Granite Construction Inc (GVA) 2017 Q4 法說會逐字稿

Good morning, everyone. My name is William, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Fourth Quarter 2017 Earnings Conference Call. (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, Ron Botoff. Thank you. The floor is yours.

Thank you. Welcome to the Granite Construction Incorporated Fourth Quarter and Fiscal Year 2017 Earnings Conference Call. I am 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. These forward-looking statements are estimates reflecting the best judgment of senior management and reflect our current expectations regarding future events, occurrences, circumstances, activities, performance, outcomes and results. 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 it is my pleasure to turn the call over to Granite Construction Incorporated Chief Executive Officer, Jim Roberts.

Thank you, Ron, very much. Good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2017 results. We delivered another strong year in 2017. But before we discuss our results, I want to quickly touch on the exciting announcement we made earlier this week regarding our agreement to acquire Layne Christensen. On Wednesday, we announced an agreement to acquire Layne in an all stock merger transaction valued at $565 million. This accretive transaction brings together 2 complementary organizations, creates a compelling platform for growth and delivers significant benefits for shareholders, employees and customers of both companies. And with the addition of Layne's businesses, we will expand our presence and strengthen our capabilities in the attractive water and wastewater markets. We are encouraged by the early positive feedback we have received from employees, shareholders and customers who will all benefit from our expanded capabilities and geographic reach.

Turning now to our results. We are extremely proud of how Granite employees and teams responded to challenges in 2017 and we are enthusiastic about the diverse opportunities in front of us that build upon a year of such tremendous growth. Across the country in 2017, we were inundated by storms, floods and fires. Mother Nature certainly was not kind to our country or to our industry over the past year. The Granite family displayed its resilience, passion and focus along with incredible compassion in helping our neighbors. After this barrage, we included -- which included an early wet end to 2016 and an even wetter start to 2017, we finally got a bit of a break late in the year as mild fourth quarter weather supplied some extra time for our teams to execute on record backlog.

I congratulate Granite teams for their focus, effort, enthusiasm and, ultimately, for their execution throughout the fourth quarter and the entire year. These efforts produced solid quarterly results and have put a strong finish to a year of exceptional top line growth, solid cost controls and improved bottom line results. Most importantly, of course, our teams work safely and responsibly, displaying our core values in their work every single day. Our focus on safety performance is unwavering. We believe our goal of 0 injuries is attainable and we will continue to invest in and to promote safety and training for all of our people. We are tirelessly committed to working to ensure we get everyone home safely every single day.

On Monday, we proudly announced that for the ninth consecutive year, Granite was named by Ethisphere Institute as one of the 2018 World's Most Ethical Companies. Our strong culture also reflects in our recent certification as a great workplace by the independent analysts at Great Place to Work. Thank you to all of our employees. You are the reason behind this important recognition.

Now before I hand the call over to Laurel to discuss the details of our results and guidance, let's spend a few minutes discussing our performance, some of the drivers of our visibility and outlook and how this positions Granite for growth in 2018 and beyond. With private and public demand continuing a positive trend, we finished 2017 with record year-end backlog of $3.72 billion. As I noted, mild fourth quarter weather allowed us to work longer. This resulted in much of the sequential backlog burn from the third quarter's all-time record of $4.2 billion. This transitory trend occurred in advance of a significant expected and observed uptick in lettings and related spending at the beginning of this year especially here in California. Encouragingly, across the company, the operational update has not changed. Granite teams continued to execute at a high level. Our teams today are consistently delivering results while balancing broad, diverse growth opportunities across the enterprise and across the country.

Let's start today with the Construction segment. Here, we again have exhibited excellent top line growth and solid cost control and we posted another strong performance in the fourth quarter. As I noted, the much milder start to the winter across much of the West allowed our teams more time to efficiently work through near record backlog, fueling another quarter of outstanding revenue growth, profit growth and mid-teens margin performance. While the strong performance translated into some backlog burn in the quarter, Construction segment backlog remained historically healthy at nearly $900 million. Private demand remained steady and public lettings are picking up as we speak. As a result, our outlook remains very strong, and after a year of such significant revenue growth in some areas, our teams are emphasizing balance and discipline to create and encourage improved profitability while continuing to grow.

That said, much of the balance in this segment emanates from the effort and emphasis on diversification and on project returns more aligned to increase long-term demand and lower overall project risk profiles. We are seeing this balance in markets ranging from public lettings and publicly funded alternative procurement projects such as CM/GC to a recent uptick in mining work and steady demand for private industrial development. These positive trends are the drivers of balance and profitability. Encouragingly, these trends are not meaningfully different, whether in the state of Washington, the Southeast, the Midwest or in California. Across geographies and markets and the customers we serve, we continue to target disciplined profitable growth in 2018 and beyond.

Next moving to the Construction Materials segment. Clearly, this is the part of our business most susceptible to seasonality. Improved demand and mild weather across much of the West in the second half of the year, especially in Q4, allowed Granite teams the chance to more than make up for our start to 2017. As we saw last quarter, we got the benefit of both price and volume improvement again in the fourth quarter, which translated into strong top line growth and stronger profit improvement with margins finishing at nearly 19% in the quarter and 13% for the year, both up significantly from 2016. The bright outlook for this part of our business continues to come in to improve focus. We have noted for some time that our materials facilities continue to operate below both capacity and optimal utilization. With public spending at the state and local level now increasing, demand in committed volumes are expected to improve. The Construction Materials segment remains well positioned to improve results in 2018 and beyond.

