Granite Construction Inc (GVA) 2016 Q1 法說會逐字稿

Good morning. My name is Alison and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction investor relations first-quarter 2016 earnings conference call. (Operator Instructions). After the speaker's 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 Inc. first-quarter 2016 earnings conference call. I'm 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 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 sees 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. Please note, that a reconciliation of certain non-GAAP measures are included as part of our 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 Inc. Chief Executive Officer, Jim Roberts.

Thank you, Ron, and good morning everyone. Next week marks the third annual construction industry safety week. Granite, along with dozens of other construction companies from coast to coast, will gather on job sites to share stories, to probe for safe ways to build work and to reach out to community to raise awareness all in an effort to reduce jobsite incidents and to ensure our employees go home safely each and every day.

We are proud to be a leader in this effort and proud to be part of this great construction community. While our teams are off to a solid start in 2016 we continue to challenge our people to work more safely every single day.

Before I discuss our operating results in the quarter, I must congratulate Granite employees for their everyday commitment to do business the right way. A crucial component of being named one of Ethisphere Institute's world's most ethical companies for the seventh consecutive year. Our employees' commitment also is reflected in a recent recognition on Forbes list of America's best midsize employers. Such recognition enables us to continue to focus on setting a high bar in all that we do.

Now moving into [broad] performance in the first quarter 2016. Results reflect steady market conditions and strong execution, which produced a solid overall performance. Our geographic and end market diversification continues to help balance the risks and returns on our portfolio businesses.

This quarter, key parts of our vertically integrated business and Kenny, especially California and Kenny Power, delivered consistent, strong results that largely offset seasonal challenges in the Construction Materials segment and some ongoing challenges in Large Projects.

Beginning today with the Construction Materials segment. Steady performance and efficiencies are the order of the day in the Construction Materials segment, the leading indicator of Granite's vertically integrated business.

The business continues to perform solidly, reporting a loss of just over $1 million in the quarter, about a $2 million swing from last year. That was despite cold, wet weather that impacted both internal and external demand and resulted in revenue down almost 17% from the first quarter of 2015.

Wet weather also provided us a window of time we did not get last year, allowing us to invest in some growth-focused maintenance and upgrades. These costs also impacted first-quarter segment margin. We expect the maintenance and upgrades early this year are well timed to help propel our plants and to facilitate strong production for the remainder of the year.

Although first quarter volumes declined compared to last year, we expect that work simply has been delayed until weather allows the work to be built. We expect to use the balance of the calendar year to recapture this opportunity.

Across geographies in the Construction Materials segment, committed volume levels are strong and growing and this portion of our business is poised to grow solidly again in 2016. This business continues to benefit from gains in quality efficiency and from our renewed customer focus. The Construction Materials segment remains firmly on its path of steady, profitable growth.

Next, moving to the Construction segment, the larger portion of a vertically integrated business and where a good portion of our Kenny work is reported, during the quarter strong performance in California and our power businesses helped segment profitability improve about 200 basis points year-over-year to nearly 13% in the quarter.

We produced consistent solid results despite tepid public spending trends that continued in the first quarter. The business also overcame welcomed wet weather in the West in the first quarter of 2016 delivering year-over-year gross margin improvement for the eighth consecutive quarter and the 11th quarter out of the past 13.

The businesses in the Construction segment continue to recover and perform well. This is the biggest near-term driver of our growth. We are winning and building profitable work, not only transportation, but also in the power market including transmission and distribution projects and renewable energy projects.

In addition, water, commercial developments and industrial expansion all continue to fuel our growth. This diversification, coupled with the renewed focus on transportation funding, is now driving results in the Construction segment that we anticipate will continue to progress.

In the Large Project segment, granted employees in joint venture teams continue bidding, winning and building some of the largest and most complex infrastructure projects in the country. Performance level overall was a bit uneven during the first quarter, with certain projects impacted by weather, production, design scope and owner-related issues.

The Tappan Zee Bridge, IH-35E in Texas, the I-4 Ultimate, and the Pennsylvania Rapid Bridge Replacement continue to represent the majority of our Large Projects segment revenue. Our project portfolio is growing, keeping our portfolio maturity at an early stage.

During the first quarter, we booked into backlog our portion of the Loop 202 South Mountain Freeway in Phoenix and our Alabama I-59, I-20 interchange project in Birmingham. These projects added nearly $500 million to segment backlog in the first quarter, pushing it to a record level of $2.4 billion. We're also finalizing the contract on a $280 million total project in Hartford, Connecticut that we expect to book into backlog in the second quarter.

Granite will continue to pursue numerous significant bidding opportunities, whether as a sole contractor or as a highly desired partner. In prioritizing future North American projects, we expect to build and maintain a broad roster of at least $10 billion to $20 billion of bidding opportunities over a rolling two-year period. Our recent wins and existing backlog allows us to be more selective on the projects that we bid.

