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Operator
Good morning. My name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2007 Earnings Release Conference Call. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to Jacque Underdown, Director of Investor Relations. Please go ahead.
Jacque Underdown - Director of IR
Good morning and thank you for joining us today. Today I'm joined by Bill Dorey, President and Chief Executive Officer; Mark Boitano, Executive Vice President and Chief Operating Officer; Dave Watts, our Chairman of the Board; Bill Barton, Senior Vice President and Chief Financial Officer and Jim Roberts, Senior Vice President and Granite West Manager. Mike Donnino, our Senior Vice President and Granite East Manager is not with us today.
This call will be recorded. Please be aware that if you decide to ask a question it will be included in both our live transmission as well as any future use of this recording. As always, shareholders, analysts and employees can listen to our live webcast of the call on our website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed at today's earnings press release and the comments made during this conference call, and in the Management's discussion and analysis section of our Form 10-K and other reports and filings with the SEC. We do not take any-- we do not undertake any duty to update any forward-looking statements. With that, I will turn the call over to Bill Dorey. Bill?
Bill Dorey - President, CEO
Thank you, Jacqui. Welcome and good morning and thank you all for joining us on our Granite Construction Second Quarter Earnings Call. I would like to point out that we have a presentation available on our website that I will be referring to throughout my opening remarks and you can follow along if you like.
On our call today I will address the following topics -- first, I will update you regarding the progress of our strategic realignment that was announced in February, along with an overview of our new reporting segments. Second, I will review the terrific financial performance by our Granite West business segment. Third, I will talk at some length regarding Granite East and the improving results and prospects for this business. Fourth, I will address our balance sheet and in particular our cash position. And last, I will review our strategic growth plan.
Our strategic realignment is progressing faster than we had anticipated. The changes have been well-received by our employees, and we are on track to have the whole transition completed by year-end. As a result of this progress, we are now reporting financial results from our two new operating segments, Granite West and Granite East, in lieu of our former Branch division and Heavy Construction division.
As we explained in February, this new structure will allow us to focus our large project resources and right size our large projects' business, as well as position us to take full advantage of the long-term opportunities and public transportation funding we anticipate in the West. As you can see from our press release, reporting as Granite West and Granite East has not significantly changed the financial results from what would have been reported from the Branch division and Heavy Construction division.
We view these changes to our structure as more of a geographic and organizational realignment, rather than a financial realignment. Let me walk you through these changes.
As slide six in our posted presentation illustrates, our Granite East segment includes all of our projects east of the Rockies, as well as our SR-22 project in Southern California. We have elected not to transition the SR-22 to Granite West, because the project is nearly complete.
As you can see on slide eight, Granite West includes our 13 vertically-integrated branch businesses in the West. These branch businesses are by far the largest part of Granite West. Granite West also includes three projects that had previously been reported under our Heavy Construction division. The three projects are the $230 million design build I-15 project in Utah, our $130 million design build US-20 project in Oregon, and our 25% minority interest in $160 million design build light rail project in Portland.
In the interest of providing transparency between our traditional branch business in the West in these three projects, I will discuss these projects separately, as well as walk you through the revenue, gross profit, and backlog. Our I-15 project in Ogden, Utah, is now reporting through our Utah branch office. Through the second quarter, this project was 51% complete, and is on schedule and on budget. We are very pleased with the performance of this project and expect it to contribute nicely to our Granite West profitability in both 2007 and 2008.
We believe the agreement announced on July 11th with the Oregon Department of Transportation to suspend the US-20 project is a positive event. The suspension will allow time for both ODOT and our project team to jointly explore simpler, less expensive landslide mitigation, and there is incentive for all parties to collaborate to achieve this common objective. The suspension provides that costs associated with the suspension will be shared and provides for a third-party dispute review board to determine what, if anything, should have been included in our bid for landslide mitigation for the contract terms.
On March 31st, 2007 the US-20 project was forecast at a loss of approximately $20 million. There is remaining uncertainty surrounding the ultimate determination of responsibility for the landslide mitigation costs, and as a result, we do not anticipate recording any adjustments on project forecasts until the revisions to the design are complete, and we have a clear understanding of the cost impact, if any, to the project.
The Portland light rail project is in its early stages and is off to a good start. We do not expect it to reach the 25% completion threshold necessary for profit recognition until 2008.
Turning to slide nine, the revenue gross margin and backlog associated with these three legacy HCD projects now included in our Granite West financial results are as follows. For the second quarter, revenue is $30.6 million, and this is for all three of those projects - revenue was $30.6 million, gross margin was $3 million. Year-to-date, revenue was $47.2 million, and gross margin was $4.6 million. The consolidated backlog with these three projects at June 30th was $199 million.
Let's talk about Granite West's financial performance. Granite West's second quarter revenue was $542.4 million, and the gross margin earned on that revenue was $109.4 million. This is truly outstanding performance, and equates to a second quarter gross margin percentage of 20.2%. Granite West Construction activities and our Construction Materials business are both performing well. Gross margin percentages for Granite West Construction and Construction Materials for the quarter were 19.9% and 21.2%, respectively.
