Q2 2019 Earnings Call
This call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer period.
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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 host granite construction Investor Relations Lisa Curtis Ma'am the floor is yours.
Thank you Katie.
Welcome to the granite construction incorporated second quarter 2019 earnings conference call.
I'm pleased to be here today, with President and Chief Executive Officer, Jim Roberts.
And senior Vice President and Chief Financial Officer, Jackie should decide.
Please note that todays earnings presentation referencing slides that are available on the events and presentations page of the grant its investor Relations website, investor Dot granite construction dot com.
[noise], we begin today with an overview of the company's Safe Harbor language.
Some of the discussion today may include forward looking statements.
These forward looking statements are estimates, reflecting the current expectation can best judgment senior management regarding future events.
Occurrences gross demand strategic plan circumstances activity performance outcomes guidance backlog committed or awarded projects and results.
Actual results could differ materially from statements made today. Please refer to granites. Most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect projections and assumptions.
The company assumes no obligation to update forward looking statements.
What are the result of new information future events or otherwise.
Earlier this week, we made a preliminary announcement of our results for second quarter 2019, and the impact related to four legacy unconsolidated heavy civil joint venture projects.
Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives.
These include but are not limited to adjusted EBITDA adjusted EBITDA margin adjusted net income or loss.
Adjusted earnings or loss per share.
Committed it awarded projects backlog or result.
Please note that some metrics also my reference or excludes nonrecurring acquisition related expenses and one time integration costs.
Reconciliations of certain non-GAAP measures are included as part of our earnings press releases and in company presentation, which are available on our Investor Relations website.
Now I would like to turn the call over to granite construction incorporated President and Chief Executive Officer, Jim Roberts. Good morning, everyone and thank you Lisa and thank you all for joining us today.
Earlier. This week, we provided you with a woman a review of our second quarter 2019 results and an update of our full year 2019 out which was precipitated by unanticipated project charges in the heavy civil operating group portfolio.
We acknowledge and understand that this represents a significant disappointment glamour and stakeholders and we understand the concerns that many of you have shared since monday's announcement.
Today, I will start with what happened in the second quarter and how we believe it represents a tailwind of friends Megaproject strategic era.
Then I will update you on the journey, we started more than two years ago, developing a new path to diversify and to de risk or no record portfolio work.
It's our growing portfolio in mind I will spend just a couple of moments talking about what is next.
While we believe our record committed and awarded projects that are known as Caf is increasingly aligned with our strategic initiatives targeting a path for more consistent profitable results.
Finally, I will spend a few minutes talking about wanting to remain optimistic that early cycle demand trends continue to provide wind in the sales or end market focused segments.
So let's dive into the Q2 details.
Through our quarterly project reviews, and estimate to complete updates our teams report in late June that they had experienced increased project completion costs in the second quarter of 2019.
These costs, which were exacerbated by schedule delays and by the execution of disputed work resulted in the charge as reported today and in Monday's announcement.
The charges relate to the four legacy projects bid between 2012 and 2014, we have been discussing for several years.
Additionally in early July we received notice of an unfavorable court ruling on one of the related outstanding project disputes.
As a result of these charges, which included a revenue reduction of more than $114 million in the second quarter, we have revised our full year expectations for 2019.
Junkies, who will discuss our results and our guidance in more detail shortly.
We recognize that this quarter's results and the heavy civil group or a sharp contrast to the very positive backdrop that I just mentioned.
We are taking action in the form of an accelerated strategic review of the heavy civil group operations and how we approach larger projects in our portfolio. This is not business. This is one all options are certainly on the table.
Our immediate focus is on our ground within our talented granite teams working to ensure that our projects are appropriately resourced to deliver mid day margin expectations.
Operational either near term priority is successful project completion.
But critically the second half 2019 has begun on a record pace and our long term expectations for mid teens consolidated gross profit margins and solid organic growth remain intact.
Well, we never expected or wanted to show the slide again.
Significant wet weather had impacts across our business through may and it was a drag on first half results.
Importantly June Mark something of an inflection point with an acceleration of activity and a spike in profitability setting the tone for what we anticipate will be record results for our business in the second half of the year.
Fortunately the biggest impact of the wet weather is simply timing as these delays have created additional pent up demand to go with consistently strong bookings across the business.
With an assumption, while I will call hope for normal weather here until the end of the year, we anticipate that a strong second half will allow us to cheap to achieve high single digit revenue growth in 2019.
Now, let's shift back to the heavy civil operating.
We have begun working to address risk in this portion of our business and particularly in mitigating our exposure to mega projects for the past several years.
And notably we have discussed persistent challenges in this portion of our portfolio for sometime now.
Each of the four legacy projects is design build and each contract is fixed price with project values ranging in excess of 1 billion to nearly 4 billion.
When performing work on this type of a contract delivery model. We are contractually obligated to continue work on the jobs and to recognize the associated cost regardless of whether we agree that the work we have been directed to perform is within the scope of our contract.
We will pursue our dispute with project owners separately.
The resolution of project disputes represents a critical ongoing focus area that will take some time to resolve.
Eliminating the company's remaining exposure to these mega projects as an important step that will improve the stability and trajectory of our results.
Instead of entering into what we believe to be a partnering relationship. It is now clear that especially in the context of these mega projects the fixed price design build contract delivery model and the public private partnership contract delivery model, resulting in untenable imbalance in risk sharing between granite and the project owners. These projects clearly are not aligned with our expectations or with those of our stakeholders.
