Granite Construction Inc (GVA) 2015 Q4 法說會逐字稿

Good morning. My name is Robert, 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 2015 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). Please note, we will take one question and one follow-up question from each participant.

It is now my pleasure to turn the floor over to your host, Granite Construction Director of Investor Relations, Ron Botoff. Sir, the floor is yours.

Welcome to the Granite Construction Incorporated fourth quarter and fiscal year 2015 earnings conference call. I am here today with our President and Chief Executive Officer, Jim Roberts and our Executive Vice President and Chief Financial Officer, Laurel Krzeminski. We begin today with an overview of the Company's Safe Harbor language.

Some of the discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The Company assumes no obligation to update forward-looking statements whether as a result of new information, future events or otherwise.

Certain non-GAAP measures may be discussed during the call and from time-to-time by the Company's executives. And please note that a reconciliation of certain non-GAAP measures is included as part of our earnings press release. For more information, visit our Investor Relations website at investor.graniteconstruction.com.

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

Thank you, Ron and good morning everyone. It is with great pleasure today that I have the privilege to speak with you about our improved performance in the fourth quarter and throughout 2015. It is with great pleasure today that I congratulate and thank Granite teams across the country for delivering improved results in the fourth quarter and throughout 2015. And it is with great pleasure today that I thank Congress for finally doing their job in December in passing the first long-term federal highway bill in a decade, the FAST Act.

But before I comment on public funding trends and the requisite opportunities and challenges that present, let's start today by discussing the successes and challenges in our business. 2015 was a successful year and it is reflected in our results. Certainly, the market has improved, but our teams are working more safely and efficiently, and it is paying dividends. Let's dive into the business beginning with Construction Materials.

In 2013, we suggested that the materials business was the leading indicator for our vertically integrated business. Two years later, quarterly segment profit margin has improved in six of the past seven quarters and annual gross profit margin more than tripled from about 3% in 2013 to more than 11% in 2015. While pricing has increased over the past couple of years, the majority of materials improvement is related to higher volumes. Notably, volume has a long way to go to reach the previous peak production levels we experienced eight to 10 years ago. But perhaps most importantly, this business is continuing on a path of improved quality, efficiency, cost savings and a renewed customer focus. These important recurring efforts are enabling this portion of our business to continue on its path of steady, profitable growth.

Despite a continued environment of lukewarm public spending trends for at least the past five years, Construction segment margins have traveled a similar path as materials, nearly doubling from about 8.5% in 2013 to a very respectable level of about 15% in 2015. In fact, the fourth quarter of 2015 marks the seventh consecutive quarter and the 10th quarter out of the past 12 with year-over-year gross margin improvement in the segment. We are pleased, but not satisfied with this recovery. Certain markets in the West and strong contributions from our power and underground businesses helped segment profitability nearly double the 20% in the quarter. This standout performance was key to our results in the fourth quarter.

Construction markets have recovered from the bottom, but bidding remains highly competitive across geographies and across end markets. Once again, our success in Construction follows a similar path as in materials.

As we executed the past few years on our strategic plan, the relentless focus on safety, execution, diversification and continuous improvement all contributed to our results. Importantly, we continue to work to improve pricing, which unfortunately tends to move north more slowly than when it move south. Our leaders are committed to increasing prices in all areas of our business. Throughout local markets, opportunities and power, underground and continuing strength in the overall commercial market are combining to fuel improved gross margins. Increased focus and attention in these areas in the past few years is yielding results, contributing strongly to top and bottom line growth in the Construction segment even in the tepid public spending environments of the past few years.

Now moving to the Large Project segment. Business performance improved in the second half of 2015 after a challenging start to the year. In the first half of 2015, weather and project challenges, some within our control and some not, ultimately left us well short of the project progress we had anticipated for the year. Granite teams across the country continue to execute on more than $2 billion of segment backlog as our bidding activity continues to pay dividends with recent wins on the Loop 202 South Mountain Freeway in Phoenix and the Alabama I-59, I-20 interchange in Birmingham. These projects are expected to contribute more than $400 million to segment backlog in the first quarter. The Tappan Zee Bridge, the IH-35E in Texas, the I-4 Ultimate in Florida and the Pennsylvania rapid bridge replacement continue to represent the majority of segment revenue. At the end of 2015, only the Tappan Zee and IH-35E projects have reached the halfway point of completion. With early stage jobs still comprising the majority of segment revenue, we continue to expect margins to remain lower than when they mature through the project lifecycle over the next few years. Unfortunately, a number projects nearing completion performed below expectations, which also contributed to weaker-than-expected performance in 2015.

As projects mature and as we are able to mitigate risks, both project and segment profitability should improve. While we expect improvement in 2016 from the segment gross profit margin we posted in 2015, we believe it will be 2017 before the project portfolio mix again can produce margins in the mid-teens range our long-term project expectation. It is always difficult to pinpoint specific timing, but we are confident that we are managing appropriately to improve performance in our Large Projects business. Challenging and sometimes unprofitable projects occur and even in the past decade, our project portfolio was produced quite variable results, especially on a quarter-to-quarter basis. Over that time, our Large Project portfolio has delivered returns in line with our expectations in the mid-teens.