Our second quarter and year-to-date performance of our Legacy Branch division is better than our record-breaking effort last year. Our Vertically Integrated business in the West, our traditional Branch business is off to another very good start and is poised to deliver another excellent year. I believe this demonstrates once again that if our markets are strong, we have the strategic assets, the quality people, and the right business model to harvest extraordinary profitability.
While our business in the West has performed exceptionally well so far this year, we are experiencing fewer residential and commercial development opportunities in many of our markets. In addition, the increase in the California transportation bond funding has not materialized as quickly as we had expected. This has resulted in slightly lower revenue generated from our Construction Materials business and a more competitive bidding environment compared to last year.
We have obviously built up a lot of momentum with our business in the West, and we are hopeful we can carry that momentum into 2008. However, the more competitive bidding environment and delayed release of California transportation funding will likely make it difficult to meet or exceed last year's record Branch division performance.
Now let's discuss our Granite East business and our second quarter results. I am pleased to report that the news from Granite East is generally good, despite a $15.7 million second quarter write down to the profitability of the SR-22 project. Granite East's forecasts improved in the quarter. I don't want to dwell on the SR-22 because I don't think it's the primary story. It's been a difficult project for us; we lost significant money building it and it has consumed considerable time, energy and resources. But it's 93% complete through June, and by year-end we expect this project will be in our rear-view mirror.
In the quarter, we had seven Granite East projects that experienced positive forecast changes exceeding $1 million, and four projects that experienced negative forecast changes exceeding $1 million. From the standpoint of our overall Granite East business, it appears that with the exception of the SR-22, our large projects forecasts have generally stabilized.
The primary story for Granite East and our large project business east of the Rockies is that our portfolio of projects now consist mostly of work which we believe has the potential to contribute acceptable gross margins. This is very exciting for all of our Granite East employees and for me personally as well. Certainly there are risks associated with our large projects and our large project portfolio, but we have diligently worked through the problem projects, learned from our experiences, and instituted considerable change, from our realignment and project selection, to risk analysis and project staffing.
Over the next 24 months, there are four bellwether projects you should be watching in Granite East. These are projects that all have significant potential. These four projects are as follows: US-90; this is our $283 million design build bridge across Bay St. Louis, in Mississippi. This project continues to improve its forecast, and should contribute nicely to our profitability for the balance of 2007.
I-64 - This is a $420 million design build highway improvement project in St. Louis, Missouri. We are well into the design phase on this project, and have started construction. We are off to a very good start and we have high hopes for this project. We have a 50% interest in this venture and we expect it to reach our profit recognition threshold in 2008.
The Inter-County Connector - This is a $464 million design build highway improvement project in Maryland. We are in the design phase and are quite optimistic regarding this-- its prospects. We have a 55%-- we are a 55% partner in this project and expect it to reach our profit recognition threshold in 2008.
The World Trade Center - We are a 20% partner on a Fluor-Skanska-led team to rebuild the below-ground facilities. We are currently pricing and working on the beginning phases of this project. We are recognizing some margin this year; however, the project is ramping up its activity and profit recognition will be more apparent in 2008. We believe the profit potential for these projects will deliver improved performance compared with the last several years.
Our-- for 2007 our previous guidance for this business remains unchanged. Under our new Granite East reporting segment, as well as under the former HCD operating segment, we expect operating income to be at or near break-even for the year.
I would like to talk to you about our balance sheet and our cash position. This is detailed on slide 15. At June-- June 30th, 2007, our cash and cash equivalents, short-term marketable securities and long-term marketable securities totaled $406 million, including $127 million of cash in our consolidated joint ventures.
At first glance it may appear as if we have excess cash on our balance sheet. However, our net billings in excess of cost and cost in excess of billings is a liability of approximately $203 million, $95 million of which relates to our consolidated joint ventures. The amount of non-joint venture cash, short-term investments and long-term investments net of this liability is approximately $171 million, approximately $150 million of which is required to support our bonding capacity.
As we have discussed with you in the past, we have an aggressive strategic plan which will require significant investment to grow our business in the West. That said, we are always looking to optimize our capital structure, while ensuring that we have the resources necessary to fund that growth.
I would like to now take a few minutes to update you on our strategic growth plan. We have talked with you about our strategy to claim new territory in the past. Our phrase "claim new territory" simply means that we intend to establish or acquire new vertically-integrated branchlike businesses in new geographies to grow our business. Our focus for now is in the West, ideally contiguous to existing operations, and we are looking for construction materials businesses or vertically-integrated construction and construction materials businesses.
Our recent acquisition of the Superior group of companies in Eastern Washington is a good example of our growth strategy. We believe that our recently-announced Granite West organizational structure will help us accelerate and support that growth.
As we have suggested, we believe our vertically-integrated branch business model has proved to be very successful, and has earned the right to capital and continued investment. Our five-year plan anticipates significant continued growth and investment into our traditional Branch business in the West.
As to the claiming of new territory, we are also expanding into-- our investments into reserves and processing facilities. In some instances these investments are simply replacing the cleared reserves and old facilities in existing markets. In other instances we are expanding capacity as well. Considerable effort is being expended to pursue these growth activities and our employees are excited about these prospects and focused to make it happen and to build long-term shareholder value.