Two years ago, we ceased pursuing mega projects.
Our project wins since early 2017 have not included any unconsolidated JV projects of any significant size.
We have been deliberate enacting to limit risk by reducing the scope and duration of our contracts across the company.
As a result, we have not contracted to construct any projects more than $510 million in our heavy civil group since 2017.
We believe that this approach has provided teams with a meaningfully reduced exposure to risk and our revised pricing strategies incorporate the strong counterbalance that robust demand environment continued to provide.
As a result, we have walked away from projects ceding some bids store competitors that we might have been more willing to chase just a few years ago.
In doing so we began our journey to avoid taking on new work with operational and financial risks that are out of line with our long term expectations for mid teens gross profit margins. Our procurement strategy has shifted towards negotiated work and other best value procurement methods, including construction management general contractor known as CMG see construction management at risk known as CMR and Progressive design build all with a strong waiting on best value and technical skills.
We have significantly reduced the average an overall project scope and duration of bidding opportunities and cash flow considerations now are a critical gating item for project targets.
In addition, our strategy has focused almost exclusively on solvent rana projects or on projects with granite in the lead position.
By taking a movie we are in a far better position to control, our operational and financial destiny, better able to deliver consistent profitable performance and improved cash flow for all granted stakeholders.
However, we do understand that we have more work to do.
How we get there begins with our growing diverse portfolio of work.
At midyear 2019 granite cat totaled a record 4.9 billion.
Up more than a third year over year.
At the end of the second quarter of this year, our current heavy civil group cap was $1.8 billion or approximately 37% of overall grant a cap.
This is down significantly from an average of more than 54% of our portfolio value since 2015.
Within three to four year anticipated burn rate the heavy civil portion of transportation cap has anticipated gross profit margins in the high single digits, reflecting the mix of steady performing projects as well as the future impact of less than $350 million of remaining work on the four legacy projects that we have discussed.
We are encouraged that the substantial increase in negotiated and best value procurement project wins in our cap is expected to accelerate the declining influence of the current heavy civil portion of transportation segment cap.
Grants footprint and our infrastructure solutions capabilities have expanded dramatically over the past five years, both organically and through acquisitions in the water and wastewater markets. We are focusing our project pursuit efforts in markets, where brands presence capabilities and resources provide strategic advantages. This is a critical driver of improved project quality and reduced project risk.
So where are we going and what does our path looks like to get us there.
Our ongoing strategic review of the heavy Civil group includes an even deeper emphasis on areas, where we can be successful with lower risk higher margin work.
It also includes a potential exit of certain end markets and geographic markets, where we have concluded that project or market conditions do not align with our near or long term risk and return expectations.
Our focus is on project, where the owner is seeking a partner to create successful infrastructure solutions and outcomes owners that are seeking to build their work with shared risk that allows for acceptable returns.
The changes we have made since 2017 have steered us in the right direction.
And we are now accelerating our strategy in markets that do not meet our needs redirecting resources appropriately and focusing our energies on work that creates consistent value for all granted stakeholders.
Typically we start here, but today is a particularly good time for reminder of what has not changed at granite.
Who we are.
We are America's infrastructure company, and our unwavering commitment to do things the right way everyday creates value for all granted stakeholders from investors and employees to partners and clients.
Working safely and striving for our ultimate goal of zero injuries, certainly aligns us well with our stakeholders.
With a heightened consistent focus across the company, including our most recent acquisitions in 2018.
Granite teams have started 2019 on the safest path in our 97 year history.
And important in common metric used to measure safety performance is the Osha recordable incident rate.
Today, our teams are operating at a best in class levels, well below a 1.0.
With record cap and a healthy demand outlook, we remain focused on working to ensure that all granite employees, making home safely every single day.
Thank you to all of our employees for your hard work in this area and please stay safe.
Beyond changes in the heavy civil operating group, our over arching views on market conditions and strategy remain intact.
The strong booking trends, we have experienced remains supported by robust public and private market demand across various end markets.
Public demand is driven by continuing investment at the state and local level further evidenced by multi year programs in key granted geographies, including California, Washington, Utah and in the recently approved $45 billion transportation infrastructure structural program in the state of Illinois.
In addition, private market demand continues to bolster our strong outlook for growth in most markets.
As we have said for some time, we continue to anticipate that 2021 to 2023, ultimately will mark a mid cycle point for today's early stages of infrastructure investment expansion.
Taken together we believe these are the key factors that supports the view that our business is poised to grow steadily for quite some time.
Next let's move to an overview of the second quarter end of overall operational performance and our reportable segments.
So second quarter project delays driven by weather have stacked additional work on top of strong market conditions across geographies and end markets.
From May to June 2019 hours worked in the field jumped 62%.
Up from 48% in the same period last year.
Importantly June 2019 hours work increased more than 11% year over year.
June strong performance trajectory combined with six and seven day work weeks and multiple shifts to meet demand fast are becoming the order of the day.
Our teams are well into the full swing of what is now expected to be granted busiest summer and fall construction season ever.
With that in mind I will shift now to a quick segment overview before I hand, the call over to Judy.
Okay lets start off with the transportation segment.
As we noted persistent wet weather had a negative impact across most of our operations in the west through may even with accelerated activity in June pent up demand and strong bookings have driven record cap in the transportation segment and in our California Group operations.