In recent years, the scope and scale if projects have grown significantly in alignment with increased levels of aggressive competition. Ultimately, these factors have raised contractual risk, leading to an imbalance of risk and returns in both the design and construction phases of projects. We are working hard to mitigate this imbalance going forward.

Granite teams across the country are working diligently to improve performance and deliver improved results throughout the remainder of 2016. As projects mature and we are able to mitigate risks, both project and segment profitability should improve significantly. But given current operational performance and portfolio maturity, we do not expect to achieve our longer-term margin expectations until next year.

For a change, it is quite nice to not speak about Congress, but our quarterly call would not be the same without at least a short update on trends impacting public funding in general. Massive infrastructure investment catchups remain necessities across the country as under investment has ruled the day for years. Of course, as we mentioned in recent quarters, recent state actions that increased transportation funding are just now beginning to impact the market.

We continue to expect the recently passed federal highway bill known as the FAST Act to provide its initial impact for Granite in the second half of 2016 and heighten bidding activity while gaining even more momentum in 2017. So as bidding activity picks up in line with our expectations we are committed to optimize these opportunities for Granite.

We're helping lead the charge in California where construction, industry and labor leaders are working shoulder to shoulder to build legislative support for a long-term incremental commitment to transportation investment of at least an additional $40 billion over the next 10 years. We remain hopeful to garner significant commitment in California from the governor and the legislature this year.

We are relentlessly focused on safety execution diversification and continuous improvement to spur proficiency and drive growth across geographies and across end markets. We believe that 2016 provides us with an environment of steady modest growth and we remain focused on opportunities for acceleration in 2017 and beyond.

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

Thank you, Jim, and good morning, everyone. First-quarter 2016 revenue was $439.5 million up 4.6% from last year. Loss per share in the quarter was $0.28 compared to $0.22 in 2015.

Despite gross profit increasing to $39.2 million, total Company gross profit margin decreased 33 basis points year-over-year in the first quarter to 8.9%. Particular strength in the Construction segment which included double-digit revenue growth was offset by seasonal impacts to our Construction Materials segment and weaker Large Project segment results.

Notably, first-quarter 2016 results show that our core business segments are operating at a higher level as we reflected in the reduction of recognized claims revenue from last year. This year total claim recognition was $2.8 million in the first quarter and nearly $7 million year-over-year decline from last year when we implemented an accounting policy change for contract claim recognition.

Last year's total first-quarter claim recognition of $9.7 million largely was a one-time catch up from the accounting change from prior periods, split about 70-30 between the Construction and Large Project segments.

First-quarter ST&A expenses includes 10% year-over-year to $56.1 million driven primarily by increased compensation expenses. While we used cash as we normally do in the first quarter, the balance sheet remains strong with $314 million in cash and marketable securities at the end of the quarter.

We continue to invest across our business in opportunities for growth and efficiencies as suggested by the first quarter spending ramp of both CapEx, plant maintenance and upgrades invested to support a strong second quarter start and execution on our growing backlog.

Total contract backlog at the end of the first quarter finished at an all-time record of $3.4 billion up 15.3% from last year and 16.4% sequentially. Large Project construction backlog increased 9.1% year-over-year and 16.5% sequentially to $2.4 billion. In the Construction segment, backlog surged to $1 billion, up more than 33.5% from last year and up 16.2% sequentially.

This new work reflects a balance of bookings across segments and markets and geographies and it is the most positive sign we have seen in years in the largest segment of our business. It also is a clear reflection of the success of our diversification efforts. We are at the start of a nice uptick in new end markets in which we focused. This has been anticipated for quite some time and it is now occurring.

As Jim mentioned, backlog now includes our $284 million portion of the Arizona 202 project as well as our $208 million I-59 I-20 project, but it does not yet include the $280 million Hartford Tunnel project, which we expect to enter into backlog in the second quarter.

Looking at segment detail, first-quarter Construction segment revenues increased 11.1% to $209.5 million with gross profit margin of 12.9%, up nearly 200 basis points from 10.9% last year. Segment revenue and profit improvement was driven both by increased demand and improved execution.

Solid performance continues to be the order of the day. This resilience is reflected in the segment delivering its eighth consecutive quarter of margin improvement.

Large Project segment revenues increased 2.7% in the quarter to $195.4 million. First-quarter segment margin of 6.9% declined 230 basis points from 9.2% last year, a reflection of the performance factors Jim mentioned.

Even as our new projects mature in 2016, the Large Project portfolio remains weighted towards projects still earlier in progression. In fact, today's Large Project portfolio is the largest, most diverse, most complex, and least mature portfolio we have ever had.

New project teams are focused on efficient project kickoffs and teams on our maturity projects are focused on opportunities for improved performance. As Jim noted, given current operational performance and portfolio maturity, segment growth margins likely will remain below our full project lifecycle mid-teens expectations for the remainder of 2016.

Moving on now to Construction Materials where revenues in the segment decreased about 17% in the first quarter, $234.5 million as cold, wet weather limited paving work and less demand in the quarter across many Western markets.