Looking ahead to 2008 and beyond, we are optimistic that much of the organization work we are doing in Granite West will position us to capitalize on the opportunities from the California Transportation initiative, and the ever-increasing need for infrastructure improvement and new capacity throughout the West. While we expect new public money to be additive to the CalTrans budget in the 2007-2008 fiscal cycle, we expect the most significant increase will be in 2009, 2010 and 2011.
If the housing market is revitalized by then and complements the strong public works market we are anticipating, we will experience a very exciting market which will support strong operating performance. We believe our growth strategy will make us stronger in the markets we are already in and establish us in new markets at an opportune time.
Looking ahead in Granite East into 2008 and 2009, we expect to continue to see improvement in this business. We believe this improvement will validate our commitment to this business and to the hard work it has taken to make the changes necessary to turn Granite East into a contributor to Granite's overall performance.
Before I turn this call back to our moderator for questions, I would like to once again thank our employees across the country for your hard work, professionalism and commitment to excellence. You walk your talk and you model our core values every day and you make me proud. Now I would like-- now we would be glad to take your questions.
Operator
(OPERATOR INSTRUCTIONS). Bob Labick, CJS Securities.
Bob Labick - Analyst
Good morning. Congratulations on an excellent quarter.
Bill Dorey - President, CEO
Thank you.
Bob Labick - Analyst
A few questions. Wanted to start first with HTB or Granite East. Obviously this was a, you know, perfect quarter and a great turnaround from recent results. Was there any, you know, catch up or, you know, prior change order collection or, you know, one-time events in this quarter or is this more indicative of, you know, a level of profitability you would expect going forward?
Mark Boitano - EVP and CFO
Bob, this is Mark Boitano. We had some small recoveries of prior claim-related revenue, but overall I would that, and we think that this is more indicative of the direction that we're heading at this time. So there is a mix and a match of a few things here, but nothing that was of great materiality to the quarter.
Bill Dorey - President, CEO
I think that the most interesting thing for me is the result that we had despite the write down on SR-22. So that's an indication that we-- you know, we overcame quite a bit there to post positive gross margins and that's pretty remarkable, frankly. So we think that's a pretty good indication of where we're going, as Mark said.
Bob Labick - Analyst
Great. And, obviously, the implied guidance, if you will, is around-- is a similar margin, 2.5% or so for the back half. And this is all just kind of run rate, not including new, you know, catch up or change order. So should we expect that to continue or even to grow into 2008 as well?
Bill Dorey - President, CEO
Well, we've said two things in this opening monologue. One is that we expect to break even for the year, or be close to that. So in order to do that we're going to have to have a stronger second half of the year than we had first half. So we're expecting that, and we expect that momentum to carry into 2008 and beyond.
Bob Labick - Analyst
Great. Switching over to material sales, could you just give us some color on if sales were down quarter over quarter? You mentioned part of it is the result of this delaying lettings of Prop 1B in California. Can you give us a sense of pricing versus volume in the quarter? And then, also, margins were down year-over-year from 26 to 21%. What do you expect them to be going forward and, you know, what caused that? If indeed pricing was up generally you'd expect margins to follow with it.
Jim Roberts - SVP and Granite West Manager
Bob, this is Jim Roberts with Granite West. Yeah, we had a slight reduction in revenue and margin in the Materials business in the first half of the year and the second quarter. Really indicative of probably more of the residential side of the business slowing down. Yes, one of the things that we're not overly concerned about. We do think that hopefully with the additional public sector work forthcoming, we will be back to where we were last year. If-- the total of those, I would say, short-term market adjustments, we don't think are significant, although there is obviously third-party sales that are going to be reduced during a timeframe when the residential market reduces itself.
Overall, I think the nice part about it is that you'll that with that vertically integrated model we were able to capture additional opportunities on the construction side and-- so that offset some of those reductions in the Materials business. That's our model, and so it worked well in the second quarter of the first half of the year.
Bob Labick - Analyst
Great. Last question and I'll get back in queue. Just on the acquisition, was there any impact-- from the results from the acquisition or how much are you expecting going forward and how is the integration going?
Jim Roberts - SVP and Granite West Manager
Okay, this is Jim again, Bob. The acquisition, assuming you're talking about Superior up in -
Bob Labick - Analyst
Yes.
Jim Roberts - SVP and Granite West Manager
There was a net effect for the quarter, really negligible. Again, that business transaction occurred on April 1st. We are in the transition parts of that business as we speak. It's going very well. Our people up there that we've infused-- a couple people in the business, but the people we were able to acquire through the Superior business are exceptional. And we knew that when we were looking at the company and they're hitting the ground running and they're meeting expectations from what we had anticipated. I think they're going to provide value to the company immediately in 2007.
Bob Labick - Analyst
Terrific. Thank you very much. Congratulations on the quarter.
Jim Roberts - SVP and Granite West Manager
Thanks.
Operator
Richard Paget, Morgan Joseph.
Richard Paget - Analyst
Good morning. I just wanted a quick clarification on Granite East. You know, you were saying that despite that big $15 million write-down, you guys performed pretty well. So if I add back that 15 it kind of gets me into gross margins in the, you know, 13 plus range. Is that a more normalized rate or were there some positive readjustments kind of offsetting that?
