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

Brandon Jaffe - Goldman Sachs & Co. Michael S. Dudas - Sterne, Agee & Leach, Inc. Michael David Shlisky - Seaport Global Securities LLC Nicholas Andrew Coppola - Thompson Research Group LLC Alex J. Rygiel - FBR Capital Markets & Co. William Bremer - Maxim Group LLC Sameer Rathod - Macquarie Capital (USA), Inc.

Adam Robert Thalhimer - BB&T Capital Markets Brian Gary Rafn - Morgan Dempsey Capital Management LLC.

Good morning. My name is Robert, 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 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. Please note, we will take one question and one follow-up question from each participant. It is now my pleasure to turn the floor over to your host, Granite Construction Director of Investor Relations, Ron Botoff. Sir, the floor is yours..

Welcome to the Granite Construction, Incorporated fourth quarter and fiscal year 2015 earnings conference call. I'm here today with our President and Chief Executive Officer, Jim Roberts; and our Executive Vice President and Chief Financial Officer, Laurel Krzeminski. We begin today with an overview of the company's Safe Harbor language.

Some of the discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions.

The company assumes no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise. Certain non-GAAP measures may be discussed during the call and from time to time by the company's executives.

And please note that a reconciliation of certain non-GAAP measures is included as part of our earnings press release. For more information, visit our Investor Relations website at investor.graniteconstruction.com. Thank you. Now, I would like to turn the call over to Granite Construction, Incorporated Chief Executive Officer, Jim Roberts..

The California Board of Equalization just this week approved a third consecutive annual reduction in gas taxes, this time $0.022 down to $0.278 from July of 2016 through June of 2017, a 30% reduction from $0.395 motorists paid in 2014. And it results in an estimated $328 million less to spend on transportation projects in California next fiscal year.

For California today, it is hard to move forward when it is stuck in reverse. Please don't get me wrong. We remain extremely constructive about the coming opportunities here in California.

Unfortunately, I am less confident now that action will be taken in the first half of this year than I was last fall when I presented to the California Legislature's Special Session conference.

Governor Brown's $36 billion 10-year transportation funding enhancement plan remains on the table, as do a number of individually submitted bills, all of which are larger than the Governor's proposal. But the timing of any significant commitment in California remains uncertain.

I remain hopeful that 2016 can be the launch point for this critical investment. Over the past few years, we invested in becoming a stronger, smarter, more efficient company by looking inwardly to challenge ourselves to be better even in light of some extremely challenging market conditions, and we are not finished.

We still have a long way to go to be satisfied that we are generating steady, growing operating and financial results. With last year's results in mind, we set our sights on improved performance in 2016 in an environment of steady but modest growth. However, we expect both company and industry growth to accelerate in 2017 and in 2018.

So with that, I will turn the call over to Laurel to discuss more details of our results and our 2016 outlook.

Laurel?.

Thank you, Jim, and good morning, everyone. Fourth quarter 2015 revenue was $630.2 million, up 6.8% from last year, with fiscal year 2015 revenue increasing 4.2% to about $2.4 billion.

Earnings per share increased 68.6% in the fourth quarter of 2015 to $0.72, up from $0.43 last year, and 2015 EPS more than doubled to $1.52 per share compared to $0.64 in 2014. Total company 2015 gross profit margin was 16.2% in the fourth quarter, and we're particularly pleased with the more than 210 basis point margin improvement in 2015 to 12.8%.

During the quarter and throughout 2015, improved results were driven by particular strength in the Construction and Construction Materials segments. SG&A expenses increased in 2015 to $207.3 million, driven primarily by personnel-related costs. Contract backlog totaled $2.9 billion at the end of 2015, up 7% from $2.7 billion last year.

Large Project Construction backlog increased about 2% year-over-year to more than $2 billion with Construction backlog increasing nearly 21% in 2015 to more than $860 million.

And as Jim mentioned, this does not include our portion of the Arizona project, the Alabama project and additional business resulting from early season win rates tracking well ahead of the last couple of years.

Looking at the segment detail, fourth quarter Construction segment revenue increased more than 9% to $341.5 million with 2015 Construction revenue improving 6.4% to $1.3 billion. In the fourth quarter, segment gross profit margin improved more than 900 basis points year-over-year to 20%.

In 2015, Construction gross profit margin improved more than 500 basis points to just over 15%, returning to what we would consider healthy level for the first time in many years. We are excited and encouraged by this performance.

Moving now to Large Project Construction, where segment revenues increased 4% in the quarter to $222.4 million and fiscal year 2015 revenues decreased 1.5% to $812.7 million. Fourth quarter segment margin declined about 560 basis points from last year to 11.6% with 2015 segment margin finishing at 9.8%, down about 320 basis points.