Now turning to the business of winning new business. We bid on more than $5 billion on Large Projects in the fourth quarter with successes in Arizona and Alabama representing more than $1.1 billion of project value for Granite teams, a hit rate in line with our segment expectations. These wins and our existing backlog allow us to be more selective in our upcoming bid list. In 2016, the lion share of remaining bidding is in the back half of the year, but our list of prospects remains long. We expect to bid on more than $15 billion of large projects through the end of next year. This competitive market continues to produce robust and diverse bidding opportunities that allow Granite to better prioritize the work we want to bid, when and build.

Now, let's shift for just a few minutes to the always critical topic of public funding. Let's start with the good news from Washington DC, the FAST Act is here. Remember though that this represents a starting point for Granite and for an industry that has been starved of consistent funding for many, many years. We do not expect a significant change to the near-term competitive environment, but we do expect initial impact to show up for Granite in the second half of 2016 in the form of more bidding activity than we have seen in many years, which will rapidly could change the capacity and pricing landscape. And we expect bidding activity to gain momentum, especially in 2017, which should help accelerate additional growth.

But the FAST Act alone is not a panacea, because while nearly two dozen states have taken actions since 2012 to address transportation funding shortfall, little of these new funds have yet to reach the Street. We believe that a change in focus and commitment is gaining momentum, but the disparity of commitment from state to state remains troubling. And many state and municipal entities have underinvested for so long that massive catch-ups remain a necessity.

Illustrating the stark differences in transportation funding trends from state to state are Texas and California. Last November, Texas voters approved Proposition 7, which is expected to provide an additional $3 billion a year for the Texas Department of Transportation in an annual transfer from the Texas General Fund. And this is after voters approved a separate greater than $1 billion per year transportation funding ballot measure in 2014 called Proposition 1. This critical commitment to investment unfortunately is offset by chronic in action and inefficiency in California. California system is at least bruised if not broken. Even as state revenues have swelled again to record levels, transportation spending continues to decline. Across the state, the list of projects on the chopping block due to spending vows continues to grow and in the shadow of a budget surplus. Gas taxes here are set and adjusted annually based on our obtained revenue neutral system with the 2010 base. The result, the California Board of Equalization just this week approved a third consecutive annual reduction to gas taxes, this time $0.022 down to $0.278 from July 2016 through June 2017, a 30% reduction from $0.395 Motors paid in 2014. And that results in an estimated $328 million left to spend on transportation projects in California next fiscal year. For California today, it is hard to move forward when it is stuck in reverse. Please don't get me wrong. We remain extremely constructive about the coming opportunities here in California. Unfortunately, I am less confident now that action will be taken in the first half of this year than it was last fall, when I presented to the California Legislature's Special Session Conference.

Governor Brown's $36 billion 10-year transportation funding enhancement plan remains on the table as do a number of individually submitted bills, all of which are larger than the Governor's proposal but the timing of any significant commitment in California remains uncertain. I remain hopeful that 2016 can be the launch point for this critical investment.

Over the past few years, we invested in becoming a stronger, smarter, more efficient Company by looking inwardly to challenge ourselves to be better even in light of some extremely challenging market conditions and we are not finished. We still have a long way to go to be satisfied that we are generating steady, growing, operating and financial results.

With last year's results in mind, we set our sights on improved performance in 2016 in an environment of steady but modest growth. However, we expect both Company and industry growth to accelerate in 2017 and in 2018.

So, with that, I will turn the call over to Laurel to discuss more details of our results and our 2016 outlook. Laurel?

Thank you, Jim, and good morning everyone. Fourth quarter 2015 revenue was $630.2 million, up 6.8% from last year with fiscal year 2015 revenue increasing 4.2% to about $2.4 billion. Earnings per share increased 68.6% in the fourth quarter of 2015 to $0.72, up from $0.43 last year. And 2015 EPS more than doubled to $1.52 per share compared to $0.64 in 2014. Total Company 2015 gross profit margin was 16.2% in the fourth quarter and we're particularly pleased with the more than 210 basis point margin improvement in 2015 to 12.8%.

During the quarter and throughout 2015, improved results were driven by particular strength in the Construction and Construction Materials segments. SG&A expenses increased in 2015 to $207.3 million, driven primarily by personnel-related costs. Contract backlog totaled $2.9 billion at the end of 2015, up 7% from $2.7 billion last year. Large Project Construction backlog increased about 2% year-over-year to more than $2 billion, with Construction backlog increasing nearly 21% in 2015 to more than $860 million. And as Jim mentioned, this does not include our portion of the Arizona project, the Alabama project and additional business resulting from early season win rate, tracking well ahead of the last couple of years.

Looking at the segment detail. Fourth quarter Construction segment revenue increased more than 9% to $341.5 million, with 2015 Construction revenue improving 6.4% to $1.3 billion. In the fourth quarter, segment gross profit margin improved more than 900 basis points year-over-year to 20%. In 2015, Construction gross profit margin improved more than 500 basis points to just over 15%, returning to what we would consider healthy levels for the first time in many years. We're excited and encouraged by this performance.

Moving now to Large Project Construction where segment revenues increased 4% in the quarter to $222.4 million and fiscal year 2015 revenues decreased 1.5% to $812.7 million. Fourth quarter segment margin declined about 560 basis points from last year to 11.6% with 2015 segment margins finishing at 9.8%, down about 320 basis points. 2015 performance reflects the timing of overall project portfolio progression coupled with execution issues on certain projects. Fourth quarter 2014 segment gross profit included an initial profit recognition and dispute resolution of more than $25 million.

