Good morning. My name is Aronson and I will be your conference facilitator today. At this time, I would like to welcome everybody to the Granite Construction Investor Relations Second Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks there will be a question and answer period. [Operator Instructions] It is now my pleasure to turn the floor over to your host Granite Construction Director of Investor Relations Ron Botoff. Sir, the floor is yours.

Thank you. Welcome to the Granite Construction Incorporated second quarter 2016 earnings conference call. I am pleased to be here today with President and Chief Executive Officer Jim Roberts and Executive Vice President and Chief Financial Officer Laurel Krzeminski. We begin today with an overview of the Company’s Safe Harbor language. Some of the discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to grant its 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 and investor.graniteconstruction.com Thank you. Now I would like to turn the call over to Granite Construction Incorporated Chief Executive Officer Jim Roberts

Thank you, Ron, and good morning, everyone. Now deep into our construction season across the country, I want to begin today by both thanking our employees for their tireless work and renewing the challenge to our teams to raise the bar even higher on safety. Safety performance remain solid and our focus must be unrelenting as we lead efforts to reduce job site incidents even further, enabling and empowering our employees and the public to get home safely each and every single day. Early second quarter activity responded slowly from seasonal impacts across our business during the first quarter. The back half of the quarter, however, was marked by strong acceleration, solid demand, and we gathered significant momentum in June to drive improved year-over-year results. Steady revenue growth and solid execution across our business portfolio drove gross profit growth, operating income expansion and improved overall bottom line performance. Certainly there are stand-out areas, some positive and some less so. We remain particular encouraged that, in alignment with our strategic plan, geographic and end market diversification has created a positive balance for our business. And it is this positive balance that produced another quarter of steady growth and another quarter of record backlog at nearly $3.8 billion at the end of the second quarter. Moving to some detail in our business; let's start with the construction segment, which today is providing a considerable and positive balance to our business. Here, steady private nonresidential market activity, our focus on new and diversified markets, and our emphasis on strengthening client relationships all are factors allowing our teams to penetrate and expand more deeply into new and existing markets. This helped drive year-over-year revenue growth of more than 8% in the second quarter as well as nearly 40% segment backlog growth to more than…

Thank you, Jim and good morning, everyone. Second quarter 2016 revenues were $604.6 million, up 6.2% from last year. Net income improved 47% year-over-year, pushing earnings per share to $0.35, our best second quarter since 2009. Gross profit increased 14% year-over-year to $73.2 million, with gross profit margin at 83 basis points to 12.1% as a strong construction segment and steady construction materials segment more than offset a weaker large projects segment contribution. SG&A expenses increased 2.5% year-over-year in the quarter to $48.7 million. On a year-to-date basis, SG&A has increased 6.4% driven primarily by increased compensation expenses. Our balance sheet remains strong, with $238.8 million in cash and marketable securities at the end of June. As is typical, our balance reflects the seasonal nature of our business. In addition, we invested earlier and more in CapEx to support efficient project starts and executions on our growing backlog. As a result, in the first half of 2016, CapEx investment increased to $48.8 million, up nearly $33 million year-over-year. Total contract backlog at the end of the first quarter finished at an all-time record of nearly $3.8 billion, up 25% from last year. Large project construction backlog increased 20.1% year-over-year, to a record level of $2.6 billion. In the construction segment backlogs grew to yet another record of more than $1.1 billion, up nearly 38% from last year. As we saw in the first quarter, broad based demand of second quarter bookings across end markets and geographies, continuing to highlight the diversification benefits and the broadening of opportunities for our business. Backlog at the end as a second quarter includes the $279 million South Hartford conveyance and storage tunnel project, a consolidated joint venture, with our portion at 65%. However, the backlog does not yet include the $874 million Honolulu Authority…

Thank you, Laurel. All in all, the second quarter performance was solid, reflecting the positive balance in our portfolio of work and businesses. Our vertically integrated businesses as well as Kenny [ph] are expected to continue to provide excellent growth and profit opportunities in the second half of the year. Our large project segment remains focused on efficient start-up of new projects, opportunities for improved construction execution on current projects, and resolution of design and owner-related issues, all keys to improved operational and financial performance. Today with record backlog on board and an improving public spending environment on the horizon, it provides us with confidence that we can continue to grow in 2016, 2017 and well beyond. And with that, we'll be happy to take your questions.

