Ronald Botoff - Director - Investor Relations James Hildebrand Roberts - President, Chief Executive Officer & Director Laurel J. Krzeminski - Chief Financial Officer & Senior Vice President.
Daniel Scott - Cowen & Co. LLC Michael S. Dudas - Sterne Agee CRT Jerry David Revich - Goldman Sachs & Co. Michael David Shlisky - Seaport Global Securities LLC Adam Robert Thalhimer - BB&T Capital Markets John Bergstrom Rogers - D.A. Davidson & Co. Min Chung Cho - FBR Capital Markets & Co. Nicholas Andrew Coppola - Thompson Research Group LLC.
Good morning. My name is Chad, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Third Quarter 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. Please note, today's call is being recorded.
After the speakers' remarks, there will be a question-and-answer period. Please also note, we will take one question and one follow-up question from each participant. It is now my pleasure to turn the floor over to your host to Granite Construction, Director of Investor Relations, Ron Botoff. Sir, the floor is yours..
Welcome to the Granite Construction, Incorporated third quarter 2015 earnings conference call. I'm here today with our President and Chief Executive Officer, Jim Roberts; and our Senior Vice President and Chief Financial Officer, Laurel Krzeminski. We begin today with an overview of the company's Safe Harbor language.
Some of the discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions.
The company assumes no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise. Certain non-GAAP measures may be discussed during the call and from time-to-time by the company's executives.
And please note that a reconciliation of certain non-GAAP measures is included as part of our third quarter earnings press release. For more information, visit our Investor Relations website at investor.graniteconstruction.com. Thank you.
Now, I would like to turn the call over to Granite Construction, Incorporated Chief Executive Officer, Jim Roberts..
Thank you, Ron. And good morning, everyone. Following another quarter of steady growth and solid performance, I first want to congratulate Granite teams across the country. The focus on execution throughout our business is driving improved results across geographies and across end markets.
Our constant focus on safety remains a steady contributor to our performance and I am quite proud of the fact that we again are riding this trend toward another year of record company safety performance. Another bright spot, speaking of records, our backlog at $3.1 billion once again moved the bar higher for us this quarter.
I am particularly proud of our results in the third quarter. Lukewarm public spending trends continue to be a key revenue influencer. While revenue grew a little more than 4%, quarterly gross profit improved more than 51% and net income more than doubled from last year.
Strong performance was broad with profitability growing in each segment and margins continuing their steady upward trend. In the third quarter, we again were met by a consistent drumbeat of steady and competitive market conditions.
However, without additional needed public funding, we do not expect a significant change to the current competitive landscape. Before highlighting segment performance and turning the call over to Laurel to discuss the financials, let me spend just a couple of moments speaking about everyone's most frustrating subject, public funding trends.
Let's start in Texas where our Large Project headquarters is located and on a positive note. Texas voters tomorrow are expected to approve SJR5, better known as Prop 7, which is expected to provide an additional $3 billion a year for TxDOT in an annual transfer from the Texas general fund.
If approved, it would represent the largest single increase in transportation funding in the history of the state. Importantly, Proposition 7 and last year's Texas ballot measure Proposition 1, both require funding to be used for certain dedicated budget line items, including right-of-way acquisition, construction, maintenance, and debt services.
And we're getting more and more constructive about the coming opportunities here, in our home state of California. Less than two weeks ago, I had the opportunity to present to the California Legislature's Special Session Conference Committee on Transportation.
In two meetings, the committee was presented with the Governor's $36 billion (4:28) enhancement plan, as a potential starting point for discussion and negotiation. The overarching need for investment has been evident to all during these early-stage discussions, which notably have not been the base.
While the terms and timing of the ultimate commitment in California remain uncertain, the vision for significant incremental, dedicated transportation investment is coming into focus. We're hopeful that 2016 can be a launch point for this critical investment.
And of course, our quarterly discussion would not be the same without at least a mention of the latest inaction from Washington, D.C. Just last week, Congress approved the 35th short-term patch to transportation funding in the past six years, extending funding three weeks through November 20.
This sales strategy continues as we kick the proverbial can an ever shorter distance down an ever more crumbling road. So while state and local level trends are encouraging, it ultimately requires support from a long-term federal highway bill to free the growing wave of tens or hundreds of billions of dollars of pent-up demand across our country.
We still remain hopeful that Congress will take responsibility on this critical issue and pass a long-term bill this year. The latest short-term extension only through November 20 is a positive sign that negotiations between the House and Senate are getting closer to a final resolution.