2015 performance reflects the timing of overall project portfolio progression coupled with execution issues on certain projects. Fourth quarter 2014 segment gross profit included initial profit recognition and dispute resolution of more than $25 million.

As Jim mentioned, we continue to target mid-teens margins over the life of projects and we do expect some improvement in 2016 from the gross margins we posted in 2015. But we expect it will be 2017 before we can again produce margins in the mid-teens range.

Fourth quarter 2015 Construction Materials segment revenue increased 5.5% year-over-year to $66.2 million. For a second straight year in 2015, Materials revenue increased double digits to nearly $296 million. Quarterly segment gross profit margin surged to 12%, up more than 660 basis points from last year.

This was a strong contributor to the nearly 400 basis points of year-over-year margin improvement to 11.2% in 2015. Revenue and profit growth was driven primarily by improved volumes, with aggregate pricing and production efficiency gains also contributing to the performance. Finally, let's turn to our outlook and guidance.

Last February, we suggested that revenue would grow mid-single digits and EBITDA margin would improve to finish in a range of 6% to 8%. We also suggested that our profitability would improve fairly in line with 2014.

How did we do? Revenue increased 4.2%, check; EBITDA margin increased 7.3%, check; gross profit improved more than $60 million for a second consecutive year with net income of more than $35 million in 2015 after improving nearly $30 million the year before, check.

2016 is on desk now with the benefit of the strong foundation we built with our solid 2015 performance. We entered 2016 with the balance of potential headwinds and tailwinds shaping our opportunities.

Certainly today's very real transportation funding issues in California contribute to the challenge of tepid public funding trends, but this is balanced with a potential late 2016 positive impact to market from the FAST Act.

While we expect large project margins to remain below our long-term trends in 2016, we do this while executing on continued near record backlog of $2.9 billion. Of course we continue to expect to benefit from ongoing execution improvement and efficiency gains across our business, and our Materials business continues to strengthen.

In light of these factors, we currently expect mid-single-digit consolidated revenue growth in 2016, with EBITDA margin in a range of 6% to 8%. And quite pleasingly, growth acceleration in 2017 is now in our sight. Now before we take your questions, let me turn the call back to Jim..

Thank you, Laurel. Today, we are executing more effectively on the foundation we built and shaped during the difficult times of the past five years to leverage coming growth opportunities. As was a case at this time last year, we are focused on capturing and executing on broad opportunities across geographies and end markets.

We will continue to emphasize strong cost control and strategic investment, as we build on consecutive years of improved operational and financial performance. And now, we'll be happy to take your questions..

Our first question is from Mr. Jerry Revich of Goldman Sachs..

Thanks. This is actually Brandon Jaffe on behalf of Jerry. It's clear that you are positive on the long-term impact to the highway bill, but in the press release, you've made some cautionary comments about the near term.

Can you just talk about what concerns you in the context of relatively healthy DoT budgets?.

Okay, You bet. My concern always any time any kind of a public spending bill gets passed is how quickly it can be put into place.

And if you look at historically what a federal highway bill, it will take time to get that work typically put into play and bid and physically awarded to contractors and then you won't see the physical financial results of it until probably two quarters or three quarters later.

So when we give a little cautionary statement about the federal highway bill, it's mostly relative to the timing. And I state that the back half of the year is when we will see some positive results from it. We are already seeing the opportunity with some designs and things coming out to play, but it doesn't hit the financials to later in the year..

Okay. Thanks.

And your Construction backlog is at pretty healthy levels entering 2016 which has usually been positive for the margin profile earlier in the year? How should we be thinking about the margins in that segment for 2016?.

Yeah. I think that you are right. The backlog in Construction is quite a bit from the previous year and it's a mix which is really nice to see. It's not just DoT type work. We've expanded the businesses. The power business has a lot of work in the Construction segment.

The underground business has a lot of work in that segment and we've actually expanded the Constriction segment into the private sector. Renewable energy is a big deal of the day and so is the commercial markets. Commercial markets are coming back. So we expect in the long term, we've always said somewhere around 12% to 15%.

We are very pleased with 15% last year. That is a healthy type of margin for our standard Construction segment. But I think you are right. What happens in these markets is that when there is a lot of backlog and people, I'll talk about competitors first, when they have a healthy backlog, then the pricing changes.

And I mentioned that in the script that it takes a saturation point in the market place to get pricing to change, and more backlog at the beginning of the year means that that pricing differential could occur in the second quarter, could occur in the third quarter, quite not sure yet but the same point is I think the mid-teens are very healthy margin in the Construction business..

Thank you..

Okay..

The next questioner will be Michael Dudas of Sterne Agee. Go ahead..

Good morning, gentlemen, Laurel..

Good morning..

Good morning, Mike..

Jim, to amplify on your California comment, so is that – obviously it seems like it changed from what your anticipation was second half of last year.