As Jim mentioned, we continue to target mid-teens margins over the life of projects and we do expect some improvement in 2016 from the gross margins we posted in 2015. But we expect it will be 2017 before we can again produce margins in the mid-teens range. Fourth quarter 2015 Construction Materials segment revenue increased 5.5% year-over-year to $66.2 million. For a second straight year in 2015, Materials revenue increased double-digits to nearly $296 million. Quarterly segment gross profit margin surged to 12%, up more than 660 basis points from last year. This was a strong contributor to the nearly 400 basis points of year-over-year margin improvement to 11.2% in 2015. Revenue and profit growth was driven primarily by improved volumes with aggregate pricing and production efficiency gains also contributing to the performance.

Finally, let's turn to our outlook and guidance. Last February, we suggested that revenue would grow mid-single digits and EBITDA margin would improve to finish in a range of 6% to 8%. We also suggested that our profitability would improve fairly in line with 2014. How did we do? Revenue increased 4.2%, check. EBITDA margin increased 7.3%, check. Gross profit improved more than $60 million for second consecutive year with net income up more than $35 million in 2015, after improving nearly $30 million the year before, check.

2016 is on [debt] now with the benefit of the strong foundation we built with our solid 2015 performance. We entered 2016 with a balance of potential headwinds and tailwinds shaping our opportunities. Certainly today's very real transportation funding issues in California contribute to the challenge of tepid public funding trends, but this is balanced with the potential late 2016 positive impact to market from the FAST Act. While we expect large project margins to remain below our long-term trends in 2016, we do this while executing on continued near record backlog of $2.9 billion. Of course, we continue to expect to benefit from ongoing execution improvement and efficiency gains across our business, and our Materials business continues to strengthen. In light of these factors, we currently expect mid-single digit consolidated revenue growth in 2016 with EBITDA margin in a range of 6% to 8%. And quite pleasingly, growth acceleration in 2017 is now in our sight.

Now, before we take your questions, let me turn the call back to Jim.

Thank you, Laurel. Today we are executing more effectively on the foundation we built and shaped during the difficult times in the past five years to leverage coming growth opportunities. As was a case at this time last year, we are focused on capturing and executing on broad opportunities across geographies and end markets. We will continue to emphasize strong cost control and strategic investment, as we build on consecutive years of improved operational and financial performance.

And now, we'll be happy to take your questions.

(Operator Instructions) Jerry Revich, Goldman Sachs.

This is actually Brandon Jafee on behalf of Jerry, it's clear that you're positive on a long-term impact to the highway bill but in the press release, you made some cautionary comments about the near-term. Can you just talk about what concerns you in the context of relatively healthy DOT budgets?

Okay. You bet. My concern always, anytime, any kind of a public spending bill gets passed is how quickly it can be put into place. And if you look at historically with a federal highway bill, it will take time to get that work typically put into play and bid and physically awarded to contractors and then you won't see the physical financial results of it until probably two or three quarters later. So, when we give a little cautionary statement about the federal highway bill, it's mostly relative to timing, and I state that the back half of the year is when we'll see some positive results from it. We're already seeing the opportunity with some designs and things coming out to play, but it doesn't hit the financials to later in the year.

Okay, thanks. And your Construction backlog is at pretty healthy levels entering 2016, which has usually been positive for the margin profile earlier in the year, how should we be thinking about the margins in that segment for 2016?

Yes, I think that you are right, the backlog in Construction is quite a bit up from the previous year and it's a mix, which is really nice to see. It's not just DOT-type work. We've expanded the businesses, the power business has a lot of work in the Construction segment. The underground business has a lot of work in that segment and we've actually expanded the Construction segment in the private sector. Renewable energy is a big deal today and so is the commercial markets, commercial markets are coming back.

So, we expect in the long-term, we've always said somewhere around 12% to 15%. We're very pleased with 15% last year. That is a healthy type of margin for our standard Construction segment, but I think you're right. What happens in these markets is that when there is a lot of backlog and people -- I'll talk about competitors first, when they have a healthy backlog, then the pricing changes and I mentioned that in the script, that it takes a saturation point in the marketplace to get pricing to change and more backlog at the beginning of the year means that that pricing differential could occur in the second quarter, could occur in the third quarter, quite not sure yet, but the same point is I think the mid-teens are very healthy margin in the Construction business.

Michael Dudas, Sterne Agee.

Jim, to amplify on your California comments, so, is that -- obviously, it seems like you changed from what your anticipation was second half of last year, is there an actual frustration or is it just like pushed out timing where some of those monies can get liberated to hit the Street second half of this year and is that part of the maybe the cautionary headwind discussion that you put through in your prepared remarks?

Mike, when you mention frustration, the answer is yes and yes. So, I was very hopeful last year that we had some serious momentum in California with the special session appointed by the Governor that they would act and get something done, and they had real momentum and then it died over the holidays. We're back on and we are moving very heavily in California to get a transportation bill that is somewhere between the Governor's minimal proposal of $3.6 billion up to proposals on the Street today that are up to $7 billion annually. It's not a matter of if in California, it's a matter of when and everybody knows that. It's just as always in politics, the timing is very difficult to figure out. But I do think, Mike, that we'll get something passed in 2016.