Let's finish today in the Large Project Construction segment, where we anticipate significant performance and profit improvement in 2018. As we have seen from much of the past couple of years, performance was impacted by accelerated work on a number of challenging projects. These projects again represented a significant amount of segment revenue in the quarter, but as expected, we are near substantial completion on 2 of these projects and we are working towards substantial completion of 2 additional projects in 2018. So as we work through these projects as quickly as possible, we expect the negative drag from acceleration should lessen throughout the year. The solid starts and steady performance in the newer portion of our Large Project portfolio gives our team significant opportunities to deliver operational and financial performance improvement. The market remains robust and our emphasis remains targeted to disciplined project selection, partner selection, project duration and owner dynamics, all while keenly focused on associated risks and appropriate returns.

As has been the case for a number of quarters now, our visibility and our long-term growth outlook is supported by steady economic trends and steady to improving funding environments. Probably the most encouraging thing about our performance the past few years has been the consistency and alignment of both demand and execution across our businesses. In a matter of just the past half a dozen quarters, Granite's operating dynamics have changed consistently to the positive. As a result, our businesses today are well positioned for growth, for investment and for improved profitability. Coming off a year of strong growth and with many positive demand dynamics in play today, some may ask, "So when is the peak?" Just for a moment. Please consider a little context in the form of national demand for asphalt paving.

The historical data is from the National Asphalt Pavement Association. In the U.S., peak tonnage production for the asphalt pavement industry was about 550 million tons produced nationally in 2006. Demand cratered, bottoming in 2013 with 330 million tons produced nationally, down 40% from peak. By the end of 2017, we have slowly recovered to about 378 million tons, up about 15% from the bottom but still more than 31% below prior peak demand. Today, the increased state and local funding we have talked about for so long finally is walking on to our doorsteps around the country. California's $52 billion SB 1 transportation bill was passed in April and we are beginning to see this legislation in action. The 2017, '18 California budget included an increase in state transportation capital funding from less than $2 billion in fiscal '16 to '17 to more than $4.5 billion this year with most of the increase in the current January to June period. The 2018 '19 budget adds an incremental $1.7 billion. Add the decade-long SB 1 investment to the nearly $190 billion of long-term local measures passed by voters in California and Washington State in November of 2016, and it illustrates that we have a very nice road ahead.

At the same time, after federal transportation funding has been stalled since passage of the FAST Act in December 2015, Congress and the administration finally acted to end more than 6 years of continuing resolution and sequester limited funding by passing 2-year budget legislation. This bolsters both FAST Act spending by about $900 million over the last fiscal year and it commits $10 billion a year towards incremental infrastructure investment. We will not know how these funds will be allocated or what type of projects will be funded until Congress passes a separate omnibus appropriations bill, most likely in March. We expect a significant portion will flow to the existing Federal-Aid Highway Program. At that time, the state highway agencies will know their full year budget and start awarding contracts. This notably was a 2-year deal, providing improved visibility and certainty that we have not had in a long time at the federal level.

Though some progress has been made but we continue to emphasize the need for Congress to take a leadership role to deliver a permanent funding fix to the deficit in our nation's Highway Trust Fund. Just last month, the U.S. Chamber of Commerce called for an increase in the federal gas tax of $0.25 a gallon phased in over 5 years. The business group and many others have long been calling for a boost in the gas tax which has not been increased since 1993. We continue to emphasize the need for and the benefits derived from appropriate levels and investment in our service transportation network, some of our nation's and our society's most valuable assets. Congress can accomplish this and much more by championing a well-funded long-term federal infrastructure investment bill. Unfortunately, neither of these critical national areas were part of the recently passed H.R.1, commonly referred to as the Tax Cuts and Jobs Act, which passed in December. Of course, the good news is that as we have noted for some time, any federal investment in this area would be incremental to the significant drivers of today's positive state and local public funding trends.

From vehicle mileage tracking to increased interest in tolling, after more than half the states in the union passed transportation legislation over the past 5 years, the focus is moving beyond just gas tax increases. A number of states that do not currently have tolls are considering a variety of options. Connecticut, Michigan, Wyoming and other states are considering tolling as a new effective and dedicated way to pay for new infrastructure and fund existing infrastructure and related long-term maintenance. These positive trends and our consistent performance together strengthen the confidence in our outlook for disciplined profitable growth. Granite began last year with lofty safety, execution, growth and profitability goals. After an outstanding 2017, we again are challenging our teams to raise the bar even higher and capture the growing opportunities in front of us in 2018 and beyond.

And now I hand it to Laurel with some more detail on our results and our 2018 outlook. Laurel?

Thank you, Jim, and good morning, everyone. For the year, consolidated revenue of $2.99 billion represents a new high watermark for Granite, reflecting an increase of nearly 19% year-over-year and in line with the guidance we've provided. Fourth quarter 2017 revenue of $801.3 million, up more than 20% from last year, represents an all-time Q4 revenue record. Diluted earnings per share in the quarter increased 103% year-over-year to $0.81, a strong contributor to 2017 diluted earnings per share of $1.71, up 20.5% from $1.42 per share in 2016. Fourth quarter net income includes a $3.7 million benefit or $0.09 per share from the year-end adjustment to deferred taxes required by the recently passed tax legislation.

Gross profit increased nearly 24% year-over-year to $100.7 million in the fourth quarter, driven primarily by the strong performance of our vertically integrated business in the West as mild late 2017 weather allowed us to work later and more efficiently than in 2016. This strong Q4 performance was key to an annual gross profit increase of 4.5% year-over-year to $314.9 million in 2017, again driven by improved performance in the Construction and Construction Material segment. Gross profit margin in 2017 West 10.5% compared with 12% in 2016 with the difference driven primarily by Large Project Construction performance. That said, gross profit in the fourth quarter expanded about 40 basis points year-over-year to 12.6% with Construction and Construction Materials segment performance outweighing continued margin drag from the Large Project Construction segment.

