Granite Construction Inc (GVA) 2017 Q3 法說會逐字稿

Good morning. My name is Andrea and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Third Quarter 2017 Earnings Conference Call. Today's call is being recorded. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Granite Construction Vice President of Investor Relations and Government Affairs, Mr. Ron Botoff. Sir, the floor is yours.

Welcome to the Granite Construction Incorporated Third 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 future -- forward-looking statements, whether as a result of new information, future events or otherwise. Certain non-GAAP measures may be discussed during the call and from time to time by the company's executives. And please note that a reconciliation of certain non-GAAP measures is included as part of our earnings press release. For more information, visit our Investor Relations website at investor.graniteconstruction.com. Thank you.

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

Thank you, Ron, and good morning, everyone, and thank you for joining us to discuss our third quarter results. Today, I begin by thanking Granite employees and teams for their effort and execution in the third quarter, which resulted in a strong top line performance as well as improved bottom line results. Safety performance remained steady, and though we need finish strongly to get there, we still target 2017 to be the safest year in our company's history. With that in mind, we expect our teams to maintain a consistent safety focus enabling our very busy people to finish the 2017 construction year by getting everyone home safely every single day.

This year's growth and our outlook continues to be supported by steady economic trends and steady to improving funding environments. Across geographies, private and public demand continues to trend positively. So even with another quarter of strong growth, bookings remain strong and again, we posted another all-time company backlog record at quarter's end of $4.2 billion.

Before I hand the call over to Laurel to discuss our results and guidance, let's focus first on our operational performance and on our growth outlook. I begin today with the Large Project construction segment. In the third quarter, performance was impacted by accelerated work on a number of challenging projects that represented a significant amount of segment revenue. We are working diligently to finish these projects as quickly as possible in the remainder of 2017 and 2018. We continue to focus on project selection, partner selection, project duration and owner dynamics with significantly higher return expectations in our sites and in our bids. Looking ahead, steady performance across the newer projects in our Large Project portfolio, combined with a steady stream of project wins, provides our teams with diverse opportunities to improve operational and financial performance. We were pleased to add 2 new projects to segment backlog in the quarter. Our federal group was awarded a $165 million contract by the Naval Facilities Engineering Command Pacific, better known as NAVFAC for the Finegayan Utilities and Site Improvements Phase I project in Guam. Granite is the consolidating partner with 55% of the contract. We also recently were awarded a nearly $410 million bridge project near Chesapeake, Virginia. We have a 50% share of this Granite led and consolidated project. These solid additions are right in line with our focus to reshape our project portfolio with smaller Granite sponsored jobs.

Next our Construction segment continued its strong performance in the third quarter. Solid execution on near record backlog continues to fuel our team's strong results. The diverse businesses that comprise the Construction segment delivered nearly 25% revenue growth in the quarter. And margins expanded in the quarter to a very healthy 15.8% resulting from nearly 28% gross profit growth. While some of this pickup in activity certainly is tied to recovery from our muddy first quarter, strong project bookings continued to be order of the day. Markets continued to offer broad opportunities and our teams continued to capitalize. So even though we burned some backlog in the quarter, Construction segment backlog above the billion-dollar mark for the sixth consecutive quarter bodes well for our outlook.

Next moving to the Construction Materials segment. Here, solid demand across most of the West gave our teams the opportunity to recover most of the ground we gave up in the first quarter. Getting the benefit of both price and volume improvement in the third quarter, this business started to flex a little muscle with margins finishing above 17%. Pleasingly, we continue to expect demand and committed volumes will improve, which should allow the Construction Materials segment to deliver improved results this year, in 2018 and beyond. As a reminder, our materials facilities continue to operate with utilization well below capacity. Thus, our materials business is poised to capitalize on significant increases in demand, ultimately allowing us to deliver sustained operational and financial improvement.

So what is the source of our confidence in the strength of these positive trends? Well, as most of you on this call are aware, public transportation and infrastructure spending is growing. Increased long-term funding commitments have been dominated by actions taken at the local and state level. This is happening today. And this positive trend will be bolstered by any incremental investment commitment from the administration and from Congress. I recently had the privilege to testify before the House transportation and infrastructure subcommittee on highways and trans and on behalf of the Transportation Construction Coalition, a partnership of 31 national associations and construction unions. My visit to Washington, D.C. also allowed me the chance to meet with some of our elected officials in the House of Representatives. Both in committee testimony and in meetings with members, we emphasized the need for Congress to lead the way to fix the permanent funding deficit in our nation's Highway Trust Fund. Given the pace of both mobility and technological change, we suggested that all potential funding options should be on the table. And we emphasized that funding options should create long-term solutions that stabilize and appropriately leverage federal investments. We also discussed and suggested some practical reforms to ensure efficient project delivery, and we listened with great interest about potential congressional and administration plans and timelines. We also highlighted the unique opportunity and responsibility the administration and Congress have to provide the leadership necessary to deliver a promised, well-funded, long-term federal infrastructure investment bill. This investment would be incremental to the significant drivers of today's positive state and local public and funding trends.