Overall, the business reported a growth loss of $1.2 million. Last year, the segment delivered a small positive growth profit in the first quarter enabled by mild weather in the West. Execution in the business environment remain significantly improved from prior trough levels in recent years.

Improving operational performance and greater efficiencies guide our expectations for continued growth in this business. In addition, we have compiled a nice increase in our committed volumes for 2016, which will help offset the slow start from weather we experienced in the first quarter.

For Granite, our expectations for the year remain unchanged. We expect mid-single digit consolidated revenue growth in 2016, with EBITDA margin in a range of 6% to 8%, with overall 2016 profitability to grow in line with revenue.

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

Okay, well, thank you Laurel. Before your questions, just a quick recap of where we stand today. As you can see, our business remains on solid ground. For the leading indicator of our business, the Construction Material segment, the stable economic environment continues to support growth with solid committed volumes pointing to expansion in 2016 and in 2017.

Strong backlog trends, especially the one billion-dollar all-time record total in the Construction segment reflect the impact and balance provided by the strength of the market for smaller term work as well as diversification delivering results. Both the West and Kenny will see movements in 2016 and in 2017 and we expect this will be the main driver of our overall growth.

We continue to focus on opportunities in Large Projects to improve execution, achieve expectation, and deliver improved results. We are working to ensure increased public funding in states across the country with a strong California focus.

Lastly, continuous improvement is driving efficiencies in all areas of our business. It is beginning to become ingrained in our culture to simply make us a better company.

With that, we will be happy to take your questions.

Jerry?Revich; Goldman Sachs

Good morning. This is actually Brendan Gaffney on behalf of Jerry. Can you talk about pace of revenue burn that you would expect for the current list of projects in your large construction backlog as we progress throughout 2016?

I think that as you can tell even in the first quarter the revenue burn was higher than last year. I think you're going to see a very consistent burn on that revenue as well. Especially on the jobs that were in maturity today. We do expect Large Projects to be a larger revenue producer this year than last year.

Okay. Thanks, that is helpful. The book to bill in Large Construction was really high in the quarter. Were there any orders pulled forward into one queue that you would expect to be booked later in the year?

No, not at all. Actually, it is interesting because those jobs, the Arizona 202 job actually was awarded quite quickly relative to a project of that size. That is a 900 and something million-dollar job that was awarded in the same quarter it was announced.

So nothing was pulled up. In fact, the one project that we mentioned, the Hartford Tunnel job, was actually opened in the first quarter and actually that will be delayed relative to an award to the second quarter. So I think everything is pretty much in line with the typical 30 to 60 days after the notification that you are the successful bidder is typically when you get an award.

Thanks a lot.

Michael Dudas; Sterne Agee

Good morning, Jim, Laurel and Ron. First, Jim, I wanted to have you elaborate a little bit in your prepared remarks. You talked about in the Large Projects segment prioritizing future business going forward, which seems like a positive thing. But also about the -- in design and construction, some of the risk imbalances you are seeing in the market.

Can you maybe talk a little more about that, whether it is a Granite, you're trying to handle the risk and reward issue or is the competitive nature still to the point where the -- it is still better for you to wait to bid on projects if there are too many people chasing?

Okay, so, Mike, those are two important parts of our Large Project business. Let me just tackle them together. Future bids and the design construction issues. I think that what we are seeing today is we have a very nice robust backlog, it's a good backlog, it's the kind of work we want. It is very diverse in nature, some is in the tunnel business, some is in the transportation business.

Those are different kinds of work but again, also very large work. But what we are trying to do now is analyze the projects that we think will create the most value for Granite, relative to the risk associated with the work.

Let me give you some examples. If you think about it and you look at a billion-dollar job and you have a five-year ability to build it, that is a different job than a billion-dollar job that you can go build in two years and you can turn it faster.

We're diving into the contractual details to make sure the way our obligations to the owner are set up so that we don't feel we're being held liable for things that should not be, we should not be held liable when you get down into the details of the contract.

It could be liquidated damages, it could be different O&M issues. We think that we are in a position today, Mike, where it is important to just go work on backlog that is really going to allow a larger return relative to risk than other projects.

It is great to have about, right now we have $17 billion we're looking at over the next 18 months. We don't need to go overly aggressive on that work. But we will look and we will be aggressive on the type of work in the geographies that we want to be working in. And also tying it in with the people that we have on our bench, so to speak, to deliver the work.

We are also being very focused on having the right partner on our work. And that is very important because we want those parties that have the same kind of interest that we do. The same kind of margin expectations and the same kind of risk expectations. It is really nice to be in this position today and we're going to pick and choose the Large Projects that can create really value that outweighs the risk and we probably haven't been in that position for a long time.

