Ronald Botoff - Director - Investor Relations James Hildebrand Roberts - President, Chief Executive Officer & Director Laurel J. Krzeminski - Chief Financial Officer & Senior Vice President.

Jerry David Revich - Goldman Sachs & Co. Michael S. Dudas - Sterne Agee CRT Daniel W. Scott - Cowen & Co. LLC Alex J. Rygiel - FBR Capital Markets & Co. John Bergstrom Rogers - D.A. Davidson & Co. Nicholas Andrew Coppola - Thompson Research Group LLC Brian Gary Rafn - Morgan Dempsey Capital Management LLC Adam Robert Thalhimer - BB&T Capital Markets.

Good morning. My name is Zilda, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Second Quarter 2015 Earnings Conference Call.

All lines have been placed on mute to prevent any background noise, and after the speakers' remarks, there will be a question-and-answer period. It is now my pleasure to turn the floor over to your host, Granite Construction, Director of Investor Relations, Ron Botoff. Sir, the floor is yours..

Welcome to the Granite Construction Incorporated second quarter 2015 earnings conference call. I'm here today with our President and CEO, Jim Roberts; and our Senior Vice President and CFO, 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. So, 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. A reconciliation of non-GAAP results is included as part of our second quarter earnings press release. Certain non-GAAP measures may be discussed during the call and from time-to-time by the company's executives.

For more information, please 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..

California's 50,000 miles of highways and nearly 13,000 bridges needs an estimated additional $59 billion worth of repairs.

Democratic proposals would contribute at least $2 billion to $3 billion per year to transportation projects each over a five-year period and a competing Republican alternative provides $6 billion of incremental annual funding for transportation in California.

It's too soon to say which of the bills has the best chance of success, but it is encouraging to see potential progress is being made in Sacramento from both sides of the aisle. Now if only a representative in D.C. could follow suit.

In another key Granite market, the state of Washington, legislators recently passed and the governor signed into law a 16-year, $16.1 billion transportation revenue bill that commits more than half of the funds, $8.8 billion, to new road projects.

Certainly we are well positioned to be a significant beneficiary of this important legislation and the opportunities it creates in the state of Washington. But let's not lose sight of a simple fact.

The United States needs a highway bill that resolves current and future funding gaps, grows the annual investment, and enables a long-term planning environment. Period. Anything less is unacceptable. I was among a group of construction industry leaders who walked the halls of Congress about a month ago.

Unfortunately, our call to action for long-term investment with both Senate and House leaders remains unheeded with Congress expected once again to only kick the can down the road before they recess. We are hopeful that they will take proper action on this critical issue and pass a long-term highway bill later this year. Make no mistake, though.

We're not sitting idle waiting for Congress to help. Despite federal investment stalled for more than six years, we've made significant investments in our business. We've invested in modernizing our business systems, upgrading our plant facilities, and purchasing state-of-the-art rolling stock equipment.

But the most important investments we've made in recent years have been in our people and in our processes. We've doubled our expenditures in training and development over the last three years and we've advanced a very progressive Lean Six Sigma approach, the process improvement that we term continuous improvement.

It has taken a lot of hard work and it is now paying off as we continue to develop into a better, stronger, more efficient company. Our vertically-integrated business is beginning to gain some of the momentum I've spoken about for years.

We will continue to update you regularly on the progress of our currently early-stage large projects portfolio, but our medium and long-term perspective gives us confidence in our expectations and in execution of our overall strategic plan.

So having produced our best first half overall financial performance since 2009, we're focused on capitalizing and building upon our current momentum. And finally I'm confident that we're building a strong team to lead our company through this next phase of growth and prosperity.

Recently, Rob Beekhuizen, a former Fluor senior leader, joined the Granite team to help guide the growth of our vertically-integrated business. Focused on accelerating diversification efforts, and developing stronger client relationships, Rich Rantala joined the Granite team from Balfour Beatty to oversee all business development endeavors.

And Rick Dennis is now our supply chain leader coming to us from Great Lakes Dredge & Dock. Rick and his team are building a company-wide approach to leverage the buying power of a $2 billion company. I'm confident that these additions coupled with our strong incumbent Granite team are preparing the company for our next phase of growth in leadership.