Importantly, we talked about the results of inaction and action. Congressional inaction in the form of Highway Trust Fund uncertainty spurred action from states and local authorities to take local responsibility. As a result, states responded with decisive action, from New Jersey to Texas to Indiana, to California and Washington. In the past few years, more than half of the states of our union have increased their commitments to transportation and infrastructure investment. I am challenging the Granite teams to remain disciplined in response to improved demand, and I am reinforcing with Granite's business leaders that the products and the services we provide create much more value and are worth far more than recent industry pricing and performance results reflect. We must focus on raising our expectations. Across the country, but clearly, in both the states of Washington and California, our businesses are extremely well-positioned to continue to benefit from the balance of steady private market demand and increased public investment. I am confident that positive demand trends will give Granite teams the chance to improve both top and bottom line results.

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

Thank you, Jim, and good morning, everyone.

Third quarter 2017 revenues were $957.1 million, up 19.1% from last year. Diluted earnings per share in the quarter was $1.14, up almost 24% from last year. Gross profit in the third quarter increased 6.4% to $114.5 million, with company gross profit margin of 12%. Fueled by continued strong performance in our Construction and Construction Materials segment, we've now made up much of the stagger from first quarter wet weather as year-to-date gross profit totaled $214.2 million. Year-to-date, company gross profit margin at 9.8% remains about 210 basis points down from last year, driven almost exclusively by Large Project construction underperformance.

Third quarter SG&A expenses decreased 8.7% year-over-year to $49.5 million. On a year-to-date basis, SG&A as a percentage of revenue was 7.4%, down almost 120 basis points from last year as our core cost structure provides scalable benefits. Our intentional efforts to streamline overhead are paying off. As a result, we've produced high teens revenue growth through 3 quarters of 2017, while selling, general and administrative expenses have increased only about 2%. We expect continued benefits from the balance of strong growth and disciplined cost control.

The balance sheet remains strong, with $303 million in cash and marketable securities at the end of the quarter, up more than $45 million from last year. Company contract backlog again finished the quarter at an all-time record level, ending September up 12.5% from last year at $4.23 billion. Large Project construction segment backlog finished at $3.1 billion, up 16.4% year-over-year, reflecting the addition of the 2 new consolidated projects Jim mentioned. In the Construction segment, backlog finished at $1.13 billion, reflecting another solid booking quarter, up 3% from last year. Backlog continues to reflect broad bookings across our businesses and markets and geographies. Remember, this does not yet include any impact from California's recently passed SB 1 transportation funding legislation.

Looking at the segment detail. Third quarter Construction segment revenues increased 24.6% to $579.1 million from last year. Gross profit increased 27.7% year-over-year to $91.3 million resulting in gross profit margin of 15.8%, up nearly 40 basis points from last year. Capitalizing on private market opportunity continues to be a key driver in our Construction segment's success, with strong third quarter bookings in the West and Midwest leading the way. These businesses continue to operate at a high level, and we are pleased to expect continued top and bottom line growth in this segment. Large Project segment revenues increased 12.2% in the quarter to $279.8 million. Third quarter gross profit margin is 2.3% and year-to-date margin at 1.3% remains significantly lower on a year-over-year basis reflecting the performance of mature projects we have discussed for some time. Our focus on Large Project construction segment performance improvement remains unrelenting, and it will take well into 2018 to deliver significantly improved returns.

Moving now to Construction Materials, where segment revenues increased 9.1% year-over-year to $98.1 million in the third quarter. Materials gross profit rose 33% year-over-year resulting in gross profit margin of 17.1%, up more than 300 basis points. Steady to improving demand in pricing across geographies in the West continues to fuel revenue and profit growth and our operational outlook remains healthy. Coupled with strong execution, demand growth will help our materials businesses deliver continued top and bottom line improvement.

With that, I will finish with our outlook.

Our expectations remain mid to high teens consolidated revenue growth and consolidated EBITDA margin of 6% to 6.5%.

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

Thank you very much, Laurel. The positive funding trends fueling today's growth are undeniable. Local and state entities are stepping up to do their part to invest. Private market activity continues to provide our teams with diverse growth opportunities. And now, we believe the next logical investment leg needs to emanate from the federal resources. Our outlook and market visibility continues to point to significantly improved results for Granite, our shareholders and our employees over the next few years.

And with that, we'll be very happy to take your questions.