[Operator Instructions] Our first question is from John Rogers of D.A. Davidson. Please go ahead.

Good morning. I guess, first thing, in terms of the large projects, you indicated that margins would be lower into 2017. Are you saying that -- I mean, you're, what, 6.9% for the first half of the year. Is that the run rate that you're looking and is it -- it sounds like it's fairly broad-based across a lot of these projects and I'm just wondering if you just kind of run through them all at this point to before we can see that margin improvement? Is that the situation? And then as a follow-up, I'm wondering: the claims that are outstanding on these projects. Could you give us a sense of the size of those in aggregate? I know you probably don't want to discuss them specifically. And what the timing is on when you might get to a resolution.

Okay, John, this is Jim. Let me help out on this a little bit. So I think what we're trying to say is that we're running demand up to the first half of the year, 6.9%. We have expectations in the mid-teens, is what we've been transmitting for quite some time. And we don't expect to get back to our expectations until well into 2017, because of what we have today are a lot of jobs that are ongoing that have some conflicts with owners and designers and it's going to be a matter of when those resolutions occur. Until we get ourselves starting to see an uptick back closer towards expectations. So I wouldn’t suggest that 6.9% is the run rate. But I would say that I do anticipate as we move closer towards the end of 2016 and into the first half of 2017, I don't believe we're going to be back up to expectations until later in our overall timeframe. So that's the answer relative to the financial issues. As far as claims go, we try not to talk about the amount of claims or the size of the claims but I will tell you, they are not reducing in size and they are significant. And they are -- and what happens in large projects and what we've seen and I tried to discuss that in my comments, is the larger the projects, the larger the issues. And what we find on these large projects is that the owners typically do not want to resolve the issues until the job is at some stage of near completion. So as these projects get toward completion, the current ones that we're building. We expect to have resolution to some sizable claims, but we can't tell you exactly when, because when you go through the arbitration, mediation and the judicial system. You never know when you're going to come to a settlement and so the timing is a little uneven but there will be an uptick as these jobs mature and get towards the end of them.

And John, our 10-Q will be out later this morning. And included in a disclosures are some amounts relative to what's in revenue and gross profit associated with claims. So you can see more details there including increased contract cost.

I want to make it clear John that the key here is that we've been -- we believe that mid-teens is the expectations for large projects business. We're not going to get there in the short run.

And that's what your bid pricing is presumably?

Exactly, that's where we expect that business to be at the end of the day, right now it's running substantially lower than that and there is a host of reasons why and we don't want our investors to think that this is going to change overnight. It's going to take several quarters for us to get resolution and burn-off some of these others -- some of these old jobs and bring on the new jobs and I will say this, and I mentioned it, the newer jobs that we have in our portfolio are starting off quite nicely.

And John, I think we've discussed this before but -- you mentioned bid margins, it depends on the job. So the more complex the job is, the bid margin typically is higher and easier less -- like bid build versus design build and things like that typically have lower margins. So there is a portfolio mix.

But our portfolio expectations have not changed John.

Thank you.

Our next question comes from Jerry Revich of Goldman Sachs. Please go ahead.

Good morning, everyone. I'm wondering if you could talk about your appetite to continue a high level of bidding in large construction, in the past you've spoken about not wanting to get that portfolio to outpace the construction backlog by two out of a degree to maintain your risk tolerances. And in your prepared remarks, Jim you spoke about pretty robust outlook for state EOT budgets, can you just talk about where you expect your bookings to shake out over the next couple of quarters? And then a separate question, how have -- you see your approach to bids change post the issues that you've highlighted over the past two quarters? Is there a process difference in terms of what we're seeing booked in backlog today compared to these projects that you're working through now?