We are particularly proud of our cost control performance throughout the year and efforts to streamline overhead have produced results. Despite 20% revenue growth, fourth quarter 2017 SG&A decreased slightly, 0.5% year-over-year, to $59.1 million. More importantly, though, on a year-to-date basis, SG&A spending increased only 1.6% to $222.8 million, and as a percentage of revenue, it was 7.5% in 2017, down more than 125 basis points from last year. We continue to expect our core cost structure to provide scale benefits.

Granite's balance sheet remains strong, with $366.5 million in cash and marketable securities at the end of the year, up solidly from last year, the result of strong Q4 and 2017 operating cash flow performance. A milder start to the winter provided our teams with an opportunity to work efficiently later in the year on near-record backlog. In addition, we also continued ramping recent Large Project wins and accelerating mature projects late in the year. As a result, total contract backlog was down sequentially from last quarter's all-time record level but still finished at $3.7 billion, another year-end record. Large Project Construction segment backlog finished at $2.82 billion, up 15% year-over-year, reflecting the net addition of new consolidated and Granite only projects.

In the Construction segment, backlog finished at $897 million, reflecting mild Q4 weather and modestly weaker public lettings and bookings in the quarter, especially in California. Backlog again reflects broad bookings across our businesses, end markets and geographies. Today, our backlog includes only a handful of early projects from California's recently passed SB 1 transportation funding legislation.

Looking at the segment detail. In the fourth quarter, Construction segment revenues increased 19.4% to $429.4 million. For 2017, segment revenues totaled $1.66 billion, up 21.9% from last year. Gross profit increased 5.7% in the fourth quarter to $65.2 million and 18.1% year-over-year to $247 million in 2017. For the quarter, the result was gross profit margin in line with our mid-teen expectations at 15.2%, down about 200 basis points from last year. For the year, gross margin declined about 50 basis points to 14.8%.

Large Project segment revenues increased 18.2% in the fourth quarter and 15.2% in 2017 to $290.9 million and $1.03 billion, respectively. Fourth quarter gross profit margin of 7% reflects about 150 basis points of year-over-year improvement. 2017 gross profit margin finished at 2.9%, down more than 400 basis points from last year and again reflecting the project portfolio dynamics we have discussed for some time. Our focus on Large Project Construction segment performance improvement remains unrelenting and we anticipate significantly improved returns in the back half of 2018.

Moving now to Construction Materials where segment revenues increased 33% year-over-year to $80.9 million in the fourth quarter, with profit up nearly 150% year-over-year. This translated into gross profit margin of 18.7%, up nearly 870 basis points. In 2017, materials revenue increased to $292.8 million, up 12.1% from last year. Gross profit increased 36% year-over-year, resulting in gross profit margin of 13%, up about 230 basis points and finally returning to the mid-teens minimum levels we have anticipated for a number of years. Solid demand, pricing discipline and a steady focus on investment and cost control continue to fuel our healthy operational and financial outlook across the business.

Now before I turn to our 2018 outlook, let me offer just a little more color on a few notable items as we enter the year. Let's start with overhead. After an outstanding year of growth in cost management, we expect our SG&A as a percent of revenue to be in line with last year's 7.5% level, hopefully even slightly better. We expect to continue to invest in selling expenses as we grow our business, and we are confident the G&A portion is more scalable. In 2018, we expect a capital expenditures requirement of 2.5% to 3% of revenue and we expect depreciation should increase to $75 million to $80 million.

Finally, on taxes and the impact from the tax legislation. We expect our tax rate, which dropped from a historical low 30 percentage range to 27.4% in 2017, to settle around the mid-20s percentage level, reflecting the impact of the 21% federal rate offset by the loss of certain tax deductions. With that, I finish with our outlook, which does not include any potential impact from this week's announced transaction. Our expectations for 2018 are high single to low double-digit consolidated revenue growth and consolidated EBITDA margin of 7% to 8%.

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

Thank you very much, Laurel. In sum, we ended the year on a great note with strong momentum and believe the opportunity for Granite has never been greater. We continue to focus on delivering improved results for Granite, our shareholders and our employees in 2018 and well beyond. And with that, we'll be happy to take your questions.

(Operator Instructions) And our first question is from Jerry Revich with Goldman Sachs.

This is Corinne Jenkins on for Jerry Revich. It sounds like you guys are starting to see a ramp-up in the SB 1 awards in California. Can you talk about how the pace of that compares to what you'd originally expected and if we should still think about those awards flowing through to revenue in the back half of the year?

You bet. Thank you. That's a good question. There's no doubt that when SB 1 passed in April last year that we weren't certain when the investments were going to really start hitting the books. We had hoped that -- we knew it was going to either be the fourth quarter or first quarter of this year, and things did get pushed a little slower than we had hoped for. So we didn't see a lot of action in the fourth quarter of '17 and that's noted, I think, in our Construction backlog and our discussions earlier. So I do see the original $2.8 billion infusion for the '17, '18 budget having a heavy weighting in the first half of this year because it's been delayed. And then as a note, and I hope I made it clear, that there's another $1.7 billion starting in July 1. So that would mean $4.5 billion above the original Caltrans budget from 2 years ago. So to answer the question, I think what you're going to see is you're going to see lettings heavily begin now in the first quarter. They will continue to ramp up every quarter as we go through the year, and I think you're going to see it physically on our books in the second half of the year. And I think we're already seeing the lettings are out. We just haven't seen the bids physically conclude yet. So I would tell you that you're going to see a lot of action on the Caltrans websites during the first half of the year and then hitting our books in the second half of the year.

Great. And then separately, can you just update us on the progress of those legacy projects? I thought you were expecting to wrap up the 2 of them in 2017, just tying up some loose ends. And then is there anything we should keep in mind between, like, the 2 projects that you're wrapping up and the 3 projects that you still have to finish?