(Operator Instructions) Our first question is from Jerry Revich of Goldman Sachs.

This is Corinne Jenkins on for Jerry Revich. Your EBITDA margin guidance implies EBITDA's up $10 million sequentially and low teen margins in the fourth quarter. That's a lot better than normal seasonality. Can you talk about what's driving that?

I think that the key ingredient to the overall projection for the year is the momentum we have today already. We're coming off of a very healthy third quarter, ending the fourth quarter healthy. And really, the key ingredient to finish the year is going to be weather for us. We have the backlog. We've got the momentum in all parts of our business. And as long as weather maintains, we're going to have a very healthy fourth quarter.

Our next question comes from Michael Shlisky of Seaport Global.

So I want to just get a quick update here now that we're a few weeks out or 1.5 weeks out from Election Day. Guys kind of what states are you watching right now for any further gasoline tax changes or other infrastructure spending referendums? Or is it really all about what the federal government does from this point forward?

Yes. Mike, I think that based on our outlook today, there's nothing significant that we expect to happen in November elections. But there are -- obviously, the fed is a very important relative to a longer-term investment infrastructure bill. And also, there are some issues that will be arriving next year, of which, one key ingredient in the next major elections will be the constitutional amendment to make sure that all the funds for SB 1 California are dedicated to transportation. So that'll be a probably one of the biggest next issues we see in the ballot box for transportation funding.

Next June.

Next June, right.

Okay. Okay, got it. And for my follow-up, just wanted to get some more color around the SG&A cadence here. It was great that was down 9% year-over-year. Certainly very solid. It's been up various quarters down. I kind of want to get a sense as to after you've had these cost structure changes, is there any change to what you think the sort of long-term run rate is? And any change to the seasonality of how you might incur your SG&A kind of each quarter throughout the year going forward?

Okay. So SG&A is seasonal, as you know, and we don't expect the seasonality to change. However, there are some costs that aren't dependent on that, like pre-bid costs on large projects that we bid and things like that. And so that, actually, was down in the third quarter, which added to the favorability. And then, of course, the other really significant variable is how long we can work during the year, which is what drives some of the seasonality and how best we can utilize our employees. But we believe that the actions we've taken over the last couple of years to become more efficient as a company allow us to be scalable without having to grow our SG&A at the same rate that we grow our top line. So we expect to continue to see that come down as a percentage of revenue.

Yes, Mike. I think the other thing is that we're trending down below the 8% mark. We expect to stay down below 8%. And that would be kind of the first time in the history of the company that we've -- in the recent history, modern history, that we've been able to maintain that kind of an SG&A as a percentage of revenue. So as we continue to see the market improve on the topside, I think you're going to continue to see the improvement in the SG&A percentage of revenue line.

Our next question comes from Michael Dudas of Vertical Research.

Turning to SB 1, and oil in the next few quarters, we'll have some interesting discussion about California politics, I'm guessing, as you get to the new governor and such. But how's the funding look so far from July 1 start? Any change or update on how you're thinking the moneys are going to flow through and projects being led? And Granite's strategy in attacking the opportunities that at least are going to start to show up, say, over the next 6 to 12 months.

Yes. So Mike, just as a reminder for everybody that may not know as much about SB 1 as you do here, that $52 billion 10-year bill is intended to average about $5 billion a year over the next 10 years. The run rate in this first fiscal year, July 1 to June 30th of 2018, has about a $2.8 billion addition to the current size of the transportation program. The intention was originally to wait and make sure that there was funding for it. And then in the more recent time, what they did is they moved some of the work up to the front half of the fiscal year, suggesting they would get some projects out early or, I would say, late this calendar year but early in the fiscal year. I would suggest that the real increase will start here in the fourth quarter and first quarter, and we'll probably start seeing some backlog increase in California, I would say about midyear. By the time you get the work out to bid and physically get it booked and everything and started, it'll be somewhere midyear. Now strategically speaking, it's a really good question because what we know, and history will tell us, is that a big portion of our competition will fill up quite fast. And we have -- we will -- I wouldn't say sit on the sidelines. We're going to be testing the market out continually, making sure that there is an increased expectation from our business units in terms of margins going forward in the state of California. So we may or may not pick up some of the early work. I think it will have a nice impact for our business in 2018. But depending on how the rest of the market reacts, it will determine whether it's in the middle of the year or in the end of the year. The other thing to think about also in California is that not only does the SB 1 hit the marketplace nicely in 2018, the private market is pretty healthy. In fact, it's very healthy. And so we're going to make sure that as we look into the market for 2018, that we don't load up with some very lower-margin type of public work, because the private work typically has been our higher-margin work as well.

I'm encouraged to hear about the private market side. And follow-up, you mentioned about weather and we're all hoping for that. Any observations on any activity that you're involved with or may have more involvement in Texas, Florida, given the weather we witnessed in the last quarter?