Bill Dorey - President, CEO
Well, as Mark suggested, we did settle a couple of small issues but we-- and we expect to have that pattern continue. I mean, we've got quite a few issues out there yet to resolve. So it's not going to be unusual to see some of those fall into our results. We certainly hope that's the case. But we do expect to just do better on our work. We've been telling you all for some time that we think we have more margin in this work to begin with. I clicked off several jobs that we think are pretty good and we expect those, when they reach that-- those earnings thresholds to kick in and help us. So -
Richard Paget - Analyst
Could you maybe give us a range or something of what normalized margins could or should be?
Bill Dorey - President, CEO
Well, you know, what we've said in the past is-- and we've been asked this question and you know, can you expect to get in the high single digits and we expect to exceed that. I don't know whether it's an expectation. It's certainly a goal. And we've been down in the low single digits for a couple years and that certainly is not acceptable. And we're heading towards the high single digits and beyond over the next two years, we hope.
Richard Paget - Analyst
Now, you're-- you're talking gross there, correct? Or operating?
Bill Dorey - President, CEO
Yes, and we like to-- if we can, we try to under-promise and over-perform. So I'm very reluctant to get too optimistic in what I tell our investors.
Richard Paget - Analyst
Okay. and then I'd-- given your comments about some of the public sector work in California taking a little bit longer to get out there. And the outlook on housing, I mean, it sounds like the short-term weakness might be a little bit longer than maybe originally anticipated. Is that fair to say?
Jim Roberts - SVP and Granite West Manager
Richard, this is Jim. Yes, I think that we had hoped-- and I think that even in the last quarterly call we had anticipated in the third quarter to start seeing some of this Proposition 1B monies flowing into the bidding opportunities. We are starting to see it, so it's not as if it's not happening. We just think it's happening a little slower than anticipated.
I think it's yet to be determined the net effect for us. I think by the next quarter we'll be able to determine the bidding environment in the public works and how much has actually hit the street. When the agencies come out with schedules of when work will be bid, they're somewhat flexible and what we've seen so far has been delays in [letting]. So it's a little slower than anticipated but not dramatic.
Richard Paget - Analyst
And then-- I mean, have you seen that outside of California as well? I know that some of the SAFETEA-LU money, there was a little bit of uncertainty there but it seems like it's been cleared up. Has that reaccelerated?
Jim Roberts - SVP and Granite West Manager
In most of our markets outside of California, I think the anticipated lettings have occurred as scheduled, so I don't think there's any surprises outside of California.
Richard Paget - Analyst
Okay, great. Thanks.
Operator
Todd Vencil, Davenport.
Todd Vencil - Analyst
Thanks very much. Nice quarter, guys.
Bill Dorey - President, CEO
Thank you.
Todd Vencil - Analyst
Can you tell us-- I mean, you said that there was some, you know, some projects were adjusted upward and some were-- the forecast was adjusted downward. Could you just tell us-- and I guess this will be in the queue anyway. Can you tell us what the actual net number that was?
Bill Dorey - President, CEO
Actually, I do have it. The net forecast change turned out to be a positive $2.3 million. So it was-- and that's just the forecast change.
Todd Vencil - Analyst
Got it. Appreciate that, thank you. And then, just to sort of-- to kind of go along with the schedule that you guys put in the really sort of tie in Granite West and East out to Branch and HCD. Would it be possible to drop that down one line further on the income statement and tell us what the sort of pro forma Branch and HCD operating profits would have been?
Bill Dorey - President, CEO
If what?
Todd Vencil - Analyst
I guess-- another way to think about it is what was the operating profit impact from those three jobs that were formally HCD jobs that are now in the West?
Bill Dorey - President, CEO
I think we have that in our slides.
Todd Vencil - Analyst
Okay.
Bill Dorey - President, CEO
Let me point-- let me direct you here.
Todd Vencil - Analyst
Sure. Sorry about that.
Bill Dorey - President, CEO
Slide 7 and slide 9 will do that for you.
Todd Vencil - Analyst
We've got -
Unidentified Company Representative
(Inaudible) profits though.
Todd Vencil - Analyst
We've got gross but not operating there.
Unidentified Company Representative
What I have is after.
Todd Vencil - Analyst
Well -
Bill Dorey - President, CEO
I think you can still do the arithmetic and get it, can you not?
Unidentified Company Representative
It should be your G&A for cash -
Todd Vencil - Analyst
Okay. That's fine. And they were at-- so I guess to go along with that they were sort of operating profit positive, those three jobs, in the quarter?
Bill Dorey - President, CEO
Those three jobs helped Granite East by $3 million in the quarter and $4.5 million through the year-to-date, and it hurt Granite East the same amount. Helped Granite West and hurt Granite East.
Todd Vencil - Analyst
Got it. Okay, understood. Thanks a lot, guys.
Bill Dorey - President, CEO
Okay.
Operator
Rich Wesolowski, Sidoti and Company.
Rich Wesolowski - Analyst
Thanks a lot. Good morning.