We stand ready as a willing partner, ready to grow and invest across our great country. Now let's get back to our performance in the third quarter. First, a look at the Large Project segment, where results reflect improved steady performance on our early-stage portfolio.
After first half of the year marked by challenging weather and new projects that initially ramped up slower than we had anticipated, we were able to build and recapture momentum in the quarter as revenue grew and gross margin reached double-digits.
Our project portfolio now has shifted considerably from recent years as larger and newer projects now comprise the majority of our work in the segment. Illustrating this point, the majority of our Large Project segment revenue in the third quarter was from four mega-size projects.
This include the new New York Tappan Zee Bridge, the IH-35E in Texas, the I-4 Ultimate in Florida, and the Pennsylvania Rapid Bridge Replacement. Of these projects, only the Tappan Zee, which has made solid progress in 2015, has reached the halfway point of its project life.
As we have said for some time, with our project portfolio weighted towards projects early in progression, it produces margins that are lower in the initial stages of jobs than when the projects mature.
While we focus on execution of more than $2.2 billion of Large Project backlog, we also are focused on successfully targeting, teaming, bidding, and winning additional new work. Our Large Projects and federal groups recently teamed up to win a $72 million dam modification project in Texas.
Following project funding approval just last Friday, our tunnel division expects to receive notice to proceed later this week on a more than $180 million project in Akron, Ohio. These wins reflect a large project market that continues to show strength for Granite.
Looking ahead, we have teaming agreements in place and expect to bid on more than $16 billion of Large Projects just between now and the end of 2016. And in fact, between now and the end of this year, we expect to bid on $5 billion worth of projects.
These include the more than $2 billion Purple Line in Maryland, the Grand Parkway in Houston at $800 million, and in Arizona the $1.2 billion Loop 202 South Mountain Freeway in Phoenix. Our percentage of participation in these projects remains in line with recent history.
Building on the success we had in the first half of the year, another key contributor of the third quarter performance was continued execution from our vertically integrated business. Once again, our Construction and Construction Materials segments delivered solid year-over-year improvement.
The Construction segment posted year-over-year margin improvement for the sixth consecutive quarter with performance fueled by improvements across geographies and across end markets. Power and underground continued their strong performances in 2015, helping drive segment margins north of 15% in the quarter.
Both the public and private sectors are driving the steady improvement in local markets. Market and bidding environments remain fairly stable but quite competitive. Private and industrial market activity remains a focus of our growth and our diversification opportunities.
Our teams are focused on improved pricing expectations and bidding discipline across geographies. We continue to demand more value for our products and our services. The consistent performance and improvement of our Construction Materials business was evident again in the third quarter.
Once again, internal and external demand drove revenue and profit growth. The business is now operating at levels that we have not seen since the economic downturn, with volumes in the quarter increasing double-digits over 2014. The result has been year-to-date margins at a multi-year high of more than 11%, our highest level since 2008.
Plant efficiency remains in focus and a highlight area for the business as operational and continuous improvement success at our materials facilities drives ongoing cost management gains.
Of course, while headlines hopefully will trumpet our next $1 billion project win soon, it is equally as exciting for us to highlight the positive momentum in our vertically integrated business. This momentum is very real, as is the growing level of pent-up demand and this represents an enormous growth opportunity for Granite.
So with that, I will turn the call over to Laurel to discuss results and our 2015 outlook.
Laurel?.
Thank you, Jim, and good morning, everyone. Third quarter 2015 revenues were $751.4 million, up 4.4% from last year. Earnings per share in the quarter more than doubled to $0.77 compared with $0.38 in 2014.
All segments contributed to third-party gross profit growth of 51.3% to nearly $101 million, and total gross profit margin increased 416 basis points year-over-year in the third quarter to 13.4%.
On a year-to-date basis, gross profit of $206.8 million grew 21.3%, which translated to 176 basis points of year-over-year margin improvement to 11.9% at the end of Q3. Certainly, we're not where we want to be or need to be yet, but we are making great progress as we continue our recovery from recent trough levels.
SG&A expenses increased 5.7% in the quarter, but they've risen just 2.5% year-to-date. We continue to maintain and manage a strong balance sheet with more than $310 million in cash and marketable securities at quarter end. Total contract backlog at the end of the third quarter was $3.1 billion, yet another all-time record, up 3.9% from last year.
Large Project Construction segment backlog increased 3.1% to more than $2.2 billion, and Construction segment backlog increased 6% year-over-year to more than $866 million. Our runway build continues. Let's take a look at segment results.
