Good morning. My name is Keith, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Granite Construction Investor Relations third quarter 2016 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer period [Operator instructions]. Please note this events is being recorded. [Operator Instructions] It's 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 third quarter 2016 earnings conference call. I'm pleased to be here 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 statements made today. Please refer 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.

Well, good morning, everyone, and thank you for joining us to discuss another quarter of solid execution. The focus on efficiency of our teams continues to grow and expand, always, with an emphasis on enabling and empowering our employees to get home safely each and every single day. Today marks the end of an internal 90-day safety challenge called Lead From the Heart, which has emphasized three themes. People over projects, stories over statistics, and relationship-based safety. Daily, weekly and monthly communications during safety meetings, inspections and observations have engaged employees to gather and share stories on best practices across all of our businesses and projects from coast to coast. We expect teams will continue to emphasize the learnings of this program as they work to finish a very busy year safely. We believe strongly that safe work is a key component to operational and financial performance. I personally challenge our teams to keep up the momentum and finish the year as safely as possible. Late second quarter momentum carried into the third quarter driving strong year over year results, 7% revenue growth translated into our highest revenue quarter since 2008. It spurred more than 20% improvement in net income to more than $37 million, our best quarterly performance since 2012. And the business has not paused. Backlog remains at an all-time high of nearly $3.8 billion, reflecting steady public market conditions, which remain positively countered by private non-residential demand. Gross profit growth, operating income expansion and improved overall bottom line performance continues to be driven by solid execution across our business portfolio. Let's look first at the construction segment, the driver to our year over year profit improvement. Segment revenue growth of nearly 9% in the quarter helped push margins up to more than 15%. That makes it 10…

Thank you, Jim. And good morning, everyone. Third quarter 2016 revenues were $803.9 million, up 7% from last year. Net income improved 20.6% year over year with diluted earnings per share of $0.92 up from $0.77 last year. Gross profit increase 12.1% year-over-year to $107.7 million with gross profit margin up about 60 basis points to 13.4% as a strong construction segment and steady construction materials segment, once again, more than offset a weaker large project segment contribution. SG&A expenses increased year-over-year in the quarter to $54.2 million, driven primarily by compensation expenses. Our balance sheet remains strong with $258 million in cash and marketable securities at the end of September. Cash and working capital trends, have been impacted this year primarily by increased CapEx investment as well as the addition of two new consolidated joint venture tunnel projects. We've invested more in CapEx to support efficient project starts and execution on our growing backlog with year-to-date investment increasing to $67.9 million up about $41 million year over year. Total contract bag log at the end of the third quarter finished at a record nearly $3.8 billion, up 21.9% from last year. Large project construction backlog increased 19.8% year over year to nearly $2.7 billion and it now includes our one-third portion of the $874 million HEART project. In the construction segment backlog grew 27.2% from last year to more than 1.1 billion. As we have seen each quarter this year, third quarter bookings were broad based across end markets and geographies, continuing to highlight the diversification benefits and the broadening of opportunities for our business. Looking at the segment detail, third quarter construction segment revenues increased 8.8% to $464.6 million with gross profit margin of 15.4% up more than 120 basis points from last year. Solid execution across the…

Thank you very much, Laurel. We remain encouraged by the progress our teams around the country are making. We are focused on execution of our strategic plan, looking to capitalize on a strong market, a large project segment with strong demand, and performance that is stabilizing. And solid demands for our materials businesses across the west. In California we are confident that significant long-term transportation funding solutions are achievable either in 2016 after election day or early in 2017. Our focus on California's elected leaders in this area is unrelenting. We continue to focus on opportunities to drive improved operational and financial performance, both through execution on our record $3.8 billion of backlog and solid demand trends in 2017 and beyond. And with that we'll be happy to take your questions.

Thank you. [Operator instructions] Our first question is from John Rogers, D.A. Davidson.

I guess first thing is, I mean, you mentioned the shift in some of the construction materials work for internal use, and can you give us a sense of how much of your operating income, if it's possible, was transitioned between the construction materials and the construction segment?

