Granite Construction Inc (GVA) 2017 Q1 法說會逐字稿

Good morning. My name is Gary, 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 2017 Earnings Conference Call. (Operator Instructions) Please also note, this call is being recorded.

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.

Thank you. Welcome to the Granite Construction Incorporated First Quarter 2017 Earnings Conference Call. I'm pleased to be here today with President and Chief Executive Officer, Jim Roberts; and 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.

Well, good morning, everyone, and thank you for joining us to discuss our first quarter results. I'll begin today by acknowledging Granite employees for exhibiting our core values every single day. As a result, Granite was named one of Ethisphere Institute's World's Most Ethical Companies for the eighth consecutive year. Our unwavering commitment to do things the right way every day creates value for all Granite stakeholders, from investors and employees to partners and clients. Working safely and striving for the ultimate goal of 0 injuries also aligns us well with all of our stakeholders.

This week, Granite teams and construction companies across the country are participating in the Fourth Annual Construction Industry Safety Week. Whether sharing best practice training methods, near-miss stories or simply raising awareness, thousands of construction industry employees nationwide will join together to develop solutions to work more safely and get home safely every single day.

Granite teams have started 2017 solidly, and we wish them good health as we enter the breadth of what is shaping up to be a very busy 2017 construction season.

Before Laurel discusses our financials and guidance, I want to spend a few minutes discussing the weather, our operational performance and our growth opportunities. Let's start with the weather, where Mother Nature hit California and much of our businesses on the west like a buzz saw throughout the first quarter. The drought is now officially over in California after the heaviest concentration of rainfall in about 2 decades. Notably, this inclement weather had the most negative impact on our Materials business, severely impacting production in California and across the west.

Weather also was a headwind for our solid-performing Construction segment, with growth limited to the desert southwest and our Kenny operations. And while not as significant of an impact, weather also created headwinds in the west for our Large Projects business as well.

Let's move now to operational performance, beginning with the Large Project Construction segment. First quarter performance continued to be challenged by impacts from design, weather, project execution and owner-related issues. In addressing these issues, we accelerated the work on a number of challenging projects that represented a significant amount of segment revenue in the quarter. So rate of work of these mature projects increased their drag on segment quarterly results, and we are working diligently to finish these projects as quickly as possible in 2017 and in 2018.

We continue to adjust our approach in this business to better prioritize project bidding and teaming, focusing on significantly higher return expectations. At the beginning of the year, Dale Swanberg, a seasoned veteran in the industry, who has led very successful large project businesses in the past, took the helm of the group. We brought Dale onto our team 2 years ago to succeed Mike Donnino, who is retiring this year after a 40-year Granite career. Thank you, Mike, for your leadership and your steadfast commitment to always doing all work the right way every single day.

Dale was focused on returning this business back to its appropriate mid-teens gross margin levels over the next several years through disciplined project selection, increased financial expectations, continued emphasis on safety and attracting the best people in the industry for our teams. That said, we still have a long way to go as the near-term results continue to be weighted to underperforming projects. As certain mature projects reach substantial and financial completion later this year and in 2018, segment results will steadily improve. Granite's large project teams are working to create and capture opportunities to mitigate risk, strengthen project performance, increase productivity and drive improved efficiency, all resources for stronger financial results.

Now let's look at the Construction Materials segment, where, as I noted a moment ago, extremely wet winter weather had a significant impact on our operations and on our financial results in the first quarter. Of course, we are not pleased with an expected loss -- expanded loss in this business, but we expect that we will more than make up the ground we have given up in the first quarter as the year progresses. Our teams have begun to respond to increased demand in April while focused on delivering and sustaining plant efficiency improvements as production across the west ramps up. We expect strong operational execution will spur our Materials businesses to deliver top and bottom line improvement this year as demand environments continue to point to improvement in most of our construction materials markets. I believe this is the beginning of a very positive, long-term, upward movement for this business.

Despite the wet weather in most geographies, the Construction segment continued its consistently strong performance, with gross profit up and gross margin down only slightly from last year. Quarterly revenue and profit growth was driven almost exclusively by projects and operations in the desert southwest and our Midwest-based businesses. The majority of our businesses in the west were stuck in the mud, so to speak, in the first quarter, and they are now ready to be able to make up for the lost time by accelerating work on record backlog. Increased revenue in the first quarter, with many of our business units unable to perform their work, bodes well for a strong construction season. This segment remains on target for a year of solid top line growth and consistently strong margin performance. So what gives me this confidence? Well, it starts with bidding and booking activity. Construction segment backlog finished the quarter at an all-time record level of $1.18 billion. Public transportation and infrastructure spending overall remains steady and stable, and it is poised to increase. Private nonresidential demand, the fuel of our growth the past few years, remains solid across geographies and end markets. This segment is primed for an exceptional year in 2017, and visibility for 2018 and beyond is promising for continued improvement.

