Granite Construction Inc (GVA) 2013 Q4 法說會逐字稿

Good morning, my name is Kevin, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction investor relations fourth-quarter 2013 earnings conference call.

(Operator instructions)

Please note we will take one question, and one follow-up question from each participant. Thank you. It is my pleasure to turn the floor over to your host, Mr. Ron Botoff, Granite Construction, Director of Investor Relations. Sir, the floor is yours.

Thank you, Kevin.

Welcome to the Granite Construction fourth quarter 2013 earnings conference call. I am here today with our President and CEO, Jim Roberts, and our Senior Vice President and CFO, Laurel Krzeminski. Let me 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, so 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. You should not place undo reliance on forward-looking statements, which apply only to the date they are made, and the period they reference.

Our reconciliation of non-GAAP measures is part of our fourth-quarter and full-year 2013 earnings press release, and may be discussed during the call from time to time by the Company's executives. For more information, please visit the investor relation's website, investor.graniteconstruction.com.

Thank you. Now I would like to turn the call over to Granite Construction, Chief Executive Officer, Jim Roberts.

Thank you, Ron, and good morning, everyone.

In a few moments, I will hand the call back to Laurel to discuss fourth quarter and 2013 financial results. But before I do so, let me first take a couple of moments to review some business highlights from 2013, and how these highlights aligned with Granite's overall strategic plan, and our business opportunities for the year ahead. And as we have emphasized for some time, Granite's most significant opportunities are centered on our ability to execute on our strategic plan.

And as a reminder, our plan is comprised of four themes. The first theme is transform and grow our vertically integrated business. A constant focus on execution is imperative, as we drive performance improvement during the 2014 year.

Our second theme is grow our large projects business. Growth will be driven by record year end backlog, and an extremely healthy bidding pipeline, coupled with strong field execution.

And our third theme is to diversify our business. We expect to grow and benefit further through diversification, including building synergies on the Kenny portfolio of power, underground, and tunnel in cooperation with the existing Granite business units throughout the country.

And lastly, optimize our business. We have made great strides through Six Sigma training, and are now focused on dedicated continuous improvement program, touching all parts of our company to drive waste elimination, variability reduction, and standardization of processes. This effort is empowering the people of Granite to improve each and every day. These opportunities represent exciting drivers of our growth in 2014.

In December, we completed our 2010 Enterprise Improvement Plan. As a result, fourth-quarter and full-year 2013 results included the impact of $52.1 million in restructuring and impairment charges. Excluding the impact of these charges, Granite's diluted earnings per share was $0.02 for the quarter, and a loss of $0.17 for the year 2013. This is a modest improvement from what we expected when we reported to you in the third-quarter earnings last November. But the majority of the EIP charges related to Granite Land Company, we took significant steps to complete the orderly divestiture of our real estate business.

The remaining charges were related to our construction materials business, and reflected a productive step to help optimize our business portfolio. These assets are not accretive on a forward-looking basis, and in some cases, actually provided an operational drag.

During 2013, we encountered significant cost issues on a project in the state of Washington. The project is about 90% complete now, and we are hopeful that we have mitigated the project execution issues. This project is expected to finish later this summer.

As I said last quarter, we believe we have rights for a significant cost recovery on this project, but we do not accrue for estimated claim recovery. As a reminder, we only book revenue from a claim once it has been agreed to and executed by all parties.

Even with the impact of this challenging project in Washington, the large project segment had net positive revisions in estimates of more than $25 million for the year 2013. This reflects a very healthy portfolio of projects, and an overall solid execution in this segment of our business.

Our large projects performance in 2013 included the start-up on the Tappan Zee Bridge in New York, the IH-35 East in Texas, and I-40/440 in North Carolina. These projects contributed revenue in 2013, but remained less than 25% complete, thus not yet contributing profit. These projects, a significant portion of our more than $1.8 billion of year end large projects backlog, and the balance of our portfolio projects across traditional and new end markets, provide us with the opportunity to benefit from excellence in execution for 2014 and beyond.