So with that, I'll turn the call over to Laurel to discuss results and our 2015 outlook.

Laurel?.

Thank you, Jim, and good morning, everyone. Second quarter 2015 revenues were $569.2 million, down 2.8% from last year. Earnings per share in the quarter were $0.24 compared with $0.34 in 2014. As Jim mentioned, despite a challenging first half for our Large Projects business, we produced our best midyear financial results in 2015 since 2009.

On a year-to-date basis, revenues increased 2.5% from 2014. Total company gross profit margins decreased about 250 basis points year-over-year in the second quarter to 11.6%. Importantly, the trend of improved quarterly performance in the Construction, and Construction Materials segment continued in the second quarter.

This marked the fifth consecutive quarter of gross profit margin improvement across both segments of our vertically-integrated business, one of the key trends that Jim mentioned. And following a similar year-to-date trend at the topline, gross profit margins totaled 10.7% in the first half of 2015, in line with last year.

Driven by a reduction in selling expenses, second quarter SG&A expenses decreased 4% year-over-year to $49.1 million with SG&A about flat year-to-date. We continue to maintain and manage a strong balance sheet with more than $276 million in cash and marketable securities at quarter end.

As a reminder, we typically use cash in the first half of the year and build it in the back half. Total contract backlog at the end of the second quarter was $3 billion, up more than 17% from last year.

Backlog improvement was fueled by strong growth in Large Project, Construction segment backlog of nearly 37% to $2.2 billion, which outweighed a Construction segment backlog decline of about 15% year-over-year to $831 million. Let's take a look at segment results.

Second quarter Construction segment revenues increased 13.5% with gross profit margin of 13.1%, up nearly 390 basis points from 9.2% last year. Segment revenue and profit improvement was driven by performance across geographies and across end markets.

Large Project segment revenues decreased 25.1% in the quarter with gross profit margin of 8.1% down from 20.8% last year. Remember though that last year's second quarter performance was driven primarily by initial profit recognition on the Tappan Zee Bridge project and dispute resolution income from the state of Washington.

The total of these two milestone recognitions last year added about $40 million in both revenue and gross profit in the quarter. We believe it's important that our stakeholders understand our approach and our expectations with the Large Project portfolio. So, I'll repeat what I mentioned just last quarter.

Our Large Project portfolio is currently weighted towards projects still earlier in progression. So as is typical, we expect reported margins to remain lower in the earlier stages of job than when the projects mature through the project lifecycle. This does not change our expectations for projects or for segment performance.

We continue to expect mid-teens margins over the life of projects. Today, I finish our segment discussion with our Construction Materials business where revenues in the segment increased almost 12% year-over-year in the second quarter with gross profit margin improving more than 410 basis points.

Last quarter, we were encouraged after generating modest first quarter profitability in the segment for the first time since 2008. Our enthusiasm is growing. In the second quarter, the 13.5% gross margin represents our best margin performance in this business on a quarterly basis since 2009.

This trend of improvement continues to revalidate our optimism that the overall economy is improving and demand for our products is improving. Finally, as we noted in our earnings release this morning, we are maintaining the guidance we provided to you in February and kept in May.

We continue to expect the mid-single digit consolidated revenue growth in 2015 with EBITDA margin in a range of 6% to 8%. Now before we take your questions, let me turn the call back to Jim..

Thank you, Laurel. We are well positioned to continue to grow both the top and bottom line of our business as well as diversify in the new end markets. The quality of our team, the overall economy, the improvements that we have made and continue to make are providing the foundation for both our short and long term success.

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

Our first question comes from Jerry Revich with Goldman Sachs. Please go ahead..

Good morning everyone..

Good morning, Jerry..

I'm wondering if you could just give us an update on bid pipeline as you do from time-to-time? Ron just give us a sense for projects within the next 12 months to 18 months that you're bidding on how that's evolved versus your last updated quarter ago?.

Sure, Jerry. It's actually, really an interesting question because I want to talk not just about large projects, but I think it's important to also talk about our construction business as well.