Is there an actual frustration or is it just like pushed out timing where some of those moneys can get liberated to hit the street second half of this year and is that part of maybe the cautionary headwind discussion that you put through in your prepared remarks?.

Hey, when you mentioned Mike – when you mentioned frustration, the answer is yes and yes..

Okay. Sure..

So I was very hopeful last year that we had some serious momentum in California with the special session appointed by the Governor that they would act and get something done. And they had real momentum and then it died over the holidays.

We are back on and we are moving very heavily in California to get a transportation bill that is somewhere between the Governor's minimal proposal of $3.6 billion up to proposals on the street today that are up to $7 billion annually. It's not a matter of if in California, it's a matter of when.

And everybody knows that, it's just as always in politics, timing is very difficult to figure out. But I do think, Mike, that we'll get something passed in 2016. Now whether or not, and I will call this the headwind, whether or not we get to see the value of it is questionable in 2016.

That's why I mentioned an acceleration in 2017, because I think again whether it's the state or the fed, the states move a little faster than the feds, but it will still take a quarter to two quarters to get those projects out on the street, out to bid and in company's backlogs.

So I am frustrated with the speed, but I am confident that we will get a large transportation bill in California..

Turning to your Large Project business, it seems through the optimism is well placed and there is quite a bit of bidding opportunity for Granite and you've had some very early success during the last couple months.

How are you looking to manage the timing and the opportunities in those businesses given where you are in the four that you are operating now and kind of rolling off project teams on one to another? Is it something that you can look to accelerate if things work out well and you get more wins or is there something you're going to be looking to really pick the ones where you can get the best margin not be so aggressive on the volume side?.

I think it's a little bit of both. I think first – certainly I mentioned it in the script, Mike, that we want to be more selective, number one. And we want to make sure that the projects that we bid, win and build, provide the returns that we expect in that mid-teen range in Large Projects.

But secondarily, we also know that we have to grow that part of the business, and we are promoting from within. We are putting our people on strategic positions and jobs so that they're capable to run bigger jobs down the road in the very near future. So it's a combination of both.

That business has the opportunities to grow, but the key to success in that Large Projects business is a very methodical growth. I've seen many companies that get themselves in trouble by growing that business too fast and that would be a problem.

The other thing in that part of that business is that you have to team up with the right partners when you are on mega jobs, and that's really important to pick the right partners, the ones that work well with our company and the ones that have the same level of expectation that we do on those projects.

So we are very comfortable that it's a market that's growing and our job is to just select the right projects, the right partners and demand the right kind of margins on those projects..

Thanks Jim..

You bet, Mike..

The next questioner is Mike Shlisky of Seaport Global. Please go ahead..

Good everybody..

Good morning, Mike..

I wanted to touch first on your (26:53) outlook for perhaps Construction Materials.

Do you expect a rapid acceleration there in 2016 or is that also going to wait until perhaps 2017 to see the actual percent get a little higher there?.

Okay. Well, the Materials business is and I mentioned it also in the script, it's kind of the leading indicator of what's going on in the economy. It kind of hits the first barrage of private sector involvement in the economy, and it's healthy and it's going to stay healthy.

Now how fast it improves from where it is today, I think it's going to be very methodical again. I don't see an inflection point yet, because what you need to get an inflection point in the Materials business is both the private sector click in and the public sector click in.

I actually think today the private sector has gained more momentum over the last couple of years than the public sector has.

But as I mentioned, Mike, when you start running into the end of this year and the public sector starts ticking in with the FAST Act and some of these state individual acts, then I think you're going to start seeing the Materials business move fairly quickly. And we've had years in that Materials business where we've been in the high-teen margins.

As you can tell, now we're in the low-teen margins, so there is quite a ways of upward movements still to go, but it's going to take both the private and public sector in line at the same time to get there..

Okay, great. I also wanted to ask about your SG&A, Laurel has that, I missed it. But in the fourth quarter, it was the highest it has been in a bunch of years, looking back through history.

Can you maybe just give us some more color as to what happened in the fourth quarter? And then secondly maybe like how that might be – how we should look at the 2016 run rate there? I'd appreciate that. Thanks..

Okay. The biggest driver of the increase in SG&A is personnel-related costs, primarily incentive comps and then the typical normal increase in salaries and burden. As far as how you should look at it, I would say at about the same percentage of revenue as we currently have. Our objective is to grow revenue without growing SG&A a lot.

So we want to pull the percentage that we have and begin to work that down as we grow the top line..

Great. Thank you so much guys..

Thank you very much, Mike..

The next question comes from Nick Coppola of Thompson Research. Go ahead..

Hi, good morning..

Good morning, Nick..

Good morning..

So first question would be on the Construction segment. The 20% gross margin is obviously quite strong. Can you talk more about the drivers of that improvement, maybe help parse out for us..