As we consider the natural evolution of a large project cycle, we must be mindful of a few projects that were either completed or are nearing completion. I want to recognize the Granite teams from the Western Wake Freeway in North Carolina, the Queensboro tunnel in New York, and the Houston Rapid Transit project in Texas on the success of these profitable projects. They were all key contributors to 2013, and earlier results. Thank you very much for your efforts.

In the construction segment results were mixed. Strong contributions from diversified end markets, especially underground and power help drive strong construction segment revenue growth, and some margin improvement in 2013. Some of our traditional transportation focused markets produced good performance aligned with economic improvement, while others continue to face competitive and demand driven headwinds.

That said, our focus is on execution. Market conditions aside, the improved execution is a necessity to drive incremental margin improvement in our vertically integrated businesses.

The construction materials segment finished 2013 in line with last year, and once again improved execution is expected to provide opportunities for margin improvement. Our business leaders are tasked with managing operations in very cyclical environments, and we are focused on driving the improvements necessary to generate the returns we expect for our shareholders. 2013 was a year of diversification for Granite, as we integrated a new business, entered new end markets and a new customer base, and stronger margin characteristics

Last year, I noted that our teams were pursuing that numerous projects that leveraged the combined capabilities of the Company. I am pleased to see our teams executed on this combined capability to drive significant revenue synergies in 2013.

This emphasizes the opportunities we have to drive incremental growth for all of our segments, including our newly added businesses in power, underground and tunneling, as we are committed to grow these businesses in both scope and geography. Although competitive, the large project segment current bidding pipeline is as large and robust as we have ever seen, We expect to bid on more than $13 billion of large projects in 2014, with about half of the value of the work representing potential Granite backlog. This includes a robust transportation mark for our public/private partnerships, design build jobs, CM at-risk jobs, CM general contractor jobs, as well as significant power and tunnel work.

We believe the current backdrop of stable but short-term public funding, and approved execution of the Transportation Infrastructure Financing and Innovation Act, better known as TIFIA, have contributed to many of these significant large project bidding opportunities. We have spoken about the positive impact we expect TIFIA to provide, and we are extremely pleased that three of our projects include TIFIA financing: the Tappan Zee Bridge, IH-35E, as well as Phase 2 of the US 36 project in Colorado.

But we believe that without strong attention from Congress to provide the long-term stability of a new expanded highway bill, the transportation industry will continue to face short- and long-term funding challenges. Funding stability and financing alternatives are critical to driving progress on infrastructure investment at the federal, state and local levels.

Throughout 2013, we also invested in our business to create opportunities to optimize our operation. Our black belts and our green belts and the project teams they led are all focused on driving incremental change through improved processes and improved execution. Our continuous improvement efforts are significant, as our center of excellence has been created to help bring together Company efforts to reduce waste lean efforts, as well as standardizing processes to reduce overall costs, and reduce variability to increase the quality of our finished products.

Our team is focused to take advantage of the opportunities to execute on our strategic plan. And our focus on execution will allow us to first transform and grow our vertically integrated business; second, to grow the large projects business; third, to grow through diversification, and certainly to optimize our overall business portfolio.

With that, I will turn the call over to Laurel.

Thank you, Jim, and good morning, everyone.

Fourth-quarter 2013 revenues were $598 million, up 18.5% from last year. Full-year revenue increased 8.8% in 2013 to nearly $2.3 billion, driven primarily by Kenny. Fourth-quarter loss per share was $0.74, compared to earnings per share of $0.46 in the prior year. For the year, loss per share was $0.94 compared to earnings per share of a $1.15 in 2012.

These results include the impact of $52.1 million in restructuring and impairment charges related to the completion of our 2010 EIP. Excluding the impact of these charges, we earned $0.02 per share for the quarter, and we posted a loss of $0.17 per share for 2013. For reference, we included a reconciliation of the charges in this morning's earnings press release.

