want to mislead anybody to suggest that there's going to be a large collection in Q4, although we do expect large collections over the next call.
For years.
And so are these going to be incremental collections.
As you resolve parts of the dispute or is it kind of you resolve it all and then collected at the end.
Well I think there's two ways to look at it the what's happened Jim in the jobs that were building today is that the settlements have been pushed till the end of the job globally and we call on global So thank you Jesus exactly we called global settlement, we don't think it does not just with the practice.
This isn't just here. This is just everybody else that's been involved in these jobs that it's been.
A quick step change orders et cetera et cetera.
Correct, Jim but remember in the biggest portion of these outstanding dispute is in our larger non sponsored joint venture projects.
That we mentioned in Q2, so so the overall value of the disputes is well over $1 billion. Our portion just hundreds of millions and there's two ways to look at a we certainly would be willing to to negotiate short term a set.
Elements, where as long as we did not forego our rights for the larger settlement in the long run.
And if we could if we could settle portions of these disputes in advance certainly that would be a nice cash infusion because we have funded these jobs out of our balance sheet, which by the way had a really nice increase in Q3 from Q2. So we're we're well funded and are creating earnings power from cash flow.
Perspective today, but I'd be happy to negotiate these things piece by piece, but typically.
What's come to play in the industry is that you do one global settlement at the end of the job that is not what we want to do going forward because we don't believe it's good for earnings because of the way you have to.
Actually account for the losses in advance of the additional revenue and it's not good for cash flow. So we're changing our approach towards how we have the dispute as we go favor yeah. There okay. So they did.
Yeah, just to clarify my mind, so there's largest dispute east coast disputes.
Well over a billion.
We should got hundreds of millions locked up in your this is all the other.
Suppliers in the dispute you're now globally.
Trying to resolve this and in a combined effort is that is the effort to decide okay.
Does that change Jim.
No John Let me, let me read kind of global settlement I want to make sure that I define that property that I'm sorry.
It means that we have a foregone to the settlement of a host of previous disputes into one final settlement at the end of the job now now are our partners and granite are involved in it.
And there could be some flow down to some vendors and subcontractors, but what I mean by global settlement is that we have waited till the end up the job for one final settlement.
And it is not that we brought more people into it. It is it is the joint venture that is building the project or in some cases granted by ourselves building the project and the global means strictly we waited till the end of the job to do a lump sum settlement.
Does that help you on the definition, Jeff Yeah, Yeah, Okay [noise].
Yeah. It doesn't change the people that that are involved in the settlement because it is already.
The entire joint venture or in the case of when it's just the granite job. It's just granite.
Okay and.
And then in the guidance for 2020.
Do you have.
Any assumption of settlements in there.
No and I and I say that from the perspective that we do not have any.
I'll call it upside or downside and the conclusion of these settlements in 2020 and off certainly we're hoping for for a good upside we believe we're conservative in the way we approach these disputes and we don't forecast on what the.
Resolution of the end dispute will be.
Okay.
But but again I'll remind that you know certainly we don't always went on every settlement. So so there could be some that create more positive value and there could be some that we lose that could be a negative value and next year, but but it is really important.
To remember that any settlement.
His is automatically a positive cash flow issue.
Because we have already expand at all the cash.
And if we just got back what we thought we were going to get back and didn't have an uptick to our earnings would have an uptick to our cash flow.
Hey, Jim one one point of clarification is when we go through these disputes we do work with our legal team too.
And then come up with an estimable and probable recovery and a portion of it is reflected in our on our financial statement and so any settlement on any of these issues will could possibly have.
A true up on that on a financial statements, but most of these settlements will have an improvement our cash position because as Jim said, we've been basically financing these projects.
Well, you've been financing them without booking the offsetting revenues.
That's that's correct. It we have not yet the cash portion of it is equivalent to the revenue portion okay that is correct.
Okay.
Okay. Thank you.
This concludes our question and answer session I would like to turn the conference back over today's host for any closing remarks.
Oh, thank everyone for your questions a a quick note for our shareholders and investors do show, Lisa and I will be on the road and at conferences visiting our operations and investors around the country over the next quarter and two please reach out to lease and we will look forward to speaking with all of you and meeting with any of you that care to meet with us and as always thank you to all of our employees.
As for keeping our fellow worker safe and for a dividend granites core values every single day and as always judicial Lisa and I are available for follow up if you have any further questions. Thank you.
The conference has now concluded thank you for attending today's presentation.