Yes. Well, I mean, I think, certainly, some of our people were negatively impacted, and we've reached out to all of them and have helped them through this difficult time. In both the Southern Texas and the Florida markets, we have work there, we have employees there. Some of our work was impacted from the events, but none of our work was significantly impacted. And from that though, we did get and we are in the middle of getting, some emergency work repairs. Interestingly enough, some kind of work that maybe you wouldn't even think about, underground repairs. We've got some of that work. So most of the upgrades, or the bigger work from the emergency side is still to come, because they've got to design it and they've got to get the funding in place for it. But the work we had was not significantly affected and we are starting to see an uptick in some of the emergency work.

So that could add some project opportunities in 2018, it sounds like?

In those markets themselves...

In those markets, of course.

Our next question comes from Nick Coppola of Thompson Research Group.

So in the past, you've talked about the Construction segment as being a mid-teens margin business, if I recall correctly. And just with the volume you're expecting and the pricing improvement, do you think there's an opportunity to outperform that? And just comping versus where you've been the last couple of years, it seems like a pretty reasonable expectation, but maybe you can just talk around that?

Well I think that, Nick, as the market gets better, we're going to try to capitalize on every drop of what's available in the marketplace. No doubt about it. And if the run rate of the public sector continues to escalate and the private market stays healthy at the same time, absolutely, we could get returns above the mid-teens. But they've got to both happen at the same time. And historically, when we've gotten close to a 20% gross margin in the Construction business, we had both a very healthy private and public sectors simultaneously. The outlook is good. But I would not suggest that we're going to get there because it's all going to be considered timing.

Right. Right. Okay, that's helpful. And then, I guess another margin question, but on Large Projects. Can you just help us think through the progress of, I guess, the completion of these jobs and how long it's going to take to get back to more normalized levels? I think it'd be helpful to just kind of think through where the stair steps are there.

Absolutely. Just as a reminder, in our Large Projects business, anything below double-digits is a significant disappointment to us. So currently, we are disappointed in the results. We have a drag on segment performance from accelerating and writing down a small number of our projects. All of those projects are at least 80% complete. So we expect 2 of the projects to wrap up late this year. Another project that should finish in late 2018. And as that occurs, what you should see in our Large Project business is over -- starting in 2018, you should see the margins start to increase on a quarter-to-quarter basis, getting us back into the high single-digit, possibly low double-digit range by Q4 of 2018. Very sequentially, the older ones drop off, the newer ones kick in. The newer projects we have booked are at a very nice margin and it's pretty much the same as we've said for the last several quarters. It's going to take just the next 3, 4 quarters to continue to burn it all off and really change the portfolio mix to the newer projects taking a larger portion of the portfolio. But realistically, it's going to take a little while longer and our Large Project people are doing a great job burning off the older work as fast as they can.

And I guess a follow-up to that focusing on the newer projects, can you talk about what -- where your focus is? I think you talked about smaller Granite sponsored jobs. Just help us think about the profile of the newer backlog.

You bet. You bet, Nick. So we made some statements probably over the last 2 or 3 quarters that when we got ourselves into this run, and I'll say from '12, '13 and '14, we got caught up in a lot of these very, very large, and I call them the billion-dollar-plus mega jobs. And on the surface, they look like the right opportunity for the industry. I would say across the industry, they have been very difficult projects for the industry to bill profitably, and they've been difficult projects for the owners as well. So as we have continued to wind down these larger projects, we've noted that in the bidding environment, we're actually more competitive in the smaller work. And I don't mean small, I'll call it half a billion on average, maybe a little smaller than that. We do much better when we are the sponsor. And even if we can get even a little smaller, we do very well when we are bidding them solely as Granite. The other thing that we're finding out is that we like the faster-paced jobs. The ones where we can get in and out in a shorter period of time, maybe a 2- to 3-year job versus a 4- or 5- or 6-year job. So all of the jobs that we have recently put into our backlog are of that nature. So we're really sticking to our strategic plan on large projects and that's why we're really confident that by the middle of next year, we're going to start seeing the turnaround and you're going to see some nice results by the end of next year.

And Nick, just to add to the backlog. In the backlog is $400 million of our partner share of backlog since we've moved more to consolidated and Granite run projects, and that compares to about $155 million same time last year. So it's double the percent from around 6% to 13% in the current backlog, so.

Our next question comes from Alex Rygiel of FBR & Co.

Jim, thank you for the guidance, quarterly guidance on the Large Project completion timeline and margin expectation timeline. How has that timeline changed from 3 or 6 months ago, if at all?