Gross profit margin was 8.3% and 8.2%, respectively, for the fourth quarter and year, but down from 11.3% in both the prior periods of 2012. Large project profit performance was the largest driver of gross profit margin contraction in the quarter and for the year.

Total contract backlog at the end of 2013 was $2.5 billion, compared with $1.7 billion last year. More than $1.8 billion is associated with our large projects business, with less than $60 million or only about 3% associated with non-controlling interests.

For comparison, in 2012 more than 11% or $113 million of the nearly $1.1 billion in large projects backlog was associated with non-controlling interests. So why is this important? It reflects a nearly 85% increase in the Granite-only value of our large projects backlog since 2012. We are executing on our strategic plan to methodically grow and evolve this important segment of our business.

Looking at the segment detail, construction segment revenues in the fourth quarter of 2013 increased 25.3% to $295 million compared with last year. Gross margin declined nearly 150 basis points to 6.2% from 7.7% last year. Revenue and margin contributions were (inaudible -- technical difficulties). Team construction revenues increased 27.1% $1.25 billion, with gross margin increasing about 60 basis points year-over-year to 8.5%. Kenny again, was the largest driver of last year's construction segment revenue and margin improvement.

Large project segment revenue increased 11.2% in the quarter to $239 million. But for the year, revenues declined about 10% from 2012 to $778 million. Fourth-quarter and full-year 2013 segment margin of 12.4% and 9.2%, respectively, continue to be impacted by timing of project progression and the mix of projects in our portfolio.

Revenues for the construction materials segment increased 17.8% to $65 million in the fourth quarter, and increased 3.1% to $238 million for the year. Despite an increase in the fourth quarter to a materials gross margin of 2.6% from a 2.7% operating loss last year, materials gross margin for 2013 declined slightly year-over-year to 2.9%.

In 2013, SG&A expenses totaled $199.9 million, an 8% increase from the year ago, with all increases coming from the Kenny acquisition. This is a slight improvement over what we expected in early November. Once again, we finished the year with a strong balance sheet, as cash and marketable securities totaled nearly $350 million at year end, including consolidated construction joint venture cash of $38.8 million.

As we begin to gain better line of sight on the upcoming construction season, we will provide you with specific guidance metrics in about 60 days, when we speak with you about our first quarter 2014 results. In the meantime, for your modeling purposes, we can offer you a few of the assumptions we have built into our plans for 2014. We currently expect the tax rate to be in the high 20%s to low 30s% range, with CapEx spending in line with recent years at about 2% of consolidated revenues, and we currently expect SG&A in line with to slightly down some in the past couple of years on a percentage of revenue basis.

And finally, although we announced in December that we had obtained temporary waivers of certain of the financial covenants in our debt agreement, we were in compliance with all of our financial covenants at December 31 without regard to the waivers. We expect to finalize the debt amendments in the next few days.

Now before we open it up for your questions, let me turn the call back to Jim.

Thank you, Laurel.

We enter 2014 as a strong Company. We are focused on execution of our strategic plan to drive significant improvements this year. In addition, the investments we have made in continuous improvement are beginning to take hold, and they ultimately are expected to create significant tangible benefits across businesses and geographies. Finally, strong backlog trends and extremely robust bidding environment provide us with opportunities to execute, diversify, and grow our Company.

And with that, we will take your questions.

(Operator instructions)

Our first question comes from Jack Kasprzak with BB&T.

Hello, Jack.

(Multiple Speakers). Hello, Jim. Can you -- I got on the call a little late, so if you mentioned it, I am sorry. But can you update us on the Washington state project, and where you think you stand with regard to clawing back a portion or a significant portion of those funds?

Sure, Jack. No, I did not mention any details on it, prior to you getting on, so this will be relevant for everybody. The project -- I did mention it was about 90% complete as we speak. But we have gone through several processes with the State of Washington's DOT, and where we are at today is that we are waiting for a response from them by March 31. And at that point in time, we will understand the next steps.