Yes. I think we did mention that we did complete 2 of them at the end of 2017, wrapped them up. We also have a couple of them that we're concluding in the first half of this year, and that's why we've suggested that they're going to end up being somewhat of a continued drag on the earnings in Large Projects for the first part of the year. And then I think we've been consistent in saying that it isn't just the completion of these older projects that are struggling. It's also the ramping up of the newer projects that will help offset and adjust the portfolio. Those really started taking off here in the first quarter. So we're heavily invested in work all across the country and it seems that the projects all seem to start a little slower than we anticipate. But once they get going, the velocity really picks up rapidly. So I think we're on target to do exactly what we said. We finished 2 at the end of last year. The other 2 projects will be -- I wouldn't say completed in the first half of the year but a big chunk of them competed in the first half of the year and the newer projects are ramping up as we speak.

And the next question today will be from Kathryn Thompson with Thompson Research Group.

This is Steven on for Kathryn. Was just wondering if there was a desired breakout for backlog or sales between Large Projects and Construction. Obviously, you want to see growth in both and that's somewhat uncontrollable. But with demand out there and better pricing, more selection, wondered if there was a target range.

Well, okay, Steven. So I mean, it's very good question. Where do you see the backlog moving? As you can tell, with the $3.7 billion, $2.8 billion of it's in Large Projects today; $900 million of it is Construction. I think the really important thing that we should always remember about backlog, backlog in the Construction segment, although sequentially moving up, it will move much slower up or much slower down because of the burn ratio. And one of the things that I've seen in more recent times is that as we get into these maintenance projects, which is where SB 1 and a lot of the states are focusing now, these are going to be really fast burn projects. So you could see us, even in the -- and I'm not going to say the first quarter because the weather may not allow it, but in the second and third quarter, you could see us pull some big revenue in construction and not have a lot of change in our backlog because we could bid and burn it actually in the same quarter. So we're very, I'm going to say, conservatively cautious on the Large Projects. We're very disciplined in our approach on Large Projects. When it comes to the Construction side of the business, we do like quick term jobs that will continue to create keep, I'm going to call it our crews eligible for more work later in the year so you never get tied up with work for too long because the opportunities are going to get better and better and better. So I would say keep watching the revenue versus backlog in Construction, and then I would suggest to you that the overall backlog in Large Projects is more about quality backlog than the size of backlog.

Very helpful. And then just thinking about the impact of SB 1, should we think of that impact implying greater percentage sales growth in the second half than in the first half for all 3 segments?

So Steven, I would focus more on construction and materials. We are noting that SB 1 is flowing into some large projects. Remember, the definition of a large project in Granite is any project greater than $75 million. So yes, there is going to be some of that. But remember also on the larger projects, you don't get those ramping up as quickly into your books as you do the smaller projects. The other thing I would say that SB 1 is doing, and I mentioned it briefly in our earlier discussion, is that California is moving in the direction of alternative procurement possibilities, which is really nice, and these don't even have to be large projects. They can be $50 million jobs and that could flow -- you can see that flowing into our books by the end of the year as well. So you're going to see more movement in Construction and Materials related to SB 1. You might see some nice movement in backlog on Large Projects for – due to SB 1 but literally, the revenue effect will be in Construction and Materials.

And our next questioner today will be Alex Rygiel with B. Riley FBR.

Jim, I didn't quite understand, maybe I missed it, but you mentioned that in the fourth quarter, there were modestly weaker public lettings. And I'm not quite sure I exactly understand why was that the case.

Well, that's a -- let me reiterate kind of what happened, and I was really focusing there on California. And I think I said that California was weaker in the fourth quarter. I think the first question was really in alignment with that today, was that we weren't sure when the SB 1 monies were really going to hit the street. We know that there's a $2.8 billion increase in the California budget in the fiscal year that concludes in June 30. We just didn't know how quickly they could get the money to the street. They didn't get it to the street as quickly as we had hoped. So really what we are suggesting in the comment was that some of the SB 1 monies got pushed into the first and second quarter of 2018 in lieu of the fourth quarter of 2017. So and also remember that in SB 1, a lot of the tax collection, the increased tax revenues, when we started accruing in the month of November, so the state of California might have suggested to themselves that let's not put the stuff on the street until we literally have the tax revenues to offset it. So that's what I was trying to suggest that, really, we had a little slower movement on the SB 1 than we had -- not necessarily anticipated, but we had kind of hoped for a little stronger push in the fourth quarter. But all that does is suggest that there's a big onslaught of bidding that has already started and it is going to be very heavy and I'm going to tell you through the entire 2018 year in California. Because not only do we have to finish in the first half of the year what didn't get done in the back half of last year, we've got another $1.7 billion added to do that going into the new fiscal year.

And then as it relates to the more broader macro U.S. environment for Large Projects, there's been quite a few that have been, call it, the mega projects $1 billion plus in size, quite a few that had been bled out and awarded over the last month or 2. Can you characterize the competitive environment there and how you see capacity being constrained and pricing developing over the coming 1 to 2 years?

Yes. Sure, Alex. I think that -- I think you're right that we continue to see these megaprojects all over the U.S. And I think that for us, for Granite, we continue to see an insatiable appetite from very large firms, global and U.S., to get involved in these megaprojects. And I'm going to -- let's suggest anything over $1 billion is a megaproject, and they are still very competitive. They're very complex. And that core group of, we'll say, half a dozen to maybe 10 competitors, continue, in our opinion, to be overly competitive and overly aggressive on that work. So we have, and as previously stated, stayed away from that work. Over the last 6 months, we have been focusing on -- I'm am not going to say small work, but I'm going to say anywhere probably less than $1 billion. We've been focusing on Granite-led projects or Granite-only projects, and we've been very disciplined as to the projects we bid. And I mentioned this in our discussion earlier. With our partner selection, with the owners, we have very good experiences with some owners and we do not have great experiences with others. We look at the cash flow dynamics, we look at the specifications. We are in a great position today, Alex, to not have to go after volume. Volume is out there and it can be obtained through a host of varieties and the way we're doing it today is less than $1 billion Granite-led, disciplined, higher margin expectations than ever before and really looking at the dynamics of the owners and the partners.