Yeah, I think that as I mentioned a little bit, Nick, earlier, the private sector's driving that. There's just no doubt about it. The expansion in the commercial markets, the renewable markets, the underground markets with some private clients has really jumped up in the last 12 months.

And so that's what's driving the big returns today, and that's what's going to drive the bigger returns down the road. The DoTs and the public sector markets are typically more commodity markets that drive lower GPMs.

But I actually think that the private sector's growing nicely and although I wouldn't expect 20% every quarter, as I mentioned you get into the mid-teen margins in construction and you're doing a really nice job. So the Granite teams did a really nice job in 2015. And I also think that our people are just doing a better job in the field.

They're executing at a substantially higher level. We've enacted our continuous improvement program. And the people in Granite are just taking the execution issues to heart and they're just operating better than their competitors.

And that does make a huge difference in a couple of points here and there in the construction business, and as you can see, when you can move up into a 20% margin, that means you're executing at a high level. The other thing that happened in the West, which is where most of our construction work is, is there was a pretty mild winter through December.

We didn't get a lot of rain. We got a lot of rain in January. But on the whole West Coast, we had nice weather, and they got to operate consistently through, say, mid-December, which makes it a nice fourth quarter, so that does help..

All right. Well, that's great to see.

And then second question here, can you talk more about what you're seeing in the state of Washington, particularly as a result of that 16-year bill that was done there?.

Yeah. So remember what they did up there last year, they passed a 16-year – or a 10-year $16 billion bill – yeah, 16 and 16, that's right. So it was $1 billion a year. We are seeing releases already.

One thing that will happen in a state like Washington, any of the Northern states that have a winter attached to them, what you'll see is a very competitive bidding environment in the first quarter. You'll see lots of work out to bid typically, and you'll see more bidders in the first quarter.

So I think it's yet to be determined, Nick, exactly how that $1 billion a year additional program will hit the street, how it will affect the bidding environment, but the Washington market is healthy. It's got a very strong private sector. It's very diversified from the East to the West. The Cascades lie in between.

And I think you're going to see that continue to make it healthier, especially when the FAST Act ties in at the same time later on in the year.

That's going to be a really nice addition to the Washington program, because as I mentioned before, I see the FAST Act starting to hit the streets in the third and fourth quarter of this year, and then you got the $1 billion a year program on the Wash DoT on top of that. I think you are going to see Washington do some really nice things..

Excellent. Thanks for taking my question..

Okay. Very good. Thanks..

The next question comes from Alex Rygiel of FBR. Go ahead..

Good morning. And thanks for taking my question.

Jim, could you talk a little bit more in depth with regards to the material sales business and where pricing is today relative to the past peak?.

Yeah, sure, Alex. So the business is – we ought to break it, in Granite, into two components for our Materials business. First of all, the aggregates business, which is much easier to track because you have a very static number of inputs to it.

You have aggregates you're extracting from the ground, and you are using a host of different methodologies to crush and make product. Those products have risen in pricing somewhere, I would say, 3% to 5% last year. We see similar type increases this year, maybe more, and it's a nice methodical market, and I like where it's going.

I think that could have an inflection point later in the year again, if we start seeing the volume demand from both private and public hitting at the same time. We haven't seen that yet, but we have seen a healthy volume increase, about 10% year-to-year in that end of the market, which is healthy which, has helped the pricing.

Now the second part of the business is a very interesting part of the business, and that's the asphalt business. The asphalt business, as you would imagine, is driven heavily by crude pricing which liquid asphalt is a major component of asphalt, and it's the bottom of the barrel out of the refinery.

And as those prices dropped tremendously over the last 18 months, so therefore has the pricing for asphalt.

The key ingredient there is to be able to not price the asphalt with the full reduction in price of liquid and capture some upside in the gross profit margin, and our businesses have been able to do that, and I think they're going to continue to be able to do that.

That is a very healthy market as well, but what happens with the asphalt market is the big volume from that market is typically driven by public projects.

You get very large, we'll call them asphalt overlays, and whether Granite does them or a third party, we really like to sell products in the very large arenas there so that we can get some fixed volumes out in our plants.

So I think again in the Materials business and the asphalt business especially, once you see the public sector gearing up and you start seeing more of the surface work coming into play, I think you're going to see that part of the Materials business, the asphalt side, maybe reach an inflection point at the end of this year or beginning of next year..

Thanks. And Jim, you referenced that Granite's likely going to be bidding on something like $15 billion worth of large projects in 2016 and 2017.

How does that number compare to maybe the past 24-month period?.

It's pretty much in line. It might be down a little bit, but what happens is that we have a whole bunch of them in the hopper that we haven't made our minds up on yet. So you could get one $3 billion project and go through what we call our large projects committee and get it approved, and then it would change, it would add $3 billion to that list.