But one of the things to remember is that, that project is being completed as we speak, and we will be done with the project by late summer as anticipated. So we are hoping, we will get a response in March 31, not sure where that is going to be, and we are completing the project in the next several months

Is it still your expectation that there is a chance to, by the end of this year claw back some of those funds?

Yes.

Okay. On the construction materials segment, are you -- and specifically in California, are you seeing any price increases? Have you announced price increases, do expect price increases in aggregates?

Yes, actually we did on January 1, announce price increases, and we are expecting them to hold.

Can you offer or share a order of magnitude?

Well, they are -- they vary from location to location.

Right.

So I really probably do not have an accurate number for you of across the board percentage increase. But it is pretty -- it is in the 3% to 5% range probably if you were to average it, with some areas being higher than that.

Okay, thanks. And then, with regards to guidance, when -- what is the plan to offer any guidance for the year, in terms of how you have done it with by segment, and maybe margin and/or sales? Is that something we will see in, with the May release perhaps?

Well, it is. Our anticipation was to provide guidance on the first-quarter results, Jack. And I think it is still yet to be determined as to what level of detail, and exactly how we provide them. But we want to get a couple level, as always before we provide. We probably will stay in a similar fashion as we have historically. But if we do change something, we will let you know in advance of what we are trying to accomplish.

Got it. Okay. Thanks very much.

Okay, Jack. Thank you.

Our next question comes from Alex Rygiel with FBR.

Thank you, nice quarter.

Thank you, Alex.

Could you talk about the little bit of the timing of some these very large bidding opportunities that you have got over the remainder of this year? Are we thinking sort of late first half, late second half, and then how does the outlook for 2015 look at this time?

Okay. So that is an open-ended question that I could talk, Alex, for a long, long time about, which is because I am very excited about it. The projects that we are looking at, which are again are just numerous -- and I actually pulled the entire list of work that we are bidding and put it in front of me for this discussion. There is a lot of work bidding in the first quarter, second quarter, third quarter, fourth quarter, so it is pretty equally spread.

The probably the more important issue is the timing of the awards of the projects. So sometimes we will bid a 3P project let's say in, February or March, and the owner may take, some owners may take 60 days, Alex, to determine the apparent winner. Some agencies may take 90 or 120 days.

So the $13 billion that I laid out in the discussion was work that we know we are going to bid this year, and a lot of it -- and actually some of it we are actually turning in this week or next week. But it is probably going to be a couple of month delay before we find out the results. And then, the second half of your question was 2015. 2015 right now is looking to be even stronger than 2014, in terms of the amount of work on the large projects bidding list.

And one of the things that we, that is probably really important to talk about is, that although we talk about large projects, I have got the bid list in front of me for the work under $75 million. And just for the month of March, it is over $300 million. So that is really healthy, as well. So that is kind of nice to see, not only the large project robust bidding pipeline, but the smaller $75 million and less work is filling up as well.

That is great. And then, can you sort of provide some description sort of on this opportunity? Are you seeing sort of bridge opportunities increase, road opportunities increase, PPPs increase, tunnel projects? Give a little bit of more detail on that description?

Well, okay, so the answer is pretty much yes to every one of those items. The highways -- I will give you a list here -- I mean, I am looking at a large job in Florida that we are turning in this week; it is a big highway job, and we are bidding a large -- and that is a $2 billion-plus project. We are bidding close to $1 million job in Texas; it is another highway job close to a $1 billion. Some more highway work in Colorado, $400 million.

High-speed rail in California is out to bid. That is $1 billion. They are doing some more highway corridor work in Southern California, that is another $1 billion. There is actually a $1 billion rapid bridge replacement project that we are bidding in Pennsylvania. More highway work in Illinois, Washington DC, big bridge projects. So I would say, most of this is highway bridge work, and a big chunk of it, Alex, is 3P. We do have concessionaires that we are teamed up with, in a lot of these projects. So there is a combination of public/private partnerships and design build projects.

Very helpful. Thank you very much.

Okay, Alex. Thank you.