And our next questioner today will be Michael Dudas with Vertical Research Partners.

So Jim, it's encouraging to hear the words discipline and focus coming from you, which, I think, has been very helpful as we look through the margins going forward. Can you maybe elaborate a little bit more on your federal business and your private sector business and how that can -- the dynamics relative to projects and margin flow in '18 and beyond?

You bet. And I hope when you said that, "It's interesting to have Jim listen to talk about discipline," I hope it's because you mean that I'm always talking about discipline, Mike.

Absolutely, 100%.

There you go. Just making sure. So when it comes to federal, this is a growth opportunity and a diversification opportunity for Granite we started maybe 5 years ago from scratch. And it's had a really nice ramp-up over the last, I'm going to say, 18 months. And we did this very similar to getting into the water and wastewater infrastructure environment plus to diversify the funding mechanisms of which we go attack the revenue. The federal programs in place today are -- we're searching for are outside of the transportation sector. They are funded through the DoD mostly and the DoE and they are -- that separate funding stream is imperative for us to diversify our opportunities from financing and funding. So what we've seen here is that as this administration and Congress has boosted military spending, is focused on military spending, we think it is another opportunity for us to expand our business. We currently have some very large workout on Guam. We performed work in Colorado last year, in Tennessee last year, in California last year. We're doing our federal business in conjunction with the rest of the Granite portfolio. So I don't expect it to be a huge component of Granite over the next couple years. I think you're going to see us modestly bring it up into a business that we may report out separately over time because it can grow into that kind of a business. I don't see that happening for a couple years but we're doing a lot of the work in alignment with our other business units, but learning how to be a real federal contractor. The federal contracting business is a far cry from being a DoT contractor or any kind of other contractor that you're working with, basic public agencies or the private sector. So unique environment, unique procurement methods and constantly understanding what the federal government wants as a different program. When you move into the private sector, what we're seeing there is, first of all, historically, we would have said private sector, the first thing would've been doing is drawing ourselves to residential and say, "What's going on with the residential market?" That's what drives the private sector. That's not today. It is amazing how we see this rebound and think about that asphalt paving ton thing that I mentioned to you during the earlier discussion, that was -- a lot of that was driven by the private sector in residential, and you see it hasn't come back anywhere close to what it was about 12 years ago. So the private sector today is being driven by industrial and commercial sector and not by residential. And what we're working very hard to do, Mike, is to negotiate work and not have to be the low-price provider but the high-quality provider. And I'm happy to say we're doing a lot more negotiated work today than in the history of Granite. And I see that getting bigger and bigger. We're going along with the big commercial operators and the big industrial operators across the country with repetitive work, negotiated work. We're using alternative procurement things such as CM/GC, CM at Risk, and those are the kind of things we want to work with in the private sector.

And Mike, about 27% of our Construction revenue is from private work.

Yes, which -- how many -- a couple of years ago, Laurel, I mean, it was...

It was below 20%, I think. Last year, it was 25%. So it's been consistently.

Growing, yes.

Yes. And we've got 25%, almost 26% of our backlog, Construction backlog is private work, so.

That sounds encouraging. I'm guessing that'll pick up as backlog grows maybe as well. And just to qualify, the federal work, it shows up in Construction?

It shows up in both categories, Mike, and obviously, depending on the size of the work. The work we have out -- the big project we have out in Guam will show up in Large Projects. Some of smaller work we've been doing in Tennessee, Colorado, California, Washington State, almost all of that showed up in Construction last year.

And my follow-up for Laurel, your team should be commended, terrific focus on the SG&A and keeping the selling cost down and showing the leverage running through. But on the capital side, how -- on the capital spending side, looking at your equipment, the yellow metal, what -- can you remind us a little bit on the age front, given the opportunities that you are projecting over the next several years, is there going to be a little bit more requirement for equipment, different types of equipment? Is there a replacement cycle for you guys? Just give a little sense of how you're spending what you guys are thinking about.

Yes. Sure, Mike. I think that is a really good visionary look as to how do you go -- how do you grow a company this fast and what do you do with CapEx to support it and maybe lead the effort as well. We talked about 3% rate for CapEx in a lot of respects as what we've been historically doing. One of the things I will say that we've done that I'm very proud of over the last 3 or 4 years, we've already ramped up CapEx and we have invested in our iron already. One thing that a lot of people don't probably realize about Granite, we actually carry this corporate pool of equipment. We have one of the largest scraper fleets, big dozer fleets, big excavators that we carry at the corporate level that is utilized throughout all of our business units across the country. We've kept that intact during the downturn specifically for the reason that we are -- where we are today. And we have tremendous underutilization of, I call it, those of you listening who are into the big yellow iron, the 631s, the 651s, the D10s, we have a big host of that equipment that is now starting to enter the utilization, and we've been talking about that for quite some time. Our plans are underutilized. You probably haven't talked enough about our rolling stock has been underutilized simultaneously. And so for us, I think we can maintain a very, very similar CapEx ratio to revenue because we're going to start pulling out and using a lot of the assets at a higher utilization that we've been doing previously.

And our next questioner today will be Joe Giordano with Cowen.

This is Tristan in for Joe. Jim, I'd like to get your opinion on the efforts to repeal SB 1. Let's just say the term repeal initiative doesn't make the ballot in November or get voted down, how likely do you think we could see another measure to repeal the law in 2 years?