Finally, today, I want to spend a couple of minutes with you on the significant growth opportunities we have in front of us as a company and how we can not only benefit in the near term but also create consistent long-term results. Over the past few years, we experienced a recovering to improving to now steady private nonresidential market, and we have benefited through our significant diversification efforts. Today, private market demand finally is being joined state-by-state and region-by-region by significant commitments to increase public investment. These commitments are tied to an ever-deepening pool of backlog for infrastructure investment created by decades of underinvestment. We expect increased public demand to provide long-sought balance to the ever competitive local construction market we serve.

On April 6, the legislature in California approved the passage of SB 1, the Road Repair and Accountability Act of 2017. And last Friday, Governor Brown signed it. The bill will raise $52.4 billion over the next 10 years to fix roads, improve maintenance, add capacity, improve local transit and help to move goods to market. This transportation bill is a rare win-win event for the public, industry and labor stakeholders. It was a long time coming and truly a team effort.

With our California offices stretching from Palm Springs and San Diego in the south, all the way to the northern coast above San Francisco, the significant expansion of much-needed investment in the state's transportation system for the next 10 years will have a lasting positive impact on this large part of our business, today representing about 1/3 of our overall revenue. This investment combines with the nearly $190 billion of long-term local measures passed by voters in California and Washington state last November. Granite's California and Washington teams are thrilled at the opportunity to realize significant profitable growth tied to this long overdue increase in investment.

At the federal level, while Trump administration infrastructure discussions remain constructive, it is unrealistic to estimate timing, magnitude or the potential impact of still undefined incremental investment. We remain cautiously aware of how slowly Congress acts in spite of a perpetually growing list of overdue projects to rebuild American infrastructure. Granite is anxiously ready to deliver increased infrastructure solutions across our nation when our country's leaders decide to unleash the needed funds to rebuild America. We are confident this commitment will occur, whether it is late 2017 or in 2018, and will further add to our growth opportunities. We truly are in exciting times as we look forward to fulfilling our long-term strategy of building value together.

As I noted in February, Granite entered 2017 in our best position in years. We have invested for growth, and we have invested for efficiency. We have prepared and we continue to prepare our teams to safely and profitably respond to the improving demand environment. We are confident that solid execution will spur revenue and gross profit growth, operating income expansion, and improve overall bottom line performance. Our vertically integrated businesses across the west continue to operate, with utilization well below our capacity and well below the last period of strong cyclical demand a decade ago. We continue to benefit from our ongoing investments and continuous improvement, utilizing Lean Six Sigma tools, and we continue to look to extend and grow these economic and efficiency benefits across our businesses. As we extend the reach of continuous improvement, it will further leverage enterprise knowledge, allowing for improved efficiency, cost containment and profitability. Granite teams are ready to accelerate and ready to grow.

And now I hand it to Laurel with some more detail on our results and our 2017 outlook. Laurel?

Thank you, Jim, and good morning, everyone. First quarter 2017 revenues were $468.4 million, up 6.6% from last year. Loss per share in the quarter was $0.60 compared to $0.26 in 2016. Gross profit in the first quarter was $25.1 million, down from $39.2 million last year, with total company gross profit margin of 5.4%. In our seasonally weakest quarter, all segments of our business were impacted negatively by weather, ranging from delays in our healthy Construction segment to production disruption across most of our Construction Materials businesses until mid-April to headwinds in our Large Projects business in the west.

First quarter SG&A expenses increased 10.2% year-over-year to $61.8 million. The increase was split between selling expenses and stock-based compensation expenses, the latter of which is primarily a first quarter item. While we use cash as we normally do in the first quarter, the balance sheet remains strong with nearly $300 million in cash and marketable securities at the end of the quarter. Total contract backlog at the end of the first quarter finished at $3.44 billion, up 1.5% from last year. Large Project Construction backlog decreased 5.4% year-over-year to $2.26 billion. Large project backlog does not include the recent notice of our joint venture team selection for the Grand Parkway project in Houston. We expect Granite's 30% portion of the $855 million project will enter large project backlog in the second quarter.

In the Construction segment, backlog again grew to another record, nearly $1.18 billion, up 17.5% from last year. This activity continues to reflect broad bookings across our businesses, end markets and geographies.