That sounds encouraging. My follow-up, Jim, back to California and special session and legislative issues. You mentioned, is there an opportunity for a solution by fiscal year, June, or are you talking throughout 2016? And are there more increased concerns about funding versus gas tax reductions and some of the fracturedness between what the governor and what the Republicans want -- how to fund certain such projects?

Okay, so the answer is yes, yes, yes and yes, relative to all those issues. Let me tell you a little bit about California. This is a big issue for Granite, knowing that that is still a third of our business, a little less than a third almost, still in the California market. We're the biggest player in the DOT market with the most projects of any other company here.

We are heavily involved right now in a very strong industrywide -- we teamed up with labor to focus on legislatively trying to get something done prior to the end of this fiscal year, which is June 30. We are still in a special session, Mike, which means that transportation has been allowed to be followed outside of the normal session, which allows it to move faster.

So we are working hard. We've got one bill that we are trying to work with the author of to get on the floor here as quickly as possible so that it can be heard in the special session before we get into the budget cycle and the end of the fiscal year.

If that does not occur, then we are looking at their governor to help us in his budget to try to put into play a nice sized bill in his budget himself. If that does not take place, then we are looking at even trying to get something completed by the end of the year.

We have reinvigorated the entire industry, labor, and we have a very strong coalition today. I would say over the last two months, Mike, the wheels are turning heavily. I think over the next six weeks, or I will say two months probably, the efforts are going to be every single day working with the legislature in California and the governor trying to get something done.

Let me mention one more thing. The low end of the bill in California is about $3.6 billion which is the governor's proposal. Now, note that that is additional work compared to what we call -- which is a $2.3 billion program today. The latest bill that just came out for overall reading is about a $5.5 billion a year bill.

So you start even putting somewhere in between there and you get a $4.5 billion to $5 billion bill and these are all 10-year bills. So these are $5 billion for 10 years or $50 billion overall. Even if you went down to the lower level, you would be having a huge increase in the overall spending in the state of California.

We're not comfortable it's going to happen yet. We are confident we are going to make tremendous progress in the next two months, and we have ramped up our efforts to try to really put a lot of pressure on those people that make those decisions because we think this is imperative for the future of California, and I think we're getting a lot of traction.

Jim, I really appreciate your thoughts on that. Thank you very much.

Nick Coppola; Thompson Research.

Good morning. This is Steven?Ramsey on for Nick. Can you talk a little bit about project progression, Large Projects? And really, you said it was still tilted towards the early stage. Can you maybe help us think about margins this year compared to last year?

Okay, so it is interesting because when you look at the Large Project portfolio, there's a couple things that we should, I think we have been trying to share this information with everybody, and I think it changes obviously every quarter when you pick up new work and you progress on the older work.

But one of the things we noticed, we actually went back and did some historical analytics here relative to all of our Large Project work, and this is the most early-stage maturity of our overall portfolio that we can ever find, which means that in the early parts of our projects, we actually have a contingency that we put aside for potential problems on jobs or potential issues of milestones that occur.

We don't typically release those contingencies until later in the project. So as we said before, the first half of every project will probably show up at a lower margin than the back half.

The other thing that is happening in our Large Projects business is we're finding that these owner-related issues with these complex projects tend to be pushed, resolution tends to be pushed to the tail end of the project. So what we're finding is global settlements as we get to the last 10% to 15% of the project where that also changes the margin on those projects but it is pushed toward the end of the project. We have several of those going on in our large projects today.

I think in general what we're seeing is that complete margin expectation isn't really occurring until we get back to maybe the last 25% of the job. As we continue this early maturity we are probably going to see results, and I'm going to say similar to last year, as we go forward through 2016, with it continuing to ramp up in 2017 and beyond.

Adam Thalhimer; BB&T Capital Markets.

Can you just reiterate what the long-term targets are for gross margins in both segments?

Okay. Maybe I will look at all three segments here. Large Projects, we have been saying mid-teens. We believe that is where that needs to be. I think it does, on Large Projects, it does depend on the type of work, our overall portfolio is. Some projects are actually higher, some project are lower. Depending on our mix we do believe that mid-teens is the appropriate returns.

In the Construction segment we have been saying the low-teens, although we are doing a little better than that right now. Historically, the low-teens have been a really nice margin in the construction business, but if the markets continue to change that could improve. But right now I would say still the low-teens for that business.

In the Construction Materials segment, I would say that mid-teens is a very reasonable return. That is consistent with what we have been saying over time. It has been as high as 20% and it has been as low as 3%. The Construction Material segment is one of, is the segment that is probably more indicative of the overall economy.

As these state revenues and budgets start balancing and getting better and better, that again is the bellwether of how we see our overall business performing. As you can see, last year our Materials business had been doing very nicely and we continue to expect it to do quite nicely this year. So mid-teens, low-teens, and mid-teens are probably the most reasonable expectations for those segments.

Okay, that is helpful, Jim. Then on the weather within California, where were you most impacted?

We were mostly in the North. But it actually hit the whole state. In the overall scheme of things, Adam, it was a good thing. The state had been in a long-term drought. And this water is now filling up the reservoirs which is going to be long term, a really good thing for our business in California.