These trends largely have been matched across most of our operations in the west and Midwest.
Most of our transportation portfolio has been driven by stable improving long term state and local funding and by growing opportunities for negotiated work.
We continue to target a significant margin improvement to mid teens gross profit margins in this part of our business.
And as I hope, we now have made clear we are accelerating actually the balanced portfolio dynamics away from large non sponsored projects tailoring our efforts to create geographic and project diversity that best Leverages, our large equipment fleet and consistent reliable access to materials local labor subcontractor vendors and strategic relationships.
Moving now to the water segment.
This quarter marks the one year anniversary of the Layne Christensen acquisition with a vast majority of the integration activities and expenses now behind us new granite teams continue to sharpen their focus on growth and optimization opportunities in these businesses.
This segment delivered second quarter revenue growth driven primarily by last year's acquisitions.
One of the key highlights of note in the integration efforts, we have made in safety and safety performance.
We made significant changes and investments in safety and our teams enthusiastically have adopted incorporated proven safety programs.
As a result, the year to date Osha incident rate for the water business improved dramatically to a 1.0 figure from above 3.0 last year.
I congratulate our teams with this concerted effort keep it up.
Certainly weather across the Midwest was challenging in the second quarter with record rainfall and historic flooding impeding progress and delaying projects and our growing portfolio of water work.
As in the transportation sector inclement weather created delays and pent up demand only adding to the solid market conditions across geographies and to expectations for a strong second half of the year.
Next let's move to the specialty segment.
Especially segment is fueled by strong growing teams and tunnel mining and mining services power renewable energy federal and site development leveraging the combination of our highly specialized equipment and capabilities.
This quarter's results reflect a diverse mix of projects and businesses that comprise the segment.
Improved revenue was driven by acquisitions and by project mix was concluded the anniversary of the Lane acquisition.
In addition, we are seeing strong demand for solar work in the South Western States continued private sector investment in commercial and industrial expansion as well as project wins in our federal division, coupled with overall solid demand in the west.
By focusing on customer needs and challenges, we continue to be successful in aligning outcomes, creating significant value for all parties.
This solutions focus is a key grant a differentiator.
Now, let's finish with a discussion on the materials segment.
Sure again poor weather had a significant impact in granite markets through most of the quarter with activity production volume Inflecting positively in June .
The key driver to this portion of our business is the production sale and use of asphalt and concrete products with a smaller contribution from our liner products water business.
Strong second half 2019 results are expected to be fueled by record committed volumes another way of saying materials backlog.
This positions us extremely well for the rest of 2019 and supports our improved visibility into our 2020 demand.
So as it is across much of our business our materials teams are producing in earnest now.
Also employing six and seven day work weeks and multiple shifts to meet demand.
Our performance in this part of our business will be driven by the combination of increased committed volumes and steady economic growth.
Today, we believe that our business is really are limited only by the number of operating days on the foreseeable horizon.
And with that I will now turn the call over to begin should to discuss our financial results and our 2019 guidance you gave us.
Thank you Jim and good morning, everyone.
Let me begin with a deeper dive into charge specifics on the four legacy unconsolidated heavy civil joint venture projects and how they impacted our financials.
Second quarter 2019 results include a noncash pretax charges of $143.7 million.
$406.7 million aftertax.
These costs are reflected in the transportation segment with both a reduction in revenue of $114.2 million and increased costs of $29.5 million.
The charges include increased project completion costs exacerbated by schedule delays and execution of a significant amount of disputed work and by a recent unfavorable court ruling on a project dispute.
The revenue reduction represents a decrease in percentage of completion on these projects and it represents the majority of our revenue guidance revision.
Percentage of completion accounting can be confusing. So let me spend just a moment going through the mechanics.
The percentage of completion method calculates project revenue as a percentage of actual cost incurred divided by total estimated cost forecast on the job. This percentage is then applied to total estimated revenue for the job to determine revenue for the period.
For these non cash charges, we had significant unanticipated project costs, which increased the denominator, thus lowering the project completion percentage and thereby reducing revenue.
Ran its disciplined cash management and operational strength positions the company to navigate the current situation, while maintaining a strong balance sheet.
Our disciplined capital allocation strategy. This strategy has not changed we remain focused on actions that provide the most appropriate value for our stakeholders.
Granted it's consolidated second quarter 2019 revenues were $789.5 million, which includes the reduction of revenue of $114.2 million.
On a year to date basis revenue increased to $1.4 billion.
Net loss per share was $2.09 in the current quarter, including discuss project charges of $2.28 compared to a net loss of 20 cents per share in the prior year.
Quarterly and first half 2019 results include acquisition related expense of $12 million and $26.5 million respectively.
Second quarter gross loss was $52.4 million, including charges compared to gross profit of $80.4 million in the prior year.
Year to date gross loss was $11.9 million compared to gross profit of $136.7 million in the prior year.
Selling general and administrative expenses were $70 million or 8.9% of revenues in the second quarter of 2019 up from 7.6% of revenue last year with the increase driven primarily by our acquired businesses.
We continue to focus on overhead reduction and are making strides in this area, but it will still be some time before we reach our longer term target of 7.5%.
As Jim noted granite have is now at a record level of $4.9 billion up 33.4% year over year and 8.9% sequentially and this figure now includes approximately $1.6 billion of negotiated work all related to project procurements in the past 12 to 18 months.