Tristan, I think that -- let's back up a little bit on SB 1. Maybe a lot of the listeners don't understand what that is because I think it is a very, very good question and it is an issue. SB 1 was passed by -- through the legislature in April of '17, and then literally, the tax flow on the gas and diesel taxes started in November and the registration fee increases began on January 1 of this year. Again, possible reason for some of the delay of the work which is now flowing nicely. So what they did is there was a small political group, and I'm going to call them, for political reasons, are out of the company to gather signatures to get a repeal of SB 1 in place with a political movement to really try to get certain voters to the ballot box to try to help out some political groupings during the overall election in November. So they've got to gather somewhere around 580,000 signatures by sometime in March. And if they do, then they also have to gather a tremendous amount of funding to put it on the ballot in November. Now 2 things. If -- do I think it's going to get the signatures? I say that's 50-50. They've done, what I understand, a commendable job today getting signatures. That's kind of the easy part because if you put it across the front page of a piece of paper and say, "Do you want your taxes reduced?" 90% of the population is going to sign on something. But do I think that they're going to literally get the funding and be able to mount any kind of a campaign for November? I think that's a far cry. That's a very difficult thing to do. One other thing that's happening right now in the state of California is that the original ACA 5, which is a constitutional amendment to make sure that all of those legislative appropriated funds be dedicated to transportation, that is on the ballot in June, this upcoming June as Proposition 69. So what happens is it takes away a huge part of the argument of the small group that is proposing to repeal SB 1, that they're using as an argument that, historically, in the state of California, the legislature has taken money and thrown it into the general fund, although suggested to be used for another portion of work or, in this case, transportation. They're free and they're saying they would steal it, put it in the general fund and use it to fund a lot of the entitlement programs in the State of California. Well, in June, Prop 69 will be on the ballot. Constitutional amendment will be passed, that this money cannot be taken from the transportation budget to be moved into the general fund, and I think they lose their argument right there. And so I think that yes, they could get the signatures, let's get through June with the ACA 5 known as Prop 69 today, and then I think it's a whole different animal from that point forward. So could they -- if it gets defeated in November, could they come back out? Yes, but highly, highly unlikely. They will have lost all their momentum, they will have lost all the funding and the real initiative here really is not about SB 1. It's about getting a certain type of voter to the ballot box to vote for the other candidates in certain districts in the state of California. So I do not see it happening again and I am very confident that we will move along as planned for the remainder of the year. Little lengthy a discussion there.

No, this is great. I appreciate the details. That was -- actually, my follow-up was going to be on ACA 5, so I appreciate you talking about this. So just as it relates to this, I was under the impression that when SB 1 was approved that funding was already allocated to transportation projects. So...

It is. It absolutely is. So the 19th Amendment already protects 100% of the gas tax monies for transportation. That's already been in place. It's actually Article 19. That's already in place. But there is some emergency legislative things and the governor could pool funding very out of the ordinary, could move money around. Prop 69 will disallow that to happen under any circumstance.

And our next questioner today will be Bobby Burleson with Canaccord.

Just looking at the recently announced acquisition. Clearly, diversification remains a strategic focus. Wondering what the optimal business mix is in terms of funding sources, any other way that you want to describe it as you look out over the next few years where you'd like to be?

Yes. So thank you for that because that's really important to what we have been talking about for the last several years, is really diversifying the funding mechanism that supports the work that Granite does across the country. And when you look at the acquisition of Layne, and you start putting immediately at the water sector, it starts really adding up to about 14% of the Granite mix, you look at the Materials business at about 8% of the mix, you look at Construction at about 50% and you look at Large Projects at about 30%, I think you then need to break it out, we need to break it out into segment type: where is the workflow, where is the funding mechanisms coming from. So I'd love to see us down the road, Bobby, have one of those segments of the pie chart say federal on it because that's different than everything else. I'd like to see water grow. And then I'd like to say that the rest of it relative to transportation really starts taking on a bigger picture nationally. The next component of our portfolio growth is to add more VI businesses across the country, and really I think it's diversifying within those segments is so important. So when you diversify geographically and you diversify by revenue type, is so important. What we went through in 2009 and 2010, I never want to see Granite have to go through that again, even if the market and the macroeconomic environment has gone through it. What we are attempting to do in both the water infrastructure market and the transportation infrastructure market, and I'll call it the civil infrastructure market with federal and some other things, is to diversify our customers, diversify the geographies and diversify the funding streams. Those are so important. So for us, we call ourselves now, Bobby, an infrastructure solutions company. It is not just transportation, it's not just water. You're going to see us moving into, like, great question on the federal today, the entire infrastructure in the U.S. and I'd say in Americas is our focus and that's where we're headed. So when you look at the portfolio mix, you have to look at it several different ways, Bobby.

Okay, great. And then just curious, any update from Granite's perspective on labor availability, your skilled versus unskilled, and how you guys are positioned vis-à-vis any shortages or wage inflation that you see currently and on the horizon?