Bill Dorey - President, CEO
Hi, Rich.
Unidentified Company Representative
Hi, Rich.
Rich Wesolowski - Analyst
When you guys speak about the increased competition in Granite West business, are you talking about the contractors that are going out their smaller work that's now available or the bigger guys that you would expect to see bidding on the $80 million to $100 million type projects that you eventually that you eventually expect to come out related to 1B.
Jim Roberts - SVP and Granite West Manager
Rich, this is Jim again. You're right. It is really more focused on the smaller work, typically in the residential private sector, contractors are capable of bidding more of the smaller, public works as well. And when you get into the larger work, the competition certainly minimizes-- a different group of competitors at the larger work level. And that work is as steady as it was last year.
Rich Wesolowsi
Are the big margins on the smaller Granite West work, say in the second quarter, materially different from what you saw at this time last year?
Jim Roberts - SVP and Granite West Manager
I would say it's more competitive and what we have done-- and I think you'll see it in our backlog, we have stayed very disciplined and tried to maintain the same level of margins from the previous year. And by doing that we've actually had a reduction in our backlog.
Rich Wesolowski - Analyst
Okay. And thirdly, I mean, I understand the delay in bidding on the 1B work leaves you open to a choppier period in the Branch for a temporary period of time. But setting that aside, am I correct in assuming this is just really a matter of timing and not your assessment as to the overall opportunity?
Jim Roberts - SVP and Granite West Manager
That's correct. We understand the size of the Prop 1B moneys and the CalTrans budgets going forward. And it's really, Rich, just more a matter of timing exactly, as to when that work will hit the streets. When it does hit the streets we think there's just tremendous opportunities. And again, I think it's delaying probably a quarter or maybe even two quarters a little bit slower than anticipated. But it is strictly a timing issue.
Rich Wesolowski - Analyst
Great. Thank you.
Operator
Avi Fisher, BMO Capital Markets.
Avi Fisher - Analyst
Hi, good morning. The three projects that were moved over. You know, it looks like you have about 10% gross profit hinging on those projects. One of them's suspended; one of them is less than 25% complete. So is all that profit from Salt Lake City side?
Bill Dorey - President, CEO
Yes.
Avi Fisher - Analyst
Okay. And-- I mean, that's-- so that's a pretty strong gross profit margin on that. is that project kind of a regular, acceptable gross profit margin, or is that kind of one time change orders on that? Or, I guess, what do you attribute the strong gross profit margin on that project to?
Bill Dorey - President, CEO
Well, that project is on budget, so I think the answer to that is that it is beating our expectations. And those are the expectations we have on a good day for that type of work.
Mark Boitano - EVP and CFO
I might add-- this is Mark-- we have an excellent team there that's doing a heck of a job. I mean, those guys are really performing at a level that we would expect we can perform at on most of our jobs.
Avi Fisher - Analyst
Gotcha. So when things go well, this is what it would look like?
Mark Boitano - EVP and CFO
I think you could say that.
Bill Dorey - President, CEO
We had that question earlier, you know, what we can expect. Well, I'll tell you that those are the expectations we have for our large projects these days. Now whether we can achieve those in the next, you know, six, eight months, that remains to be seen and we're-- we're a little reluctant to suggest that that's going to happen. But those are the expectations that we've set for this business, the reason we did this realignment, the message that we've sent throughout the company, that's where we're trying to go.
Avi Fisher - Analyst
Gotcha. Two more questions. On the tax rate, it was pretty variable last year. Should we expect the same variability this year or just sort of model over to the 31%?
Bill Dorey - President, CEO
Certainly it's tested up to how we're required to report for GAAP purposes with some of the new rules. But the 31.3% percent that's reflected in this quarter, we believe, is going to be a fraction of what it will be for this year. So -
Avi Fisher - Analyst
Okay, thanks. That's all for me.
Operator
Richard Rossi, Ferris, Baker Watts.
Richard Rossi - Analyst
Good morning, everybody, and congratulations on a very good quarter.
Bill Dorey - President, CEO
Thanks, Rich.
Richard Rossi - Analyst
Going back to the competition in California, it sounds like right now you're seeing what is-- has been normal in the past when the private sector comes ba-- comes out. And you get these small players messing up the bids a bit. But are you or are you anticipating, given the large chunk of money coming in from the public sector down the road, some of the larger players who haven't been in California coming in and maybe joint venturing with some of the locals?
Jim Roberts - SVP and Granite West Manager
Richard, this is Jim, again. That's always a possibility that people will migrate into a strong market. But typically you have to have a workforce; you have to have access to materials. You have to know the owners and the subcontractors and in this environment they might joint venture with some of our competitors that come into play.
The kind of work that we're approaching in Granite West is probably not what I would consider to be the mega projects, but in the smaller sized projects that we've been typically doing in the HDB business in the past, I think it's very difficult to move in Granite to try to compete with the local players at those sized jobs. So I think it might happen but I'm not overly concerned about it.
Richard Rossi - Analyst
Talking about capacity, both manpower and equipment, could you sort of give us an update on how that stands geographically? I would presume that it's tight and maybe some -- and very tight in some of your markets?