So first of all let's talk about the balance between large projects and construction. There is no doubt that -- and I've mentioned this several times that the risk portfolio of our business is very, very important; and we do not want to have our large projects business outpace or say the combination of the other businesses which are fairly minimal on the risk scale. So the way we're anticipating this is that we are more selective on large projects, we are looking at large projects at higher margins than we have in the past. And we are looking at projects that tie in line with the completion of our current projects so that we could ramp up with the staff on the new projects. We're being very, very picky, we're being -- we're looking at projects that have definitely higher margins. And we do anticipate the construction part of the business to grow faster than large projects which it will when you look at the amount of backlog. We grew our backlog over $300 million the year-over-year and the turn on that construction work tends to take 1.5:1 or 2:1 sometimes ratio. So we are growing the construction segment faster and that is exactly what we want to do but the key to large projects going forward is that it's not slowing down, the demand in the U.S. for large project work is not slowing. Our job is to be substantially more selective and to look at the projects that are going to provide higher margin expectations with commensurate risk. So we are absolute -- you are right on Jerry, relative to what we told you previously; we do not want to grow large projects as fast as the rest of the business.

Okay, thank you for the color. And then, this is the second quarter that you've mentioned design has been an issue which I think we can drive continued cost overruns on a sustained basis. Can you just provide some more context than where we are on that project, specifically? And then, it looks like there was a crane issue on the tapping the project, post-quarter end I'm assuming that any provisions are included in your guidance but maybe you can touch on those two items and I will get back in the queue. Thanks.

Sure. On the design side -- as we as we continue to mature into these larger mega design build; finance, operate, maintain projects. The design portion of these jobs is critical. And whether it is a combination of the construction joint venture, design changes, owner related design changes -- what we've seen is there have been a host of design changes that we believe are compensable items, and that either third parties or owners are questioning. So we are taking a much more proactive approach towards design management, I mentioned that in the discussion where we want to make sure that between us, our designer, and the owner, that we have our hands on the design because what happens is if, if somebody in the contract relationship changes the design it changes the scope, changes the magnitude of the work which can significantly change the cost of the project. And we've seen a host of those occur over the last couple of years. And so whether or not it is the construction partner or the design partner or the owner, what we're working on is to make sure that all three of those groups are in alignment going forward. There are some claims around those design issues that we're trying to resolve, we're trying not to get into that position again as we enter the new contracts. So that is a key issue and we are working closely with designers and owners so that people are more aware of the significance of the design change than in the past. So now the other deal of the crane issue, a very unfortunate issue, on Tappan Zee that occurred; we try not to do any -- too much discussion around it because it's under investigation right now. We did have a crane collapse, we were very fortunate that the bloom collapsed and did not significantly injure anybody on the job on Tappan Zee, it was cleaned up and the traffic was put back into place by late that evening. But certainly that's under investigation as to how it occurred, and certainly we have beefed up the crane supervision to make sure that it doesn't happen again. But to go any further in a discussion relative to that is not appropriate at this time in the investigation period.

All right, thank you for the color.

Our next question comes from Joe Giordano of Cowen. Please go ahead.

I wanted to touch just the larger -- the margin that you talked about for large projects getting into the mid-teens, is it a fair statement that if the market stays healthy and you're consistently adding big projects, you should almost never get there, right. Is that more of a rate that you should get to as the portfolio matures substantially you're not adding anything new? Is that kind of -- you should always be chasing that number but never really getting it in a healthy market, is that fair?

Joe, I think that's a really astute observation because we struggle with that as well, you're going to have projects early on that are going to be lower in the gross profit margin range. But I think it does really depend on the portfolio maturity because I think what happens is that at the end of somebody's projects you can have a surge in the actual margin when you settle a significant issue. So I would not suggest that you'll never get there but I would suggest that it was an even run rate then the answer would be yes, you would never get there. But it's not an even run rate and you've seen that in our results because we have settlements that occur in one quarter and we have issues that begin in another quarter. So I think from quarter-to-quarter, you're going to see some significant swings in this business going forward. And I do think that in the long run you're going to see the average of the quarters get back up into that range but there is still going to be a significant swing quarter-to-quarter.

And kind of related to that, I know, since you've change your recognition policy to recognize according to your budgets and it goes up as you release contingencies. With this seemingly like kind of accelerating issues that may get resolved as the project progresses but are there risks to some of your internal budgets at this point that maybe needs -- continue to see that typically get released.