Today, the trend in composition and quality of our cap has never been stronger with a greater mix of smaller higher margin. That's valued granite led negotiated work combined with geographical diversity.
The granite led component of this strategic shift we made more than two years ago is a result of the lessons we learned coming out of the economic crisis, a decade ago, where owners made a significant shift in how they approach risk sharing and dispute resolution across the industry.
Now, let's dive into segment results this quarter.
Aside from the charges and their impact on the transportation segment wet weather this quarter again slowed our core construction materials and water businesses through may.
Mother nature gave us a reprieve in June and our businesses finally are in a position to fire on all cylinders.
In the second quarter Transportation segment revenue was $404 million, which includes the reduction in revenue of $114.2 million.
On a year to date basis revenue was $742.2 million, including the revenue reduction down from $861.9 million last year.
Quarterly gross loss of $99.9 million include charges compares to gross profit of $36 million in the prior year.
On a year to date basis gross loss was $78.6 million compared to gross profit of $67.4 million in the prior year.
Transportation cap in the June 2019 quarter at a record $4 billion, which notably includes approximately $1.6 billion of negotiated work added in just the past year.
In the water segment second quarter revenue increased $212.8 million compared to 51.6 million in the prior year quarter.
First half 2019 water segment revenues were $212.1 million compared to $91.7 million last year, the quarterly and year to date results primarily reflect the impact of acquired businesses.
Gross profit for the quarter was $11.3 million up from $5.5 million in the prior year.
Year to date gross profit was $19.4 million up from $17 million in the prior year.
Quarterly gross profit margin was in line with last year's second quarter, though down on a year to date basis due to emergency work performed in 2018 that was not repeated.
As to know whether a map indicated wet weather across the country and especially in the Midwest had a negative impact across much of our water business operation.
Bookings remain consistent as water cap total $318 million at end of June .
Specialty segment revenue grew $275.1 million in second quarter with year to date 2019 revenue of $315.8 million.
For the second quarter gross profit was $22.2 million up modestly year over year and the gross profit was flat at $37.1 million on a year to date basis.
Specialty cap totaled $559.3 million at end of June .
In the second quarter materials segment revenue was $97.6 million down modestly from the prior year period with year to date revenues up $139.3 million.
Quarterly gross profit was $14 million with a year to date gross profit of $10.2 million.
Here again, what weather impact to this business across the first half of 2019 was a headwind to resolve and with this business volume is the key component to creating significant improvement in operating and financial leverage which is now expected to accelerate for the remainder of the year.
As a result of the impact of Mega project Mega project charges, we incurred and discuss we have adjusted our full year guidance. We now anticipate high single digit consolidated revenue growth and adjusted EBITDA margin of 4% to 5%.
The core operational strength of the business combined with a record 4.9 billion of cap at mid year.
Gives us confidence that we can target and achieve a low double digit adjusted EBITDA margin in the second half of the year and with that I will turn the call back over to Jim well. Thank you dig Asia, our construction materials and water businesses continue to operate well overall, an important indication of the overall health of our company.
We are very encouraged by the underlying performance of the majority of our business and by the robust and voice market environments in which we operate.
After 2018% to 39% increase in adjusted EBITDA, We began this year targeting another year of better than 30% adjusted EBITDA improvement.
Even in light of this quarters charges, our longer term outlook has not dipped.
As we look ahead to the rest of 2019, we believe importantly that both our short and long term earnings trajectory continues to point to meaningful top and bottom line growth in the second half of this year and in 2020.
We expect our second half adjusted EBITDA growth to more than double last year's 17% growth performance, we continue to develop and deliver exciting expansion opportunities across our end market focused businesses.
Our focus and investments in our geographical and end market diversification continue to position granted incredibly well for long term profitable growth. We are prioritizing projects infrastructure solutions that leverage our broad growing footprint, our diverse capabilities and an outstanding dedicated workforce that delivers on grounds core values every single day.
And with that we will be happy to answer your questions.
Thank you Sir to ask a question. Please press star one please limit yourself to one question and one follow up question and feel free to jump back in the queue. If you have any additional questions.
Our first question will come from Michael data with vertical research.
[noise] good morning.
Everyone.
And that's an early warning you guys I know I know, it's very early when I know of anybody can sleep last night.
[noise] Yeah, we're just we're lucky in making sure that everybody on the East Coast got the proper time. So that's we're happy to do it.
And we do appreciate that thank you very much. So my first question is and you addressed this towards the end of your prepared remarks, Jim just a few seconds ago.
Yes, if not for the large project issues and poor wet weather, which everybody was aware of.
May.
If you were to have this as you look out to the second half into 2020 and beyond.
Has the cadence and the visibility improves for what you would have thought about the same even just going through the numbers.
And how much of this problem that you are trying to deal with internally relative to the large projects and monetizing or getting right sizing that.
It's going to show an impact to the results of the next couple of years and are there any costs.
Reductions to offset that given what you're going to be restructured.
Okay. So first of all Mike relative to have we seen a change in the market sort of the cadence of where we're going and the answer is yes, no I would say that it is in alignment with what we thought was that we were going to see happening in the markets were strong we mentioned, California that the that the SP. One program is healthy we've seen markets like Illinois now pass a transportation program. The state programs are healthy a private sector investment is healthy the mining services business is healthy. So those are things we saw starting to develop at the beginning of the year. We started seeing develop last year and that hasn't changed at all in fact, I would say that were very very happy with where the where the basic overall market is heading it's in alignment with our thoughts when you look at the heavy civil group.