Now, whether or not, and I would call this the headwind, whether or not we get to see the value of it is questionable in 2016. That's why I mentioned an acceleration in 2017, because I think again, whether it's the state or the feds, the states move a little faster than the feds, but it will still take a quarter to two to get those projects out on the Street, out to bid and in companies' backlogs. So, I am frustrated with the speed, but I'm confident that we will get a large transportation bill in California.

Turning to your Large Project business, it seems the optimism is well placed and there is quite a bit of bidding opportunity for Granite and you've had some very early success here in the last couple months. How are you looking to manage the timing and the opportunities in those businesses given where you are in the floor that you are operating now and kind of rolling off project teams on one to another? Is that something that you can look to accelerate if things work out well and you get more wins or is it something you're going to be looking to really pick the ones where you can get the best margin not be so aggressive on the volume side?

I think it's a little bit of both. I think first, certainly I mentioned in the script, Mike, that we want to be more selective, number one and we want to make sure that the projects that we bid, win, and build provide the returns that we expect in that mid-teen range on Large Projects, but secondarily, we also know that we have to grow that part of the business. And we are promoting from within, we are putting our people on strategic positions in jobs, so that they're capable to run bigger jobs down the road in the very near future. So, it's a combination of both. That business has the opportunities to grow, but the key to success in that Large Projects business is a very methodical growth. I've seen many companies that get themselves in trouble by growing that business too fast, and that would be a problem.

The other thing in that part of the business is that you have to team up with the right partners when you're on mega jobs, and that's really important to pick the right partners, the ones that work well with our Company and the ones that have the same level of expectation that we do on those projects. So, we are very comfortable that it's a market that's growing and our job is to just select the right projects, the right partners and demand the right kind of margins on those projects.

Mike Shlisky, Seaport Global.

I wanted to touch first on your gross profit outlook for perhaps Construction Materials. Did you expect a rapid acceleration there in 2016 or is that (inaudible) actual percent get little higher there?

Okay. The Materials business is -- and I mentioned it also in the script, it's kind of leading indicator what's going on in the economy, it kind of hits the first rise of private-sector involvement in the economy and it's healthy, and it's going to stay healthy. Now, how fast it improves from where it is today, I think it's going to be very methodical again. I don't see an inflection point yet, because why you need to get an inflection point in the Materials business is both the private sector click-in and the public sector click-in.

I actually think today the private sector has gained more momentum over the last couple of years than the public sector has. But as I mentioned Mike, when you start running into the end of this year and the public sector starts kicking in with the FAST Act and some of these state individual acts, then I think you're going to start seeing the Materials business move fairly quickly. And we've had years in that Materials business, we've been in the high-teen margins. As you can tell now, we're in the low-teen margins. So, there is quite a ways of upward movement still to go, but it's going to take both the private and public sector in line at the same time to get there.

Okay, great. I also want to ask about your SG&A, perhaps I missed it, but in the fourth quarter, it was the highest, has been in a bunch of years looking back to history and then if you just give a color on what happened in the fourth quarter, then secondly, maybe like how that might be -- how we should look at the 2016 run rate there, I'd appreciate that. Thanks.

Okay. The biggest driver of the increase in SG&A is personnel-related costs, primarily incentive comps and then the typical normal increase in salaries and burdens. (inaudible) as far as how you should look at it, I would say at about the same percentage of revenue as we currently have. Our objective is to grow revenue without growing SG&A a lot. So, we want to hold the percentage that we have and begin to work that down as we grow the topline.

Nick Coppola, Thompson Research.

So, first question would be on the Construction segment, the 20% gross margins obviously quite strong, can you talk more about the drivers of that improvement, maybe help parse that out for us?

Yes, I think that as I mentioned a little bit, Nick, earlier, the private sector is driving that. There is just no doubt about it. The expansion in the commercial markets, the renewable markets, the underground markets with some private clients have really jumped up in the last 12 months. And so, that's what's driving the big returns today and that's what's going to drive the bigger returns down the road. The DOTs and the public sector markets are typically more commodity markets that drive lower GPMs. But I actually think that the private sector is growing nicely and although I wouldn't expect 20% every quarter, as I mentioned, you get into the mid-teen margins in Construction and you're doing a really nice job. So the Granite teams did a really nice job in 2015.

And I also think that our people are just doing a better job in the field. They're executing at a substantially higher level. We've enacted our continuous improvement program and the people in Granite are just taking the execution issues to heart and they're just operating better than their competitors. And that does make a huge difference in a couple of points here and there in the Construction business and as you can see, when you can move up into a 20% margin, that means you're executing at a high level.

The other thing that happened in the west, which is where most of our construction work is, it was a pretty mild winter through December. We didn't get a lot of rain. We got a lot of rain in January, but on the whole West Coast, we had nice weather and they got to operate consistently through say mid-December, which makes it a nice fourth quarter. So, that does help.

All right, well, that's great to see. And then second question here, can you talk more about what you're seeing in the State of Washington, particularly as a result of that 16-year bill that was signed there?