Not really a whole lot, Alex. Maybe a quarter plus or minus. I will tell you, the positive -- what I'm happy about what's happened in the last 6 months is that we have been able to book some nice wins that will help offset some of those older mature projects sooner than maybe would have happened if we had not booked the nice projects this year. So really, not a big difference in the completion of the mature projects, but probably a positive change in the addition of the new positive bookings.

That was very helpful. And can you comment a little bit about Kenny, backlog related to Kenny? Talk a little bit more about the diversification strategy and some the benefits you're seeing there.

Sure. Sure. So just as a reminder, the Kenny business, which we purchased at the end of 2013, is really consists of 4 different businesses. And we have -- and I'll go through each of them real quickly, but I'll remind you of what they do. They have a power business, which is mostly construction management. They have a tunnel division, which is building some of the more complicated complex tunnel jobs across the country. We have an underground division, which is focusing on pipeline rehabilitation lining work, and then, we have a civil business in Chicago. Let me kind of move into each one of them real briefly. By the way, we're very happy with the Kenny business. They've really ramped up. Their revenues are ramping up. And in all 4 of those business units, we're starting to see a nice increase in their markets just as we are on the transportation market in the Western part of the U.S. as well. The power business, again, we are construction managers, so we provide management services into that for a lot of the larger utilities across the country. That's a healthy business. It is a very people-oriented business, from program management, materials management, and that business is growing at a very steady pace. And again, it's a little more difficult with that business to grow overly as fast as the rest of the business because it is relative to the number of employees that you have on the business, but doing quite well. The tunnel business is doing excellent. We have -- we carry typically, 3 to 4 tunnel projects on our portfolio simultaneously. We are busy today. We've got projects in Connecticut, in Ohio, in Illinois. We're bidding work across the country. And some of that work is in our Large Project segment, some of the work is in the Construction segment, but it is very good work and very nice margin work. The underground, the in-liner type work where we've lined pipes and pipeline rehabilitation is one of our shining stars historically. It has been a higher margin business. We are moving that business into other parts of the country outside of just the Illinois market. So again, growing that business geographically. And then the civil market that we brought over from the Kenny family is we've grown that business significantly into the Illinois and surrounding states markets where we are doing a lot of what you would expect a typical Granite type work around that surrounding area, and it's growing quite nicely as well. So we're very happy with the Kenny business. And it gives us that geographic diversity that we needed in our company to get into the Midwest.

Great, helpful. My last question -- go ahead, Laurel.

I was just going to add, in the construction backlog -- and the Q will be out later today, you'll be able to see the details -- but the amount of private work in our backlog is up about $100 million, and Kenny is contributing to that. So you'll see more of the details there, but that's really positive for us, so.

And thank you for your comments on the hurricanes and whatnot. Any comment on the wildfires in California and how that could affect your business or did?

Yes, Alex. Well first of all, the fires in California were just absolutely devastating, tragic. We didn't have any businesses in the heart of the fire zone. We definitely have some businesses north and south of the Napa area, directly north. One of our office is located up in Ukiah. We have a lot of employees that were affected. But I think in general, it did not have a significant negative effect on our business in Northern California. I will tell you, I can't tell you how proud I am both in the hurricanes and the fire, people in Granite that were affected. A lot of other families in Granite took in those families from people who were affected. And so we're working as one big family to make sure everybody gets taken care of properly. And as far as I know today, we do not have people in Northern California displaced out of their homes as of we speak. But I will tell you, we had a lot of people that in that area that literally left the area even if their home wasn't damage. They left the area because of the hazards of the smoke inhalation.

Our next question comes from Bobby Burleson of Canaccord.

Most of my questions have been answered. But just I was wondering maybe if we could preempt any potential investor concerns around the repeal of SB 1. If you can kind of walk us through the mechanics of the constitutionality of the transportation, the gas taxes being (inaudible) funding and how they're -- if there is any risk of that being repealed?

Okay. Sure, Bobby. So as most everybody knows, on April 6 of this last year, the legislature passed SB 1. And it really was an issue for the general public relative to the gas tax, diesel tax, registration fees, vehicle license fees, the gas tax will begin on November 1. There was a very small group of people that are quite vocal that are attempting to repeal it. And in a lot of cases, with a lot of things that are done legislatively, people certainly have the right to voice their opinions. Today, it's in a signature gathering environment. They've got to raise money. They've got to get it on the ballot. And I would suggest that we're quite confident that we will be moving forward with SB 1 just as planned, but as always, there's always a possibility that something could happen. We're pretty confident that SB 1 will move along as planned.

And then just you touched on the California wildfires. But I was wondering, just living in the Bay Area, I noticed there are some gravel pits and kind of some smaller players maybe in the materials world that are up in the Napa area. And I'm wondering if you guys have noted any disruption maybe to activity for competitors in the region? And I think you have obviously the facilities in Pleasanton, and you also mentioned North, where maybe could pick up some of that volume? Is there any dynamic like that, that's emerging?