We certainly believe that the work we have on our books today.
His work the work, especially we booked in the last two years is in alignment with our expectations. We also believe that we have covered our current challenges and future risks and the heavy civil group adjustments that we made in those four legacy projects that we announced on Monday. So we will have some some costs relative to I'm not going to call. It a certain restructuring, but remember we're doing a strategic review on that business. So that we are just focused on optimizing the results going forward by reducing the risk and increasing the margins and I don't see significant cost but of course, there will be some as we move forward, but we have embedded that in when we give guidance those costs are embedded in the guidance that we provided Mike.
Thank you for that you have at my follow up is for Gpus.
As you look at you know given the the charges and everything that Youve discussed. This morning as you look at the balance sheet, how do you and how do you feel relative to cash generation second half of the year given.
The outlook that you have in the fact that you're wrapping things up so quickly.
And ER and your cash level on the balance sheet cash flow how comfortable do you have is there opportunities to allocate that capital in other ways to maybe to reactivate share repurchases. The board this seems to see that fits.
Yeah, Let me let me address the cash flow question first our cash flow generation is dependent on the timing of the distributions of cash from these unconsolidated JV, that's where some of our I mean lion share of our cash is tied up as as Jim pointed out and you know we do not expect any additional meaningful cash contributions for these legacy projects. So is it we are expecting our operating cash flows to be a positive barring any unforeseeable issues around these are non sponsor JV that said.
You know, we also sold through seasonality aspect of our cash cycle and we tend to see the cash kind of dip at this level a march between May and June we probably hit the bottom and then we started building our cash levels into third and fourth quarter. So that's pretty consistent with what's happening in 2019, and and again I think from a capital allocation perspective, as I mentioned during my remarks.
Our strategy on capital allocation has not changed.
That said, we're certainly going to be monitoring what's happening in the marketplace and we will be opportunistic we do have $190 million of $200 million of share authorization in place and we will be opportunistic.
Thank you our next question.
[noise] comes from Brent Thielman with D.A. Davidson.
Great. Thanks, good morning.
Good morning, Jim or <unk> could you clarify I think you said $350 million is remaining from the Jvs and cap and I guess I just wanted to bridge I think in the last Q, you said somewhere around $900 million related to all of your unconsolidated Jvs I guess can you can you just update us on performance of the other the other jobs in there.
Okay. So let me let me just focus a little bit here on the.
The jobs that we've been talking about for the weeks here, though for unconsolidated jobs that were bid we call them and Omega jobs that were between 2012 and 2014, we can call them the problem jobs, a mega jobs that caused a large charge in this quarter those jobs have about 350 or less <unk> million in our backlog and in our cap going forward. We do have some other unconsolidated job, but they are smaller and certainly they would be in addition to that amount Brent I don't know I don't have the number in front of me of the exact amount of backlog and those numbers, but overall all the work in that portion of our portfolio is about 1.8 billion for the entire heavy civil group.
Okay, and then I guess my follow up Jimmy curious you know that the contracting dollars associated with.
SP one are they moving at the pace you expect now I guess is the agency beyond some of the.
Bottlenecks, maybe previous we seem to get it to work out.
Well it kind of goes you know Brent what happens with California kind of goes in in lumps and and interestingly I'm. The first half of the year. It was was substantially higher than than last year, which is good which is what we had expected you know even when I say that even in Q2 2019. This year, we saw our awards up about over 50%. So that's really healthy. We also saw that we're getting a larger share of the California work, which we had in previous years. So thats good and it comes in I'm going to say again buckets and right now we see a large amount of work bidding in the second half of 2019 that they have released.
California Transportation Commission put a list out and so so its coming I would say as planned on an annual basis, but its very lumpy during the year.
Our next question comes from Jerry Revich with Goldman Sachs.
Yes, hi, good morning, everyone.
Good morning, Gerry Gerry.
Hey, can you give us a rough understanding out of the project write downs this quarter, what proportion of that was too.
The single project, that's only 60% complete versus the three others that are over 90% complete and can you say more about your review process this quarter what triggered the review.
Certainly I understand the comments on rainfall and and litigation but.
This is a really big adjustment and presumably.
We're contemplating making it too.
Just one last quarter to some extent.
I don't think Thats only big catalysts this quarter outside the litigation so maybe can you.
Talking about your your process there as well.
Okay. So so Jerry first of all the what we don't do is talk about individual projects. Because every one of these four projects is in form of some form of a dispute resolution process and therefore, I really don't want to focus on how much is of the charge was on the job that is only I'll call. It two thirds complete because I think we have work to do without owner and relative to the resolving disputes, but what we do every quarter is.
As we go through a detailed cost estimate to complete every job and so this quarter was no different than any other quarter, we actually buy buy ill say beginning of June beginning of the third month. We go through an exhaustive detailed cost to complete and the issues that occurred that were cumulative in these four projects were new issues that became apparent to us I would say by the time, we had concluded our our forecast by the end of June and then obviously, we had some resolutions and a dispute that we had a rendering of a decision in early July . So they are just standard protocol issues that we are doing every quarter on these large projects and it just happened to be one of those quarters, where you had a host of items that occurred at the same time.
Well and.
I appreciate the.
Ongoing discussion with customers, but the reason for my question has implications for the stock a really different.
Big chunk of the charges.