Looking at the segment detail. First quarter Construction segment revenues increased 8.3% to $226.8 million, with gross profit margin of 12.3%, down about 50 basis points from last year. Though revenue and segment profit increased, weather impacts to the business delayed further activity and negatively impacted additional growth in the quarter.

Large Project segment revenues increased 5.9% in the quarter to $207 million. First quarter gross profit declined nearly $11 million year-over-year, in large part a reflection of the underperforming mature projects, coupled with severe wet weather conditions causing production losses and project delays. As a result, net project write-downs in the first quarter were $13 million compared to $2.8 million in 2016. The underperformance and challenges were limited to 5 projects, all at least 80% complete. In fact, 2 of the projects are now close to 100% complete, and the others are accelerating toward completion in late 2017 and 2018. While mature projects typically are a consistent source of profitability, write-downs on these projects were and are particularly disappointing and decretive to results. As our project portfolio matures and the influence of newer, better-performing projects grows, we expect it will provide improved returns.

Moving on now to Construction Materials, where revenues in this segment were flat year-over-year in the first quarter at $34.5 million. Operations at many of our facilities were delayed until materials deposits dried for efficient aggregate and asphalt production, which began at some locations in mid-April. As a result, first quarter gross loss expanded to more than $5 million from $1.2 million last year.

Please note that production costs are absorbed into inventory at a rate based on expected annual production. With aggregate production in California significantly impacted by weather, the reduced production meant excess capacity was expensed in the period as the weather also drove higher aggregate per unit production cost. Despite the weather impacted start in the first quarter, expectations for demand growth and strong execution will help our Materials businesses deliver top and bottom line improvement this year.

With that, I finish with our outlook. Now entering the breadth of our construction season, activity is accelerating across the company and across the country. We are keenly focused on driving improvement in our Large Projects business as soon as possible as well as accelerating the building of our very healthy backlog in the Construction and Materials businesses. With the backdrop of improving macro and market trends, we're excited to finally begin the robust 2017 construction season ahead of us. We currently expect no change to our previous annual guidance of low double-digit consolidated revenue growth and consolidated EBITDA margin of 6.5% to 7.5%.

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

Thank you, Laurel. We believe public market demand is beginning to enter a period of stability and long-term growth. I was reminded recently that often, the challenge is uncovering and capturing the maximum value of an opportunity. While I and other seasoned Granite leaders have been through multiple up and down cycles over the past 3 decades or more, many of our teams and younger leaders have never experienced a healthy growth environment. And given its severity, unfortunately, the expectations of some long-term employees and many of our peers remain linked to the depth and pain of the recent recession. We are challenging our seasoned leaders to expect and demand higher return expectations on all of their work. We are teaching those with less experience, those who have not been through an up cycle, to expect more and to set their sights higher. Great builders create value and deserve higher returns. And this is especially true in an increasing demand environment, where the balance of risk on our work has benefited our clients for more than a half decade. Today's increasing demand environment will continue to spawn exceptional opportunities for significantly improved returns with more manageable risk.

And with that, we will now take your questions.

(Operator Instructions) Our first question is from Michael Dudas with Vertical Research.

My first question is regarding acceleration. You mentioned about accelerating the large project work and some of the underperforming projects in Q1. Can you talk a little bit about the decision to do that and how much more acceleration we may see throughout '17 that can get some of those lower-return projects off the books quicker? And then on the other side, the acceleration of opportunities to make up for Construction Materials and some of the setbacks in Q1, the opportunities for that to accelerate so you can achieve the target that you've reconfirmed on our call this morning.

Sure, Mike. Yes. Thank you. Yes, large projects, certainly, we know, and knew coming in, that we have a host of projects that are nearing completion that we want to get behind us. And so in the first quarter, we did accelerate. We have 5 projects that we named. 2 of them are almost done as we speak. The other 3 will carry us all the way through the middle of the end of 2018, and those are jobs that we believe we want to get through as quickly as we can possibly. So I would suggest 2017, the remainder of 2017, will not be weighted as heavily as the first quarter, but it will be weighted with some significant completion and acceleration of those last 3 that will carry all the way into 2018, but reminding you that there's a host of quality projects or new ones that are starting to ramp up in 2017 as well. And that didn't happen in the first quarter. We had a very slow first quarter with some slow starts on a couple of our newer jobs. And so I think what you'll see, Mike, is more of a balance. And it will take all the way to the end of 2018 to get those other 3 projects off of our books. But you're going to see a nice balance start working its way through the system over the next 18 months. Now the offset to Construction Materials is that -- it's pretty simple. That business is a day-to-day business. We know we have out in front of us. We know we didn't get a whole lot done in the first quarter. I said we were stuck in the mud, so to speak. When our deposits are muddy and sopping wet, there's not much you can do. Certainly, we did sell some materials. And what we saw in the first quarter was that demand is significant. And also, we have committed volumes through the rest of the year. Simply speaking, on the Materials business, we know the volumes are there. We know the pricing is there. And all we need to do there is we're going to keep our plants open longer. We're going to work more days, and we're very comfortable suggesting we will get back to where we expected on the Materials business with improved overall volumes and margins this year. It's pretty -- it's a pretty easy business to look out in front of you and look at the demand environment, and the demand is actually quite exciting right now.