The next question comes from John Rogers with D.A. Davidson.

Hello, good morning.

Good morning, John.

Jim, just a little bit of clarification on the large project work. In the release, I mean, you highlighted growth in the construction materials in 2014. Are you expecting the -- given your schedules, the margins to be better for large project work this year?

Well, let's put it this way, we are not in the guidance projection at this -- (Multiple Speakers)

Right, right. But it -- (Multiple Speakers).

But yes, you can think about -- what we have been mentioning John, is that we have got several of these large projects we started towards the tail end of 2013, and we expect them to hit profit recognition in the tail end of 2014. So yes, you can assume from that, that when they hit profit recognition, they will be a big push towards overall margin improvement

But they are still -- I mean, they don't like tap into some of these others that, you don't hit, or you don't think you hit 25% levels until 2015, is that correct?

Well, these actually, suggested and announced I think in the fourth -- in the third quarter earnings that we would -- our anticipation is in the fourth quarter of 2014

Okay, okay. Thank you. And then, the other thing is the weather, any impact on you?

No.

I mean, it is normally seasonally weak but?

I would just say, I really -- personally I don't like weather as a positive or negative discussion point. We expect weather, through the winter. (Laughter). And we have got better, some better weather in the West, and some worst weather in the East. So it all tends to offset one another. And so, if there was something significant with weather, I would have let you know, John. But no, it is not a big issue.

Okay, great. And then, maybe I guess for Laurel, in terms of the covenants, are there any significant charges associated with that? And what are you expecting for interest costs this year?

No significant charges. Some small dollar charge, but not significant in total. And interest should be similar to what we have paid. No change to the interest rate, so interest should be similar to what we had in 2013.

Okay, great. Thank you very much.

Thanks, John.

Your next question comes from Jerry Revich with Goldman Sachs.

It is Matt on the call for Jerry. If you can just talk a little more about the cadence of orders in 2014. And I know it sounded like there was pretty even distribution of the bidding activity. But from an awards standpoint, is there any core that we would look to see more awards come through, both in the large construction and construction side?

Well, let us put it this way, again the owners definitely have their own assumption of schedules. And although what we would expect on a lot of these larger projects is probably a 60 to 90 day delay, from the day we bid to the day we award. Sometimes especially with the TIFIA financing alternatives, it could be delayed.

So I would say historically, the smaller work, the second and third quarter tend to be our biggest award quarters. And that is when most of the bidding heats up. I would suggest that in the large products it varies quarter to quarter, every year is different. So but I do think that you will see most of it heating up in smaller awards in the second and third quarter

Got it. And Jim, if you could just touch a little more on the margin dollar for the large construction business. I do not know if you quantify in the K at all, what the headwind was for the full year from the Washington state project?

Well, I think we have been talking about it over the last several quarters. And the overall write-down for the year was somewhere in the $25 million to $30 million range. So that was part of the gross profit deterioration in the large projects.

And our portion of that is 60%.

Got it. And so, is it fair to assume -- and obviously, you touched on the fact that a number projects will reach profit recognition in 2014, but also fair to assume that margin should improve just through working through the remaining 10% of the Washington state project?

Yes.

Perfect, thanks.

Thank you.

Next question comes from Sameer Rathod with Macquarie.

Hello, good morning. I know in the last housing cycle Granite benefited quite a bit from building infrastructure for new subdivisions. I think there has been a lot of talk about declines in vacant lots. So could you comment if you are seeing any additional work on these new subdivisions, or any comments around that?

Well, hello, Sameer. The answer is it kind of goes up and down on the residential side. But let me talk in general about the private side, Sameer, because I think that is really an important sector for the Company, and we are starting to see larger opportunities in the overall private sector. But I would not suggest to you that the residential is really the strong driver of our private work today.

Yes, you are starting to see some infrastructure, some lots become all taken up for buildings. And you are starting to see a little backbone being built now, which is nice. But I don't think that is the driver. What we are seeing the drivers on the private side for us, are on the power side. We are seeing it, not only from the large power, but the smaller power, as well.