I would suggest this, Alex. It is robust. We're being very choosy, and we're turning opportunities away, and the amount of work that we're going to bid is going to be in line with what our capabilities are..

Very helpful. Thank you..

You bet..

The next question comes from William Bremer of Maxim Group. Go ahead..

Good morning, gentlemen and Laurel..

Good morning..

Good morning..

So I want to add on the last couple of questions, Jim.

Let's go to the pricing as well as your capacity and help us understand how you are bidding, trying to balance not overextending yourselves near term?.

Okay. That's an interesting question because that's what we used to chat about 10 years ago. Do we have a capacity issue, is there some saturation point in your business that you are going to not be able to do any more, and you are going to turn and walk away.

And the key ingredient is exactly what you said is that you start optimizing your margin expectations long before you reach a saturation point so that you don't fill yourself up with lower margin work and then lose the opportunities in the higher margin work.

I'll tell you with the businesses that we have across the country, we have a huge opportunity to increase the amount of work we do in the Construction Materials segment. We are nowhere near capacity.

But it is smart business to watch what goes on in the markets and not reach capacity too quickly, because what we have seen historically is that our competitors are smaller, they have less elasticity in their business, and they tend to fill up faster when the markets improve and then there is a significant change in the pricing and that's that inflection point.

So I don't see a capacity issue for Granite today. I think that it is a good business to continually move prices up, find out where that pressure point is. And I think we are going to be working that very hard over the next – in 2016..

Okay. Good color there. Thank you. My follow-up is overall on labor and hiring at this point.

Are you seeing labor starting to tweak up here or due to the fallout of the shales, do you feel more in essence that it's contained?.

Well, I'll say it's both. You are getting some other industries. There is an influx of workers from the other industries. No doubt, the upstream oil industry has allowed some opportunities for those individuals to move into the construction segment which is good, but of course that's not in all geographic parts of the country.

The other thing that we've seen is that when we are on prevailing wage jobs which is a big chunk of our work, we typically are able to get craft workers because the wage rates that we are providing those craft workers is higher than the open shop or non-prevailing wage work in the same geographic market.

I would suggest that there is an equal pressure point on talented professionals in the industry.

And when you start obtaining large work and you need 30, 40 engineers, different types of capabilities, scheduling, quality, safety, the technical side of the professional business, I think, is going to be actually reach a saturation point before the craft level does.

So there is a duplicate of concerns but as long as you are willing to reward those people properly, I think those kind of companies are going to make it through this nice upward pick in the market. But if you are going to stay on the cheap side, you're going to have a problem obtaining and retaining people..

Okay. And one last one if I could just tweak it in. Texas had quite a bit of rainfall mid-November to the end of the year. Was there any impact to the projects that you are doing there? You are doing some material projects there..

Well, absolutely. Yeah, we are doing some big work in Dallas and it has affected – that's the IH-35 job. It has absolutely affected that job. We've had a big – we had a big wet year at the beginning of last year as well that had a significant negative effect in Texas. Then it dried out.

We made huge progress, but I would say that that job – one job there in Dallas itself has been affected by rain over the last 12 months..

Okay. Thank you, Jim..

You bet..

The next questioner will come from Sameer Rathod of Macquarie. Go ahead, sir..

Hi. Good morning. Thank you for taking my questions. I think in the past you guys have talked about a total sales funnel or total work outstanding that you guys see if I recall correctly it was like a $50 billion or $60 billion number.

How is that number tracking? I know you've said $15 billion over the next year or so, but how is the total amount of work that you are seeing coming to market changing?.

Well, I would say, Sameer – by the way, good to hear from you. I'd say that it's pretty similar to where it's been. It may be not even getting bigger. The overall market size is growing.

And the question obviously is when we give you a $60 billion number, those are things that are in our hopper that we are looking at and that we know are out there and that we are tracking.

And it could be two or three years down the road before that actually comes into play and there are also times where the owner decides to go a different route, break the project up into smaller projects or they can't get the permits to actually build the work. But I don't see that changing. I actually see the amount of construction work growing.

Thinking about the marketplace on construction that's the $75 million and less on the Granite portfolio side, I think that long-term outlook for work is actually growing quite a bit. The other thing that's happening is that we are looking at a more diversified kind of pile of work out there in the U.S.

So we are not just looking at a big transportation project anymore. We are looking at big power projects. We are looking at big water facilities.

And as we expand our horizons and diversify, I think that what you're going to see is that pot and we can talk about this in the future, the size that overall long-term tracking is going to get bigger and bigger..

Right. Right. That's helpful. I guess my next question is on oil and gas. Obviously, you don't have any direct exposure, but you're in a stage that lot of the economy is based on oil and gas.

Have you seen any kind of second or third order derivative from the decline in oil and gas on kind of how the public officials are thinking about infrastructure?.

Well, I think that – yes and no.