Jim Roberts - SVP and Granite West Manager
Well, in the West we have built up quite a team that's capable of performing a great deal of revenue. We certainly have room for substantial additional capacity in the West. With the realignment, we were able to refocus some of the previous HCD expertise on large projects into what we now call our large project support group in Granite West. That will allow us to have more capacity in the bidding and managing of the large work and then obviously you have the field hands which are probably the single most important component of building this work and what's in our established home markets, we have tremendous opportunities to access field employees. So I'm not concerned about capacity at this time in the West. I think we have the ability ramp up quite a bit more.
Bill Dorey - President, CEO
And in the East I think we're holding our own. I think it's always a concern and the consideration is around the quality that we get both with staff, our management as well as our craft levels, and we're working hard to solidify our short base of operations around our home market. That's part of our home market strategy is to work with a known workforce. So we're working hard in that arena. It gets a little more problematic as we're a bit more scattered on some of our jobs in the East. But we're working really hard in that arena. And we're not seeing huge problems. We have pockets of problems in certain areas but it's not something that we don't think we can overcome at this point.
Richard Rossi - Analyst
One question on the cost side. How are energy costs impacting your results currently?
Jim Roberts - SVP and Granite West Manager
Well, from a materials business which is where the majority of the energy consumption is, we plan for the liquid asphalt rates that we have in our bids -- I don't think there's negative effect; I don't think there's a positive effect from it. It is planned. We do go out and buy some of our forward looking strips for natural gas for heating our materials in our asphalt business. That's pretty consistent. We bought a lot of our product already.
The one play probably, Richard, that is probably the most volatile is the diesel right now. We do look at the forward markets to price our diesel going forward for up to one to two years and I don't think it's had a negative impact yet, although you see some crude price changing recently and continue to move its way up. We try to anticipate that in advance and put contingencies in our longer term bids to offset that.
Richard Rossi - Analyst
Alright. And then just one final question, real estate sales, could you give us sort of your guess for how they might come out for the full year?
Jim Roberts - SVP and Granite West Manager
At this time as you know, Richard, and this is still firm, that it's pretty lumpy. It's really kind of when you have a cash (inaudible) that's been completed. But we anticipate, as I think I said in the prior call that it will be very similar to last year.
Richard Rossi - Analyst
So there's no change in that view?
Jim Roberts - SVP and Granite West Manager
No.
Richard Rossi - Analyst
Great. Thanks very much.
Operator
Jack Kasprzak with BB&T Capital Markets.
Jack Kasprzak - Analyst
Thanks, good morning. I was, I apologize, I had to hop off for a minute but Bill I heard you talk about -- I think you were referring to the Utah project saying that that's sort of how you'd like to -- all of the large work to look is -- when you were referring to that project, what did you say in terms of the performance there and how the rest of the business is sort of aimed to look that way?
Bill Dorey - President, CEO
Well, I'm not precisely sure what you're looking for but that job, if you speculate on the revenues as it relates to the profits on all three of these jobs and if you speculate that that profitability is primarily from Utah, it's -- it's a 12%, 14%, 15% job today. It seems to be on schedule. That's what we expect from that job. I said in my opening remarks that we expect it to contribute nicely through 2007, 2008. So we do not believe that that job will deteriorate or hopefully will get better.
Jim Roberts - SVP and Granite West Manager
Jack, this is Jim. Let me add to that. I think that that is what we are looking for going forward and these large projects and we have - and I'll reiterate, Mark mentioned that we have an excellent team there, we have an excellent owner and we have a good relationship with our Utah branch and previous HCD. That relationship was excellent, the capabilities -- everything kind of flows together there and when you're in your home market and have all those issues that are working for you, you have opportunities and that's really what we're looking for going forward is to align ourselves and let all those things occur as we go forward. But I think that is an expectation.
Bill Dorey - President, CEO
I think it's important, maybe this is more important for our employees who are listening, this is a job that was primarily led through the estimate and managed by our old western region of HCD and we transitioned this job into our Granite West over the last couple months. But this job got off to a great start under the old management and I think it's important that our employees and our investors appreciate that this is a success story that was started with our old HCD structure and I think they deserve a lot of the credit for this, as well. Our branch in Salt Lake has picked it up, we haven't missed a beat and the job is working fine.
Jack Kasprzak - Analyst
That's great. Thanks. And with regard to the -- I think Jim was talking about the projects coming through the pipeline in California from all the funding improvements and there seems to be some delays but you're confident about the ultimate opportunity there. Do you guys -- how much of that is hope versus how much of that is you guys actually -- they talk to you. They tell you what's being designed. You literally know that this project or that project coming through the pipeline perhaps if you thought it might come next month of the month after and maybe at some point in the future but you know it's there versus trying to extrapolate, hey, there's a lot of money, and we just hope the work comes through.
Jim Roberts - SVP and Granite West Manager
Yes. Jack, there literally are -- is a complete list of projects with dates to be led and we know what the projects are, we know the valuation of those projects. The only issue is that those timing -- the original -- some of those original dates are delayed. They are known though. It's not a guess.