We are seeing solar fields still in the southern part of the country being built. We are seeing oil and gas refinery work is, we have got a lot of that going on. We are actually seeing some commercial work, private commercial work take off now, which is really nice to see. And usually that really follows residential. So what it means is that infrastructure and residential that was built previously is starting to fill up, which is now driving new commercial work. So overall, it is a stronger part of our portfolio today than it has been. But I don't think I would suggest to you, Sameer, that residential is driving it.

Right. Right. I guess, could you talk a little bit about the competition on the private side? I know in the downturn, a lot of people had entered doing public work, I guess. Are you seeing people going back to their core, if non res is picking up, helping potential margins in coming quarters?

Yes, I think we are, Sameer. We are seeing a lot of the contractors wanting to go back to the private side. And they are, which is creating a smaller bid list on the -- reasonably sized I am going to say, $20 million to $50 million public works. It is still competitive though.

So I don't want to suggest that that market has reached a, just a rapid inflection point. It is getting better, but they are not moving over the private side as fast as I would have liked. But at the same time, it is definitely increasing the opportunities for us. Every quarter is getting better. Then the overall private side, we are actually seeing on the larger private work, the competitive level is not as great, and we are seeing some good margin opportunities for us on the larger private work.

Okay. Thank you.

Thank you, Sameer.

(Operator instructions)

Our next question comes from Brian Rafn with Morgan Dempsey Capital Management.

A question for you, Jim, relative to the -- you talked a little bit about the private side, utility power, solar fields, and some oil and gas refinery. Is that ability coupled with some resurgence in residential at some point, two, three, four years out going to resuscitate that kind of the old turn branch business in total volume and margin?

I think actually the answer to that is yes, Brian. But I think there was one more thing that is going to happen there to help bring that back part of the business back again. And I think you are going to see more transportation related projects, as well, over the next couple of years.

Because again, we have been in a very depressed environment for the transportation projects. So what we have been doing, is diversifying into a lot of the private sectors, which is creating value for is now. And at the same time, we are in a position that when there is transportation infrastructure investment, I think that is going to move itself up over the next couple of years.

Much better position, hitting more diversification in our BI business, or what we call the BI today, the old branch business. Because as you know Brian, a much more diversified, which creates a real upside going forward.

Okay. Okay. I missed probably about 20 minutes of violin music, so I was late getting on. Did you put a number on kind of the total, kind of bid universe for the large heavy civil, the big design build project, what is kind of your universe for 2014?

Yes, I did, Brian. And right now, I have got a list that we are committed to of over $13 billion for 2013. And then on the tail end of that, 2014, and then on the tail end of that we have another $20 billion that we are looking to bid in that market beyond 2014.

Okay. And you talked about bid day, and bid list. What award, on maybe some of that heavy large projects, the heavy civil. What on bid day, are you five or six competitors? Is it dozens? Where are you, and how has it maybe gotten a little better relative to the competitive make up?

Okay. So on the large projects, what we are seeing is, and what we are seeing overall in large projects, Brian, is that the value of them is increasing. So in the old days, we thought a big project was $200 million. Today a big project is $2 billion.

So what that is doing is, it is providing a qualification environment where the owner will shortlist the amount of bidders prior to all of us going and doing our hard due diligence, putting our bids together. So what we are looking at now on every one of these, I call mega projects, is no more than four bidders typically. It is usually three to four bidders on these projects that have ben pre-qualified by the owner.

Okay. And then, just one more on the materials side. When you look at a large picture, a 50,000 foot view, what from the standpoint of the aggregate would you be using internally in your operations versus what you are selling externally, and maybe across the whole network. Where is the high and low capacity utilization?

Well, let me put it on average. So that is something we look at every quarter, and we try to really gauge, and historically I try to gauge on internal and external sales. And right now, about two-thirds of our sales are to the external market, about a third of them are to -- within Granite. Typically that is a good sign, that when we go to the external market that means that typically that is a higher margin products.