I think certainly the oil sector and the crude pricing has caused some revenue issues in certain states, and I mentioned in my remarks that the drop in crude and the Board of Equalization just dropped some significant gas tax requirements in the state of California, and you think about a state that we do have a nice business in that has been hit with the – because of the oil industry – is Alaska.

That's a very focused state on oil and energy, and that has hit that state now. We've done quite well up there and we anticipate doing quite well, but certainly it puts struggles on states like that.

But it's interesting in the power market, we're actually seeing our power business having tremendous opportunities, by changing the transmission and distribution systems and looking at new power lines and decommissioning lines and expansion in right-away projects and the construction management portion that we do.

So the oil and gas side and the related energy side except for the gas tax reduction in the state of Alaska has actually helped our power business..

Right. Right. Okay, thanks..

All right. Thank you..

The next question comes from Adam Thalhimer of BB&T. Go ahead..

Good morning. Congrats on a nice Q4..

Yeah. Thanks, Adam..

Thanks..

Thinking about California, for 2016, how much of a headwind does the road budget for 2016?.

Well, I wouldn't call it really a huge headwind. I would call a lack of what I would want to see as a huge tailwind. There's plenty of work in California. The private sector is alive and well in California.

I'm just frustrated that California can't get – I call it (45:45) and get moving on a very proactive environment where we know that this work has to get done. So California is one of our stronger states right now overall.

And the way that we are performing business, the bottom line, the revenue and everything else, it just has another significant notch up that it can go when the politicians do what they are supposed to do..

Got it. And then I think there was some hope early on with the FAST Act that it could lead to higher spring lettings. Is there still a chance of that? I know you said that maybe the bidding was really too competitive..

Yeah, I think there is. Well, no, I think there will be spring lettings.

But remember what happens, Adam, a spring letting, let's just say typically you've got more states, you've got a minimum requirement of 30 days to 60 days of public announcement to actually put a public bid out, and then you've got somewhere between 30 days and 90 days to award the job typically inside the contract, and then you've got another 30 days before the notice to proceed and you physically get out on the grade.

So that's why I was saying that I think we'll start seeing the positive effects of it late in the year. But we absolutely can see some spring lettings. But you still won't see the financial effects of that until later in the year..

Got it. And then can you give any color – the Large Project margin was 10% last year, maybe mid-teens next year.

I mean how should we think about it for 2016?.

Well, what we mentioned there was that it should be somewhere in between. We said that it should be better than last year, but we don't see it at the mid-teens range in 2016. We've got some early progression projects.

And again, we've mentioned before that at the early part of our projects, we hold some moneys back to try to make sure that the jobs are heading in the right direction and when the portfolio mix is still young, you are going to naturally have a lower margin expectation.

So we mentioned 2017 is when we start seeing getting back to the typical expectation, 2016 will be somewhat as a progression from where 2015 was and in between 2015 and 2017..

But everything you've seen with those four mega jobs that you started late last year is encouraging to you or any change?.

Well, they are very complicated jobs and complex inside and outside, but all four of them are progressing quite well. Again, only two of them are over the 50% mark, and two of them are early in the stage, just the I-4 is very early in the stage and the Pennsylvania job is in the first quartile of its stage.

So again, we expect lower margins while they are in those early stages. And the Tappan Zee is progressing quite well and it has had a very nice 2015. Weather certainly helped in 2014 and the previous two winters did not help that job. And I think I-35 has progressed quite nicely in the second half of the year.

It got done with some serious range in the first half of the year and it is progressing well now as well, but what happens is that when you get your new work, now you start having to add on, you've got the 202 which is a really nice win for Granite. You got the Alabama I-59, I-20 job, another nice win.

Now you've got to mix those young ones back into the portfolio. So I think that our projects are going well.

I think that you are going to see that we're going to continue to increase the backlog and progression will be a combination of how well we execute and how well really we can get to work in some of those locations where we've got some significant winners. New York so far is good. Pennsylvania is kind of come and go.

I know they got some weather hitting right now, but overall I think our Large Project progression in 2016 should improve from 2015..

Perfect. Thanks, Jim..

All right. Thank you..

The next question comes from Michael Dudas of Sterne, Agee. Go ahead, sir..

Thanks for the follow-up. Cash flow pretty strong in the quarter, looks like pretty good year.

Laurel, remind us about the debt repayment, where that's headed? And the follow-up, Jim, given the outlook that you're presenting and you said in the past about potential acquisitions, how do you feel about that today going into what looks like to be pretty good upturn next few years?.

Okay.

Why don't you hit the cash line first, Laurel?.

Sure. So we have private placement notes that have five years of $40 million of payments, and the first payment was due in December of 2015.

We refinanced our credit facility in the fourth quarter in October, and as part of that, we took a portion of it as a term loan, and we used $30 million of that term loan to pay off some of the $40 million and then used cash for the remainder of it. And so, every year, we will – and our plans for 2016 are similar to what we did in 2015..