It actually did a couple of things. The weather was very wet in January and very wet in March. It actually subsided a little bit in February. The large rains, it really didn't give you a chance to work in February because everything was so wet from January.

It did allow us some time to get our plant maintenance and upgrades done in the first quarter, which we really hadn't done in a while. That certainly affected the segment margins but it also put us in a stronger position for the remainder of the year.

The weather, although I would say from the middle of the state north was a big hit, it still hit the southern part of the state, and it moved over into our Nevada market and Utah market as well, it's the same basic storm channel there. Just a delay in the Materials business is really the bigger issue on the California side.

Okay. Very helpful. Thanks, Jim.

Joe Giordano; Cowen

Thanks for taking my questions here. I just want to talk about capital [build] a little bit you been talking about on most of your recent calls. Have you seen private company valuations, maybe particularly on the Material side as you look to expand that further east? As commodity prices have moved up here have you seen valuation start to move away?

We haven't done a lot of individual valuations but the answer is probably, no. I'm going to tell you why. Every one of these vertically integrated businesses typically comes from a family-oriented environment. What happens is about when they decide to pass the company on outside of the family, it is a time frame where it is fairly emotional, and I actually think those multiples have been healthy for even during the downturn.

The bigger issue here is more of, if they start seeing significantly increased earnings with the same multiples then you're going to see some pricing differential. I don't think the marketplace has changed much. When one of those businesses becomes available, it is strictly the right fit more than anything. It comes down to the right fit and the negotiated number for a whole host of reasons.

One of the things I have also seen in those businesses is the quality of the reserves, the physical assets, certainly the management, will drive significant different results in terms of the multiples. I don't think there is a change in the multiples. It's going to be the individual business.

Okay, great. Maybe on the Large Project side, is there anyway you can get into some of the detail on the execution and known related issues that you've been seeing to give us a better sense of that this is normal course of business stuff? It is hard to judge a trend on any one quarter on your projects. Just so we have an understanding there.

I don't want to dive into the individual projects themselves, but let me give you a higher level typical situation that will occur. On these big mega complex jobs, they will have a combination of, I would say, design issues, schedule issues, then owner scope revisions. Those are the biggest drivers of changes on these jobs.

Typically, what happens is that we plow through all of those issues during the first half of the job and we just keep moving forward. We work with our designers to try to resolve issues with them as the project progresses. We work with the owner to try to resolve scheduling conflicts.

If it is something that they wanted or let's call it weather or design change is going to impact the schedule we tend to work with them to try to say, okay, what is a reasonable schedule? A lot of times a force majeure which is an act of God where something major comes into play we would be compensated for both potentially time and money. Those issues are negotiated over time.

Then the owner a lot of times changes what they want. That is kind of the one where when those things occur, contractually tell us to keep plowing forward during while we're building the job and then what we will look at as the plus and minuses at the end of the job, and I call those global settlements.

Those tend to take place in the last, I will call it, 25% of the job. You put all these things, and I will call it the scoresheet, put them over on the right-hand side of the table and say, okay, if you can meet your goals, your schedules, the upgraded designs and everything and then we will look at global settlement terms at the end of the job. That is why a lot of these things are plow ahead during the first half of the job, keep things in order financially and schedule wise, then work towards resolution on the tail end of the jobs.

Okay. That is helpful. Then maybe one last quick one. Did the mild winter in the Northeast bring forward any work on Tappan Zee? And where would you say that project is in terms of percentage completion at this point?

Yes, that job actually did progress very nicely over the winter and it was fairly mild weather. Of course, that is an offset to what we saw the previous two winters which were really, really poor. It was a very good winter on the job. It is about 65% complete right now.

It is progressing along very nicely with anticipated (inaudible) next year. On the Tappan Zee, you're exactly right. That was one case where we actually had some nice advancement during the winter which we had not had for several years.

Thanks, guys.

Sameer Rathod; Macquarie

How do you think about capacity and capacity constraints now that the backlog is at an all-time high? I saw CapEx picked up year-on-year. Maybe just some thoughts on how you guys are thinking about the pace and capacity you have.

Okay, so I would put it into the buckets of the segments if we're going to talk about capacity. Let's go Large Projects first. Large Projects is, again, I wouldn't look at volume as a capacity issue because we certainly have the financial capacity to [bond] a lot of work and that is not the issue; we have the financial capacity to fund the job from an equity position.

What we're going to find on Large Projects, it comes down to the people. The type of work that we go out and bid and build will depend on, I said earlier, the people we have inside the organization to physically go build that work. I think it's going to depend in Large Projects on the type of work that we are out pursuing relative to the people we have.

We have a lot of capacity in the business, certain projects as they closeout. We want to overlap new projects with old projects. We have expanded our capacity over the last several years as well as on these Large Projects.