Now I would normally say that is very good. But I would also say that in this environment, the internal should be greater because of the fact that when we do a lot of work, we like to use our own materials on our projects. So historically over the last three or four years, it has been about a 50/50. Prior to that, when we were really hitting the private sector, we were probably 65/35 to the external world, because that is the higher-margin project. But where I would like to see it today is closer to the 50/50, and increase the amount of work and the materials we provide to our own products. Simultaneously, obviously I would love to increase our external environment, and build the whole business. But 65/35 today is where it is at.

Yes, and what about capacity utilization, Jim, I know that is a difficult question. But I guess it is more asking how much potential do you have in the system, before you got to put in CapEx for crushers and the type of thing?

We have got a long way to go Brian, before any capacity issues there. There is no problem with capacity at this time. (Laughter).

Okay. All right. I appreciate it. Thanks.

Our next question comes from Michael Dudas with Sterne Agee.

Following up on the aggregate discussion, just regionally in the market that you are buying aggregates, are there any regions that are a bit more pricier, more active, or more tightness in the marketplace than others?

Wow, Mike, I would probably not be able to give you the right answer for that, so I am going to hold off on that. I do think that there are consolidated markets in some parts of the country, and more fragmented than others. But most of our materials businesses are focused in the Western US, and it is a little more fragmented than the eastern part of the country. So in general, I would say the East is more consolidated, which can provide a tighter market than the West which is fragmented.

That is great. I appreciate that, Jim. Two other just quick follow-ups.

One, your own internal access to labor, how has the turnover been? Are you pleased with where you are on a manpower basis? And on a follow-up to that, do we expect in the next 12 months more tuck-in, or is there an opportunities for acquisition that might look attractive for Granite, given where you are in the ramp-up, especially in the large project cycle?

Okay. So first of all labor. We have heard a lot of people talk over the last 12 months about labor shortages. We have not seen that, and I say that as a general statement. I would say certainly, there are pockets where it might be an issue.

,I do not think labor for Granite is going to be a huge driver of any critical issues in our business in 2014, and I think that is a positive. Granted, people, when we get work, people like working with us, so we attract a very strong supply of labor as we build our projects. What was that -- let's go back, Mike to the second question?

Acquisitions.

Yes. So on the acquisition side, we are constantly looking at opportunities to diversify or grow our business. And I would suggest you this, that yes, we have some opportunities out in front of us, but we are going to focus for the first half of the year for sure, on the core execution as I mentioned, in the actual script, and focus heavily on getting the execution where we want it to be. And then, on the back half of the year, you could see the acquisition and the opportunities that come to play.

Sounds like a reasonable plan. Thanks, Jim

Okay, Mike. Thank you.

Our next question comes from John Rogers with D.A. Davidson.

Jim, just a follow up, I guess to Mike's question, as well. In terms of your -- you have talked about in the past about trying to do more private sector work. And with Kenny and what you have now, how much of your business over the next couple of years, do you expect to be in the private versus public sector?

Let me put it this way, John, because it is actually working as we had hoped. We are happy now 15% of our overall volume coming from private sector, which historically, John, and you know Granite well, we have been up in the range of 95% public work. So we are starting to slowly see that part of the business grow, and I could easily see it into the 25% range in the next couple of years, as we continue to grow that part of our business.

So with your current mix of assets and before additional acquisitions, is that --?

That is correct. That is correct. In fact, I would love to see us continue to expand the private side of the business.

Okay. Great. Thank you.

You bet, John.

Our next question comes from Brian Rafn with Morgan Dempsey Capital Management.

Hello, again I apologize if you have said it in your opening comments, did you give kind of a focused highlight on Kenny specifically, their kind of outlook forecast specific to their business?

I did not, Brian. But I would -- let me suggest this at a very high level. They did what we wanted them to do in 2013, met our expectations. We are very happy with the acquisition, and they have a very nice backlog going into 2014. And we think that it is going to be a nice growth pattern for them in 2014 and 2015, and I think things are working real well.