Well, I'm not sure I understand the question. I mean, if it's -- the operating income adjustment, overall, probably didn't adjust itself. It just went from one segment to the other, John. It actually moved from the materials segment to the construction segment. Overall it would be the same at the end of the day.

Sure. I'm just trying to understand how much moved. So as we think about looking forward, how to think about margins in each of those segments.

Well, okay. So, just as a reminder, John, you know our business quite well, as we bid work, sometimes we'll bid as a materials supplier we'll bid it as a contractor. And in some cases, you know, we'll be competing as a contractor on jobs where we'll actually be supplying the materials to our competitors. And in that case, it just depends on who gets the job at that time. You get a very large project and we'll call it with hundreds of thousands of tons of asphalt on it and in the swipe of a pen on bid day, depending on who was the low bidder, it could be internal consumption or external consumption. So this last quarter, we have seen more work going to Granite than to the external customer, but it could change back next quarter and the following quarter. I think the key for us is the overall volume that we produce through our materials facilities. And then whether it goes one direction or the other really is not overly important to us and as we said the materials volume in general has kept at the same levels since 2015.

So, thank you for that. I'm just trying to understand is this $1 million that shifted between those or orders of magnitude?

No. I think it's substantially more than that. But I don't have, I don't know if I can detail that out for you as to what the difference is. And maybe we can talk offline later, John, if there's more details that we're not properly relaying to you as to what the shift was. Maybe another way to look at it is this, when you look at our materials business over the years, it's fluctuated anywhere from 50/50, 50% internal sales, 50% external sales, all the way to 70% external to 30% internal. Right now it's shifting more of a 60/40, it's more 60% external, 40%. So it's shifting more towards internal from last year but it's not that far out of alignment with the historicals.

That's very helpful.

Yes, and John. The 10-Q will be out shortly where we show the inner segment transfers and the segment footnotes and I believe it's around $73 million in total revenue. Just to give you some basis versus the external revenue. [indiscernible].

And, John, I think the key is how is it different from previous quarters or previous years. And I think that that's also available in the Q as well.

Great, thanks. It's just that you had mentioned it in the press release. I just wanted to understand a little how significant --.

It's a mix. It's more of a quarter over quarter and year over year discussion point for right now.

Okay. And my follow-up question would just be, Jim, in terms of, especially the construction segment, the smaller project work, are, you talked about the politics of it, but are we starting to see that FAST Act money show up in bid activity at the end of 2016? I mean, are you starting to see those bids come out now? I mean, when it was passed, you know, a year ago, you had indicated we wouldn't see it until the second half of this year at the earliest, and is that starting to show up now?

Yes. It is, John, and as expected. That's why I really wanted to make sure that as it passed last December that everybody understood that a federal bill takes longer to enact than a state bill, than a local bill. So, yeah we're starting to see it happen. September was actually a pretty good bidding month. October is a pretty healthy bidding month. November is a very healthy bidding month and we'll start seeing that play in the fourth quarter and the first half of next year, we'll start seeing it ramp up. And that's what we've talked about all along and it's happening.

Thank you. And the next question comes from Daniel Scott with MKM Partners.

So, Jim, you've talked about the California bill over the past several quarters and the way I hear your words it sounds like the momentum has been building, the anticipation of maybe being able to pass something in the lame duck session next month seems to be improving. Maybe you could talk to handicapping it a little bit. Does that presume that the Democrats have to get the super majority or has your team been able to push some Republicans?

First of all, Dan, I'm not a bet be man, to begin with. But we have worked very hard with the California legislature to talk about opportunities. And I do think that after Election Day, there is a very strong opportunity to bring the legislators back to session to discuss and hopefully vote on a transportation bill. I don't think it is a huge issue relative to whether you get a Democratic super majority or not. I think that whether it is the Republicans or the Democrats, they've all kind of come to an agreement that the infrastructure investment in California is suffering. They understand that. They're all willing to do something. It's more a matter of getting the fine print and everything done relative to reform of environmental issues, reform of the way the DOT operates, and some adjustments to the size of the bill. I think we've got a pretty good agreement from both sides of the aisle for a transportation bill. It's more about the details than anything. So I don't think it's a huge issue relative to being a Democratic super majority or not.