Third quarter Construction segment revenues decreased 4.5%, but we were particularly pleased with gross profit margin of 15.1%, up 414 basis points from 10.9% last year. Strong execution across geographies and across end-markets drove the profit growth, with particular strength in certain parts of the West and across the Kenny business lines.
Large Project segment revenues increased 21% in the third quarter, and gross profit margin increased 723 basis points to 10.4%, up from 3.2% last year. This reflects a now complete year-over-year transition from a portfolio weighted between mature and new products, including a couple of challenging projects.
Today, our project portfolio remains heavily weighted toward newer, larger projects, still fairly early in progression. And also today, we progressed past most of last year's mature projects and thankfully, last year's challenges are now largely behind us.
So while we expect mid-teens margins over the life of projects with four large and early stage jobs comprising the majority of our Large Projects revenue, we continue to expect margins to remain lower in the earlier stages of these jobs than when the projects mature through the project lifecycle over the next few years.
And finally, back to the growing bright spot in our Construction Materials segment where revenues increased 15.1% year-over-year during the third quarter. Segment profitability increased at about the same pace producing gross profit margin of 13.1% in line with last year as strong volume trends drove revenue and profit growth.
Before I touch on our guidance, let me offer a quick update on two areas. First, an update on the year-to-date comparison of both initial profit recognition as well as that for claim recognition and claim recovery related to the change in our accounting policy this year.
As disclosed in our 10-Q which will be filed today, on a year-to-date basis at the end of the third quarter of 2015, initial profit recognition totaled $21.6 million, a decrease from $50 million in the prior year period. Year-to-date claim recognition in 2015 totaled $44.7 million, compared to claim recovery of $23.2 million in the prior year period.
Second, as expected and subsequent to the close of the third quarter, we completed a second amended and restated credit agreement. The facility provides for an increase to $300 million from $215 million, of which $200 million is a revolving credit facility, and $100 million is a term-loan with the revised maturity date of October 2020.
We intend to use a portion of the facility to pay down $40 million of initial principal payment on our higher cost senior notes in the fourth quarter of 2015 while utilizing the remainder to help fuel our growth strategy.
And finally, as we noted in our earnings press release this morning, we did maintain the annual guidance we provided to you back in February. We continue to expect mid-single digit consolidated revenue growth in 2015 with EBITDA margin in a range of 6% to 8%. Now before we take your questions, let me turn the call back to Jim..
Thank you, Laurel. All-in-all, our solid third quarter and steady year-to-date performance reflects continued recovery from a more than six year industry slowdown. Across the country, the construction industry has been sidelined by the lack of long-term dedicated federal transportation funding.
We're already partner, ready to build new capacity, ready to repair our ageing infrastructure and ready to invest for future generations. At Granite, we are building a stronger, deeper organization with internal resources aligned to our operations to help us compete more effectively across end markets and across geographies.
We are poised for the next steps on our evolution, well prepared to leverage our capabilities and to accelerate our company's growth. And now, we'll be happy to take your questions..
Thank you very much. The first question comes today from Daniel Scott with Cowen & Company. Please go ahead..
Hey. Good morning, guys..
Good morning, Dan..
Good morning..
You mentioned there at the end of the comments that obviously the major projects are early stages and lower margin, other than Tappan Zee, they're all earlier in life and half way.
What year are we looking at for the existing portfolio of Large Projects where they will kind of hit their max profitability level for lack of a better term?.
Well, I would say out of those four now, again, it's going to depend on the new wins as well. So, on those four mega projects, I would suggest to you next year we'll be in full stride on all four of them.
But remember, as we continue to build new projects, which we absolutely anticipate we will, we'll hit on a few of these coming up, it is going to really again weight the portfolio towards those four getting into the maturity stages and then some younger ones in the preliminary stages.
So it will continue to evolve, Dan, over time, but those four, probably 2016 and 2017, they'll be hitting on all strides..
Okay, great. And then last quarter you made comments about aggregates pricing was encouraging. And I think you said it was especially the higher quality products were showing the most strength.
Is that trend continuing?.
It is. In fact, I would suggest that the higher quality products are becoming the higher demand products and that continues to really work directly into our material strategy as we try to make sure that we provide the higher quality products into the marketplace.
So, yes, it's continuing and as noted in the financials and in some of Laurel's points there during her discussion, the materials business is really strong right now..
Okay, great. Thanks. And then just one last thing. In the past, you've looked at potential to add, I think some geographic diversity to aggregates as you try to move projects more into the East.