Well, let's be very, very focused on how we account for that. We have a very -- we only account and expect on resolving issues with a very high level probability. So if it doesn't have a very high level probability then it is not in our anticipated financials. So, no -- there is probably -- and I look at it as probably not a tremendous amount of risk relative to meeting our expectations or our budgeted expectations because we've already taken into consideration any outstanding issues that we may not be getting compensated for. The other thing that's important to note is that when we have an outstanding issue, at best we recognize cost only. And certainly when we are in the resolution of a claim or a dispute, we seek an appropriate margin for that dispute as well, that is never recognized until we actually have a complete resolution to an issue.

Okay, fair enough. And then Laurel, if I could just sneak one real fast one in there. There was $3 million in other income, what was that related to?

It was related to a gain on Granite land transaction.

Okay, great. Thanks guys.

Thank you, Joe.

Our next question comes from Alex Rygiel of FBR. Please go ahead.

Thanks, good morning everyone. Jim, you sounded a little bit negative on public spending, I mean you just mentioned a comment, tepid spending, public spending, bidding activity is yet to improve. How confident are you that you are going to see increased bidding later this year that will lead to increased reward activity next year?

Well I'm very confident. The process through the Feds, when you have the fast act; it takes time to get it shifted and put out the bid and literally put into play, you get nervous to proceed, visibly get people in the field. And we knew -- in fact I'm pretty consistent I think Alex relative to my expectation that it would not have effect on us until late in 2016. It's happening, we are starting to see the DOTs starting to advertise which is good, which is the good news. What I wanted to make clear was that we're not really relying on that in the current environment and I think that's the good news, that's the really good because we're growing the business without the DOT increased spending. And we've diversified our portfolio into the private sector which is stronger than it's ever been, and we're diversifying into different parts of the private sector. But I do anticipate the DOT work to come and I think it's going to be a nice uplift in the business at the end of 2016. Whether or not we get it into backlog and get it physically put on the books of revenue is questionable in the fourth quarter, but certainly I'm confident that 2017 it's coming. And I'm also very confident that this California issue was going to get resolved, and I've mentioned it several quarters now that our anticipation is to get California cleaned up by the end of the year. And I will tell you it's gaining momentum, it is a tough environment; but in California today there is a significantly reduced amount of spending but we are actually performing quite well because we've diversified our business. So I am probably negative on the current state Alex, I should have been much more excited relative to where it's going in the next several quarters.

That's helpful. And then specifically as it relates to the construction segment; a number of times on this call you've mentioned diversification benefits, you've mentioned broadening of opportunities. Can you give some precise examples of what you mean by those two statements?

So an example would be the commercial market. We have been attacking the commercial market much longer than we've seen in the past, a lot of high-tech companies are expanding their warehousing, their office spaces; and they are moving not just in California but out of California as well, and we've got some very large projects with some of those companies. The solar side, the renewable energy side; we are doing quite a few renewable energy projects across the southwest right now. And in fact they are probably some of the more strongest clientele right now, and they are repeat business. So that's really healthy. We're starting to see water -- we're starting to get into the water business. We're seeing stronger revenue spent on the water side, we've expanded into some very nice work and our pipeline rehabilitation business is nicely expanding. And I think overall the power in the energy business is another part, we do a lot of construction management work and we do a lot of work directly for the utilities, and that's expanding as well. The other part of it that is -- that falls under our construction segment that you might not think of it is our federal, we started as a federal group a couple years ago and we're starting to create backlog and work in that part of the business that is starting to add to our backlog and add to our revenue side of our business as well. All of this is exactly -- and I mentioned this is exactly as planned so that we would not be reliant on transportation. But it doesn't mean that we aren't excited about where transportation is going because I do think that there will a significant infusion at the end of the year, and I am confident we will get something big in California. I just wish I knew exactly when we were going to get it.

Nice quarter and congratulations.

Thanks, Alex.

Our next question comes from Ryan Cassil of Seaport Global. Please go ahead.

This is Jerome Bender [ph] in for Ryan today. On the material segment, last quarter you guys talked about pursuing capacity expansion there. I'm just wondering how that's going to this point?

I'm sorry, can you say that one more time?

Yes. On the material segment, last quarter you guys talked about capacity expansion, I was wondering if you have an update on that.