Okay. Great. And could you maybe give us some color on what the polls might be saying about the Los Angeles and Santa Clara initiatives?

Well, there's, and without diving into detail on any of those individually, they're just all over the state of California. There's, like, a dozen measures ranging everywhere from Northern California around the Sacramento area to the Bay Area. There's actually a big one right here in our backyard in Monterey County. LA's measure M is huge, I think it's a $120 billion long-term infrastructure investment bill. Then when you look at what's happening, and this is what I was trying to articulate in the script, Dan, was that people are, at the local level are fed up and they're not getting what they need and their quality of life is being affected by being stuck in traffic, trying to get from point A to point B every single day. So that group of people are starting to vote at the local level to pass all these measures. So whether it's $6 billion a year total, including measure M, and, you know, I'm sure a chunk of those will pass and some of them probably won't because most of them will need a super majority to pass in the state of California and then you couple that with a transportation bill for the entire state for the highway system, there's a big movement underplay right now to get the infrastructure investment in the state of California back where it belongs. So we'll see. We got a couple weeks, Dan.

And just to echo what you said earlier, I think you would expect the pace of anything state or local to be faster than what we're seeing in the FAST Act.

Oh, absolutely yes. The FAST Act we knew it would take a year to get that money into the system and then we had the congressional budget delays that delayed it actually a couple more months. But at the state and local level, those monies get collected and distributed much quicker.

All right. Thanks very much, Jim.

Thank you. And the next question comes from Jerry Revich with Goldman Sachs.

Jim, can you talk about your risk metrics on the large construction side at this point, you and Laurel have spoken about practical limits of how big the large construction business can be as part of your overall mix. Can you just update us on where you stand with that? And then, also, can you talk about how to think about the margin trajectory into 2017 and 2018, I guess typically at this point in the cycle we get improving margins on new bids as the work gets let, so I'm wondering at which point do the project issues that you alluded to earlier get ironed out and we transition to improving margins in large construction broadly.

Okay. So just maybe large projects in general, Jerry, because I think you've got several questions in there. First of all, large projects has always been a very strong part of our company. And I continue to feel and know that we are an excellent bidder of large projects. And historically large projects has been about a third of our company and we like that balance of somewhere from 25% to 33% is fine relative to the size of our business and where the large projects seats in our portfolio. As far as our ability to operate at a level backup into the mid-teens and how long it's going to take, I think it's going to take through 2017 to get there. We certainly did improve slightly quarter-over-quarter in the last quarter we still have some of these older jobs to burn off. We have a host of nice new jobs that are absolutely did higher margins. And we have some other host of owner related and design related issues that were attempting to resolve right and as those resolutions take place which it typically take place at the end of the projects, we start seeing a nice opportunity for some margin adjustments at point in time as well. But most of those of our projects won't be ending for probably let's say two to three years from now. And so we are working hard to try to get those cleaned up as quickly as possible. I deal in -- we work with owners on these issues continually and I deal in many cases we settle on before the end of the jobs. But I’ll say this, one thing that we have done is that is significantly different than historically that we have done, we are now working at the beginning of these projects and I mentioned this over the last several quarters to really fine tune the design of these projects and advance at any construction and fine tune our relationships with the owners. So that we know we are in better position to know exactly where those projects are going before you put a shovel in the ground. And that's really the key, and I mentioned that earlier when I was chatting, it's really the key, get these projects started off correctly and typically end up doing very nice jobs. So I am not sure Jerry if I answered every question of your there. But certainly if there is anything else I can -- that you need just let me know.

That's really good context. And in terms of the Caltrans budget is down about 5% this yeah, you folks have posted really good top line and order performance despite that. Can you just talk about whether you folks have a higher win rate or was it a mix of work that was more favorable to you within the overall budget? Can you just give us some more context there?