And when you look at the construction business, it doesn't necessarily make the highlights and that's been averaging somewhere on our bidding horizon here around somewhere from $250 million to $450 million worth of work every single month that we're bidding in the construction segment.

And that's one of the things that we highlighted here in our discussion and our press release was that that market is changing, it's getting to be more robust and that's a good sign.

So that's one thing and those – we bid hundreds of projects and I think everybody knows that, but to see the consistent amount of work out in front of us bidding in the construction segment is really a nice sign.

We go back to the large project segment and we noted that we've got about $20 billion over the next couple of years we're teamed up on, currently we've got about $6 billion that we will bid between now and yearend. And they range from large projects, large tunneling projects, we're seeing more tunnel projects come out, which is really nice.

We're seeing still some very large light rail projects that are still on the docket. We're actually seeing some nice freeway, highway expansion projects coming on the docket too. So there is a huge amount of diversification in the large projects business, which is really nice.

Because we've got highways, we've got tunnels, we've got some work in the Greater New York City area, really just a nice amount of work, we're actually again being very picky, Jerry, as to what we team up with and what we bid. We have more coming in than we can actually bid, so we want to pick the jobs we have the best shot of obtaining..

And Jim, can you just put the $250 million to $400 million of bid work per month, just to give us a rough sense, where was that number a year ago? And any change in mix within that compared to a year ago?.

Yeah. So, the best way to put it really is that I think the opportunities that we've got today are slightly greater than they were a year ago, but the key is that we're seeing less competitors on the work, and we're seeing more visibility months ahead that there is still more work out there. So, it's a stronger market.

I wouldn't say it's substantially bigger, Jerry, but I would say it's a stronger market. And we're seeing different types of work come into play. I'll give you an example.

We're seeing DOT work is probably just the same, that's probably has not been a big increase, because obviously with the highway bill lack of visibility down the road the DOTs have been stalling. So, the nice part is that at least as much of that stalled work has been made up in other types of work, and I'll give you an example, solar work.

We do a lot of solar work in the west and in the southwest and that has actually picked up this year. So again working with private companies doing solar work is something that wasn't on the horizon a year ago. We're also seeing more commercial work that is out there today. We're seeing more industrial work that is out there today.

But one thing we're not seeing is more residential work. It's interesting. The residential market has just kind of slowed and then picked up and slowed, but the nice part about what we've seen is that the remainder of the private sector is more than offsetting a sluggish residential and a sluggish DOT market.

So when the DOT market comes back and if the residential market comes back, I think you're going to see this really jump to another level..

Okay.

And Jim you gave some helpful color on the State of Washington, so the $1 billion in per year funding increase, can you just put that into context for us, what's the current total federal and state highway spending there? So how big of an increase is that versus current budget? And then out of the 12 states that you mentioned, what have you seen has been the general increase in highway spending for the states that have supplemented with their own use based fees?.

Well. Okay. In general, I can't give you all the details of the states, I can't give you the details Jerry on this call relative to what the increase or what the current rate is in the State of Washington.

Again I know that there is about $8.8 billion of additional roadwork, it equates to about $1 billion of additional overall infrastructure work on an annualized basis. But I can't go back and give you the details relative to what's currently being spent there. I don't have that in front of me.

But I will tell you this that whether it is the State of Washington, other big states we work in, Utah has just increased last March their gas taxes by $0.05 a gallon. They've actually added a 12% tax on the wholesale price of gasoline. So, that's going to be a nice increase. I don't have the dollar value of that increase as well.

North Dakota, South Dakota, Ohio, Idaho, a state we do work in had a $0.07 increase in the fuel tax. So, that's been nice. The key ingredient here for us and I can go down the whole list here, Texas has obviously done a lot of work.

They've actually added about $2.5 billion of their general sales tax and a portion of their future motor vehicle sales tax to the highway fund. Oregon has got some voluntary road usage charge program. They've actually increased their overall program.

I think the point here really Jerry is across the board, all of the states are starting to just – they've convinced themselves, they're not going to wait for the Feds and they are focusing on what they can do to take care of themselves. The big one is California.