Yes. I think that it's been a major topic for, I'd say, the last 2 years in anticipation of a substantial ramp-up. And my response has historically been, and it isn't changing much, is that when we are a very strong player in a market, such as we are, and I'm going to say in the majority of the locations that we work in the U.S., we naturally have people who want to come work for us. So what we're seeing as the markets heat up, Bobby, is we're starting to see a migration from a lot of our competitors, and I'm talking mostly here about hourly workforce, into the Granite workforce. We are not the low, low-wage company. We pay high wages and we pay high benefits. And I think that when people start noticing that the construction industry is a nice place to make a living, I think you're going to see more new entrants into the market. But currently, we've done very well being able to provide labor for the work that we foresee, and I'm saying at least in 2018, by really using -- being an attractive company for the industry to work for. But I will say this, that what we need in this industry is to understand that there was a migration away from the industry in 2009, 2010 when people couldn't make a living. They struggled because not only Granite but most construction companies in the U.S. couldn't guarantee 40 hours a week, let alone 50 or 60 hours a week in order for people to make a good living. Now that we have a runway and we've always said, and that was actually nice to see in some of the articles and some of the words from the administration this week, that what we don't need is a stimulus in this country. What we need is a dedicated path towards infrastructure investment. And if it's long term, like we're beginning to see here in some of the states now, and if the federal government can do that, then what we're really seeing, Bobby, is an influx, a migration into the construction industry because people will believe that they can make a good wage for their families. And I do believe that from the combination of more money in the system, more consistent operating hours for those individuals, and I see the wages ticking up, rightfully so, for the hourly workforce, and with that, I don't think there's going to be a big problem. Today, we have not seen it necessarily across our business. Certain pockets, yes, but we've all got to learn that this is going to be a big part of the country's investment going forward. We need to make sure that we pay people correctly.

And should we think about any particular susceptibility or -- to wage inflation or protection against that when we think about your quicker turn-type work versus the longer projects that you're winning?

Well, I think that yes, I think you are really hitting on a very important subject matter that we've talked about in Granite. We do like quick turn work. We do like work that utilizes the assets that we have, not only the personnel assets but the physical assets as well. So we love the quick turn maintenance work. We love quick turn bridges. We love the stuff that we can turn faster. The longer duration work certainly ties up the personnel resources for a long time, and in our opinion is that if we can get in and out, satisfy and exceed our customers' demands on the quick work, that would be our preference.

(Operator Instructions) And our next question today will come from Brent Thielman with D. A. Davidson.

Jim, the big uptick in lettings you're starting to see in California year-to-date, I know you talked before that you're going to be careful about what you take on early as you look for capacity to tighten up in the market. Is there anything to take away from what you've seen thus far in that activity? Does it look like other participants in the market are taking a similar approach maybe to a level where industry discipline's a little better than you thought early on?

It's really interesting, and one of the things that I always tell all the Granite folks is we have a system where everybody inputs the bid results every day. And by the evening, by the time you close up shop and you want to go and see how Granite did across the country, all you got to do is go click on the computer and you can see all the bid results. And so as I watch them every single day, Brent, I see the local, smaller players still being very competitive. It is February. That doesn't surprise me at all. The bid lists are still fairly healthy. But as I've said for a long time, what happens in that part of our business is that overnight, the market changes. And so our job is to be disciplined and I'm going to say throughout the first quarter, although I will say that with the amount of work bidding, we will naturally get our share of it. But I think we will get a higher share of it towards the back end of the year. And I think we are absolutely targeting work that we can move through fast. There's no doubt. We want to keep, call it, our powder dry, so to speak, so you don't get tied up for several years on work with a margin and the opportunities are changing in the marketplace and all of our regional folks understand that within the markets that are very hot today. So for the first couple months, it's about discipline and it is about making sure that we read the markets because most of the players that we compete with will change their bidding perspective overnight. And you won't know it, obviously, until you start seeing in the bid results, and all of a sudden, it went from 5 bidders to 3 bidders to 2 bidders or you start seeing a significant price change. Hasn't occurred yet. It is mid-February. I've never seen it occur by mid-February, and I've been doing this for a long time, but it will occur and it will occur most likely in the second quarter sometime this year as the overall work load ramps up. So discipline is the key component today and our people are doing a really nice job right now of staying focused and really getting an understanding of what's going on in the marketplace. That's really important in the first part of the year.

Got it. That's interesting color. And then I guess follow-up would be any flavor on the potential kind of pace of bookings opportunities you see in the Large Project side this year? I know some of the stuff that's out of your control, particularly timelines. But does it look like more of a front half-weighted, back half-weighted bias to the jobs you're looking at right now?

Well, it's pretty evenly spread, Brent, and in fact, I'm pulling up a list here in front of me. One of the things that has always happened with Large Projects is that we call them lumpy, so to speak. So all you need to do is get one $500 million job, and all of a sudden, you got $500 million of backlog, and then all -- then you wait another 4 months before you get another one, then all of a sudden, pop, you get another big one. But I will say this, right now I'm looking at about $7 billion of work bidding in our Large Projects business for the year. And notably, there's a lot more projects because they're smaller in nature than some of those big ones we've talked about before and which gives us a lot more opportunity. Before, it was so lumpy because you were bidding $1 billion here, $2 billion here, and it just made large fluctuations with broad timing between the individual bid results. I see this more moving in the direction of the $500 million, $600 million, $400 million work, many of them bidding each quarter. So I think you're going to see that the average procurement of those work is going to kind of smooth out over time now. But again, I mean, and literally speaking, we'd be happy to talk about all these jobs we're bidding. I can go through here and talk to you for 20 minutes on all of the jobs we're bidding and they're all over the country. They're different-sized projects. They're down as low as $100 million. They're as high -- I see there's an $800 million job on the list. Again, there is very few, if any, jobs over $1 billion that we think we need to pursue today. And I think that is part of our strategy and it's a very disciplined approach to our Large Projects and it's working, and it's working very nicely.

And our last questioner for today will be Herb Buchbinder with Stifel.

Can I ask you a couple of questions about Layne? I'm new to your company but I've been following Layne for many, many years and I'm a large shareholder here. But are you able to discuss the merger at this point?

I think we can discuss the things relative to the merger but we certainly cannot discuss the individual components of Layne because they have -- they're still their own business unit, Herb, and they still run their business separately, but let's see what we can help you with here. And if we can't, I'll be candidly telling you, I'm sorry we can't answer that question.