Well, again Caltrans has been one of our biggest customers almost every year in the company. But I would say that Yes, our win rate is absolutely higher. The projects that we have at Caltrans are bigger, we have got a very large project down in the Palm Springs area, very large projects down the Highway 99 corridor. But the key to our California success is actually been our diversification affords. It has been moving away from just large listed number of bidders on projects for DOT work to a lot of the renewable energy work, a lot industrial and commercial work. And so we are starting to see a better mix in overall portfolio, but I’ll say is that if being transportation bill pass it will dramatically change that Caltrans program. The Caltrans program as you mentioned is pretty [indiscernible] today, it's down in the $2 billion level and substantially lower where it has been historically and it will change the dynamics of the bidding environment on Caltrans work if a bill is passed. But for us we have a higher win rate and we diversified into other areas in California and that’s been our success story.

Okay thank you very much.

Thanks, Jerry.

Thank you. And the next question comes from Nick Coppola with Thompson Research Group.

Wanted to follow up on your large project pipeline. I know in the past you talked about kind of the size of that and expectations there. So any color around projects you're looking at bidding on here in the near future.

Sure. In fact I pulled the list out and put it in front of me in case that question got asked, and I, one of the things, Nick, that always tends to continually surprise me with large projects is there's just no shortage of opportunities. And they just keep coming and they keep coming and keep coming. So our job today is to try to pick and choose and be very selective on which projects we bid but I'm looking at a list here in front of me of $20 billion that we're teamed up with on projects for the next couple years. And it doesn't even include a whole bunch of projects that we're in discussion with right now. So anywhere from all the way from out in Guam to Washington D.C., L.A., Boston, more Hawaii work, lots of New York work, Florida work, I'd be happy to discuss any project, but they're just continuing to come, and it's a very, it's a nice position to be in when you have $2.7 billion of backlog and you have some really nice new projects starting and you have a robust pipeline behind you. So our job now is to be very selective, focus on the projects that we believe can get us into the margin range that we're, that's acceptable to us and obviously we have a good chance of winning. So it's not slowing down at all, Nick.

That's good to hear. And then moving over to construction, margins there continue to be up nicely and I know you've talked about your diversification efforts. What's going on in terms of margins in core public infrastructure type work? Any comment on the competitive environment?

Yes. I go back and look at that core public work as being kind of the foundation of what we do. But, honestly, it's the lowest margin work that we have. And the problem with that is -- and the reason behind it, is that it's been under funded for quite some time and a lot of companies, these regional companies, have built their businesses around having to obtain a certain percentage or a certain amount of that local Public Works. And with very little Public Works spending going on, that obviously creates a very competitive environment. So where I see it going is that with the FAST Act kicking in, which will help the DOT side, with these measures that we see coming up and we see, transportation bills at the state level, that's going to change those dynamics. So we've been able to capitalize on diversification efforts and raise our margin profile because of diversifying outside of the solid standard public projects, but now that those projects have the ability to start increasing the demand side over there, I think those margins are going to change and come back to where they're going to be back up to the same area of where our private sector margins are. But historically, they've been the lowest margins in the business.

Just how positively you're going forward. Thanks for taking my questions.

Absolutely. Thank you.

Thank you. And the next question comes from Ryan Cassil with Seaport Global.

Just following on that last question, proliferation of work going on in construction right now, do you see your more prominent competitors thinking about higher margins as bidding activity picks up? Or do you have any sense there that there's going to be, you know, sort of more rational approach to these bids? Any color you can give there?

Well, Ryan, first of all, I wouldn't know what my competitors are doing inside of their own businesses. But I would imagine that good business people, as they see the market starting to adjust positively would certainly do the same thing that we are and raising their expectations on margins. But, obviously, I have no idea what the other companies' individual expectations are. But in general what happens is as the bid list gets shorter, the margin opportunities increase. And that's historically been the trend.

Okay. Sure. That's what I was getting at. Then in terms of the SG&A line, you guys mentioned some investments you were making there and some compensation expenses going on. Obviously there's a variable component to that, but do you feel like, you know, you're making these investments in next year as you can begin to lever that line more significantly?

Yes. We do. As we make more money, though, obviously compensation, some elements of compensation, will go up, because that portion is variable. We are investing in selling expenses as well. You'll see that when the 10-Q comes out and there's the breakout but we would expect to grow the top line faster than we grow our SG&A.