And my follow-up, Jim, my follow-up question would be, as you look at the transportation bill that was signed last Friday, as you kind of reflect on the whole process, how did it turn out relative to what expectations you have or the company had? And do you still see the mechanisms and the funding in the type of practice flowing to the point where Granite and other in labor and industry can start to see benefits from these funds later this year as you kind of indicated in the past?

Okay. So -- yes, maybe I will spend some energy now because I think it is a big issue for the company, and probably other people will want to know where SB 1 started and stopped and everything relative to what we thought was going to happen. And I think it was about a year ago, I sat here and told you that we were just starting to get heavily engaged. And it was April of 2016, which Granite and some other industry leaders decided that nothing was going to get done unless we all stepped up to the plate and really took this thing to another level. And we did. The industry and labor, which is quite unusual in a lot of states and a lot of locations, got together and created a team. And we went out and got both sides of the party and got industry, and we raised a lot of money and we started focusing on what is it that we need. At that point in time, there was a big divergence in what the governor was looking at versus what certain leadership in our assembly was looking at. Leadership in the assembly was up in the $7 billion range, and the governor was down as low as a $3.5 billion range on an annual basis. And when that started, that divergence was creating really an opportunity at such a wide gap that nobody felt anything was going to get done. So what I found out, and I think a lot of us in the industry found out, that politics is slow. It is -- you have to be patient, although you get frustrated. We believed at all points in time that if we could bring the governor's original budget in 2016, along with the assembly leaders' budget or expectations, to $7 million, bring them to the middle and come up with somewhere in a $5 billion year package, that we would be happy. I again mentioned last year, I was hoping we could get it done by the end of the year. That did not happen. But what did happen by the end of last year, which I thought was a big win for us, was the governor, the senate pro tem and the speaker of the assembly all committed to getting this done. And once you get leadership in our political environment all on the same page, which we have yet to see, obviously, in Washington, D.C., when you do get them all on the same page, things get done. And then when the governor and the senate pro tem and the speaker all gave April 6 as a deadline, we just saw that -- we saw everything moving in the direction. Now where did it end up? It ended up at $52 billion over 10 years. It ended up with a host of funding mechanisms through gas taxes, diesel taxes, 0 emission vehicle taxes, transportation improvement fees, diesel sales tax, all those things. At the end of the day, what I really think is great about this is that we're going to also focus on a constitutional amendment to make sure that everything is dedicated to transportation. And during the tough times, which we go through cyclical ups and downs, as we all know, that you cannot go in and rob the transportation funding mechanism to put back into the general fund. That is key. Getting $5 billion a year available for transportation but then having it to be potentially robbed to go back into the general fund is a disaster in waiting. So we're going to cure that with the constitutional amendment next year. And right now, I mean, these -- the gas taxes, the diesel taxes, the registration fees alone raised over $3 billion a year, all that will start taking place in November of this year. Well, that's not true. Registration fees will take place in January. All the tax increases will take place in November. So where I see this going is at the state level and the local level, I think you're going to see a very nice impact by mid-2018. And one of the things I've always said, Mike, is that as you work your way closer to the people, as you get into the state and local municipalities, that money hits the physical construction work much faster. So I think you can expect a huge improvement in the local markets by mid-2018. And so I think 2018 is going to be a nice uplift, and then I think you'll get full value to the end -- by the end of 2018 and really 100% full value for the entire 2019 year. I would say to you and everybody, this is probably the biggest legislative funding thing that I've seen in my career. As far as this goes, again, 1/3 of our revenue's in California. We do a big, large portion of the work in the entire state of California, and adding $5 billion a year for 10 years to the program is just a big uplift for us. So maybe a little more detail than you asked for, Mike, but it's pretty exciting times, and I'm pretty proud of the industry and labor all working together to get that done.

No, no, I think the investors are very appreciative of your thoughts and the job everybody did to get this thing done and for the citizens of California, of course.

I absolutely believe that, too. The citizens of California are stuck in gridlock today, and something has to be done.

The next question comes from Alex Rygiel with FBR & Co.