Well, I will say this, Bobby, that there's no doubt that there are several players that were impacted from the fires. We know them quite well. And in fact, some of them, we partnered with, some of them, we provide aggregates to their businesses, and some of them, they supply aggregates to our businesses. I have not heard of any business in the Napa area itself that is basically shut down because of the fires. I do know that it slowed down some of the actual work in the area for a short while. But I'm not -- I'm just not aware of any individual business. But it's a really good point. And I know that our people in the Ukiah and North Bay Area work closely with them. And I'm going to actually reach out after this to find out if they heard anything from our competitors. But nothing of significance, Bobby, at this time.

Our next question comes from Brent Thielman of D. A. Davidson.

Jim, on the Large Project business, the new bids you're out pursuing, are you seeing or starting to see gross profit margin bid opportunities out there as kind of good as the hey days '07 to '09 for that business? And I guess secondarily for that, can these half-billion-dollar jobs a year after get you there?

Yes. So first, let's talk about margins. I think the interesting part about the Large Projects business is that the market, the individual jobs are so unique, Brent, that, really, the margin comes down to the ability to be innovative in the design and in the approach to the bid. So the margin expectations, there's no doubt in my mind, that the market today can definitely support our margin expectations. And we're seeing that in the bids that we've been winning this year so far. And there's no doubt in my mind as well that doing a half a billion dollar job or several of them versus a billion dollar job can get us where want to get. And that's exactly our strategy. We think it's actually a better diversification plan. And we think we can actually move faster and get more acceleration in that business by doing several jobs versus one job. So I think the strategy is already starting to pay off and I think the margins are going to be there.

Okay. And the majority, the opportunities you see on the Large Project side, is it defined in certain regions or is it spreading out more across the country?

That business has always been spread out. And I was going through the -- in preparation for our discussion today, I was going through our list of all the jobs we have over the next 12 to 18 months. It just had to slow down and it's very diverse. I mean, the one program that's actually picking up now, too, is federal. And you can see us over in Guam with an $8 billion program build-out over the next 8 years there. That's in addition to what we -- well, actually, it's an item we talked about maybe 7 years ago that never happened, but now, it's back. So there's a huge geographic zone for this work, and it's all across the U.S. In fact, we're bidding a couple of big highway jobs in Southern California. We've got some jobs in Texas. The Southeast is busy. We picked up a nice bridge job in New York, we're bidding more work in New York. It's just all over the country. And that's why I think I like this half-a-billion-dollar range because there is more geographic diversity in those kind of projects.

Our next question comes from Joe Giordano of Cowen.

Laurel, I was wondering, Laurel, if you could frame out maybe the opportunity. As you run down these projects that are holding back the margins in Large Projects, can you frame out the opportunity for potential reimbursement as you work with the owners to kind of figure out compensation for the scope change and things like that?

Well maybe that's more in my path than Laurel's. I thought you were going to talk about taxes. So I guarantee you, she's a lot more up to speed on a whole bunch of the financial stuff. But relative to the individual projects, Joe, I'll give you an example of a host of issues that are out there. At times, owners will ask us to accelerate a job to meet a schedule. So we do and we hold the discussion and the financial implications of it in the abeyance until we know all of our costs associated with acceleration of getting work done. So what that does is it pushes the resolution to the end of the job and in the meantime, we obviously take a financial impediment to begin with. So those are majority of the issues we have out there, right, are either acceleration issues or simultaneously, an owner directed change where we have not been compensated for it as of yet. It could be a scheduling issue itself that maybe the owner thinks that we should have finished the job earlier and they're charging us for overrunning the time on the job. But almost, what we've seen on these large projects, Joe, and I don't care whether it is on the East Coast, West Coast, is that there are so many things going on at once that the owner would prefer to resolve the issues at the end of the job in a global type settlement so that they can take everything and put them into the melting pot at the same time and come up with a financial resolution at the end of the project. And that's the problem. In the interim with these jobs, is that you're going to have a lower margin showing up in your financials until you come to a finished product resolution and almost every one of the mature projects that we have that we're struggling on today has some of those issues in them.

So are you baking like favorable resolution of those issues into your kind of the way you're talking about guidance and margin progression into next year?

No. What we do, and we made it pretty clear, that on any kind of resolution, we will probability weigh what we believe the resolution will be, and we will book revenue equals cost. So we try to be as straight down the middle as possible as to what the probability of receiving a certain sum is and then we do not book any margin until we physically get the resolution in place.

It's not common to have a probability that would be close to 100%. So it's usually less than the costs that you're incurring to date on it.