Well, a couple of things on the materials business. First of all, we saw really nice ramp up in the last month of the quarter, and that's a business that is positively and negatively affected by weather. And we started getting clean -- I'll call it dry weather although not too many people in California would be happy if I said I was happy to see dry weather, but the west was turned out nice in June and it's going to be a nice second half of the year in that materials business. From a capacity standpoint, I think a couple of things Jerome that I've been chatting about is that we have significant capacity in that business system underutilized now for use. And we're starting to see as the demand increases, our capacity is not affected. We have a tremendous amount of capacity but what does happen is the utilization starts picking up, and as the utilization of these large fixed facilities that we have picks up, then so does our efficiency gains. And I think that's what you noticed in our comments, and you see the other gross profit margin moving up in the materials business. As the size and the demand picks up in that business, you're going to continue to see efficiency gains because of the large size of our business. The other thing that we are doing, we have recently been out seeking additional reserves and in markets that we believe are growing markets. And we are investing back in in the materials business, making sure we have long-term reserves. And that's another capacity issue that will give us the long-term play in that business. It is a good business, we like the business, it's solid and right now we have a really nice backlog in that business that I think is going to keep us chugging along quite nicely for the remainder of the year and well into 2017.

Thank you. I'm going to jump back in queue.

Thank you, Jerome.

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

Good morning. Those comments about the large projects segment already but can you just add any color around -- what's going on in the competitive environment there? Would bidding behavior has looked like even on shortlisted type work?

You bet, Nick. I think that what I see is that there is a handful and I've mentioned this several times. At all call say ten, ten competitors in this business that are really capable of moving across the U.S. market and compete on almost any job. The amount of work out there to bid is solid and I either have a bid list in front of me, it's steady at the 2018 to $20 billion over the next two years. And I think what we're seeing in the competitive environment is that everybody is having the same issues; they are having owner issues, they are having design issues, and we find that out when we go to these mega projects and we start teaming with. In some cases, consistently some competitors and they have the same issues and we have -- we were all attempting to resolve them to create a better -- I'll call it contractual environment in the large projects segment. So every one of our competitors knows that it has been tough to try to get these mega projects done on budget, on-track, on time without owner issues. And I do think the industry is migrating towards a better understanding, a better pricing mechanism and especially understanding the risk and pricing risk into the bids. But I will tell you, most of our competitors are seeing the same issues we are Nick.

Okay, that's helpful. And then moving over to construction materials -- the quarter saw lower revenue year-over-year, can you help us think more about the volume price mix bridge there? Any color would be helpful.

First of all, and I mentioned it that we -- we actually had a very slow start to the year in the construction materials business. We had nicely in the West -- we had wet weather for the first quarter which slowed the business down and then it carried into April that we had some wet weather as well. And so we had a little slower start for the second quarter but June was the big month. So I'm pretty comfortable that we had -- we've got a sizable backlog, sizable demand, the other thing that was interesting is that we had some of our larger portion of our materials production flow into our construction business versus outside sales. And as we've always suggested that our materials business fluctuates somewhere in the 50-50 range; half of it goes through to Granite, half of it goes to the external world; upwards maybe even 30% to Granite, 70% to the external world. But in the second quarter we saw stronger demand side on the Granite construction side. And I think it was just more of a short-term shift in the workload and I do think the external demand is going to be quite high going forward. And I do think the demand and the overall size of the business will grow in 2016 compared to 2015.

And we say pricing was positive?

Yes, pricing had some slight increases. We got some increases at the beginning of the year and they have stuck which was nice. Sometimes when you put out pricing expectations they don't stick in the market, these did stick but what's happening now is we're still eating up some of the backlog from last year. So some of the new pricing is being put out on the street and some of the old friend pricing is going across the gate. But we're seeing nice -- we're seeing the pricing is sticking, increases are sticking, but I will say this and it's really important Nick, there the markets vary, they come to -- they are geographically bound, I would say within 100 mile radius, typically of a plant facility. The market can be variably different from within 200 to 300 miles from one plant to another. Across the board I would suggest that price increases have stuck and I would suggest that we're going to probably have more price increases towards later in the year.

Okay. Thanks for taking my questions.

Thanks Nick.

Our next question comes from William Bremer of Maxim Group. Please go ahead.