Okay. As your construction and engineering, you had issues with the highway builds, and just then just the economy, the fall off of the old branch turn business that was residential and that kind of thing, as you look at your business going forward, what changes do you see strategically maybe from a procurement of equipment, using more part-time or kind of third-party contract people? You talked in the past, about the mobility of shifting crews around? If you look maybe three or four years in the future, versus maybe back at your history, how has that changed?

Now that is right in line with our strategic plan, Brian. And what I did focus on the first part of the call, was really the job of Granite is to stay focused on our plan, and it is long-term plan. And one of the first initiatives is transform and grow the vertically integrated business.

And one of the things that is very important in that, as you know that following Granite as long as you have, that is old branch business is to be much more asset light. So that we don't over invest in a certain geographic location, but we become more mobile and nimble.

And I continually talk about that with, instead of being a huge aggregate plant, maybe we take a portable plant in to a reserve. So that is a different philosophical approach towards that part of the business.

I also see the geographic expansion as huge. And we have been talking about this as part of our overall plan, is that we geographically expand our business to all parts of the US and up into Canada. And we have worked in Canada, today several jobs up there that we have expanded, both the tunneling business and the power business into.

And then the other thing is really looking at that private sector, getting ourselves focused on not relying on federally funded transportation work, creating a diversified business that has all of these different funding streams available to us. And we have historically talked, Brian, and you have seen this in our strategic plan, about expanding into power, water, oil gas all these different end market funding streams, which you have seen us do over the last 12 to 18 months now. We are going to continue to do that, so that we don't get stuck in one marketplace if there is a downturn that it affects the Company negatively.

Yes. Okay. And I will ask just one more.

As you look at your entrance into some of these talk about solar fields, oil and gas, water, power utility, how is the risks transfer or the risk sharing that you might have historically had in your legacy road construction, construction and engineering business. You have always got that kind of horse-trading in your -- you have got bidding and you have got risks, and the owners want you to assume more liability, and you are trying to protect yourself, and getting it -- and getting the right margin on bid day and all the things that you have talked about?

As you enter some of those other industries, those other areas in the private sector, what are the dynamics between you as a builder and the project owner, and are there any differences, or are they the same?

Well, I think that everybody is different, Brian, but it brings up a really good business model question. Because when you go into the private sector, it depends on what your intentions are. If you go into an EPC market, an engineer procure construct market, then you have the potential to take on more liability because you have some performance expectations.

We are not in that position today. We are entering the private market and using the skill sets that we have in our Company to continue to build the work that we know we are good at.

So I am very comfortable with the contractual arrangements. I am very comfortable with the offset for the potential downside and the margin expectations. And in fact, I would suggest that if you really put the ratios together, the private sector has a higher opportunity relative to risk than the public sector today. But as we go forward, and we are starting to build these larger projects, we need to consistently and continuously analyze that risk portfolio, and how it affects our overall Company.

And we do that all the time. We will take -- we will look at one job that may be in a new market, and consider it a risk, and say okay, well, let's limit the amount of work we do in this environment until we are comfortable, and we will move over here and try to build some more of our traditional work. So as we go into new markets, we will do two things, look at the risk/reward on that individual job, and then look and see how it affects our overall portfolio.

Okay, thanks. I appreciate it, Jim.

Thanks, Brian.

This is the end of the Q&A, and I would now like to turn the call back over to our host.

Okay, everyone. Well, thank you for your questions. And certainly we hope to see many of you on the road this year, as Laurel, Ron and I hit a lot of geographies throughout the entire year. We will get out on the road for just a couple of days on the West Coast in March. But when the second quarter, we expect to make multiple trips east to the Midwest Mid-Atlantic, and the Northeast. So, of course, Laurel, Ron and I always are available for follow up, if you have any further questions. And thank you again, for your time today.

Ladies and gentlemen, this does concludes today's presentation. You may now disconnect, and have a wonderful day.