It comes from a project that's only two thirds complete versus the ones that are scheduled to reach completion was here.
Yes, I understand that Jerry and I will say this that that the project that is two thirds complete.
I will say, we have a good relationship with the owner.
We are working on continuing working on dispute resolutions and I believe.
That the work we're doing without owner has progressed nicely.
In in the last three months in the last quarter and we've got more work to do with them, but but that is about the extent of what I think is appropriate to talk about on that job itself.
Next question comes from Alex Rigel with B. Riley.
Thank you good morning, everyone.
Good morning, Alex.
Jim can you comment on.
July hours worked and weather related to June .
Okay. So I don't have the hours sitting in sitting in front of me right now, but I will say that this Alex it was it was healthy it was a very busy month whether is is.
In excellent shape as we've seen it for June and July and especially July would be say weather was even less impactful to our business in June .
And as I mentioned, we really are working six to seven day weeks in almost all locations now. So July it will have been a healthy month as well, but I don't want to have the man hours in front of me.
And Jim or given it looks like in the specialty business.
Margins were down in Two Q1 9 versus Twoq of 18, I Didnt hear you call out to weather as an issue in specialty. So I was curious why margins might have been a little soft.
[noise] and I don't know if I have an answer for that the margins are actually pretty good.
In specialty in fact, I think they're actually quite healthy and there is no reason to suggest that there's any issues. There at all I think you are still in the mid.
Mid teens.
In specialty so with that in mind, we have one location that we had a strike with a large customer that occurred for most of the quarter that strike was resolved at the end of the quarter that might have had some impact.
I would suggest specialty business is operating at a very nice level.
Yeah, I would agree that the mining activities were impacted.
As a result of some of this the strike that Jim referenced otherwise looking at the quickly here I don't think anything that kind of jump at it but we can certainly dive deeper into that.
And again this is a this is a you know specialty segment has been kinda or like the put peri and it's a mix driven by diverse work off portfolios. So this one it probably will fluctuate from a from a year to year to quarter to quarter, depending on the completion of work.
There might have been a little bit of whether on the specialty side, just as in everything else as well Alex.
But I do think it's a very it's a very healthy market.
Thank you our next call. Thank you Alex.
Comes from Steven Ramsey with Thompson Research group.
Good morning.
I want to delve into good morning, Yeah, I wanted to delve into the alternative procurement see you know.
Maybe talk to how these projects are focused in certain geographies and if it's and expanding field.
Play in do you expect them to.
Alternative procurement to hit in sectors outside of the transportation sector overtime.
Okay. So so I think that that's a pretty broad question, Stephen and let me.
And I think it's a it's a really good environment to talk about because the procurement delivery methods are changing across what I see in the U.S. and it is not strictly a transportation issue. This is in general what were seeing is that as we saw this this migration of projects to a larger size. We saw this huge risk shift over to the contractor and as Jason mentioned about 10 years ago.
Contractor for willing to assume that risk or at least the contracts and mandated they assume that risk. So so in today's environment. What we're trying to us what we're seeing is that the owners and the contractors agree that we've got to get to the goal line in these jobs in a satisfactory manner that provides a product at the end of the day that is a win win.
And to do that these alternative procurement methods allow you to expedite the process of the bidding.
And to reduce the risk and I'll give you an example.
This CMG C, which is not just the transportation issue. This can happen in water is going to happen.
In specialty mining is going to happen with private sector, what can happen with public sector, but these alternative procurement methods are where you literally.
Create an environment, where the owner chooses the contractor.
In advanced based on qualifications.
And then in a lot of these cases, we are literally either negotiating a price that the owner and the contractor reach or we actually do an open book.
We estimate and that open book estimate literally allows the owner to understand what the contractor has included in their bid.
Therefore, as the job progresses.
The owner knows whether or not the dispute is reasonable because they know whether or not that was anticipated.
At the time of the bid.
And that's the biggest single issue I see today is that as things change on these jobs and they are fixed price jobs.
That the that the owner assumes that the contract or have those it inside their bid.
And the contractor Didnt and so that just utilizes than we have what we call construction claims. So the idea here is to create a stronger relationship between the owner and the contractor at the very beginning and have a very open relationship a key ingredient to the win win in this industry is going to be when we do not have dispute at the end of the job.
That is the bottom line and that has to change in this industry and progressive design build CMG cm at risk and negotiated work are all better options than fixed price and then.
Battle out the disputes at the end of the job that process is not working.
Thank you for the color and then.
Maybe to understand a little bit more the unfavorable court rules impact.
He said it happened.
In in early July did that hit actually hit Q2 results.
And and maybe talk to of the charges.
How how much of that was due to.
To the court ruling.
Okay. So so Steven.
The we've got the decision in the second week of July .
And it was a bench decision so in other words, the judge provided the ruling and we did book it.
Into the Q2 results so as soon as we we knew it we were closing our books for the second quarter and it was still a it was the books were still available to be have the adjustment made and there was significant material to the company's financial so we did book it.
In the quarter.
Now here's the reason I can't quantify it or or I can't quantify but I am not unwilling to share at right. Now is that we have not seen the details of the ruling.
And we are in the process once we get that information, we will determine whether or not we believe it should be appealed or not.
But until then until we have all that information we believe that it is probably in the best interest of the company in case, we need to appeal it to kind of hold those financials close to our best for the moment, but it is a material event and when we have on our books open we still need to book those items.