Right. Okay. That's fair. And then just last on M&A. Some, we've talked about on every call for a couple of years here. Talk about the outlook. Is it more culture-fit that you haven't found, or is it valuation that's giving you the most problems here? How anxious are you to deploy? Just kind of talk us through the environment now.

You bet, Joe. So we have a dedicated team focusing on M&A. We have built that team up over the last 18 months. And we continue to have very strong discussions with a host of opportunities. And it does come. I don't think culture has been the issue. We quickly decide whether or not there's a culture fit and if there is not a culture fit, then we move on to other options. I think it comes down more to timing of the target. Are they ready? It has come down to price at times. And -- but I will tell you that we are persevering very heavily here in this environment and we do expect to have M&A part of our business plan over the next 12 to 18 months.

Our next question comes from Sameer Rathod of Macquarie.

I just had a quick question on potential bottlenecks or labor issues. Are you seeing any tightness in terms of labor or in terms of your ability to ramp up on the upcoming pipeline of projects? What kind of concerns you, or are you going to mitigate any of these factors?

You bet, Sameer. Excellent question. The market, overall, as it heats up, always seems to have the labor as a bottleneck. We haven't seen it significantly hit us yet. Specific markets, maybe. When there's 3 or 4 large projects in 1 metropolitan area, certainly, that can cause a heat up in the market. But I think that overall across the U.S. it has not been a huge issue yet. Now what happens -- and it's good and bad, having the labor as a bottleneck. The bad part is, obviously, it could limit the amount of work to be accomplished. The good part is that it creates an environment to bring new people into the industry. And we've been talking about that for quite some time now, that during the downturn, Sameer, people migrated out of the construction industry because they couldn't see the longevity of building a career and providing for their families. And now, as we start seeing a longer-term program out in front of us, 10 years in California; hopefully, a longer-term program coming from the feds, I think you're going to see a migration of healthy workforce into the industry, and that's going to ramp up over time. But prior to that happening, what will happen is you'll see a price change. You will see companies understand that if there is a labor shortage, they're going to have to price their work accordingly. There may be more hours. They may not be able to build as much work. This will mostly affect the smaller companies. And therefore, they're going their price their work accordingly. If they have to go to the outside labor markets, they're going to add more money on an hourly wage rate to the employees, which I think is the right thing to do. So I think, short-term, there might be a shortage. Longer-term, I think it's a real positive for the industry to get more higher-paying wages and people into the industry. One other thing, Sameer, real quickly, that I think is really important, the industry is really a combination of, obviously, both the public and private sector. In the public sector, the majority of the employees are paid at a per day wage rate, which is very, very healthy. At the private side of sector, certainly, there's lower wages and there are lower benefit packages available to a lot of those employees. So what I think the first part of the industry that's going to feel the impact of labor is going to be on the private sector. And they're going to be forced to raise wages, raise benefits. Otherwise, I think there's going to be a migration of some of those employees moving from the private side over the public side. So there's some dynamic inside the industry as well, Sameer.

And we have a follow-up question from Brent Thielman of D.A. Davidson.

Just a clarification. On the full year EBITDA margin outlook, just given where we're at year-to-date, your expectations are kind of slow progress on Large Project margins. It seems like you're effectively implying the Construction and Construction Materials margins should be stronger in 4Q, is that appropriate?

Well, I think that what we're looking at is a healthy weather. We have the momentum. And yes, I think it should be a very healthy fourth quarter and the projections are to really just keep moving further on the third quarter.

Okay. And Jim, that Construction Materials margin, I mean, really strong this quarter. Any benefits from mix, or is it just good workflow?

Well, I think it's coming from a combination of volume and pricing. And I think that one of the things we mentioned, Brent, in the write-up was that our plants, and I go back to remembering 10 years ago, we were building bigger, higher production plants to be able to handle the volume that was running into the industry at that time. And they haven't been utilized until just they're starting to be utilized now so what we're seeing is the ability, basically, to turn the dial and produce more output with really very little incremental cost increase. And so I think that's a big part of the margin change. And going into 2018 now, we are starting to look at the pricing dynamics simultaneously because we believe the market will allow higher pricing in 2018 as well. So we got a combination of the volume and the pricing that's starting to make that business move in the direction that we have been looking for, for quite some time.

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

Give us a little bit of your kind of national pipeline synopsis? What's the total dollar value over the next -- used to have kind of a 12 to 18 month scenario? And then, maybe just kind of highlight maybe some of the projects you might be looking at or what's available.