Okay. They have a nice pipe repair business which I could see not only fitting well with you but also you should be in a position to maybe help them get more business, but, two, they have mineral exploration drilling, which does not seem to be a fit. And then I guess the third thing I would ask is why it wasn't a cash transaction since you've got plenty of cash to do it that way.

Okay, good. Those are -- yes, I think I can help on all 3 of those. Yes, sure. Pipe repair, so Inliner, one of their divisions, is a business that we've known for years and years and years. We've admired Layne in general for years and certainly admired the Inliner business, which has actually historically been somewhat of a competitor, but not really. It's in the same space as one of our businesses called Kenny Underground and it's in the CIPP space, which is the cured-in-place pipe rehabilitation program, and it is a very large sector today. It's about an $8 billion sector throughout the U.S. Inliner is a leader in the industry. They're #2 in the entire industry today. And although our portion of the business is much smaller, and we don't have a lot of overlap either. But we absolutely -- you're absolutely correct, Herb, we think the combination of the Granite businesses and the Layne businesses in the inliner space is a really nice approach to operating -- having a larger portion of that overall segment of an $8 billion market. It's a very fragmented market today, and the combination of Layne and Granite can certainly become a major player in that market. So that's a big -- like you said, that was a little more of an obvious fit. The other thing that it does is that we are geographically dispersed in different parts of the country. So whether it is the Water Resources business or the Inliner business, we really don't overlap geographically very much. And so we think we can bring the Inliner business to certain parts of the country that are not today and we think that the Water Resources portion of Layne can bring Granite to certain parts of the country where Granite doesn't exist today. So there's a real strong marriage there. The other thing you mentioned was about Mineral Services, and interestingly enough, there is an overlap there and there is a common ground there. Their core business in the Mineral Services business is helping with mine exploration and water management in the mining industry. And people don't associate Granite today in the mining industry but we historically have been heavily involved in the mining industry and we have probably over the last 5 years, moved back into the mining industry. And as we chatted with the Layne folks, there is a nice core overlap of customer base in the mining industry that I think we can both be very complementary. And what we can do on the Mineral Services side is we can offer a very larger, broader complementary suite of services to the mining industry that we couldn't do before. So it is complementary, more so than -- we haven't talked about it historically, but I think you will see us talking about that as we close the transaction and talk about some very strategic arrangements between the 2 companies that will create real value. And maybe lastly, Herb -- I'm sorry, well, I was going to talk about the cash deal. But go ahead, Herb, we'll talk about cash deal last.

They also have international operations and joint ventures in Latin America. Are you comfortable having some businesses outside the United States? And it might -- does it have much effect on your tax situation since they have unusual tax liabilities with international businesses?

Yes. So I really won't comment on the tax issue because, certainly, that would be part of our work on our transition integration plan. But we have done a significant amount of due diligence on the foreign businesses, on all components of the businesses and we are comfortable with all parts of the businesses. We know their partners, we know their situations and they've done a really nice job the past few years. The entire business and really one of the things that I'd like to make a public statement about is that Mike Caliel, Michael Anderson, that entire Layne management team, has done a really nice job the last couple years positioning Layne for not only growth but for increased levels of profitability at the operational level and reduced structure at the SG&A level. They've done a really nice job. And what I'd tell Mike, and Mike and I chat a lot, is that it's really our job now is to help them go to the next level, and we're really comfortable.

Their new pipeline business, I think you could do some of -- water pipeline business has really been a nice boost for their earnings short term. I think you could do some of that. All right, make your last comment on why this is not a cash deal.

Well, okay, so Herb, it's obvious you know the business and you've obviously done your work with Granite. We're very -- we keep a high level of cash on our balance sheet for a host of reasons, and if you're new to Granite, let me explain real briefly that when we work in -- with a lot of bonded projects. So we're a little different than a Layne or some other company you might be more familiar with, where we're required through the surety system to keep a level of cash on our balance sheet at all times because of the size of the bonded amount of work we have out in play at one time.

Yes. We also have seasonality which impacts our cash balance.

And the seasonality does impact our cash balance. And again, hopefully, as a GVA future shareholder, you'll be able to notice that we will fluctuate. During the summer months, we'll have a lower cash balance than we will in the winter months and we'll eat cash in the first half of the year. But we like to keep at least $100 million on our books to satisfy the requirements of the sureties, and that's just a common agreement that we have there. The other thing that we have talked with Layne about and with our folks, as we see growth in the marketplace, Herb, what we're trying to do is make sure that we retain as much cash as possible to invest in those businesses going forward. We've looked at the Layne business. We think it's a really good operating model. They have had capital constraints. As we were able to do this transaction and hopefully complete this transaction in a complete stock merger, it does save our cash to invest back in Layne and some of the growth plans in Granite without using the cash in our balance sheet for a transaction but keeping, so to speak, that dry powder available to grow the business themselves. So that's the main reason for having it at an all-stock transaction. And I think it creates a really unlevered balance sheet with us going forward. And we're a very conservatively -- a very conservative company relative to the way we approach our balance sheet and our covenants. We want to stay that way. So yes, we could have levered up and done it, but we think we're -- just our conservative nature says, let's keep our balance sheet clean. Let's keep it very conservative and let's use that cash for growing all the companies that are underneath the Granite umbrella.

Well, plus this gives a chance for the Layne holders to own a nice new company. Hopefully, a lot of the Layne shareholders will stay with you guys. And I think it's a good deal for everyone. I'm glad you did it.

Yes. Thank you, Herb, and always, we're available after for questions if you have any more questions at all.

And this is the end of the Q&A. And I would like to turn the call back over to our host.

Well, thank you very much, everybody, for your questions. Just a quick note for our shareholders. We'll be on the road next week meeting with investors in Boston, New York and Chicago. So please don't hesitate to reach out to see if we still have room in our schedule to meet with any of you. 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, everybody.

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