Right. And then the other thing that happens with that new credit facility, obviously larger than our old credit facility. It ties nicely into the second question, the M&A side, and we certainly are considering expanding the business through acquisition. We are in the market to look and see what's out there.

We like, and I mentioned it before, diversifying geographically and in both end market, diversifying into the water market I think is really top on our list, geographically diversifying our vertically integrated business is top on our list.

And I think one of the things I've always said that's really important is that, you do not move into the acquisition mode before you are efficient and effective in your core business at all times. And I'm happy to say that I think our teams have done a tremendous job in 2015, becoming more efficient, more effective.

And our strategic plan is to grow both organically and through acquisitions..

Thanks, Jim and Laurel..

You bet..

Thanks..

The next question comes from Brian Rafn, Morgan Dempsey Capital Management. Go ahead, sir..

Good morning, Jim..

Good morning, Brian.

How you doing?.

Doing good. We talked about $15 billion that you were looking at bidding out.

How much of that is really high-end design build?.

The majority of it..

Okay..

I would suggest that when we start looking at large projects work now, Brian, there's very few jobs. Remember, our threshold is $75 million, and most of the jobs today in this environment are way over $75 million. And most of them are design build.

I'll give you an example of one that's not, that's actually bidding today, is a job in Hartford, Connecticut, which is a somewhere between $200 million and $400 million tunnel job that is a bid build. So different types of jobs are taking on different contractual outlooks. Tunnels are typically bid build.

The other projects we're looking at are almost all design build nowadays, all the big ones..

Okay.

When you do joint ventures, you're talking about partnering, is there a priority to being the general, is there a benefit to being the lead? Or is it better to be just partner and diversify?.

Well, okay. So that is a very strong topic of discussion inside Granite as well. And it's a very strategic question, Brian. In fact, it's a really good question, because there's a combination of things that you have to look at when you're – we'll call it yourself a sponsor or a non-sponsor on a joint venture.

And when you get into design build, you have to make sure that if you're going to sponsor a job, that you have the personnel to lead the job and that could be up to 40 or 50 people. And I mentioned the engineering staff, and those people that you're going to need to put on a project in order to be the lead player.

So you need to have those people available if you're going to lead a $1 billion job and be the sponsor. The second thing that you need to be a sponsor is to make sure that you can handle the cash requirements of a large project.

A lot of these projects will start with a cash call and equity infusion, and if you're going to be a 50% or 60% partner, you need to do some very strong cash flow curves on these jobs to determine what kind of cash the company is willing to infuse in the job before you get a distribution. Now, secondarily – so that's part one.

Part two is, a lot of times you can obligate yourself to a partner on the premise that if you are a non-sponsor or you're taking a smaller role today, that you promise your partner you're going to take a larger role a year down the road.

And because it takes a lot of different requirements from the partners and sometimes there's not an even percentage of effort going into play, you could be a 40% partner and put in 60% of the assets and the resources. So you have to have sometimes sponsor, sometimes non-sponsor.

I think you're going to see Granite on jobs $500 million to $600 million and lower typically be the sponsor. And I think that when we get to the larger jobs, we would like to increase the size of projects that we're sponsoring. We're healthy.

We're developing a lot of people in the field today, and I mentioned this earlier, in roles so that they can actually run these $1 billion jobs going forward and when they become completed on the jobs they're on and they become available into Granite for future work, I think you're going to see us bidding and sponsoring larger projects going down the road..

Okay. I appreciate that.

On the aggregate side, how much of the volume are you guys using internal versus external sales?.

It's about 60% external, 40% internal..

Okay. Okay. All right. And then you mentioned selectivity and you guys have always talked in the past about having discipline on bid day.

The types of – and I don't know if you can quantify it or give some color, what are the types of projects that you've stayed away from? Are there geographic areas, are there specific owners, you don't have to obviously mention names, but what are the types of things that through history that you've decided to avoid?.

It's really important, Brian. That is such a big deal, especially in the Large Projects business. And I'll tell you what really surfaces in choosing and not choosing a job.

Number one, can you get the right team? Are you in the game early? Do you have the right partners? And does that allow you an advantageous position on the project? Secondarily, we look heavily at the contractual documents themselves.

How are they set up? Does this owner provide reasonable cash flow? Does this owner have a dispute resolution program that is fair? Are they the judge and jury with the dispute? And also we look at the history of how we've done with these agencies across the country.

We dealt with the majority of these bigger agencies across the country and we know how they treat people.

The other thing we look at is when we go into a large job, we go okay, who are the competitors on this job and can we be competitive? And if there is somebody that we know has an advantaged position over Granite, then we are not going to spend millions in bidding a job if we really don't think we have a great shot at getting the job.