Jim, can you talk a little bit about any costs that are inflating on you and maybe even tie in commentary about access to labor in a tightening labor market?

Okay. So let's talk about labor to begin with. Yes, I think you're going to see there has been -- over the last several years, there's been pockets, regional pockets, where there had been labor issues more so than others. And I've said it before, Alex, typically, labor is going to migrate towards where the higher wage rates are possible. And so what I've seen is the south, the southeast is typically the first place that has a labor shortage because of the -- unfortunately, the wage rates there are at the lowest in the U.S. California now, I think there is going to be a competition for labor. And I do think, actually, the western states around California are very healthy today, too. So there won't be a direct migration, I think, to California from the surrounding states. I think you're going to see it from the south, a little bit in the Midwest, you're going to see a little migration into the markets. I think California will struggle a little bit for labor, but I think what's going to happen is you're going to see a shift where people are going to migrate back into the construction industry now. The wage rates for the work that's going to be done in California are high for [minimum] wage rates, and it's much higher-paying jobs than other jobs that are available on the market today. And I think that what happened, obviously, was during the downturn, people just [flat got] out of the construction industry because there was no work. I think it's a better source of a career now, now that we have long-term funding. I think that creates the ability for somebody to make that big decision that suggests I should be there more than here because I got 10-year visibility. It's no different than how we look at our business with being able to tell our shareholders we have long-term visibility. If the worker sees long-term visibility in their career, they'll migrate back to where they want to work. And I see that happening in the industry today. California, Washington, both have huge investment packages coming up. And I think you're going to start seeing that we're going to get new people into the workforce, which is exactly what we want to do. So I'm not concerned about it from Granite's perspective necessarily because we are paying at the higher level. And what you're also going to see is some of the companies that are paying at the lower level are going to start losing employees unless their cost bases change dramatically of what they're willing to pay. Now on an inflationary side, on everything else, I do think that you will see some of the components of the industry start to raise their pricing certainly. We expect our materials pricing to go up more than it has recently. And certainly, you're starting to see a little uptick in crude. That's going to reflect over to the price of our liquid asphalt and our emulsions and the products we use in our industry. I think you're starting to see steel pricing move. So I do think you're going to see the components move. I don't think they're going to be dramatic, but I think you're going to see a real steady increase over time, which I think, again, is healthy. And as long as we have the foresight to price it and do our jobs, then I think it's actually a healthy movement today. Unfortunately, Alex, it's reverted in the other direction over the last 5 years, and now the turnaround is a good thing to see.

And one last question. Could you just update us on your M&A interests? I know you've gotten a little bit more interested over the last couple of quarters, but there hasn't been too much activity. Where do you stand on that topic?

Well, we stand active and ready. And I put that from a perspective of 2 components that we're strongly looking at. And we've actually ramped up our internal capabilities to address it. Our corporate development side is larger than it has been in previous years. And the 2 expansion opportunities that we're consistently looking at, and we've got some opportunities that we've been talking with, are absolutely with the water business. We look at getting into the water industry, and expanding deeper into the water industry across the country is number one, and number two is taking our vertically integrated model and moving it outside of the west. We are looking closely at that as well. So those 2 are still working, and obviously, that's about all I can tell you. But we are more active than we have been in the last year.

The next question comes from Nick Coppola with Thompson Research Group.

So you talked about improvement from the California bill expected in mid-2018. Just -- and thinking about the process and contractors' backlogs filling up, then maybe -- being able to push price a bit more, how do you think about the ramp there? How quickly does that occur? Maybe you can just elaborate on that.

Okay. So every time we -- and again, there's many cycles, Nick, and we've chatted about this before, many cycles as I've been through, there's 2 things that occur. First of all, the market demand. People look at it, and they either go, oh my goodness, there's no work out there or there's a bunch of work out there. And then what happens is the reality hits. And you get the public market, you get the bid list start coming into play and then you get the private market where the owners are reaching out and they're expanding their horizons a little bit. Both of those things -- when both of those happen, what happens is that there's an immediate change in, and I'll call it the more intellectually focused competitors. And I see that already happening. What's happening today is both the public and private side are heating up. We're seeing, even today, in the first quarter, as you can see as our construction backlog ramped up, that you're seeing pricing is starting to move up slowly. So I think what you're going to have, that's just more of the excitement that people look out in front of you. As that public work actually hits, that's when the next kind of the -- I'll call it the inflection point hits on pricing. When they physically start getting to the point where people are seeing work out to bid and they do not have the capacity to build it, that's when the next inflection point changes. Today, it's a very healthy market. We're looking at less bidders than we had last year at this time in most of our markets. And I say, I've always said, Nick, that every one of these markets is unique, so some of them still have 10 bidders, others are down to 2 bidders. And certainly, we expect to take advantage of markets that have less competition. And I think what you're going to see is a slow ramp-up over the next 2 to 4 quarters. And I would suggest to you that in 2018, there should be another level of margin expectation in the construction business.