If we have knowledge of a prior to actually the earnings which as you know obviously now today, so regardless of whether we decide to appeal or not were required by the accounting rules to make the adjustments on our financial as soon as we know as soon as we know about it.
You again as a reminder, please press star one to ask a question.
Our next question comes from Joe.
Dear Dano with Cowen and company.
Hi, Good morning, this is Robert in for Joe.
Just looking at the legacy projects in the morning.
The legacy projects that you took write downs on there was four different projects I was wondering one how many other legacy projects.
Our in your portfolio.
And do you think they face similar risk and also have these projects been evaluated already.
As well and I have one follow up okay.
Okay, Robert well, we call. These the four legacy projects because they were bid between 2012 in 2014 and we have these are the only jobs that we have in our portfolio that were bid in that timeframe.
And and we also have isolated these four jobs because of the fact that they are all for over $1 billion and they are all for unconsolidated joint ventures, where we are already made or minority partner in each and every one of them. So so there are no more in this in this category now with that said of course, we have a host more of large projects that we have in our portfolio that we've built after 2014.
And certainly starting in 2017, we have a whole new portfolio of the type of work that we've been bidding since then and we evaluate these projects every single quarter in detail.
As to how they are performing so every project every other project in our portfolio has been evaluated in detail as of June Thirtyth.
And just as a reminder, and every.
Forecast that we have in place is intended to cover all of the current challenges and future risks in them. So every one of those items has been covered.
And just to reiterate we really have no we have no other projects that were bid.
From 2012 that 2014 in our portfolio.
Okay. Thank you and then.
What gives you comfort that the current projects don't need to be adjusted further or do you feel like the write downs and everything that's been taken is enough to cover anything that might pop up in the future.
Thank you yeah, we're confident that we have covered the current challenges in the future risks and the forecast that we have provided for not just the four legacy projects for but for all of our work.
Thank you. Our next question comes from Michael Douglas with vertical research.
Hi, Jim just two quick follow ups, thanks for taking them first.
I wanted to maybe you can elaborate on this the new alternative project delivery and CMTC work you are doing.
What what gives granite the competitive advantage too.
Be successful in winning those type of work because it sounds like it's a type of delivery project that boy everybody would like to do because you know its not fixed price. That's open book in that you can.
Negotiate with clients and how they play out and is that lead to the selectively where you have to go to get those projects that meet your what you can generate to those to the customer that you have the confidence again the projects done on time and under budget.
Sure sure, Mike and I think that that really is the key question. So.
It sounds like the process is great, which we do like the process because it creates the rate the opportunity to to have a better beginning pricing and relationship with the owner and the key ingredient to these is to provide something different to the owner that not every contractor can provide I'll give you. An example, we mentioned this starting on Monday in in our in our release that we focus on relationships we focus on.
Local labor pools, we focus on knowing the subcontractors the vendors we focus on knowing the owners' requirements and their specifications and what we do is we literally have a a I'll call. It a qualification process with them and then we typically go through an oral interview and the key ingredient is they're looking for a partner. This this is a partnering approach and they want a partner that they feel comfortable with that has the resources to physically build their work.
To create an environment to get the projects done on time at a high quality and that can openly provide I'll call. It a path towards completion with a cost basis that is acceptable. These owners have have a different approach towards business from the perspective of this growing everything on the contract that they want to get the job done and they want to get it done in a timely manner.
What's happened in the last decade is that projects are coming in behind budget behind timing and over budget.
And a big portion of that is because of the ongoing disputes that are happening between the owner and the contractor.
So this relationship not only talks about creating a stronger relationship. It provides open discussions to partner and making sure that the job success is the priority for both partners and it's not about just being cheap it's about finishing the job on time, so that the owner can provide the product to the customer I was going to add Mike that the there is a lot better collaborations on their risk sharing discussion, which also happens on the front end side, because we've seen a shift from the owners to the contract on lot of these risks. So weather is there you know easement until or permitting or environmental all of those things have been much more.
Disgusting advance and price Accordingly, and I think that's been the positive around the CMTC procurement methodology and I think maybe Mike to address what makes grant a different is that we provide in the markets that we have strength, we obviously have very strong resources.
To bring to the table they look at our labor our history in the market. They look at the equipment, we provide they looked at the resources the physical resources of our materials businesses and they also look at the bigger granite to say that if they need to bring in additional resources beyond what they have in the local market. They can bring that in from other resources as well. So this is why we said in our discussion earlier. This week is that where we have local strategic advantages is where we want to do our work.
And it is very difficult to parachute in from an external environment and have have advantages. So we are going to be focusing on areas, where this type of work is the owner would like to have us because were different and we have stronger resources.
Jim I just wanted a one more question I couldn't let the call and without you providing your.
A recent thoughts with your political antenna out there on.
What's going to happen out of Washington, and is there any encouragement on what's that.
W doing and and is there a chance we get something maybe even for maybe 20 point of need more vocal point I'd seen you should hear that.
Okay, Mike well so my my view on Washington will talk strictly about about transportation, otherwise, we could talk forever right Mike.
So relative to the transportation, it's encouraging to see the Senate coming up with some I'll call. It a skeleton built which which is a nice substantial increase from the current fast Act.
I personally don't see them coming to a conclusion, but I do think this skeleton approach towards getting that discussion started is imperative and I'll say this also having coming out of the Senate is unusual usually these these things percolate up through the house the T. The transportation infrastructure Subcommittee so having the Senate take the lead on this thing really bypasses a step.