The Governor has a special session in place today that is debating and I mentioned it, some alternatives here.

But I believe the State of California is very well committed to increasing its transportation funding somewhere from – I'm going to say – $3 billion to $6 billion per year and I think we're going to see that implemented in the state of California in the very near future.

There's potential that it will get done in the special session before the end of the August. And if that takes place, California is really on a whole different playing field than where it has been historically. So it's good news. I will say on the same side I am disappointed that the Feds haven't done a better job, Jerry, than I was hoping they could.

My expectation was that they will pass the highway bill by the end of the year. I did expect them to kick the can down the road prior to their break in August. I think they're going to do that. The House has already passed a three-month extension, but it's really just same old stuff in D.C. right now.

So that's why I think the states are really stepping up to the game and doing a nice job..

Our next question comes from Michael Dudas with Sterne Agee. Please go ahead..

Good morning, Jim and Laurel.

How are you today?.

Good..

Good morning..

Mike, How are you?.

Wonderful. Thank you, Jim. Two questions. First, short-term sense of how weather is so far currently through the first month of the third quarter. And off that on your comment about on the Construction Materials side, internal/external demand both growing pretty nicely.

Is there a sense one growing better than the other? Do you get a predictive sense that with more external demand that could lead to less competition, better bidding opportunities on the constructions side?.

what we're starting to see is back where we were 10 years ago, we're starting to see the external customers buying the higher-quality products and that's a really important change. When they buy concrete aggregates, when they buy the products that are of the higher quality, it creates more opportunity for us.

The other thing we're seeing in the Materials business is we've got a nice amount of committed volume between now and the end of the year. And we don't call it backlog, we don't report backlog in our Materials business, internally we call it committed volume.

We've got nice consistent customer base, we've got dedicated expectations of volume through the end of the year, very nice consistent run rate out in front of us in that business..

(29:24).

That sounds very helpful, Jim, and my follow-up question would be, so as you look at what's going on in Washington, is it – and there's been some creative ways that the Senate and House have come up to try to help bridge the funding gaps here, but is it really going to be tied towards this repatriation issue or is it going to be just the issue on gasoline taxes? Is there something you can point toward that could smooth the way for something to happen in 2016, and are those the two key determinants before we get more clarity on that?.

Okay. So, Mike, today those are two key issues. First of all, the repatriation monies, there's been long talks, but when you listen to certain members, they'll tell you that they won't discuss the repatriation monies until we do overall tax reform. So that's potentially a problem.

And at the same time, you have certain really focused members who say they will not allow a gas tax to pass. So I think what's going to probably end up happening between – and I'm going to somewhere in October through December, which hasn't changed, you're going to see some innovative funding mechanisms come into play.

And I wouldn't be surprised at all, Mike, if they come up with a totally different alternative to fund a long-term highway bill. The Senate has really already I think today they will probably approve their six-year bill, knowing that the House already tossed over a three-month extension to them.

But I think you're going to see some real innovation over the next six months on alternative funding mechanisms, because there are people that will not touch repatriation because of overall tax reform, and there are people that won't touch gas tax just because it's political suicide in their opinion.

But I do think you're going to come up with some numbers and the Senate has already come up with a reasonable six-year bill, the financial aspects of it, and I think what they're going to focus on are some really alternative ways of funding the whole deal.

Today, I can't tell you what that's going to be, but I think the innovative part of it's going to start hitting the street here probably when they get back from recess..

Jim, excellent color. Thank you very much. Good luck..

Thanks, Mike..

The next question comes from Daniel Scott with Cowen & Co. Please go ahead..

Hey, thanks for taking my question, guys. You did give a lot of cover on large projects and weather impacts, and how that was probably a drag on the quarter.

As we look at guidance being maintained for the full year, does that imply that there is going to be a catch up contribution on the large project side or is it going to be that the vertically integrated continues to carry the day through the end of the year?.

I think it's both. I think, Dan, that as you look at it, we know we lost some time on large projects. We have accelerated those projects. So we will make up as much as we possibly can. And I also think, Dan, that you're going to see that the Construction and the Construction Materials business are in a stronger environment they've been in a while.