And also looked at water, are you still thinking kind of those sort of potential growth areas through M&A?.
Yes, Dan. In fact, I would just reinforce those are the two major areas of emphasis. We'd love to move our vertically integrated strategy eastward, and we do like several end market diversification strategies, one of which is water..
Okay, great. Thanks so much, guys..
Thanks, Dan..
The next question comes from Michael Dudas with Sterne Agee..
Good morning, Jim and Laurel..
Good morning..
Hi, Mike..
Don't want to – I'll knock on wood here. So if things maybe turn out more positively with new Speaker, House and Senate getting together. Everybody's loving each other now in Washington, so they say.
Can you take me through how this would evolve for the industry in general and how for Granite particular, how much time, lag time, how pent-up are fittings, can we see meaningful activity in 2016 from this type of certainty? I know it's going to be very geographic and such related, but maybe just share your observation on how that might occur for the industry and for Granite?.
Okay, Mike. So, maybe let me go back and give you my opinion of what's happening first and it hasn't changed actually in the last two quarters.
As we expected, whether it is a Boehner as Speaker or Ryan as Speaker or whether it is Inhofe or Boxer heading up public work side of the Senate, we're looking at end of the year bill coming into fruition and as we got these extensions over the last week from the House side moving and the Senate moving to November 20 date for a highway bill, that's a really good sign.
If you read and talk to a lot of the people that are in the know in D.C., you'll hear a very strong level of optimism that they are working behind scenes to get something done.
And if you follow what happens in D.C., well if we get a bill out of the House and they get a bill which supposed to be the working on this week heavily and we go back to the July bill, call it the back from the Senate.
If we can get both of them to pass those bills, then it goes to conference and what we are hearing today is that there is not a lot of work to get him to conference. And what we're hearing today is that the two bills that have been laid out so far are very similar, in fact very, very similar.
The Senate bill has a little higher overall revenue base than the House bill, but overall the terminology is very similar.
So they go into conference committee, if they can get a bill done and let's call it by Thanksgiving or pushing off even by Christmas which I'm fairly confident of now, I think, it will infuse an attitude immediately into the system, into the DOTs, when they have an approach, where they have certainty of their funding, they will put work out to bid in advance of knowing that they've actually got a longer-term bill out in front of them.
So I think 2016, now we'll see the value of it in the back half, because I think we'll see the projects coming out to bid in the first half of 2016, and what we'll end up seeing Mike is, we'll see some of the work coming on to our books and the bottom line by the second half of 2016 and then obviously continuing on from there..
Very helpful, Jim. My follow-up would be, given tomorrow being election day, I don't know if there's any initiative that you guys have on your screen throughout the U.S.
that might be helpful, but maybe even talk about – maybe for 2016, certainly with California you mentioned in your prepared remarks, do you anticipate in a 2016 election there will be a lot of those types of opportunities to kind of dovetail with some of this momentum you are seeing come out of Washington?.
I do. In fact, let me go back and give you obviously the two big states that I mentioned real briefly in my remarks.
California, it has been battling back and forth ever since the end of the regular session when they put together a special session starting in July and August and they've been running all the way through November now trying to put together a long-term $59 billion shortfall mechanism in the State of California.
The special session I had the privilege of talking with them, in front of them two weeks ago and they're going to get something done in California, that's fairly clear, the question is going to be when.
And then if you look at what's going in California, the Governor's proposal is a $36 billion 10-year program with a shortfall of $59 billion, so there are a host of legislators that believe that the $36 billion is not large enough, which of course you can imagine, Mike, I agree with them.
So, that one is going to probably take a little time to work out because they've got a host of mechanisms and this is what's happening in most of these states. You're looking at potentially increased gas, diesel taxes; you're looking at increased licensing fees, increased registration fees.
And in California in particular, during the downturn there were monies that were taken from the potential highway transportation budget and maneuvered back into the general fund. So they are trying to take money from the general fund and move it back to the transportation bill. So, those are all things that take time to work out.
And I think it will work itself out in California between the end of this year or maybe by the end of the first quarter. And I'm firmly in belief that they'll get something accomplished so that it will start taking some traction by the end of next year. Now, another big one that I mentioned briefly was SJR 5, better known as Proposition 7, in Texas.
Now that's an interesting one because the way that one works and that goes to the polls tomorrow and strictly needs a majority vote in the State of Texas. And what that says is actually simpler. What it says that, if revenues exceed a certain amount in the Texas budget then the overspill can go into transportation.