I mentioned it several calls ago, Sameer, we've been putting deputy project managers, second and third tier project managers, on these larger projects to develop them so they can be project managers on the top slots on big jobs going forward.

I think it's just going to depend in Large Projects on the type of work. In the Construction segment, we have a tremendous amount of elasticity. I don't see capacity being an issue in that business. We have a much stronger ability to ramp up that business.

Those who have followed Granite historically know that that that business was bigger seven, eight years ago. When we had the recessionary environment, that certainly contracted that business.

I think there's tremendous growth, and I mentioned it in the script part of this discussion, that that is the biggest overall growth component of our business is the Construction segment. We have capacity to grow that significantly.

On the Material segment, similar to the Construction segment. I mentioned that we have been upgrading our plants doing maintenance and upgrading them. We are nowhere near our capacity at all in our Materials business.

I say that overall. Certainly there are certain plants that are at a higher level of utilization than others but again we have come way off of our all-time highs in the Materials business and we are now starting to see it ramp back up. I don't think you're going to see any capacity issues on that part of the business for quite some time.

: Okay. Thank you.

You bet.

William Bremer; Maxim Group

My first question is based on, and I just want to say, hey, great color on the potential leverage of the personnel. I think that has been a key, that is a key driver going into fiscal 2017. Can you give me a little sense of the visibility of your pricing there on the potential projects that will be going into your mix?

Okay, if I heard that right, it is relative to the pricing going forward?

That is correct.

Okay, again, let's go back to the segments again and look at it. On the Large Projects, and I think that this is where I mentioned earlier that there has been an imbalance in the pricing versus the risk. Certainly our expectations are that as we go into individual contractual risks and we look at the documents themselves, that we're going to be making sure that large projects is priced to offset any potential risk on the jobs.

You're going to see Large Project expectations inside the day-to-day bidding go up on the projects that have higher risk. I'm not sure that that has happened over the last, I will say, five years, but that market is starting to get to a point now where I think all the players in that market understand that there is more risk on these complex jobs. I know from a Granite perspective we believe that the returns on those projects need to go higher. We're going to see an increase there.

On the Construction segment, this is going to depend on how fast work gets into the marketplace. If we are correct with the FAST Act, and we see these state budgets continuing to stay healthy, what we're going to see is competitors reaching a saturation point.

This is what I mentioned, we'll start seeing the benefit of it in back half of 2016 but probably the financial benefit of it 2017 is that you're going to see some smaller companies reach that capacity issue. They are going to literally not be bidding work. It will take time for us to know and lead this market change. Then you see pricing change at the end of the year and into the next year.

We're starting to see it take place a little bit today. We look at the bid list every single day, and in some markets the bid lists are long and in some markets the bid lists are short. But there's going to be some pricing change in that market.

I will say this, today you start looking at in the low-teens already in the construction business, it is performing fairly well already. A couple more points out of that business would be a really nice change and that would be very healthy in that environment.

In the Materials business, this is where the biggest movement needs to be made. The overall materials business should be in the mid-teens to the low 20s. This is where the gross profit margins need to get to because of the large asset investment in the business. That is where we used to be; we are working hard to get back there.

Again, I think you're going to see us, we will sacrifice revenue on the Material side to start moving up our gross profit expectations. That happened several times last year. You're going to see several more price increases this year. As that market continues to grow, you are going to see a lot of combination of price increases each year in 2016 and in 2017.

Great color, Jim. Thank you. My follow-up is based on, any particular surprises of any particular state or region that you are seeing the speed and the commitment of these projects coming through faster than what you anticipated?

I don't typically like to dive into individual states. The reason I dive into Californian in general is because it is a big part of our business. I would say in general, and I mentioned it, that part of the business is getting stronger.

I would say outside of California, I think things are pretty much as expected. In California, especially if we can get a transportation bill passed, that is probably where the biggest, swiftest change will take place. Right now I'm very happy with what is going on in California compared to where we were two or three years ago. That is probably the biggest state change overall in the entire Granite portfolio.

Thank you for the call.

Okay.

(Operator Instructions) Brian Rafn; Morgan Dempsey Capital Management

You talked about finding after the FAST Act Replacement Safety Rule, I think it was 29 extensions and a world war ago. Does that add, is the (inaudible) fourth quarter, does that add some margin accretion for you guys, say, two, three, years out, do you see that? It may be that is the expectation for the margin increase on the Corey Materials side and maybe on the construction side?

That is part of it. I think there was actually 35 extensions, not 29. But it was a lot. It was a heck of a lot. Yes, I think that, as I mentioned, there are two things that are driving the value creation in the Construction segment. There is the higher-margin expectation due to the FAST Act and I will talk about that a little more in a second. But the other thing I don't want to miss out on is the diversification efforts that we have made in that business.

By moving into the power segment, the T&D work is strong, the renewable energy work is strong, we beefed up our commercial developments, we beefed up our business developments to work with more private owners. That has increased. The private side, typically the work we do for the private entities is higher margin work than the work we do for the DOTs.