So there is a host of issues that go into consideration and we actually have a complete committee in Granite that's led by our COO and our Head of our Large Projects Group and we have – we look at risk mitigation through our risk department, we have our legal department heavily involved in terms of how the contracts read, we have our business development group in there to look at the partnerships with not only our joint venture partners but our engineering partners.

It's a very comprehensive group that looks at all the opportunities and says okay, this one you have a chance for obtaining the work and you have a really good chance at getting the margin that Granite needs in order to come out to back end of the job..

Yeah, okay. I appreciate it. And then several years ago during certainly the trough very difficult times, you talked about more mobility with your crews shifting around, expedite estimators.

As you guys build in capacity, as you utilize capacity, as you build up kind of getting back to more normalized margin structures, is there less mobility because there is maybe less scarcity of business or are you still seeing more transfer and more mobility moving all over the country?.

Okay. So I think there's two parts to that question, Brian. First of all, I think in Large Projects there is always going to be mobility. Our people have to go to where those specialized large projects are and that's what our people sign up for and they know that, and they're very good at that.

Now when you go to the Construction business, when you start seeing the local markets get healthier which they are, then I think you're going to start seeing less mobility of those people because they're going to be in a market where they look out in front of them and see five years, 10 years of growth in the local market, and they know that they can create significant value for the company staying in that local market.

The company is happy with it and we let them stay in those local markets. So, two parts to the question. The smaller work is going to be less mobility required due to the strength of local markets today. Large projects will always have mobility..

Okay. And then what – back to the old – yeah, I'm going to go back to legacy, so the old branch term business, which you guys would kind of call Construction today.

What is the constitution of that business? Are you seeing some private sector real estate? Is it industrial parks? What – is it city and county highways, what kind of is the bread and butter of kind of that rebuild of that business?.

Well, you nailed it, a lot of it.

It is the fact that the – what happens in those local markets and you put a geographic boundary around the local market, Brian, and you say, okay, what's the health of the state, and then you dial into what's the health of the county or the larger next jurisdiction, and then what's the health of the local municipality? What's going on in the private sector and residential? Residential by the way I would say is not something that is driving our business today, but we're snipping opportunities, we are seeing developments starting and I'm going to say starting to be built again.

But the commercial market is very strong. But what else we've done over the last five years is diversified into other parts of the business. We're doing a lot of work directly for the larger rail companies today. We are working for water facilities today that we didn't do. We are doing pipeline rehabilitation that we didn't do.

We are seeing the renewable energy business that we didn't do. And the other thing that we have actually migrated into and most of it is $75 million or less is in the federal market. We've actually gone to a whole new client. We've got a nice couple of jobs bidding in Guam, are coming up in the next couple of months.

So we've diversified our portfolio and that's the strength of the Construction business today that we didn't have five years ago, Brian..

Right. I got you. Hey, thanks, Jim. Appreciate it..

Okay, Brian. Thank you..

And the final question for today comes from – pardon me. The final question today comes from William Bremer of Maxim Group. Go ahead..

Thank you, gentlemen.

Just update on CapEx of 2016 and in particular what type of equipment and what are the lead times for that equipment? Have they increased at all?.

Sure. I think our CapEx is definitely going up. We've been typically in the 2% to 3% of revenue range and we'll stay within that range, but it's sort of migrating towards the upper end as we start building new work.

The other thing that happens is and I'll tell you one thing that's changed in our portfolio of capital expenditures is the tunneling industry. So when we go out and sponsor a large project, we now have to go out and buy these very, very intricate tunnel boring machines that can be $20 million each.

Now, we typically get paid by the owner very quickly because they understand the cash requirements but that makes a very quick change in the overall volume of capital expenditures and those are quick turn items, so that's not a big deal.

I will say this that we've done a complete kind of reboot of our capital expenditure program inside at Granite and we're ordering equipment now in the fall of the previous year for delivery in the spring. And that was something that I commend our COO, Head of our Equipment Department and our local businesses are just planning better now.

And so you give a six-month led time, but you've got to be that far in advance of the business..

Got you, Jim. Thank you..

Okay. You bet. There was another question, though, that I better address. So, what happens if Trump gets elected, do we have bridge building abilities? I thought I heard that one in the background, and we've got tremendous bridge building abilities and that's what we do.

So, certainly, we are ready for the next elected official to help build bridges and entire infrastructure in the U.S..

Okay. This ends our Q&A session for today. I would now like to turn the call back over to our host..

Okay. Very good. Well, thank you for your questions today. And thank you again to all the Granite employees for working safely, working hard and living our core values every single day. We look forward to seeing a few of you in San Francisco on Monday, Denver on Tuesday and Chicago in a few weeks from now.

And as always, Laurel, Ron and I are available for follow-up if any of you have any questions at all. Thank you. Have a good day..

Thank you. That concludes today's conference call..