And their projections are that there will be excess revenue coming into the proposal, so coming into the actual Texas DOT coffers. So, that one looks like a good chance of passing and looks like there's a really good chance of getting it funded based on Texas revenue. So, those are the two big ones.
I haven't followed a lot of the smaller ones recently. We talked about in our last call, Mike, that Washington just passed a $16 billion program. Utah passed a really nice increase in their gas tax. So, all the states have really stepped up and now we've got the federal government just kind of needs to – it's teed up, they need to hit the home run..
Jim, that's quite encouraging. Thanks for your thoughts. Appreciate it..
Thanks, Mike..
The next question comes from Jerry Revich with Goldman Sachs..
Good morning, everyone..
Good morning..
Good morning, Jerry..
I'm wondering if you could just talk about what's the cadence of major Large Project awards on bids that you're involved with? Can you help us get a sense what the next couple of quarters should look like from an activity standpoint?.
Okay, maybe ask that again, Jerry.
You want to know which projects we're bidding?.
So, out of the projects that you're bidding and in your slide deck, you typically have a list of 10 Large Projects that you're bidding, I'm wondering if you'd just talk about when those projects are expected to be awarded..
Okay. Very good. So, a couple of them that I mentioned in my discussions earlier, we've got a Large Project bidding in Arizona, the Loop 202 South Mountain Freeway. That job just is turning in as we speak this week and that one will have an answer in January, as to who will be the winner of that project. And that's over $1 billion project.
The Purple Line light rail job in Maryland, we've been talking about this one for quite some time, it goes in in December. We will most likely hear about that sometime in late in the first quarter where that goes. So that one's on the move fairly quickly.
What other one did I mentioned to you on there? On Houston, the Grand Parkway job, so that one – we should hear on that one where we end up in December. So, that's a nice one. We also turned in the Grand Central Caverns project in New York, and we should hear about that any day as well.
So, there's a host of big ones that we are turned in in the fourth quarter here that we should hear about several of them this year and then another couple of them early next year. And then, I'd be happy to walk through more bids if you'd like to hear some more, Jerry..
Sure. That'd be great, Jim.
Any other major ones beyond that?.
Well, a couple of ones, our federal group is actually bidding quite a bit of work out in Guam and that's really nice to see again. There's a nice work for the NAVFAC Pacific, the NAVFAC Marianas, both Guam jobs, that's nice to see. We're bidding a very large project up at Sound Transit in Seattle on the Lynnwood Link Extension.
We're looking at the next phase of the I-35 job, the Southern Gateway. We're bidding that in the first quarter of next year. We're actually bidding a large rail transit project in Hawaii that we've been shortlisted on, which is a very nice job, it's still listed down to three bidders, and we'll be bidding that in the first quarter of next year.
And I can go on, the list is endless, Jerry, it's just again like I said, we got $16 billion of projects we're bidding in the next 12 months, 12 months to 13 months..
And then, Laurel, can you just talk about how we should think about operating leverage in Construction Materials? Your incremental margins this quarter were similar to absolute margins.
What drove that? Was there any allocation internal versus external, and how should we think about operating leverage going forward?.
Yeah. So, 65% of the material production has been external. And as we've said, we continue to work on efficiencies in our materials business. We had a heavy cost base of fixed cost that we had to work now. We have increased volumes and that's stopping directly to the bottom line, so, nice solid improvement in our Construction Materials business..
The other thing Jerry, that's really important and Laurel started alluding to it relative to our overall cost, we have built up a very nice overall structure of equipment and plants across the Western U.S.
And as those – as the materials market increases and the volume increases, you certainly get efficiencies that we haven't been able to see in a slower economic period. So, as we start increasing volumes, a lot of our fixed costs are getting distributed over a larger volume and it's creating higher margins for us as well.
So we are lowering our costs, we've seen somewhere around a mid single-digit increase in pricing this year or we see more pricing increases coming for next year, and we see the demand being quite steady and nice. So, really the materials business is getting back to where we know it can be, and that's really the important part.
When you have a steady local economy, that will drive the materials business. And then if you can layer on a state transportation budget, you can layer on a federal transportation highway bill, those are really the icing on the cake with the materials business..
Okay. Thank you..
The next question comes from Mike Shlisky with Seaport Global Securities..
Good morning, guys..
Good morning..
Good morning, Mike..
Can you just share with us, I guess – so what's being talked about in a conference here in Congress? Is this a bill that could come out or could get passed? Is this in line with what you were hoping for from a highway bill? Is it bigger or smaller than what you were thinking about, maybe back when this whole thing first started many, many years back?.