Bill Dorey - President, CEO
Jack, I had an opportunity to spend an afternoon with Will Kemp, the CalTrans Director, here recently. And what he told me, and you take it for whatever it's worth, is that CalTrans expects in their 2007/2008 fiscal cycle which goes from July to July to advertise 20% -- the value of the projects that they would advertise in this cycle versus the prior one would be 20% more. So they expect their budget to go up 20% for this cycle.
And so in my remarks, opening remarks, I said we expect some new money. And that was the basis for that statement. When that actually comes out over the next 12 months we don't know. But that's directly from the horse's mouth, the CalTrans Director. Our expectation is that that will continue to escalate into 2008/2009 and so on. So we expect to see more work in the tail end of this transportation bond than in the beginning.
Jim Roberts - SVP and Granite West Manager
And in fact, the schedule of jobs show larger -- the larger jobs, more of the jobs coming out in the later fiscal period.
Dave Watts - Chairman of the Board
Jack, this is Dave Watts. One of the complications here is that the legislature has to actually appropriate the money which is available from the sale of bonds on Prop 1B each year and they are struggling to reach a budget for this - they are several weeks late, almost a month late - reaching a budget for this current fiscal year so that holds up everything at the beginning.
Jack Kasprzak - Analyst
Dave, good to hear from you by the way, the -- what do you think? When do you think that budgeting process will be complete?
Dave Watts - Chairman of the Board
Well, the assembly has passed one and the senate is trying to work out one between the republicans and the democrats right now. So it could happen any hour. They've had some all night sessions trying to reach agreement; hasn't happened yet.
Jack Kasprzak - Analyst
Great. Thanks very much. Great quarter.
Operator
Brian Rafn with Morgan [Dempsey].
Brian Rafn - Analyst
Good morning, guys. Can you -- maybe the question for Bill, you thought US-20 (inaudible) on DOT. What time of a time delay to mitigate that ancient landslide were we talking about?
Bill Dorey - President, CEO
Will I think the best direction I can give you is it could be up to two years. We're hopeful that it will take one season from now until the beginning of next season to get that work done and to reach an agreement. We're going to need some help, we think, to completely satisfy the goal of reducing the mitigation costs for all concerned. We're going to need some help from the public agencies up in Oregon. So we're hopeful everyone will get on the bus and we can achieve that goal in the next eight to ten months. But if it takes two seasons, I think we're all prepared for that.
Brian Rafn - Analyst
Is there any potential recourse that they might just cancel the project or is it of a commercial necessity that it has to be finished.
Bill Dorey - President, CEO
I don't think that's a possibility. I suppose it could happen; but I doubt it.
Brian Rafn - Analyst
You also talked about certainly we've had these discussions ad nauseam on the heavy construction site about operating margins and that and you talked about upper single digits, acceptable levels. Is your sense that the operating margins achieved by heavy construction in the late 90's, were those really the high water mark? We talked about transfers of risk and costs from owners and is that potentially achievable under the new segmenting or is that really a different era?
Bill Dorey - President, CEO
I think it has to be achievable. There's a great deal of risk in this business. We have capital tied up to support the business. We are communicating to our people that are involved in our large projects. The expectations are much higher than they've ever been. We intend to get back to those levels of performance. We are pricing our work to reflect that. We think the market will support much higher performance and the realignment and some of the changes that we are making in this business - and by the way, this is completely supported within our large project community - are going to take us there.
Brian Rafn - Analyst
That's a good definitive answer. I appreciate that. You're talking about, let's say, right sizing and being much more selective on design build and relative to Granite East. Can you give us a sense that a kind of big quote activity 2007 for the first half versus 2006? Might you have bid on 55 projects in '06 and maybe only 28 this year? Can you give us a sense of how that selectivity, if you could put a number on it?
Bill Dorey - President, CEO
I don't think I can. Mark, can you do that?
Mark Boitano - EVP and CFO
I think we have bid on less projects. We have been more selective. I couldn't quote for you the number of jobs year-over-year just sitting here with what I have in front of me. But the selectivity is definitely there and we have -- we actually have removed ourselves from a couple of projects because either the owner of the contract, the project itself, did not really fall into our current designations of where we want to go. So that's the best I can tell you at this juncture.
Brian Rafn - Analyst
With the (inaudible) offerings, the geographic operating segments, if you have shifts in demand several years between the old heavy construction which you call the large projects versus the branch, is it easier now going forward to move labor and equipment now that you're in kind of a geographic segment than it was under the old legacy, HCD and branch?
Jim Roberts - SVP and Granite West Manager
Brian, this is Jim. I think there absolutely is. In the environment that we're in in the West and by merging HCD and the individual branches together to create Granite West, certainly within that entire geographic confines in the western U.S. can move people around much easier. That's one of the reasons that we did it was to share equipment and manpower and expertise in a pretty much seamless environment. I do think it's very difficult to move people all the way across the country though, particularly from east all the way to the very, very west. But, I think, within Granite East itself and within Granite West itself, I think we're creating an environment where we're really asking our people to be able to lend expertise throughout the entire units.