So that performance will help bridge the gap as well. So I think both..

Okay, great. And piggybacking off of Mike's question there on the Construction Materials. Clearly it sounds like volumes are working.

Are you getting pricing as well?.

Yes, that's a key, Dan, right there, that's the key question. The volumes are up and pricing is up. We started off with some modest price increases at the first of year, and we just met with some of our teams yesterday, this last couple weeks as well, and they're actually implementing more price increases midway through the year.

So both volume and pricing increases which is exactly what needs to be happen. The pricing has stayed fairly static over several years now, and now that the volumes are raising up, the demand's raising up and the pricing is moving nicely..

Okay great. And last question, you've talked in the past little bit about targeted growth into new areas, I think water infrastructure, those sorts of things.

Is there any change in that mentality, any new opportunities that we should be aware of?.

Well, no, there is nothing new, except that we continue to explore expansion in the water, industrial, rail. We've been talking about that for quite some time and we're certainly working on it.

The other thing that we're doing is we're increasing our expansion into our power business into the underground business, the rehabilitation of pipeline business.

So we're starting to expand some of the work also into the federal market that are the latest kind of expansions for the business that we want to grow, while we look and work on getting into the new markets as well. But nothing's really changed except that we're growing the current markets as well..

Our next question comes from Alex Rygiel with FBR Capital Markets. Please go ahead..

Thanks. Good morning, Jim and Laurel..

Good morning..

Good morning, Alex..

Jim, in the past you've kind of addressed how many competitors show up at certain bids, whether or not it's in the Construction segment in California or it's on some large projects.

Can you talk about how many competitors you're seeing today in those two different environments and how it compared maybe six months, 12 months ago?.

You bet, Alex. First of all, some are large projects. That's an interesting environment, most of the projects that we're bidding today do have a shortlist approach to them. In other words, where we'll put our qualifications in and an owner will shortlist three bidders or four bidders.

I will tell you that it's interesting that even if they shortlist four bidders for large project, we would think twice about whether or not that's the kind of a project we would want to literally compete on, because of the costs of putting together a large project bid.

So three competitors on large projects, maybe four is the sweet spot today and that's about where we see that part of the business. The kind of the wildcard is over on the construction side where the markets are all different. You can have a market in one part of California substantially different than another.

But in general we're seeing somewhere between three bidders to five bidders on our projects. There are times where we'll see more than five bidders and I think sometimes we look in the mirror after that and ask ourselves why did we bid that job.

But literally speaking, it's staying pretty consistent somewhere around three bidders to five bidders, which is a healthy market. That works for our construction business.

So overall our intention on the construction side of the business is to literally focus more, kind of like large projects on where we have potential high percentage of win rate and increase our hit rate on the work that we actually did instead of just bidding everything.

So we're starting to be much more selective on the work that we bid and our overall hit rate is actually going up..

And how far into the cycle will you hope that you could actually see a little bit of pricing power develop in the construction markets where there is three bidders to five bidders?.

Well, that is another good question, because I think when you look at it, Alex, I think you're starting to see the pricing move already, and I think that what will happen is as people – and I mentioned this earlier.

If you go forward-looking and you see the workload out there and you see the competitors of Granite have a limited capacity in most of our markets, they will start changing their pricing. We have already increased our expectations on bid day in our construction market. So I think what you're going to see is it will take some time.

It's already moving there. Unfortunately the prices never move up as fast as they move down in a down market. But I think from last year to this year, there has been a positive movement. If we can continue to see the states focus on these DOT trends and get more of that DOT work out on the street, that's going to suck up a lot of capacity.

And if that happens, I think you're going to see a much more of a step jump in the overall pricing and I think that's exactly what needs to happen. But right now it's methodical and it is getting better every month because of the continued strong bid list..

That's helpful. Thank you very much..

Thanks, Alex..

The next question comes from John Rogers with D.A. Davidson. Please go ahead..

Hi, good morning..

Good morning, John..

Good morning..