Okay, Mike. Well, let me be very candid and open with you upfront. Is that what I had hoped for, absolutely not. But, probably what I had hoped for was never going to happen, Mike. So, let's be realistic.
But the key ingredient I think from the feds really is not the size of the program, it is the longevity and the certainty that it provides long-term for the industry. So, from that perspective, I am very happy that it's a six year bill.
Now, one of the things that both the Senate and the House have been focusing on is trying to figure out the funding mechanism for the back three years. They both agreed so far in their individual bills that they will fund it for three years, but they've got to find more funding in the back half. So, I am fine with the overall value increase.
It's an incremental increase on an annual basis over the six year period which is fine. I'd like to see a little more TIFIA money in the finished product. They've got the TIFIA monies at about $200 million to $300 million with about a 30 multiple projection of what it puts into the overall transportation economy.
So, down the middle, that's about another $7.5 billion annually. I'm fine with all the money part. Not what I hoped for, but I'm actually fine with it, because I think it creates value.
I think what we need to do now between now and I'll say November 20, as we get into conference, is we need to do a little more work on how we're going to fund the back half of the overall bill..
Got it. Yeah. Got it.
And my follow up is, I'm getting the sense that if a big bill like this is passed, are there some companies out there that perhaps were prequalified here, could start to ramp up and hire people to kind of get themselves prepared? And perhaps broadly can you give us your overall thoughts on the state of obtaining and keeping labor on your team for the next, let's say 12 months to 18 months?.
Okay. So, labor is certainly a discussion. But let me get into that in just a second. So, I don't think that, that what happens in this industry is you can't be in and out of the industry, one day out and then back in the next day. So, I don't see a highway bill changing the competitive landscape from adding a whole bunch of new players.
What I do see is there will be more competition for labor and fixed resources. What will happen is that companies like Granite, we've got tremendous elasticity, we've actually shrunk that portion of our business that I think will be affected by highway bill, and that would specifically be our vertically integrated business.
They will be the largest beneficiaries of a highway bill. And those – they have set labor forces in their markets and obviously we're a major player in most of the markets we work in. So, I think it's actually advantageous to people like us that have a strong presence already in the marketplace.
I think the industry as a whole, Mike, the issue is going to be is do we enough labor force in the overall industry. I'm very comfortable with the wage rates that Granite pays and the relationships we have with our employees that will be able to increase our work force.
But I do think that you have to be in the market today to take advantage of the highway bill that we're about to get..
Great. Thanks, guys. I appreciate it..
The next question comes from Adam Thalhimer with BB&T..
Hey, good morning, guys..
Good morning, Adam..
Good morning..
Nice quarter. In the Construction segment, you had a very strong margin in the quarter and you said that you had some contribution there from Kenny.
I'm just curious whether is that a good run rate going forward or were there some unusual items in the quarter?.
Well, let's do it this way. Again, we don't talk about individual segments relative to run rates and guidance and all that, but I will say this, and I'm glad you brought it up. The Kenny business is progressing very, very nicely. Obviously that was a very nice acquisition for Granite. They are a great team.
The two portions of the business that showed really strong encouragement in the third quarter was the underground business, which is our rehabilitation and pipelining business, and our power business, which is very strong with the utilities and our relationship in the construction management role with a lot of these large utilities across the country.
I see that sustaining itself nicely over time, and those both have very nice markets. Interestingly enough, the two lines that I didn't discuss are progressing nicely in Kenny as well. We're expanding our civil business in the Midwest and we have some new, young, very talented management that's helping us to expand that business very nicely.
And then the other thing I didn't talk about was the power business. It's been a really good business for us. We just got a new job in Akron, Ohio and we see more opportunities out in front of us on the tunnel side.
So, all in all, the Kenny business is performing at a very nice level, and I don't think it is an anomaly one quarter at a time – one quarter anomaly relative to the margins, but I, again I would not want to provide any guidance relative to any of the individual segments..
Okay.
And then can you just provide a quick update on private construction in the West and also what you're seeing on housing in the West?.
Well, let's start with the negative first, housing. I just have not seen housing really take off to any magnitude at all, and it is not a really strong driver in our business right now and I've always said that when the residential market takes off again, that will just be, again, more icing on the cake so to speak for Granite.
And historically it's been a nice driver of our materials business. On the other side, on a very positive side, we are seeing very strong industrial, very strong commercial. Both of those markets have heeded up nicely and we are migrating towards a larger percentage of private work relative to our overall portfolio than we've had in a long, long time.