And then can you just talk about how you're positioned in that environment? Clearly, your Construction segment has been much larger going back into years past. So what does your ability to ramp up look like over the next several years?

Yes. I think that's one of the things, as I mentioned, kind of in the closing part of my opening dialogue there, was that -- and that's kind of -- that's part of the business that I used to oversee for years, Nick. And that business was substantially bigger than it is today, back in the mid-2000s when we've had both the strong public and private sector. And that's where a lot of the things we're doing with our younger leaders today is trying to make sure that when they look at what's possible, they look at where the market can go. And we have huge elasticity in our business. And I say that mostly, number one, will be in our Materials business. The plant capacities that we have today far exceed the demand environment that they're in. We have some large, large facilities that we've built between 2000 and 2010 that have been underutilized now for a decade. And today, it doesn't take hardly anything to ramp them up. They just get to the control house and turn the dial a little faster, and those things will move at a faster pace. So the Construction Materials business is the easiest to ramp up. It is not a high-labor business, and we have the reserves. We've built a lot of reserves over the years, partly because the market has had a lack of demand. And when we built up our long-term reserves, we anticipated to exhaust those reserves at a pace that was going on in '06, '07 and '08, then all of a sudden, obviously, it came to a halt. So we really haven't impacted our reserves very much at all over the last decade. So I think first thing you're going to see is tremendous uplift in the Materials business, and I think you'll start seeing that towards the end of this year. And that's why we're confident we'll make up for whatever happened in the wet first quarter. 2018 is where the real elasticity in the materials will begin, and that's when both the public sector and private sector are going to be operating together. The other part on the construction side, I think the first thing you see on the construction side, Nick, is pricing differential. You want to bring your prices up first. You want to slowly build the size of the business so that you slowly build the workforce back so that it can support an ever increasing demand in overall revenue. But you do not want to do that overnight. That's when you stress the business. Primarily, you focus on increased margins, and you build nice revenue increases. We talked about a low double-digit revenue increase at our company this year as our guidance. That's very strong, healthy growth, and then you continue to accelerate from there. So I think it's one step at a time. And I think Materials and Construction today, getting us back to where we were 10 years ago, is really what we look forward to.

The next question comes from Jerry Revich with Goldman Sachs.

This is Abdul Tambal on behalf of Jay Revich. Can you talk about how you're planning to allocate your project management resources as the California infrastructure work ramps up? And do you expect to slow the pace of new project bids that you pursue in large construction?

Okay. I'm going to go to the first one first, and then I'll ask you to repeat the second one. First of all, in California, the project management wise, now here's the kind of work that we build typically in the state of California. Our project management teams actually oversee several projects simultaneously. And so that allows us with the locations that we have in the state of California. And I mentioned it during the dialogue there, anywhere from San Diego, Palm Springs, Santa Barbara, Bakersfield, Ventura, Palmdale, L.A., Fresno, Bakersfield, Monterey, Santa Clara, Sacramento, Fresno, up in the Ukiah, the idea there is that since we have all these local businesses is that it isn't just about the project management, it's about the teams behind them. And we've got basically 100-mile radius that we usually cover out of every one of those offices, which means that every office is going to support the expanded business, not just the project management teams. Now the other thing I will say is this is the perfect time where that next level of project engineer before -- below the project manager gets that opportunity to move up into the organization and creates career opportunities for them to start managing jobs instead of being project engineers. So what we've done over the last couple of years, and you can almost see this in our SG&A, we've ramped up those level of personnel to be able to support increased demand as we go forward. So we're going to see some of our younger project engineers become project managers, our project managers become construction managers. Perfect time to create value and create career opportunities for the people. And we're set up for it nicely. Now let's go to the second part of the question.

Yes. The second one was, do you expect to slow the pace of new project bids that you pursue in large construction?

Okay. So that is -- probably that, modulating the discussion right there, will depend on what the market does. So we've made it clear in our Large Projects business that we expect a higher return not only on bid day but at the end of the day. So we are increasing our focus on appropriate production [tender] bids. We're adding appropriate contingencies for the complexities of these bids, and we are adding expected higher rates of returns on bid day. If the market responds in the same fashion, then we will probably ramp up fairly quickly. If the market doesn't respond and we're out there as the sole leader of increased expectations, then it will slow the business down. Fortunately -- or unfortunately, I have no idea how the market is going to respond, but I do know how we're going to respond. And it's going to be to the fact that we expect higher returns.