Good morning Jim, Laurel, Ron. I'm going to tell you most of my questions have been answered already. Jim, you've done a fantastic job of clearing up the bunch. Let's go into labor, how is the labor side of your business?

That's very interesting question because that comes into -- I'll call it a myriad of challenges. First of all, labor in the West; and we'll talk about our day to day construction and materials business. We have a significant workforce in the West that is attached to Granite and has been generation over generation. And I don't see that issue as large as I would say in some isolated areas across the country. We are a union operator in most of the Western U.S., we have strong ties to our workforce and people want to work for Granite. And so as our business grows, which it is, we're seeing people moving from other companies back to Granite or into us for the first time. The workforce has not been a huge issue in the West. Now I will say when it comes to large projects and you move into a new environment and you start a large project from scratch and these are large projects, and they have a huge demand for labor, that is where it is much more difficult to ramp up and have the workforce consistently -- be the kind of workforce you need. In the South -- there is a lot of work going on in the South, a lot of demand for people, so we have seen turnover. And we have seen a lack of workforce there. Most of our jobs today, we've staffed and we're continuing to staff but I would suggest that this is something that the industry is going to have to pay strong attention to. And one of the things that I do find is that it does come down to wages, and the environment you're allowed to work in. People want to work in a safe environment and they know that we have one of the best safety records in the industry, so that helps us attract people. On the flipside, we are providing prevailing wage jobs in most of our jobs, that's greater than a lot of the workforce that's working for the private sector today. So we're seeing this migration coming from the private sector over to Granite because they know that the pay and the scale of pay and benefits are better. So we're going to have to pay very close attention across the country and the wages and benefits and the work environment, and I think if we can continue to do that we will not have a significant effect. But I will say Bill, it is an issue in the industry.

Good color, I appreciate it. So we'll build in a little inflation there for you. I want to just touch on some outside the core -- some of these new end markets -- one in particular being water rehabilitation there. Maybe you can take us a little bit through what you're seeing, maybe what your capacity is there and the types of jobs you're looking to perform there. Is strictly on the municipal side or are you going to private there as well?

So water is probably what I would consider one of the premier focuses for Granite's expansion going forward. And I've mentioned it before that I believe that this is a tremendous opportunity for us from acquisition standpoint as well. But today our organic expansion is focused on -- to begin with, pipeline rehabilitation. We have a very large pipeline rehabilitation business in the Midwest and we're able to use that in other parts of the country to grow that part of the business, and that's a pretty healthy part of the business. What production of water conveyance, dam, storage; the whole marketplace is starting to see the lack of water infrastructure. So we are actually working from a business development standpoint to build into Granite water expertise for business development and working with our local businesses to physically build the water systems. And so we've actually brought new people on board to focus on creating stronger relationships with the water environment and our local businesses are working with our business development group to create the expertise to make sure that we can attack the water market. But I will say Bill, this is one of the areas that I think is the fastest growing market in the country, and you're going to see Granite expand even more in that.

Great Jim, thank you.

Our next question comes from Daniel Scott of MKM Partners. Please go ahead.

Jim, just one more question on large projects there, in your opening comments you talked about how some of the more recent wins have been ramping faster and performing better than maybe the ones that have been dragging. Is that a result of a change in bid philosophy into those projects or is it lessons learned on execution? Can you help us figure out how you're improving on those newer projects?

Dan, you are right and you are right. So absolutely -- I think the bidding environment is to make sure that we learn from our past issues to make sure that if there is a risk that we put a mitigating circumstance inside the bid to understand that, if it occurs again we have some cost covered. Secondarily, what we're doing on the startup for these jobs is being much more intense relative to making sure that the design is in alignment with our scope expectations, that our relationship with the owner is a very open relationship where what the expectations of our team versus the owners team are to begin with as well. And we're staffing these projects with a host of experts -- subject matter experts until we get far along. And I would say that the first 20% of these jobs, the first 25% will tell the story of how the job is going to end up. So the startup is imperative. So I think that you're going to see us continue to put more effort on the startup at these jobs even if we are not the lead portion of the JV team. We've actually built a whole team of people inside the Granite organization that will help our partners, and help our teams at the very beginning of the design phase. We're learning actually, the interesting part is that the owners like it because what they want is the same thing we want, what they want is the fact that they know what to expect from the builder and we know that we want to know what the owner wants from us. So the combination of understanding in the biz -- what's possible, putting a risk mitigation approach towards at a contingency, and therefore, secondarily focusing on some of these owner and design issues upfront earlier, key to success.