So, the markets especially in the West, and the commercial industrial markets are really progressing quite nicely..
Great. Okay. Thanks a lot..
Thank you, Adam..
The next question comes from John Rogers with D.A. Davidson. Please go ahead..
Hi. Good morning..
Good morning, John..
Couple of just follow up. In terms of the – just going back to the Large Project business and your comments Jim about three of those four Large Projects that were driving business in the quarter not really hitting stride yet.
With the way you estimate margins for these projects, can you just give us a sense of the range between the margins in the early stages and at the back half, and still expectations that – I assume that this is a mid to high-teens project business.
Is that correct?.
Okay. Yeah, John, I think that that's a good question. I think let me state it to begin with that. You know our business quite well and we've always said that our Large Project business is a mid-teen margin business and we continue to believe that that is the case and that is our expectation.
But what we end up doing when we bid and build our work, we definitely hold back, and I'm going to call it contingencies, upfront. There are a lot of unknowns once we start with this work.
And we create contingencies with milestones attached to them so that as we get more comfortable and confident as the progression of the job assuming we didn't run into an issue, we release contingency as the job progresses.
Now, what's happening is about the way we have created most of our milestones is that they don't tend to get to the release point until probably you're halfway done.
And I think that's part of the issue when we talk about early progression, we still hold some monies back just in case certain issues that we have predefined, if they do come up and they occur, then we've got money set aside for them. So, as I was mentioning earlier, it depends on where the weighted portfolio is.
And in today's current book of business, outside of Tappan Zee, the other three mega projects are early in progression and still have contingencies setting aside for them, to hopefully be released, assuming we get past milestones and don't have issues in those milestones..
Okay. And can you give us a sense of the orders of magnitude now between the swings? It used to be zero at under 25% and then up over mid-teens in the remaining 75%.
I mean, are you booking these projects at single-digit margins initially?.
Well, again, two ways to look at it. The answer is no, but we are booking them in the lower-teen range....
Okay..
...and lower double-digit range and then releasing contingencies as we move forward. And the whole....
Okay. I just wanted to get an order of magnitude..
Yeah, I would say – if you want to put it in the – it's in the double-digit ranges though, we won't bid a job at single-digits or expect anything in the single-digit range. Double-digits have always been there and then with the contingency on top of that, that works ourselves towards the mid-teen range..
Okay. And then, Laurel, and I haven't seen the Q yet, but you mentioned there were claims for the nine months of $44.7 million versus the recoveries last year.
Can you tell us what those were in the quarter?.
The year-over-year variance was about $20 million between profit recognition and claims..
Okay. So, $20 million in incremental cost in the quarter..
Right, between claims and profit..
Okay..
No, incremental revenue..
Oh, incremental revenue? Sorry..
Right..
Okay. Thank you.
And then lastly, it's minor amounts, but you haven't had the significant asset sales that we've seen in the last couple of years and I know some of that's the excess property, but your thoughts there? I mean, is the market not there or have you just got your equipment and your assets where you want them now?.
I think it's a little bit of both, John. I think that we do have assets for sale and some sizable ones. But at the same time, some of them are very special assets and they're going to take the right buyer at the right time.
And overall I think that the – when you look at the smaller assets, which would be our equipment maintenance, older equipment, that market's been kind of stale and we've got no reason to dump our equipment at any cheap prices out into the marketplace. So we just hold on to it. We become opportunistic.
When the right opportunities come, we actually sell them at that time. The other thing to think about is we have tried not to sell a lot of our assets. We're pretty bullish on the fact that this overall highway program is going to increase and we're going to need every asset we have to go build the work that's going to be coming out in front of us.
So we don't see a real strong desire to sell rolling stock. Certainly if we have some old land assets that are no longer useful, those are the ones we'd try to turn over..
Okay. Great. Thanks a lot..
Thanks, John..
The next question will come today from Min Cho with FBR Capital Markets..
Great. Thank you. Jim, quick question, just about international competition. Obviously, it's happening, it's inevitable in the larger projects.
But can you tell us if you're starting to see any impact on pricing on the projects that you're bidding on and if it's impacting any win rates?.
That actually is a very interesting environment. And we have seen increased competition from international companies, and I think it has affected the prices. They're winning their share. I will say this, it's not affecting what we think we need to get out of our work in Large Projects.