The next question comes from Bobby Burleson with Canaccord.

So just curious in terms of Trump's wall, you talked about your excess capacity in terms of your Materials business. And I'm wondering just kind of industry-wide what Trump's wall might do if it gets built in terms of taking materials capacity out of the industry and if that would have sort of an enhancement effect on pricing.

Well, again, I don't know -- I guess you have to ask yourself the question about the wall, what is the wall, first, and what they're made of. I think that, if I understand correctly, they had a host of submittals on prototypes for different kinds of materials that go into the wall. So I don't know what it is going to be made of, Bobby, at all. I don't think the size of the wall relative to the location on the southern border is going to affect -- overly affect the Materials business. I think it's going to depend on those players who have materials facilities on the border. But I don't see that as a huge effect in the industry, especially based on the ratability of building it over time. And I think it's yet to be determined what it's even going to be made of. But I don't have an answer other than the fact that I don't think it will be a huge issue.

Okay. And then I guess just one more. In terms of the state-level funding that we're seeing coming through and you described a nice benefit a few quarters out that you're expecting. Curious what's the average size of the projects you expect to come out of that, that you would be bidding on. How big would you expect these highway-type projects to be, typically?

Well, it goes -- I think the way they've actually stated in the bill, they have a couple of projects that they've stated that they're going to pull out and individually fund. Other than that, it goes to the California Transportation Commission, Bobby, and they will determine where the money gets actually allocated. They have a large corridor express, I think, for $400 million, so they have a couple big jobs. They have -- most of it's going to be done around maintenance and local work itself, which actually is good for us because that's where we have all those offices I just mentioned due to local work. I think it's not predetermined as to where the money is going to go exactly, which I think is good, because it's going to be able to go -- I hope a lot of it will go into maintenance, which will allow it to immediately be utilized instead of having to wait for designs on these large projects. Now the ballot measures that we talked about previously from last year, some of those are focused on large work only. And one of the big bills was a $50 billion program in the state of Washington for Sound Transit. And Sound Transit, obviously, is their major transit program in the Puget Sound. So that will go more towards large projects. Measure M in Los Angeles from last November will -- I'm sure based on the L.A. market, will go towards some very large projects, of which they are already discussing. But the California transportation bill is more of spreading it out to doing the kind of work that they need to do on all the communities. The other thing that happens with the California transportation bill is that a chunk of that goes down to the local communities. And so that will get work into the local streets, the local roads, again, of which we do a major part of that business all throughout the state. So today, our average-sized project can be anywhere from $1 million to $5 million, somewhere in that neighborhood. I would expect that to continue to be the same.

The next question comes from Joe Giordano with Cowen and Company.

This is Tristan in for Joe today. Jim, I believe you mentioned the mid-2018 impact. I believe that was for the financials, but when do we expect the bids actually to be released from SB 1?

Okay. So here's -- and I can't say exactly when it's going to be released, but I can tell you again that the funding mechanism will start occurring in November. And historically, what would happen is -- I would give it 6 months before you start seeing the release into the actual bidding environment. With that said, there are still some talks already of leveraging some of those potential revenues coming in November, starting in November, to maybe earlier in 2018. I wouldn't count on it, but there may be some locations that will want to expedite the work so that they would put it out to bid early in the year, so it can physically get built in the middle of the year. So I think what you're going to see in general is that it will start positively affecting us middle of next year.

All right. Great. And then I don't know if you can give us some kind of framework in terms of sequential margin improvements. What are the prospects there?

I think they're good. I honestly don't know. I mean, I think it's going to depend on the individual markets. Some markets will absorb the increase a lot more effectively than others. And I think it's just going to be a matter of where the actual projects get distributed to. And there are certain markets where it could have a significant effect immediately and other markets that are so competitive that it's going to take a while to absorb it.

The next question comes from Ryan Cassil with Seaport Global Securities.

Apologize if I'm repetitive. Just looking at -- on the construction side, you said it sounds like November, you might start seeing some backlog awards starting to build there. How do you think it plays out from a pricing perspective? I would think that right when these awards start to flow, your competitors are -- might be more aggressive on pricing. I was sort of listening and looking at your commentary earlier saying that you're going to lead with pricing early. So I just wonder how you think that plays out and maybe if you expect to ramp awards more slowly in the early days of the SB 1 ramp.