Brian Rafn - Analyst
And what would you guys say from a time standpoint going forward, the actual build-up of more of a branch-like vertical operation in construction and aggregate quarry hubs in the Granite East section. Granite East primarily today is the old legacy HCD. Is that a five year window? Is it more of a decade, ten years out? When might you see some ability to build a branch system out there?
Bill Dorey - President, CEO
That's a very good question. I suspect a lot of our employees are sitting on the edge of their seats waiting to hear the answer to this one. I think -- we've talked about this a lot and we talk about it with our employees a lot. Our first order of business is to get our large projects business in the East stabilized. We need to know that that is dependable, is a dependable business. And that's our focus right now. Certainly we think we have lots of opportunity to grow our business in the west and so that's a focus, as well, because we can support that growth in the West. We have the infrastructure in place, both corporately and through our Granite West management structure to support growth in the West.
We don't currently have support to grow -- to acquire and grow a branch-like vertically integrated business in the East. So if we did venture into the East, we would need to do it with critical mass. We would need to do it with an opportunity that provided us with pretty darn good management that came with the acquisition because the people we have in the East right now are pretty well focused, and I would say consumed, with the task of getting our large work to perform. So if that -- I'm not sure that answers the question from a timetable standpoint but that at least provides you with our current thinking around the challenge.
Brian Rafn - Analyst
Sure. A question for Jim, you guys talked about kind of a modest decline in the residential and commercial projects out West. Could you put a number on that, maybe, decline in jobs or bid quote activity? Would you say it's down 10% or kind of a level of magnitude?
Jim Robert
Well, that's a good question. I'm not so sure I can define that exactly. I would say a substantial reduction in the residential and commercial markets. And I think that's evident just by what we saw on Wall Street this morning looking at some of those major home builders who are major players in the West and they are looking at a slow down in [terminating] those businesses. That certainly has affected our business. That's why it's really nice to have a diversified portfolio of public or/and private work in our share of the West.
Brian Rafn - Analyst
Kind of dovetailing on that, you guys talked about either expanding capacity or replacing depleted reserves on the material side. With the slowdown that we're seeing, certainly in residential construction and that albeit we certainly have the demand in the commercial and the public side, are you still seeing the Florida rock-type multiples on EBITDA and in buying those? If you're going to build capacity through M&A and selective businesses, it's gotten pretty pricey. What are you guys seeing?
Bill Dorey - President, CEO
Well, we certainly have not altered our plan. Again, it's a very short-term slowdown, we believe. And the way we look at these businesses from an acquisition standpoint I think is what you're referring to, Brian, some of the multiples are high. We look at businesses that we can capitalize not just on the materials business play but also on the construction play and that provides opportunities for us that other players can't look at and it is very competitive right now from a acquisition standpoint. We have several that we're looking at today and in some locations the multiples are very high and some of those locations the multiples are more reasonable. So our job is to pick those locations where we think we can make long-term value for Granite and I'm not so sure that the short-term multiple really makes a huge difference.
Brian Rafn - Analyst
So, in other words, your ability to ramp up capacity and build the construction, the material demand from that site rapidly post-purchase is really more important than what the initial multiple is?
Bill Dorey - President, CEO
That's absolutely correct. How we create value going forward is the key.
Brian Rafn - Analyst
Anything from the standpoint, we certainly have (inaudible) this environment the last three, four years. We're all waiting for the SAFETEA-LU Highway Bill. And is the whole consternation with the immigration bill, is that hurting at all labor pool demands maybe in your southern states like Texas or Southern California with maybe Hispanic or Mexican origin workers that because we don't have a national immigration policy yet, is that impairing at all the labor pool?
Bill Dorey - President, CEO
Let me answer this by telling you what we do. We have staged that's dilemma several years back as to how we confirm that our employees are citizens. And it came to us, actually, out of a computer program that we started running in our payroll department called the Pilot program. And this is probably seven or eight years ago at this point and the Pilot program matches documents and it is done electronically and it will highlight undocumented aliens or aliens with false documentation.
And what happened is that we found several years back that we had about 50 undocumented aliens on our payroll in Texas. They had been with us for six, seven, eight years in some instances. Terrific workers that were part of our team, part of our family down there. And we were really faced with somewhat of a moral dilemma as to whether to ignore that and continue to use these people or to let them go because they are illegal. And we elected to -- we let them go.
It was very difficult because they had been with us a long time. We argued quite vehemently with our insurance folks and so forth to make sure they got all their acquired benefits when they left. We worked to try to help them become citizens and so forth but we run this program every day today. And so the people that are on our payroll are citizens and we will determine if they are not within one day and terminate them immediately. So we are not -- we do not believe that we have any exposure if the laws get tougher. We're pretty happy with our situation in that regard.
Operator
At this time there are no further questions. Are there any closing remarks?
Bill Dorey - President, CEO
No. Remarks from the management? I'm sorry. Yes. There are closing remarks. Thank you all for your questions. Thank you all for your interest in Granite. And once again I want to thank all of our employees for all the hard work that they bring to our projects and to our business units everyday. We will be around this afternoon and this morning for questions if anyone has any further inquiries they'd like for us to respond to.
Thank you all for joining us this morning.
Operator
This concludes today's Second Quarter 2007 Earnings Release Conference Call. You may now disconnect.