As the FAST Act kicks in in the back half of 2016, what we are looking for the DOT work to get better margins out of it, and that is really, really important. The other thing that we have done in the Construction side is we've been on the sidelines and the mining business for a while, that has not been strong. It is starting to come back a little bit. We've got some real projects we are working on and we have expanded quite a bit with some new personnel adds recently in the water side of our business.

I think there's a combination of the FAST Act with increased DOT margins, but it is really important that we stay focused on diversification, even when that transportation market get stronger.

Let me ask -- you guys have talked over really the last decade about having certainly discipline on bid day. You had some comments you talked about mitigating risk and going back and looking at that. Would you say across Granite's diversity of portfolio, you -- obviously you guys have had a long legacy and history on the transit side, whether it is canals or bridges or roads or highways or turnpikes.

As you start looking at solar and military bases and mining and railroad and water and tunnels, is there a bit of a gap in your experience of risk mitigation in some of those new areas? Or is it just kind of a secular emphasis to -- as business builds up that we have to maintain this quality?

I think that it is actually -- it's interesting. I would suggest that we are probably, when we move into newer markets, and let's talk about the water market, I wouldn't call it new but I would say the emphasis might be new.

The solar market, which we are very strong in today, we have been doing that now for probably three to five years. You get into the tunnel market, remember when we bought Kenny, they have some of the most experienced highly talented people in the entire country in the tunnel business.

I do think, I actually think that we are experiencing in those areas some of the higher margins and some significant discipline in the bidding environments. I think where sometimes you get more aggressive is in the day-to-day work that you do so much of that you get over comfortable with it.

That is where actually I see the transportation sector is where I see the highest increases from where we are today from where we are going to go, I think that is where the higher margins we are going to see even more and more. The new stuff we talked about is the higher-margin work already.

Okay, that is good, that is good. In the Construction, the old [branch] turn business, you talked certainly about complexity and diversity. I kind of think of that as the heavy (inaudible), the Large Project side. When you look just at the turn business, how -- the residential construction, private housing, that type of thing, how would you describe certainly the diversity in that faster turn business?

I'm going to tell you, Brian, diversity today is stronger than in the history of the Company. That is what I think is creating that value. If you look at this point in time, and we are at a 12.9 margin, that just has not happened in that business because we're not focused on one type of work.

When we move, we have a very large renewable energy team now. When we look at the T&D business and the type of work we're doing there, a big chunk of staff augmentation, that is totally different. We get into the lining business and the water business, we can do that in the winter months where we cannot do a lot of the surface work in the winter months.

I think the diversification play is the strongest part of our construct business today, with the potential ramp up of transportation coming back where it belongs. This is why I continue to say that I think the Construction segment is the main driver of our growth going forward.

Okay. On the Construction side, I think you said low teens [to high] gross margins. If you go back to the halcyon days of 17, 18, 19, is there a possibility of that returning, or do you think you really need a strong private economy?

I think that there is a possibility of getting back, I was going to go to mid-teens and not get too far over my (inaudible), Brian, on high-teens, but I do think you nailed it. Back in the mid-2000s, when we were really cranking we had a strong public sector and a strong private sector. I would suggest to you today that outside housing, the private sector is becoming fairly healthy.

What we don't have today is a real healthy public sector. That is why I continue to say by the time the FAST Act kicks in, if we can continue to have a healthy private sector, that is when we're going to see the margin creep up and the volume creep up on the construction side.

That is why we are targeting late 2016 and then 2017 for the benefit of it. I do think we're going to get improved numbers. I don't know if it's going to get to where it was 10 years ago, but we are heading in a good direction.

That's fair. When you talked (inaudible) about capacity and you really you talk about bonding and (inaudible) capital equity, you talked about the physical capacity. If you were to divide that physical capacity between the human component, the bench strength of say engineers, expediters, welders, machinery drivers, versus the capital stock side of bulldozers, backhoes, graders, how is your capacity between the human component and what you might have to do on a CapEx side?

I think there is no doubt in my mind that the driving force in this industry and in Granite will be the human capacity. We can get all the equipment we want. We've got a healthy balance sheet. That is not the issue, Brian.

This is a people business; it is going to continue to come down to people. That is it. You have to have people on the bench, you've got to be patient, you've got a train them, you have to develop them and you have to give them opportunities. That is what is going to allow Granite to grow.

Yes. Last, say, go back five or six years to the [depth] trough, you talked about the aptitude to have more mobility in some of your manpower, shifting people across the country. As business ramps up and you start getting back to really decent gross margins, might there be a little more stationary where you're having to shift manpower around the country or around the region as business lifts for everyone?

Brian, I think actually there is another reason why people are less mobile today and I don't think they're going to be as mobile as they were 10, 20 years ago. I just think it is an issue, generational issue where people don't want to be mobile. I do think that as the economic environment is getting more healthy in different geographic areas, the mobility range will be minimized. That is good.