If we could just go back to the Construction segment for a second, I just want to understand a little bit more about the margins that you see in that business now and the improvement, especially year-over-year, that you've been trending at, how much of that, Jim, is related to the private work versus public work?.

I think, John, that's probably the biggest driver of the positive trends. Historically, we have always had a higher margin expectation on the private side than in the public side. The public side seems to be just the low-cost mentality and really a very competitive environment on bid day.

But our increase definitely comes from the private side and I think that it will continue to move up as the overall public side gets stronger and the bid list get shorter and some of those individuals go back to the private side. But today, our highest margins are still on the private side..

And I guess – that's why I'm wondering.

So as the public side of it comes back, I realize it would add a lot to revenue, but does it keep the margins from further improvement?.

It doesn't keep – no, because what happens is that historically, when you come back up out of a downturn, there's a very limited capacity with our competitors.

So if we can get the states to do it, we say they are doing here and what we think they're going to do, especially like California, and that alone I think would change the pricing on the transportation work in California. But I do think they have limited capacity.

And I also think as the private sector gets healthier, John, what you're seeing is that people are migrating back towards the private sector, which is reducing the competition in the public sector, and that will change the pricing there as well..

Okay.

And so still expectation for longer term, that like the large project work that can get up into those mid-teens margins?.

Well, we've said that historically, our Construction, except for probably the mid-2000s where we were up in the high-teens – mid to high-teens, we've always said that we would expect Construction to be in the low-teens.

On a typical basis, now certainly, if the market improves beyond that, we're going to be very happy, but I would not expect the Construction segment to, on average, move itself into the mid-teens, we've been saying the low teens..

Okay. And then, one other just point of clarification. In terms of the transmission market, how active are you in that business now? I mean with references – I just want to understand what you're seeing in that market..

Okay. So, remember what our transmission, our T&D business is. We are focused heavily in the staff augmentation, construction management and working with the providers themselves to manage their projects. We have ramped up significantly in the last six months in that part of our business. So, it's a very strong component.

And I mentioned that in my discussion at the beginning. That power, the power of our business is one of the fastest growing parts of our Construction segment. And really, we've stacked up with over 100 additional people for staff augmentation.

So we're continuing to see an expansion in transmission, in fact, in all parts of the country, and we're ramping up even more with more people..

Okay. Great. Thank you..

Okay, John..

Thank you. Our next question comes from Nick Coppola with Thompson Research Group. Please go ahead..

Hi, good morning..

Good morning, Nick..

In terms of operational improvement and lean initiatives, can you talk a little bit more about what work's being been done there and what kind of benefit do you expect?.

You bet, you bet. So, I don't how much, Nick, that you've followed some of the discussions I've had previously is that, so when we started CI, we started with 10 black belts back in 2014 training. We're now up to 17 black belts that have been trained and are in play, working on individual projects across the country inside the company.

Every black belt is expected to be working approximately three projects at a time. And most of those projects need to be somewhere between – have a financial benefit of somewhere $250,000 to $1 million for the individual project. We're closing out project – we're starting to close out projects now on a given example of a couple types of projects.

We had a huge project in play to minimize the non-value-added steps of our P2P process or procure-to-pay process. That will be rolled out at the end of the year here.

And that's a big deal, it's not hard dollar, it's soft dollar savings, but it will be able to redirect a lot of the efforts of our people that have been focusing on many non-value-added steps.

We've been out in our asphalt plants and really found some real cost savings in our asphalt plants, we started down in Southern California, now we're working through the rest of the company to put some of those things into play in other asphalt plants around the company as well.

So, there's a combination of hard dollar events that are occurring out in the field, and there are a combination of soft dollar, the kind of Type 1 and Type 2 benefits that are behind the scenes.

And right now, we're tracking towards about somewhere between, I'd say, $10 million to $20 million of overall annualized benefits by the end of the year here that will allow us to increase our efficiencies and our bottom line over the next several years. So it's progressing really nicely. It's something that I wish we had done a long time ago.

Although a very expensive investment, it's teaching our company how to improve our processes and make those processes stick for a long time..