Okay, that's helpful. And then on construction materials, you spoke to pricing a small increase sticking, and then to higher utilization as you go forward; what can we think about in terms of expected gross profit margin as you get that utilization rate up going into the fast stuff?

Well, I would suggest that that's a business where -- and we don't guide by segment but I'll give you an idea of where I think it should go or could go. That we've been up in the high-teens during -- I'll call it during the good times, say ten years ago. And I do think that it's going to continue to escalate as the demand escalates. And what the issue for us in the materials business, really is not the environment -- the demand environment, it comes down to how many months a year can we work out of our plant facilities. And I'll give you an example, the first quarter we had a material backlog, we had the work out in front of us but we couldn't work because it was a wet first quarter. And so what will happen in 2016 and 2017, the key for us is going to be how many days can we physically put material through our plants and on the grade. And that makes a huge difference, if it stays dry into December, that means that we end up having a pretty strong fourth quarter and if it starts raining in October, it means we have a pretty weak fourth quarter. So that will be a big difference because I don't think the demand side or the backlog side is going to be the issue. It's going to be the ability to produce material and put it physically on the grade. And I do think the other thing that's going to create an opportunity there is how quickly the fast act kicks in. And we'll see if the fast act kicks in the fourth quarter, that demand will continue to improve and the same thing for California, if that kicks in at the beginning of next year that will be a real nice uptick because we have a huge material business in the California market. But I really believe the key is how many days a year can our materials facilities operate. And I think that's going to be the key ingredient as we go forward.

That's great. And then lastly for me, on the kind of a macro view level, what is it that's preventing the fast act from kicking in? Is it release of funds? Is it the stake that DOTs were flat-footed when it passed? I mean what's causing the bid activity to lag by a full year?

Your Federal government. I say that and I mean -- what I mean there is that it takes time for them to get approvals; you have the environmental regulations. Remember when the Federal government provides financing through a state entity, you've got to go through LEPA which is the EPA, so they got to get signed off by all of the regulatory environments. And then you've got to get the money into the state system. And then once you get into the state system the state has to have all their procurement regulations as well which can be a 60/90 day notice in some states, it can be another 30 days after bid to physically award a bid, and then another 15 to 30 days to literally give a notice to proceed. So it's just -- and I knew this was going to happen last December when we had the act passed and I tried to make it clear to everybody that this would not have a positive effect until the end of this year, and it's going as planned Dan, this is exactly how long it takes. And remember the other thing is, you've got to look at the fiscal year, not just the Feds but the fiscal year of the states as well. So they have to wait until they get their new budgets in place before they can distribute the monies accordingly.

Great, Jim. Thank you very much.

But it is going as planned, it is on target.

[Operator Instructions] Our next question Sameer Rathod of Macquarie Capital

Just thinking about the election cycle here. How do you think about the attitude or whatever and changes to the postelections are there big differences between the parties and what they're talking about, or do you guys have any perspective or views on 2017 from that angle?

Well, I have lots of political view, but I try to minimize them in public. But Sameer, in general, both parties are absolutely suggesting that infrastructure is a huge play in their platform going forward. But historically, the democrats have been more proactive in attempting to get funding to hit the street. But we're going to see on the republican side here, there has been a major play on certain projects and certain infusion in order to create job growth. I think it's a real positive. In either case, I think you're going to see infrastructure investment go to another level under the next President. And I say this for this President tried to get infrastructure investment increased, but did not have the juice in Congress to really get it pushed through. I think when you get a new President on board, either side of the aisle here today, I think you're going to see another infusion sometime in the early next year, and I think it'll be part of the 100-day plan in both case, and I think it's a real positive for our business either way.

Okay, good. My next question is, have you seen any differences, positive or negative, in the regions that are oil and gas related, in terms of the work that do you? Obviously, I know you guys have a long exposure in Texas or what have you. As the price of the commodity has moved down a lot and I guess we’re crunching has there been any shifts in attitudes?