Okay. Well, let me -- actually, it's kind of an interesting question, Brian, because we're going to get pretty picky here going forward. And even speaking of that, we've been very picky over the last several months of slowing down some of the type of work that we've been bidding. We're walking away from projects today because if they don't provide the margin opportunity or the risk profile, it's really not worth our time or effort. But I'll give you a host of them. We're seeing more work in Guam -- I mentioned that earlier -- which is really nice to see, finally. We're starting to see some large highway work in the West, California. We've got a half-a-billion-dollar job we're bidding here. We've got more work in Hawaii that we're bidding, and we're doing work there today. We're actually looking at some large highway work in Michigan, which is unusual for us. We're looking for -- we've got work in Arizona bidding. We've even got some large highway work in Arkansas bidding. We're even looking at some big tunnel work on the West Coast. It's just -- it's pretty much across the board, geographically dispersed.

Okay. And then as you get down into that instead of billion-dollar plus into the more of the hundreds of millions, do any of those jobs bleed back into the construction, what I would call, the old branch division? Or are they still in the heavy civil side?

Well, I'll tell you, one of the real advantages we have is if we build a project -- a reminder, anything over $75 million in Granite is a large project. But we absolutely liked what we do, what we call an internal partnership. So some of these jobs, where we have a local business, Brian, we will internal partner, but still have the management team from Large Projects lead the project. But the local forces have the workforce, the local materials to be able to create a very competitive environment in those large projects in the geographic region where the business is. I would not like to see us, especially at this point in time, have our regional, vertically integrated businesses focusing on Large Project work in a region. It becomes a distraction to the core-to-core, core to day-to-day smaller work which tends to be very high margin, quick turn work, low-risk work. So we will look at it and we will use vertically integrated resources if they team with our Large Project business in the same geographic environment.

Got you. No, I think that makes sense What -- just kind of flush out a little bit the private-type business. Are you talking about industrial parts or residential subdivisions? What's kind of the gamut of that private area, construction?

Well, today, over the last -- I'll say last 12 to 18 months, Brian, it's really been industrial parks. That is the larger portion of the work. It has not been residential subdivisions. Although we are starting to see a little more the beginning of the backbone work in subdivisions coming back again just starting, but that has not been in play over the last couple of years at all. It has been most of the industrial, some commercial, but I would suggest the private sector is mostly industrial.

Yes. And as you get down in the bigger Large Project heavy civil stuff, and you get down in these more $100 million-plus-sized jobs, do you see a frequency of less owner changes and less the accelerating at times, some of the things you talked about. Is there less of a frequency or propensity for those problems? Or do they always happen?

Okay. So interestingly enough, depending on the format of the contractual relationship. So if you bid a $400 million bid build job or you're not responsible for the design, Brian, but you're literally working, building something that, that owner has designed, typically, there's less unknowns, there'll be less issues. But if it is a full design bid build project, you could have as many issues. But what happens, and this is the good part about the smaller jobs, is they last a shorter period of time, you'll come to a conclusion much faster. And that's what we want. We want to bring these items to conclusion. But if you've got a 4 or 5-year job, it gives the owner the ability to drag it on for 4, 5 years, which is what we want to get away from.

Yes. No, I got you. What -- from the standpoint of mix on the kind of your aggregate materials side, what might you guys be using or selling external versus what you're using internal?

Well interestingly enough, this last year's been about 50-50. So ideally, as the market heats up, historically, that has shown will have a higher percentage of external sales. And that obviously will raise the overall margin expectations at the same time. So as we go forward, I would expect to see the external sales get larger.

Yes. I just got one more. What -- kind of the propensity from the standpoint to vertically integrate east of the Mississippi River with an quarries and aggregates in that. Is that still a pretty tough road to haul?

Well, it's a tough road to a haul, but it's absolutely what we want to do. So Brian, if there's anybody you know east of the Mississippi that's available, please give me a call. Because I can tell you, I would love to have vertically integrated business east of the Mississippi.

Our next question is from this Jay Weintraub of [Weintraub, Arrington & Struffalo].

You've answered 3/4 of my question. And the only other question I have is have you looked at, or are you going to look at any of the damage in the Caribbean, whether it be the United States properties or the French or Dutch properties?

So Jay, the answer to that is no. We have a lot of opportunities here in the mainland in Hawaii, in Guam. And again, although we've actually been asked, I have discussed it with certain lead agencies. But our forces are focused on the work we have. And I think the opportunities on mainland are going to be stronger for us and fit into our game plan stronger.

This is the end of question-and-answer session. And now, I would like to turn the call back over to our host.

Okay, well thank you for your questions. And a quick note for our shareholders and analysts, we'll be on the road in November and December meeting with investors. So please do not hesitate to reach out and see if we can get together for a visit. And thank you to all of our employees for keeping your fellow workers safe and for exhibiting Granite's core values every single day. As always, Laurel, Ron and I are available for follow-up if anybody has any further questions. Thank you, everyone.

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