Yes. So, remember what they did up there last year, they passed a 16-year or a 10-year $16 billion bill, yes, 16 to 16, that's right. So, it was $1 billion a year. We are seeing releases already. One thing that will happen in a state like Washington, any of the northern states that have a winner attached to them, what you'll see is a very competitive bidding environment in the first quarter. You'll see lots of work out to bid typically and you'll see more bidders in the first quarter.

So, I think it's yet to be determined, Nick, exactly how that $1 billion a year additional program will hit the Street and how it will affect the bidding environment, but the Washington market is healthy. It's got a very strong private sector, it's very diversified from the east to the west, the Cascades that lie in between and I think you're going to see that continue to make it healthier, especially when the FAST Act ties in at the same time later on in the year. That's going to be a really nice addition to the Washington program, because as I mentioned before, I see the FAST Act starting to hit the streets in the third and fourth quarter of this year and then you got the $1 billion year program (inaudible) on top of that. I think you're going to see Washington do some really nice things.

Alex Rygiel, FBR.

Good morning and thanks for taking my questions. Jim, could you talk a little bit more in depth with regards to the Material sales business and where pricing is today relative to the past peak?

Yes, sure, Alex. So, the business is -- we ought to break it in Granite into two components for our Materials business. First of all, the aggregates business, which is much easier to track, because you have a very static number of inputs to it, you have aggregates, you're extracting from the ground and you're using a host of different methodologies to crush and make product. That -- those products have risen in pricing somewhere I would say 3% to 5%. Last year, we see similar type increases. This year, maybe more. And it's a nice methodical market and I like where it's going. I think that could have an inflection point later in the year again if we start seeing the volume demand from both private and public hitting at the same time. We haven't seen that yet, but we have seen a healthy volume increase about 10% year-to-year in that end of the market, which is healthy, which has helped the pricing.

Now, the second part of the business is a very interesting part of the business and that's the asphalt business. The asphalt business has, as you would imagine, driven heavily by crude pricing, which liquid asphalt is a major component of asphalt and it's the bottom of the barrel out of the refinery. And as those prices dropped tremendously over the last 18 months, so therefore, has the pricing for asphalt. The key ingredient there is to be able to not price the asphalt with the full reduction in price of liquid and capture some upside in the gross profit margin and our businesses have been able to do that and I think they are -- and continue to be able to do that. That is a very healthy market as well, but what happens with the asphalt market is the big volume from that market is typically driven by public projects. You get very large, we call it, asphalt overlays [and whether Granite does and we're a] third-party, we really like to sell products to the end of very large arenas there, so that we can get some fixed volumes in our plants.

So, I think again in the Materials business and the asphalt business especially, once you see the public sector gearing up and you start seeing more of the surface work coming into play, I think you're going to see that part of the Materials business, the asphalt side, maybe reach an inflection point at the end of this year or beginning of next year.

Thanks, and Jim, you referenced that Granites likely going to be bidding on something like $15 billion worth of large projects in 2016 and 2017, how does that number compared to maybe the past 24-month period?

It's pretty much in line. It might be down a little bit, but what happens is that we have a whole bunch of them in the hopper that we haven't made our minds up on yet. So, you could get one $3 billion project and go through what we call our Large Projects committee and get it approved and then it would change, it would add $3 billion to that list. I would suggest this Alex, it is robust, we're being very choosy and we're turning opportunities away and the amount of work that we're going to bid is going to be in line with what our capabilities are.

William Bremer, Maxim Group.

So, I want to add on the last couple of questions, Jim. Let's go to the pricing as well as your capacity and help us understand how you're bidding and trying to balance not over extending yourselves in near-term?

Okay, that's an interesting question, because that's what we use to chat about 10 years ago that do we have a capacity issue, is there some saturation point in your business that you're going to not be able to do any more and you're going to turn work away. And the key ingredient is exactly what you said is that you start optimizing your margin expectations long before you reach a saturation point, so that you don't fill yourself up with lower margin work and then lose the opportunities in a higher margin work.

I will tell you with the businesses that we have across the country, we have a huge opportunity to increase the amount of work we do in the Construction Materials segment. We are nowhere near capacity, but it is smart business to watch what goes on in the markets, and not reach capacity too quickly because what we have seen historically is that our competitors are smaller, they have less elasticity in their business, and they tend to fill up faster when the markets improve and then there is a significant change in the pricing, that inflection point. So, I don't see a capacity issue with Granite today. I think that it is a good business to continually move prices up, find out where that pressure point is, and I think we're going to be working that very hard over the next -- in 2016.

Okay, good color there, thank you. My follow-up is overall on labor and hiring at this point, are you seeing labor starting to tweak up year or due to the fall out of the shales, you feel more in essence that it's contained?

Well, I'll say it's both, you're getting some other industries, there is an influx of workers from the other industries, no doubt. The upstream oil industry has allowed some opportunities for those individuals to move into the Construction segment, which is good, but of course that's not in all geographic parts of the country. The other thing that we've seen is that when we are on prevailing wage jobs, which is a big chunk of our work, we typically are able to get craft workers, because the wage rates that we're providing those craft workers is higher than the open shop or non-prevailing wage work in the same geographic market.

I would suggest that there is an equal pressure point on talented professionals in the industry. And when you start obtaining large work and unique 30, 40 engineers, different types of capabilities, scheduling, quality, safety, the technical side of the professional business I think is going to be actually reach a saturation point before the craft level does. So, there is a duplicate of concerns. But as long as you're willing to reward those people properly, I think those kind of companies are going to make it through this nice upward pick in the market. But if you're going to stay on the cheap side, you're going to have a problem obtaining and retaining people.