There has been some specific states that are totally reliant on the oil industry, I will give you an example, and everybody knows this. Alaska is a huge oil and gas state. That state has been affected. But most of the other states have the focus on transportation hasn't changed. I will give an example. I was just looking at an article on Texas. Texas transportation funding is up, up dramatically. They're looking at it as a separate industry and separate need. We do quite a bit own refineries. Upgrade, maintain, work, and we haven't seen a big shift in our part of environment due to oil and gas.

Our next question is a follow-up from John Rogers. Please go ahead.

Jim or maybe for Laurel. Can you talk a little bit just your operating cash flow and where you are relative to maybe plan and how some of the lower margins in large project work may or may not effect. I know seasonally, it's back half weighted but kind of where you are relative to plan?

Yes, so, you know, Large Projects, non-sponsored joint ventures do have a more significant impact on our cash flows, and we used less cash for funding those this year than last year, so that was positive. But, obviously, we don't get the cash earnings until they actually distribute them, which sometimes is later in progression in the project. So, you know, our -- that's one of the areas depending on new projects and how we have to fund them, that is variable at this point. Our working capital is in line with our improved business. We did spend more money on capital expenditures in the first quarter. We increased the timing of the buys to support the season and the higher backlog. So anyway expect to continue to generate cash from operations, just a sort of wild card is whether we have to fund a lot of new sponsored joint ventures or something like that.

But based on your current book of business, and I guess what may be starting up in the second half of the year, should we see the same sort of seasonal pattern, you know, substantial improvement in cash flow?

Yes.

Our next question is a follow up from William Bremer. Please go ahead.

Laurel this one's for you. There's been some accounting changes regarding stock- based comp as well as the warranty tax credit. Have these affected your tax rate going forward?

You know, I’ll need to get back to you with the specifics on that tax rate going forward. So we can touch bases with you later. But I don't anticipate -- there's nothing that we look out in the future that we anticipate having a significant impact on our tax rate. So we're still looking at low to mid 30s in our tax rate.

Okay, great. Thank you.

Our next question comes from Brian Hamilton of Morgan Dempsey Capital Management. Please go ahead.

Good morning, everyone. I've got a question. You kind of touched on how you are seeing things happen as the passing of the Fast Act as it occurs, you kind of said is that things are happening as you expected. Could you talk a little bit as far as what you're seeing from individual states? Have they kind of tapered off a little bit or are they still being as aggressive as they were? Wisconsin comes to mind. That's just the state that I'm in and DOT has been spending like crazy in this state so I’m kind of wondering if you're seeing anything like that.

Well I really wish we did more work in Wisconsin, I guess. We are starting to do a little bit of work there. So that's interesting, but no I anticipated there to be a lag and what we are seeing is the business are getting healthier. So that's good but they've got to physically put the work out to been put on the street and get a bidder and then get it in the contract. But most of the states that we work in, in fact a big chunk of the states, I’d guess maybe 20 across the country. Tell us it's in the queue and you should expect a ramp up in bidding in the second half of the year and that's what we anticipated.

Ok, great. And you don't generally touch a lot on Canada, but could you maybe just put a little color on that?

Well, we certainly believe Brian that getting up into the Canadian market is something in our game plan. You know, it's always interesting that we want to expand outside the U.S. borders when we believe the market is as good or better than inside the US borders. And today the Canadian market’s pretty good but so is the U.S. market. So today we've actually turned down a couple of opportunities to do work up in Canada and very recently we've turned them down. And we're probably going to slow that environment down a little bit while we see a ramp up in the U.S. and we think the opportunities here are significant. But I do think in our longer term plan, our five year strategic plan, you will see us with an expanded operation in Canada. The question's going to be when the timing occurs.

Okay. All right, well that's great. I heard you guys are also good at building walls, so that's a positive as well.

Okay, thanks, Brian.

This concludes our question-and-answer session. Now I would like to turn the call back over to our hosts.

Okay everybody, thank you for your questions and a sincere thank you to all the Granite team for a solid start to the year. Please continue to work safely and efficiently as we target 2016 to be the safest year in the company's history. To all of our investors, Laurel, Ron and I are always available for follow up if you have any further questions. So thank you everyone.

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