We continue to be very disciplined in the margin expectations that we have on Large Projects. We have noticed that when we don't win a project and it is potentially an international competitor that does beat us, some of the pricing can make you shake your head and question whether or not it is overly aggressive. But that's somebody else's business.
And if they want to stay that aggressive in what I consider to be a high risk, high reward business, that's certainly their choice. But for us, we're going to stay disciplined and keep our pricing where it is.
And the other thing I would suggest to you on these large Large Projects, the majority of the win or lose will come out of the innovativeness of how you design, how you build, how you finance the work. It typically is not based on the margin.
And we consistently look at whether we get a project or don't, it's based on how the project has come together with us, working with our designers and our financers. So I don't think margin is an issue, but I have seen some international competition is bidding the work very cheap..
Okay. And then, Laurel, I'm assuming the Folsom Dam project was completed in the quarter.
Were there any significant contingencies there that had an impact on Large Project margins?.
Our 10-Q is going to be released today. But the revisions and estimates aren't significant, net and year-over-year, so..
Yeah. I think that it was completed, but it's got some work we're doing with the owner, the Corps of Engineers, to get it totally cleaned up. The majority of the work is basically completed, but it is not a significant player on the financials in the third quarter..
Okay. Great. Thank you..
Ladies and gentlemen, our final question today will come from Nick Coppola with Thompson Research Group..
Hi. Good morning..
Good morning, Nick..
Good morning, Nick..
So, looking at the Construction segment again, apart from the industrial type work and private type work, can you just talk more about public trends, the competitive environment there, whether it's getting any better and what's happening with bid lists?.
Yeah. So when you say public, let's talk about the different kinds of public work. Certainly you have your DOTs, which would be the majority of the largest public sector. The other areas would be municipalities, the cities, the counties.
And I would say that the bid lists are stagnant, I'd say in the five range to six range, we've been talking about that for quite some time. And I would say the pricing is just stable, it's the same as it has been. I haven't seen it get better and I haven't seen it get a whole lot worse.
Overall, I think that as we get to a larger program, I think that's when you're going to start seeing the pricing move.
But with the programs being diminished today, some of the state programs just starting to kick in, you get a federal highway bill that kicks in, that's when I'm going to see probably the smaller bid list, Nick, and the higher pricing opportunities, but it hasn't happened yet.
So everything we're doing is pretty much in a stable environment for the last 12 months..
Have you been seeing any regional highlights that are by state when you look across your offices?.
Well, we have and I really try not to dive into individual states. But certainly I'll give you one state that I think is healthier than it was four years or five years ago, and that's California. It's done quite a bit better overall. And I think it's really the private sector that's driving it in California.
You look at the overall work we're doing, we're building some major complexes for new office space. We're really heavily involved in the solar work. We're really doing a lot more private work in California. So one of the bright spots out of all the states would be California.
And also we're seeing some picked up activity in the other states around there as well, but obviously California is one of our biggest state in the country..
Okay. Then my last question.
Can you just talk a little bit more about what Prop 7 would do for your business, particularly how much incremental demand for Larger Projects could that drive?.
Yeah, okay. So, Prop 7, the way I read Prop 7 is that I don't think it's going to have a huge effect on our business overnight for two reasons. First of all, in Texas, the work that we do there is mostly Large Projects..
Right..
And those are focused on – I'll call it quasi-municipal, quasi-public agencies that have revenue streams that allow them to build these $1 billion jobs. I don't see Prop 7 affecting those Large Projects.
What I see Prop 7 doing is increasing the day-to-day smaller work in Texas, of which I would love to see Granite have a larger role in the State of Texas.
So between Prop 1 and Prop 7, I think what you're going to see is an enhanced local programs, which will help us in the overall Larger Projects because we do compete with some local players in Texas on the larger work. So I think they're going to probably be pretty darn happy with the local work and they may not migrate into the Large Projects.
But Prop 7, I don't see the way it's written today that it's going to have a large play in Large Projects funding..
Okay. Understood. Thanks for taking my question..
Okay. Thanks..
Ladies and gentlemen, that concludes our Q&A portion of today's call. So I would like to turn the call back over to our hosts..
Okay. Everyone, thank you for your questions. And thank you again to the Granite employees for working hard, working safely, and living the Granite core values every single day. We look forward to seeing a few of you in Dallas to tour our I-35E project next Monday. Please let us know if you have interest in joining us down in Texas.
As always, Laurel, Ron and I are available for follow-up, if you have any questions at all. Thank you, everybody..
Thank you. The conference is now concluded. Thank you for attending. You may now disconnect..