Okay. And one last one if I could just tweak it in, Texas had quite a bit of rainfall in mid-November to the end of the year, was there any impact to the projects that you're doing there, you are doing some material projects there?

Absolutely. Yes, we're doing some big work in Dallas and it has affected, that's the IH-35 job, it has absolutely affected that job. We've had a big -- we had a big wet year at the beginning of last year as well that had a significant negative effect in Texas, then it dried out, we made huge progress. But I would say that that job -- one job there in Dallas itself has been affected by rain over the last 12 months.

Sameer Rathod, Macquarie.

Hi, good morning. Thank you for taking my question. I think in the past, you guys have talked about a total sales funnel or total work outstanding that you guys see, if I recall correctly, it was like a $50 billion or $60 billion number. How is that number tracking? I know you said $15 billion over the next year or so, but how is the total amount of work that you are seeing coming to market changing?

Well, I would say, Sameer -- by the way, good to hear from you, I would say that it's pretty similar to where it's been, it may be not even getting bigger. The overall market size is growing. And the question obviously is when we give you a $60 billion number, it's -- those are things that are in our hopper that we're looking at and that we know are out there and that we're tracking. And it could be two or three years down the road before that actually comes into play and there are also times where the owner decides to go different route, break the project up into smaller projects or they can't get the permits to actually build the work, but I don't see that changing. I actually see the amount of construction work growing, the thinking about the marketplace on construction, that's a $75 million and less on the Granite portfolio side. I think that long-term outlook for work is actually growing quite a bit.

The other thing that's happening is that we're looking at a more diversified kind of pile of work out there in the US. So, we're not just looking at a big transportation project anymore, we're looking at big power projects, we're looking at big water facilities. And as we expand our horizons and diversifying, I think that what you're going to see is that pot and we can talk about this in the future, the size of that overall long-term tracking is going to get bigger and bigger.

Right. That's helpful. I guess my next question is on oil and gas. Obviously, you don't have any direct exposure that you are in states that a lot of the economy is based on oil and gas, have you seen any kind of second or third order derivatives from the decline in oil and gas on kind of how the public officials are thinking about infrastructure?

I think that yes and no. I think certainly the oil sector and the crude pricing has caused some revenue issues in certain states. And I mentioned in my remarks that the drop in crude and the Board of Equalization just dropped some significant gas tax requirements in the State of California, and you think about a state that we do have a nice business in that has been hit with the -- because of oil entry is Alaska. That's a very focused state on oil and energy and that has hit that state. Now, we've done quite well up there and we anticipate doing quite well, but certainly it puts struggles on states like that. But it's interesting in the power market, we're actually seeing our power business having tremendous opportunities by changing the transmission and distribution systems and looking at new power lines and decommissioning lines and expansion in right away projects and the construction management portion that we do. So, the oil and gas side and the related energy side, except for the gas tax reduction in the State of Alaska, has actually helped our power business.

Adam Thalhimer, BB&T.

Good morning, congrats on a nice Q4.

Yes, thanks Adam.

Thanks.

Thinking about California for 2016, how much of a headwind is the road budget for 2016?

I wouldn't call it really a huge headwind, I would call a lack of what I would want to see is a huge tailwind. There's plenty of work in California, the private sector is alive and well in California. I'm just frustrated that California can't get if I call it top [debt] center and get moving on a very proactive environment where we know that this work has to get done. So, California is one of our stronger states right now overall and the way that we're performing business, the bottom line, the revenue and everything else, it just has another significant notch up that it can go when the politicians do what they're supposed to do.

Got it. And then I think there was some hope early on with the FAST Act that it could lead to higher spring weddings. Is there still a chance for that? I know you said that maybe the (multiple speakers) competitive?

I think there will be spring lettings, but remember what happens, Adam, a spring wedding, which is typically you've got more states, you got a minimum requirement of 30 to 60 days of public announcement to actually put a public bid out and then you've got somewhere between 30 and 90 days to award the job typically inside the contract and then you've got another 30 days before the notice to proceed and you physically get out on the grade. So, that's why I was saying that I think we'll start seeing the positive effects of it late in the year, but we absolutely can see some spring weddings. But you still won't see the financial effects of that until later in the year.

Got it. And then can you give any color, the large project margins 10% last year, maybe mid-teens next year, I mean, how should we think about it for 2016?

Well, what we mentioned there was that it should be somewhere in between. We said that it should be better than last year, but we don't see it at the mid-teens range in 2016. We've got some early progression projects. And again, we've mentioned before that at the early part of our projects we hold some monies back to try to make sure that the jobs are heading in the right direction. And when the portfolio mix is still young, you're going to naturally have a lower margin expectation. So, we mentioned 2017 is when we start seeing getting back to the typical expectation, 2016 will be somewhat as a progression from where 2015 was and in between 2015 and 2017.

But everything you've seen with this four mega jobs that you started late last year is encouraging to you or any change?