Okay. That's certainly helpful.

And then can you add anymore color on your acquisition strategy and whether or not the number of opportunities you're looking at did change at all?.

No, it hasn't changed. Actually, we're looking at a combination of acquisition opportunities. First of all, and we've been discussing this with the diversification opportunities to move into the markets of oil and gas, water, rail, those were the focused areas that we've had. The other thing that we've been focusing on also was geographic diversity.

We're looking at moving – I'd really like to move our vertically integrated business further to the east, it's a strong business. We're starting to see it come back again where we know it can operate at, and we'd like to geographically diversify that as well. So, we're looking at all those options right now..

Okay. Thanks for taking my questions..

Thanks, Nick..

The next question comes from Brian Rafn with Morgan Dempsey Capital Management. Please go ahead..

Good morning, Jim..

Morning, Brian..

Give me a sense -- you talked about the low cost mentality on kind of the big public heavy civil side.

If by chance, by miracle, we get a six-year highway bill -- it's kind of like building the border fence -- is that going to impact in just a complete release of more federal DOT work? Will that bring margins and pricing up on some of that, what you call, low cost mentality heavy civil work?.

that if we can get a federal highway bill, which I agree with you, I'm not going to make it a miracle work, but I'm going to say that there's a 50-50 chance, maybe even better, that we'll get some by the end of year.

Some of the work that's been done over the last couple of weeks is fairly encouraging, especially on the Senate side and then the House side is now saying you give us a three-month extension and we'll work with you on something for the back half of the year. So, that's good news, but that's one thing, the federal highway bill.

I think what you're going to see, and I think that all by itself would have a slight upward tick in the pricing.

But I think the bigger deals, if you couple that, Brian, with what these states are doing themselves, I think you're going to start seeing the combination of those two is going to increase the overall volume of work bidding at the DOT level and change pricing even more. And so I think you're going to see a combination of events here.

And I think maybe even late this year and in 2016, it's going to have a nice effect on the rip – we call it the rip and read market, which is the lowest priced market in the industry today, is the standard DOT rip and read is the most competitive part of the business.

The other thing that happens is as we continue to see the private sector, commercial/industrial, and again, we haven't seen the residential side yet – as we see those other sides grow, what we're going to end up seeing is people migrating back towards the private sector, and that's going to once again create less competition on the public sector and that pricing will change as well..

Okay. From the standpoint of kind of (47:40) you talked about the heyday of some of those upper teens in the construction side, on the EBIT side.

If you look on the materials and quarry side, as you recover, do you see that external to internal mix shifting as you continue to fund more of your own internal backlog jobs, or is that 60-40 kind of where we're going to see?.

Well, I think that it probably isn't going to change dramatically, because what we're really looking at is the combination of both internal and external growing like we've seen so far this year. And I think what you're going to see is you're going to see the internal part grow, along with the external part.

So I don't think the actual ratios are going to change dramatically, and I'm kind of hoping they don't. I'd always like to see the external part grow, but it's also very healthy to have that internal work in there at the same time. And I think you're going to continue to see that part grow. So, I don't think it's going to change dramatically, Brian..

Yeah, Jim, if you see on the construction side, going back to that, again, that heyday of the mid-2000s, in the turn business today, is there any difference in the type of work, the number of jobs -- you talked a little bit about the residential, I think that would be a difference -- the dollar volume, the duration of the work, local streets versus industrial parts, any different in the mix of the construction business today versus where it was ex the margins that we talked about?.

Not really, except that I still think the private sector has a lot more growth opportunity because of the residential. I also think and I mentioned this before that things that are hot like the renewable energy market right now is a nice amount of work.

We're also seeing more of a regional transportation or really quasi-municipal setup programs that are bigger than they used to be because the DOTs are actually smaller overall. But this public work, we may have specialized groups to go focus on individual projects, those are starting to increase.

So, I think you're seeing a less DOT, more quasi-municipal, and then a shift in the private sector towards industrial and commercial..

Thanks, Jim..

You bet..

The next question comes from Adam Thalhimer – I'm sorry, I can't pronounce your name – with BB&T Capital Markets. Please go ahead..