But those are the key now to success is to get the house DNA subcommittee to come up with something similar.
And I think they will but I think the key differentiator here, that's going to cost us think the lag is going to be obviously the funding mechanism.
And I'd say this is that when you look at what Illinois, just did and they doubled their gas tax.
To provide and of the $45 billion.
Overall, bill $33 billion associated just with surface transportation. So they doubled their gas tax and I think what we're going to have to come to conclusion within DC is a very strong funding mechanism to get anything done.
I believe we're going to get a full build on or before the expiration of the current bill I think thats a win win for both parties. It's a win for Congress is so it's a win for the administration I don't believe we're going to get something done in 2019, but remember the expiration of this is in September 2020, and I think it's a win win for everybody to get something done it's nice to see the work start already Mike.
Thank you our final question for today comes from Jerry Revich with Goldman Sachs.
Yes, hi, Thank you entertain follow.
Joe I'm wondering if we could just.
Go back to the other large projects that are in the book.
As we just build our comfort level around.
Where they stand today can you just talk about what proportion of the remaining large construction work that we're see revenue burn now or for multiyear project said.
Just give us a little bit more color in terms of on the composition of the remaining book of business I think last year. Your large construction run rate was a billion. These core projects I believe we are in the 350 $400 million rings. So yes.
Can you just talk about the remaining pieces and.
What kind of projects they are.
What's the bureaus.
Sure.
I think our runway does that is that similar rate overall, but I will say that the composition has changed.
Outside of these four legacy jobs that really the job for smaller other faster burn.
They end up probably having a similar revenue cadence that we had historically also.
Jerry we're starting to see more of that and I'm going to call. It large project portfolio in our what we would call typically our vertically integrated businesses and some of that is CMTC and cm at risk work and so we're seeing that being built by our local businesses in their committed in selected award projects. So.
Smaller work.
Negotiated with the largest off that we have on our books that we put on our books in the last two years was a negotiated job.
And so with a private owner with a private owner pinpoint judicial and they're all granite led.
I don't think we have put anything into our backlog in the last two years that is not a grant of lateral a grain of salt venture projects.
So on top of that of all that work, we have 1.6 billion of the backlog where the cap is now negotiated work. So it's different work than those than those for legacy projects I mean, a substantially different work.
Okay. Thank you for the color and then in terms of getting back to that mid teens growth.
You talked about what timeframe did you have in mind and whats the topline base that we should be thinking about since we will no longer be competing for these types of projects that I believe on a trailing basis or somewhere in the $400 million revenue range. So is it as simple as.
Reducing the size of the opportunity set by 400 million and.
The.
Mid teens gross margins on the remaining business or can you frame that for us at all.
Well, if I, if I understand correctly, Jerry let me, let me talk about two things you know the cadence of the margins for US I think we've been.
We believe that by the end of 2020 that we will be approaching the mid teen margins in this part of the business.
And that part we can for steel is still consistent I don't think that the the smaller jobs that were bidding is going to change the overall.
Topline the topline is going is really a.
I'll call it a product of the burn rate and so although we are bidding smaller jobs, where we put more smaller jobs into the portfolio. They burn faster they still create a topline that we have talked about.
Historically and going forward.
And so I don't see that changing.
But I think that you are seeing that as our cap continues to increase that there is a more diverse portfolio of smaller work, but remember we talked about this for several quarters now we believe the most valuable work is the faster burn work for a host of reasons first of all it does generate very quick topline and bottom line, but it also is less risky.
Because it's easier to bid and project out cost on a shorter term basis. We certainly have found out with these legacy projects trying to price out work that takes five to seven years is obviously very very difficult to do so this quicker burn were.
Well create a very similar topline and it'll probably take us to the end of 2020 to get back to the mid teen margin Yeah, Gary the other interesting part is that for the last three months in a row, we seen our bidding schedule for jobs less than $150 million of anywhere around a billion dollars a month, we're bidding about $1 billion or what the word which is a is a huge change from the prior year because that small amount of work that we used to do that using away from somewhere around 450 to $350 million to $500 million. So we've seen a complete slip into the dynamics of our portfolio of these smaller jobs, well and were pursuing those instead of going after these 800 million EUR 1 billion dollar job and I think thats been a shifting our portfolio bidding, yes, I think that really emphasize that Jerry as I go around grant will be to our town halls.
I've been doing this now for quite some time and I remember putting up on the screen.
The monthly bid Lettings for our normal work outside of our larger projects and it was down to about $250 million a month and now for the last three months, it's been right at 1 billion. So so the market is flush and I do think that litigation is right on that that is going to be at a core driver of our growth and our steady lower risk portion of our portfolio, which is by far the vast majority of our cap today.
Thank you. This is the end of our Q1 and I would now like to turn the conference back over to our host for closing remarks.
Well. Thank you everybody for your questions a quick note for our shareholders and investors of judicial Lisa and I will be on the road in a conference of visiting our operations and investors around the country throughout the second half of 2019. So please reach out to Lisa and we will look forward to speaking with you and meeting with you and as always.
Thank you to all of our employees for keeping your fellow workers safe.
For exhibiting grants core values every single day as always to get a lease and I are available for follow up if you have any further questions and have a great day everybody. Thank you.
Thank you. The conference has now concluded we appreciate your attention.
Have a good day.