Well, they are very complicated jobs, complex inside and outside, but all four of them are progressing quite well. Again, only two of them are over the 50% mark and two of them are early in the stage, just the I-4 is very early in the stage and the Pennsylvania job is in the first quarter quartile of its stage. So again, we expect lower margins while they're in those early stages. And the Tappan Zee is progressing quite well. It has had a very nice 2015. Weather certainly helped in 2014 and the previous two winters did not help that job. And I think I-35 has progressed quite nicely in the second half of the year. It got stung with some serious range in the first half of the year and is progressing well now as well.

But what happens is that when you get your new work, now you're start having to add on, you got the 202, which is a really nice win for Granite, you got the Alabama I-59, I-20 job, another nice win. Now you got to mix those young ones back into the portfolio. So, I think that our projects are going well. I think that you're going to see that we're going to continue to increase the backlog and progression will be a combination of how well we execute and how well really we can get to work in some of those locations where we've got some significant winners. New York so far is good, Pennsylvania is kind of come and go, I know they got some weather hitting them right now. But overall, I think our large project progression in 2016 should improve from 2015.

Michael Dudas, Sterne Agee.

Thanks for the follow-up. Cash flow pretty strong in the quarter, it looks like pretty good year. Laurel, remind us about the debt repayment and where that's headed? And the follow-up, Jim, given the outlook that you're providing and you said in the past about potential acquisitions, how do you feel about that today going into what looks like to be pretty good upturn in the next few years?

Okay, once you hit the cash side first, Laurel.

Sure. So, we have private placement notes that have five years of $40 million of payments and the first payment was due in December of 2015. We refinanced our credit facility in the fourth quarter in October and as part of that, we took a portion of it as a term loan and we used $30 million of that term loan to pay off some of the $40 million and then used cash for the remainder of it. And so, every year we will -- and our plans for 2016 are similar to what we did in 2015.

And then the other thing that happens with that new credit facility, obviously larger than our old credit facility, it ties nicely into the second question, the M&A side and we certainly are considering expanding the business through acquisition. We are in the market to look and see what's out there. We like and I've mentioned it before diversifying geographically and in both end markets. Diversifying into the water market I think is really top in our list, geographically diversifying our vertically integrated business is top on our list. And I think one of the things I've always said that's really important is that you do not move into the acquisition mode before you are efficient and effective in your core business at all times, and I'm happy to say that. I think our teams have done a tremendous job in 2015 becoming more efficient, more effective and our strategic plan is to grow both organically and through acquisitions.

Brian Rafn, Morgan Dempsey Capital Management.

We talked about $15 billion that's you are looking at bidding out, how much of that is really high-end design build?

The majority of it. I would suggest that when we start looking at large projects work now, Brian, there are very few jobs. Remember our threshold is $75 million and most of the jobs today in this environment are way over $75 million and most of them are design build. I'll give you an example of one that's not, that's actually bidding today is a job in Hartford, Connecticut, which is somewhere between $200 million and $400 million tunnel job, that is a bid build. So, different types of jobs are taking on different contractual outlooks. Tunnels are typically bid build, the other projects we're looking at are almost all design build nowadays, all the big ones.

When you do joint ventures, you talk about partnering, is there a priority to being the general, is there a benefit to being the lead or is it better to be to just partner and diversify?

Well, okay, so that is a very strong topic of discussion inside Granite as well, and it's a very strategic question, Brian. It's actually a really good question, because there is a combination of things that you have to look out when you call yourself a sponsor or a non-sponsor on a joint venture, and when you get into design build, you have to make sure that if you're going to sponsor a job that you have the personnel to lead the job and that could be up to 40 or 50 people, and I mentioned the engineering staff and those people that you're going to need to put on a project in order to be the lead player. So, you need to have those people available if you're going to lead $1 billion job and be the sponsor.

The second thing that you need to be a sponsor is to make sure that you can handle the cash requirements of a large project. A lot of these projects will start with the cash call and equity infusion and if you're going to be a 50% or 60% partner, you need to do some very strong cash flow curves on these jobs to determine what kind of cash the company is willing to infuse in the job before you get to distribution.

Now, secondarily -- so that's part one. Part two is, a lot of times, you can obligate yourself to a partner on the premise that if you are a non-sponsor or you are taking a smaller role today that you promise your partner you're going to take a larger role, you're down the road. And because that takes a lot of different requirements from the partners and sometimes there's not an even percentage of effort going into play, you could be a 40% partner and put in 60% of the assets and the resources. So you have to sometime sponsor, sometimes non-sponsor. I think you're going to see Granite on jobs, $500 million to $600 million and lower typically be the sponsor and I think that when we get to the larger jobs, we would like to increase the size of projects that we're sponsoring, we're healthy, we're developing a lot of people in the field today, and I mentioned this earlier, in role, so that they can actually run these billion dollar jobs going forward. And when they become completed on the jobs are on and they become available into Granite for future work, I think you're going to see us bidding and sponsoring larger projects going down the road.

Okay. I appreciate that. On the aggregate side, how much of the volume are you guys using internal versus external sales?

It's about 60% external, 40% internal.

Okay, all right. And then you talk to -- you mentioned selectivity and you guys have always talked in the past about being -- having a discipline on bid day, the types of -- and I don't know if you can quantify it or give some color, what are the types of projects that you've stayed away from? Are there geographic areas, are there specific owners, you don't have to obviously mention names, but what are the types of things that through history that you decided to avoid?