No worries. Thanks. Good morning..

Good morning, Adam..

Good morning..

Jim, can you give – you threw some numbers on the potential additional funding from California.

Can you go over those numbers again?.

You bet, you bet. So, the governor called for, first of all, it's interesting when you look at California as a economy in itself. I mean it's got somewhere close to about $115 billion budget they just passed. And two things occurred when they passed their annual budget in the state of California.

The governor came out and said that there are two things that need to be addressed outside of the normal budget. And I want you, the legislature, to get into a special session and focus on these two issues, they need to be resolved. One of them was healthcare and the other was infrastructure and transportation improvements.

So, this special session that's put into play today had previously had some of the overall – the legislature looking at prior to the special session. Several of the Senators and assembly men had or assembly people had actually had put forth some bills in the general session that got kicked out to the special session.

So on the Democratic side, they put together a couple of bills in the $2 billion to $3 billion annual range addition to the current $2.5 billion program, and they put those out and they have reenacted those in the special session.

On the other side, The Republicans have now come out with upwards of a $6 billion program because the overall review of the condition of a highway program alone in the State of California had a $59 billion deficit.

So, the Republicans want to attack it all right now and say over the 10 years, $6 billion a year, we need to get our state back up to speed where it deserves and should be. I don't think the Democratic group is really denying that, they're actually working quite well together.

And I think that what you're going to see over the next – and I'm going to call it 30 days to 45 days, Adam, is you're going to see somewhere probably in a $3 billion to $6 billion range, somewhere between five years to 10 years of additional funding being put into place in the State of California, which is a huge play for this state.

And if you've been to this state recently, you know it needs it. Now, one thing they're able to do here, they're looking at a host of funding mechanisms to fund these additional issues. They've got licensing fees, registration fees, they're looking at electric car fees, they're looking at gas tax increases and they're looking at diesel tax increases.

So they are actually attacking the problem with a very focused financing and funding approach to it, and literally both sides of that are looking at real world together, in kind of a conclusion, $3 billion to $6 billion somewhere in that range..

Wow. Okay.

So you said, for the federal highway bill, probably 50-50 shot may be a little better, what would be your ratio for California?.

Well, I think something is going to happen in California. I'm actually quite confident. I haven't heard of anybody really fighting the idea of infrastructure improvements in the State of California.

They know with the health of the state today, a balanced budget, some surplus, the existence of a rainy day fund now, they know this entire legislature knows and the private sector knows that if we're going to create an economy in California that can last a lifetime, we've got to reinvest in the infrastructure program.

So I think this is well above 70% chance we're going to get something in this special session. Now the question I think is going to be, what size is it going to be? We're going to get something.

But obviously, I'm hoping we get up closer to the $6 billion, Adam, but there are people that may end up down at the $3 billion, but it's going to be somewhere in that range..

Well, I'm going to buy, so I'm hoping $6 billion too..

Yeah. There you go..

And then, lastly on residential. Is it fair to say you're seeing green shoots there? I mean you said it was choppy.

Is that how it normally looks before it recovers or is that just wishful thinking?.

Yeah. I haven't seen the green shoots pop up yet. The backbone that was there seven years or eight years ago is starting to be built out and that's a good sign. So you got to do the infill and you got to get the backbone built out. It just hasn't come our way yet.

So, I'm going to tell you that I think it's still ways down the road before the infrastructure development of residential comes back again. And I don't see it happening in the second half of this year. So I'm going to kick the can on that one down the road to 2016..

Okay, perfect. Thank you very much..

Okay, Adam..

This is the end of Q&A. And now, I'd like to turn the call back over to our host..

Okay, everybody. Well, thank you for your questions. To our employees, thank you for what you do every day. I can't tell you how proud I am of you for the hard work that you perform every day, and more importantly, in the way you conduct yourself each and every day at Granite. So thank you for who you are.

To all of our investors, please do not hesitate to reach out, to see if we will be able to make it your way soon, and finally, Ron, Laurel and I are available for follow up, if you have any further questions. Thank you everybody for your time..

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