I do say this, though, that in the Large Project business, that is going to continue to be where the mobile workforce is needed. But on the Construction and Materials side it is much less mobile than people were 10, 20 years ago. As the economies get healthier and healthier I think you're going to see people sticking at home.

Yeah, out here, California way, San Francisco, this $15 minimum wage labor. Does that get at all to any of the lower rungs of your work crews?

No, in fact, I think that is really good for Granite because of the wage rates that we pay are typically well above that. Way above that, especially in California. It is not going to have any negative impact on us at all. I don't think it's going to have huge impact on the construction industry in general. People at those wages, there's very few people being paid at those wages or below.

Yeah, when you talked about the Materials side, Jim, you talked about the wet weather, you took some time for maintenance upgrades. Was that rebuilding hot mix plants, were you adding capacity there? Replacing stuff that was worn out or was it service parts repairs? What kind of a [granular], what were you actually doing?

All of the above. I'll give an example. You take a hot mix plant and you put a new drum on it, Brian, and that is the main component of how you dry the aggregates. Typically, when you put a new drum on it you tend to upgrade them and make them bigger so they've got more capacity to them.

You look at a big rock plant and you change out crushers and liners and belts and typically you are doing it to really, number one, to increase the utilization so that you go from a 95% utilization of a facility to a 98% utilization for the remainder of the year. That is a big deal.

It is a combination of both. We did use the first quarter to build one big new facility. It is online, I think mid-April, it came online. That was nice to have that weather allow us to get that done. It is a host of reasons, capacity and upgrading utilization.

I have just one more strategic question for you. From a design build standpoint is it really kind of a half a dozen players where it is an oligopoly and you really, Granite really specializes in that. Also as business lifts up, might there be some opportunity to resurrect that the east of the Mississippi River, the vertical integration adding Corey Materials with the Construction side?

Two questions. First of all, I wouldn't call it an oligopoly. I would say that there is maybe 10 major players that bid on everything all over the country in some respects. Certainly, we are one of them and that hasn't changed. But it is still an aggressive market.

That is what I was saying earlier, is that in the Large Projects market I think what is going to have to happen there is a lot of the competitors that have a lot of backlog are just going to need to build out their backlog. I think they will end up seeing some of their contractual [risks]. Granite knows what is already in these contracts and I think that's going to help the market a little bit letting them build out some of their work.

As far as the vertical integrated business east of the Mississippi, we are looking and we want to move there. I have mentioned that before. Brian, if you know of anybody, please let me know.

Thank you.

Sameer Rathod; Macquarie

Yes, just one quick housekeeping question. Did you guys mention the project pipeline that you have for the next four quarters? Is it still $15 billion or has that amount changed?

I mentioned just in the comments a little bit later here that we have about a $17 billion pipeline for the next, I will say through 2017, which is typical. I am calling a two-year or 18 month look out, somewhere between $10 billion to $20 billion being a common, reasonable pipeline. If you have individual jobs that you want to know about, Sameer, I'm happy to chat with you. I have a whole long list of them sitting in front of me here.

Okay, no, that's it. Thank you.

Okay, Sameer, thank you.

Brian Rafn; Morgan Dempsey Capital Management

It is Ryan Hamilton. I know you guys don't spend a whole lot of time talking about your business in Canada, but I was reading a recently passed $125 billion bill they're using for infrastructure. Is that opening up any additional opportunities in Canada?

It has from a discussion standpoint. We certainly have been approached by partners in the Canadian market to go north of the border. Certainly there are Canadian partners that we have brought down south of the border.

I don't think that it is something that will happen overnight but I do think that moving up into that marketplace is part of our geographic diversification plan for Large Projects. Again, we have relationships with a lot of very strong Canadian contractors. That is how we would first go up there, as a joint venture partner.

Sure. That is great. I've got one more. On the Material side, can you break down what is internal and external?

Again, it was such a slow quarter with the weather, it really wasn't a big deal. It is running about 60% external, 40% internal, again, with the minor amount of work that was done due to the weather. I think that in the stronger environments, Ryan, you're going to continue to see a very strong external market, which typically is healthier, shows a healthy external market which is a healthy environment market.

I think that last year we saw an uptick in the external portion of our business as well. It is definitely in a pretty good stage today and we're looking at really beefing up our customer focus and our third-party focus.

Great. Thanks again. Keep up the good work.

Okay, Ryan, thank you.

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

Okay, everybody, thank you, thank you for all of these questions, they were excellent. Remember the safety of our employees is not just our employees but it is a core value here at Granite. If you look ahead to our industry safety week next week, I thank Granite teams from coast-to-coast for a solid start to the year as we target 2016 to be the safest year in our Company's history.

To our investors, Laurel, Ron and I are available for follow up if you have any further questions. Laurel and Ron will be on the road next week in New York, Boston and Florida, so please reach out to see if they still have any availability in their schedule. Thank you, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.