Well, it's really important, Brian, that is so -- such a big deal, especially in the Large Projects business. And I'll tell you what really surfaces in choosing and not choosing a job. Number one, can you get the right team, are you in the game early, do you have the right partners, and does that allow you an advantageous position in on the project. Secondarily, we look heavily at the contractual documents themselves, how will they set up, does this owner provide reasonable cash flow, does this owner have a dispute resolution program that is fair or they have the judge and jury with a dispute. And also we look at the history of how we've done with these agencies across the country. We dealt with the majority of these bigger agencies across the country and we know how they treat people. The other thing we look at is when we go into a large job, we go okay, who are the competitors on this job and can we be competitor. And if there is somebody that we know has an advantaged position over Granite, then we're not going to spend millions bidding a job that we really don't think we have a great shot at getting the job.

So, there is a host of issues that go into consideration and we actually have a complete committee in Granite that's led by our COO and our Head of our Large Projects group and we have -- we look at risk mitigation through our risk department. We have our legal department heavily involved in terms of how the contracts read, we have our business development group in there to look at the partnerships with not only our joint venture partners, but our engineering partners. It's a very comprehensive group that looks at all the opportunities and says, okay, this one you have a chance for obtaining the work and you have a really good chance of getting the margin that Granite needs in order to come out the back end of the job.

Yes, okay, appreciate it. And then, several years ago with debt, during certainly the trough, very difficult times, you talked about more mobility with your crews shifting around estimators. As you guys build in capacity, as you utilize capacity, as you build up kind of getting back to more normalized margin structures, is there less mobility because there is maybe less scarcity of business or are you still seeing more transfer, more mobility moving all over the country?

Okay, so I think there's two parts to that question, Brian. First of all, I think in Large Projects, there is always going to be mobility. Our people have to go to where those specialized large projects are and that's what our people sign up for, and they know that and they're very good at that. Now, when you go to the Construction business, when you start seeing the local markets get healthier which they are, then I think you're going to start seeing less mobility of those people, because they're going to be in a market where they look out in front of them and see five, 10 years of growth in the local market and they know that they can create significant value for the Company staying in that local market, the Company is happy with it and we let them stay in those local market. So, two parts of the question, the smaller work is going to be less mobility required due to the strength of local markets today, Large Projects will always have mobility.

Okay. And then what -- back to the old -- I'm going to go back to legacy, so the old (inaudible) business, which you guys kind of call Construction today, what is the constitution of that business, is that are you seeing some private sector real estate, is it industrial parts, what -- is it city and county highways, what kind of is the bread and butter of that kind of that rebuild of that business?

Well, you nailed it, a lot of it. It is the fact that the -- what happens in those local markets and you put a geographic boundary around the local market, Brian and you say, okay, what's the health of the state and then you dial into what's the health of the county or the larger mix jurisdiction and what's the health of local municipality. What's going on in the private sector in residential, residential, by the way, I would say is not something that is driving our business today, but with significant opportunities, we are seeing development starting and I'm going to say starting to be built again, but the commercial market is very strong.

But what else we've done over the last five years is diversified into other parts of the business. We're doing a lot of work directly for the larger rail companies today. We're working for water facilities today that we didn't do, we're doing pipeline rehabilitation that we didn't do, we're seeing the renewable energy business that we didn't do. And the other thing that we've actually migrated into and most of it is $75 million or less is in the federal market. We've actually gone to a whole new client. We got a nice couple of jobs bidding (inaudible) coming up in the next couple of months. So, we've diversified our portfolio and that's the strength of the Construction business today that we didn't have five years ago, Brian.

William Bremer, Maxim Group.

Thank you, gentlemen. Just an update on CapEx to 2016, and in particular what type of equipment and what are the lead times for that equipment, have they increased at all?

Sure. I think our CapEx is definitely going up. We've been typically in the 2% to 3% of revenue range and will stay within that range, but they started migrating towards the upper end as we start building new work. The other thing that happens is and I will tell you one thing that's changed in our portfolio of capital expenditures is the tunneling industry. So, when we go out and sponsor a large project, we now have to go out and buy these very, very intricate tunnel boring machines that can be $20 million each. Now, we typically get paid by the owner very quickly, because they understand the cash requirements but that makes a very quick change in the overall volume of capital expenditures and those are quick turn items. So, that's not a big deal.

I will say this that we've done a complete kind of reboot of our capital expenditure program inside of Granite and we're ordering equipment now in the fall of the previous year for delivery in the spring. And that was something that I commend our COO, head of our equipment apartment and our local businesses are just planning better now. And so, you give a six-month lead time, but you got to be that far in advance of the business.

There's another question that I better address. So, what happens if Trump gets elected, do we have bridge building abilities, I heard that one in the background, and we've got tremendous bridge building abilities, and that's what we do. So, certainly we are ready for the next elected official to help us to help build bridges and entire infrastructure in the US.

Okay. This ends our Q&A session for today. I would now like to turn the call back over to our hosts.

Okay, very good. Well, thank you for your questions today and thank you again to all the Granite employees for working safely, working hard and living our core values every single day. We look forward to seeing a few of you in San Francisco on Monday, Denver on Tuesday and Chicago in few weeks from now and as always, Laurel, Ron, and I are available for follow-up if any of you have any questions at all. Thank you. Have a good day.

Thank you. That concludes today's conference call.