Yes. Thanks, Ryan. I think that -- let me correct one thing that I hope I didn't say. I don't expect it to immediately affect us in November. What I do see in November is the collection of the funds occurring at the very beginning of November. And again, whether or not the state wants to leverage that and put work out to bid early, I can't predict what they're going to do there. But I was trying to suggest that I think mid-2018 will be the real effect when all the positivity from the bill hits. And I do think -- I am consistent, and thank you for bringing that up, I do think it is important to immediately begin to have a price differential as the market -- as we see that [most money is] coming into the market. We are a leader in many of our markets, and we want to make sure that we are a very successful leader in pricing. And as those first tranches of new work come out, we will keep our prices up at a level that we think is appropriate with the new demand environment. And we'll have to wait and see what people do. But what I've always said, Ryan, is that the majority of our competitors do not have a whole lot of elasticity in their business. So they're going to have to push the plate away from the table quite quickly if they overindulge to begin with. And what I've always seen in our industry is that contractors get in trouble when they have too much work, not when they don't have enough. So those contractors that have been around for a while understand that as well. I think what they'll do is they'll start adjusting their pricing fairly quickly. They've been under siege for quite some time now in the market. And we're going to absolutely keep our prices at a level that we think is conducive to long-term demand changes. And we may not get a bunch of that work on day 1, and I'm not even worried about that, as I think that the market will fill up quickly and the other -- remaining of the pricing will allow us to get work by mid-2018, no matter what.

Okay. Great. And then on large construction, just with respect to your outlook for '17, it's unchanged, but did any of the internal assumptions maybe around the large construction projects change and there were some other offsetting areas? Or did the quarter kind of play out how you thought and you still have those initial internal assumptions for large construction intact at this point?

Okay. So I think that's a really relevant question, Ryan. I think that internally, I believe that although our guidance is consistent and we're comfortable with it, I do think that there is going to be a stronger forward look in the Construction and Materials business, and we're still going to have to ramp up these lower-producing jobs in Large Projects. So I think you can expect a tough second half of the year in Large Projects and a very healthy second half of the year in the Construction and Construction Materials business, allowing us to get comfortably back to that guidance. So I wouldn't call it a significant change internally, but I want to make sure that I properly state that externally, that the value creation is going to come through Materials and Constructions. And Large Projects will continue to have lower margin basis for the remainder of the year.

(Operator Instructions) The next question comes from Ryan Hamilton with Morgan Dempsey Capital Management.

Sorry if there's any repetitiveness here, I'm kind of at the end of the queue here. Is it safe to say that your selectiveness in large construction bidding is reflected in the slowness of growth in the large construction project backlog? Does that explain a lot of it?

Won't you just clarify what you mean by that a little bit more, Ryan? I want to make sure I answer the questions properly.

You saw pretty good growth in your construction backlog, but it was a little bit lacking in the large project construction backlog. So I'm wondering, is that catering to what you're talking about with being selective as far as the new projects that you're taking on? And I know it doesn't reflect Houston.

Right, right. That's what I was going to say, Ryan. It's very lumpy. The overall large projects backlog, when you get a job, it creates a huge amount of backlog overnight. And so no, I wouldn't worry. I wouldn't even suggest anything around the change in -- or reduction in backlog in large projects because if we had booked that Grand Parkway job in the first quarter, it would have looked healthy or healthier. But I will say this, that the observation is correct around the fact that we are much more selective. We are putting higher margins on our work, and we have raised our expectations. But whether or not that is going to change our success rate is yet to be determined. But I would strictly say, historically, our large project backlog goes up and down in big chunks. And I wouldn't suggest the first quarter reduction was for any other reason than just it's the same as it's been historically.

No lumpiness, okay. And I would like to ask, I know it's not a big part of your business, but could you talk a little bit about what you're seeing in Canada?

Yes. I mean, Canada for us is a very small part of our business today. I think it's healthy. We've elected to stay in the Lower 48 mostly. That's not true because we have a big business in Alaska, and we actually have work in Hawaii. But in -- we elected to stay in the U.S., especially just because we think it's a really healthy market. And so we really haven't really spent as much efforts on our business development up in Canada over the last 12 months because we haven't needed to. So I'm probably not the expert to ask about Canada.

This is the end of Q&A. And now I would like to turn the call back over to our hosts.

Okay, everybody, thank you for your questions. And just a quick note for our shareholders and analysts, we will be on the road in May and June. So please, as always, don't hesitate to reach out to see if we can make it your way for a visit. As always, thank you to all of our employees for keeping your fellow workers safe every day and for exhibiting Granite's core values every single day. As always, Laurel, Ron and I are available for follow-up if you have any further questions. And to everybody across the construction industry, happy Construction Industry Safety Week, and please be safe.

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