Okay. Is that in the nature of two to one or do you have any sense there you can give us?

It depends, I think. You know, for instance, there's one things that in our third quarter this year, our non-qualified deferred compensation plan had a fair market value adjustment that just happened to know a negative comparison year over year of $2 million. It has no impact on our bottom line because it's offset in other income, but all of those details are in the 10-Q. So once you take a look at it, if you have some further questions, then we can get together and talk about it.

Also, just as another thing, the investment I think you made some great comments during the discussion earlier, Laurel, about the inward facing and the customer facing SG&A, which the customer facing would be the selling of the SG&A, and we have invested heavily into our business development program in Granite and we've actually gone throughout the entire nation to try to get our business units to be more focused on customer relationships and we're actually spending quite a bit of money there. So I do think that one is at least a two to one, even higher three to one, four to one ratio to our revenue side and actually to our income side. So we call it a return on investment, and when we look at a capital or a SG&A investment like that our business development group actually has metrics that they expect to provide back to the company relative to what they're spending on really educating the entire company on business development. So that's a change. You know, this industry has been more, I call it engineers and accountants, where we focus on numbers, where our business today, we're starting to focus on customers, what they need. And I think it's going to change the, it might change our selling costs slightly, but it's going to create a much better environment for us to deal with the customers that we want to deal with.

Great. All right. Thank you.

Thank you. And the next question comes from Min Cho with FBR.

So, in terms of the California transportation bill it sounds like this definitely should pass, it's really more of a timing issue and obviously your backlog is pretty strong now so even if it's not until 2017, seems like it should be fine but can you talk a little bit about potential labor issues? It sounds like a substantial increase in infrastructure spending in California.

Okay, Min, let me clarify one thing first. I'm very confident we're going to get a bill. I hope I don't suggest that it's done because it's not. There is a lot of work to do, and our legislators, our governor, industry associations are working very hard to cooperate, bringing everybody together. So, I mean, there is light at the end of the tunnel, and that is a really good progress. And it is big. And you're right, Min, this is a big deal to the state of California and I'll through a $5 billion on the table above where we're at today, adding $5 billion to a $2 billion program is going to upset the equilibrium of the labor force, no doubt about it. But what I will say in the state of California is, and this is why I'm ecstatic about the potential opportunity, is that we have a long history of relationships in the state of California, and we have a tremendous reputation and we also have wages that we pay that are at the very high end of the spectrum. So for Granite, I'm actually pretty comfortable saying that we will be able to expand our business to accept those challenges probably better than most any other company in the state.

Okay. Well, that makes sense and it's probably a good problem to have to deal with at some point also, if you could just talk a little bit about your M&A pipeline. I know you've talked in the past about kind of a focus on water. If you can just talk about timing or just, again, what the pipeline looks like right now.

Okay, so, yes, we're focused on -- our strategic plan has a very focused, organic growth environment and a very focused M&A environment for growth. We do believe that there are opportunities both in the water sector and in I'll call it our vertically integrated business sector. And as a reminder, we -- the timing is very difficult to determine because really it's a matter of when the right yield comes along and getting it completed at the right time, but we are actively in the process of searching and discussing opportunities in both water and vertically integrated business. As a reminder, water, we are looking at both the combination of the water/wastewater, transmission of water, the redoing/rehabilitation of pipelines, the heavy civil side of water. And then on the vertically integrated side our game plan there is to take our business model further to the east and we believe there's tremendous opportunities as this transportation sector starts to get stronger that those opportunities in the east will be really good opportunities for us. I also think that the combination of water and transportation are the key drivers, what I would say is the future infrastructure of the country. So for us, those are the two areas that we're going to continue to develop our compaction plans in, and I think the timing is going to be pretty good for things to continue to happen in both of those areas.

Okay, great. Thanks a lot.

Thank you. And excuse me the next question is a follow-up from John Rogers with D.A. Davidson.

Hi. Thanks for taking the question. Maybe from Laurel or Jim, in terms of your cash flow, seasonally it's typical that it picks up quite a bit at the end of the year. Is that the same expectation this year? And as the business ramps, especially into 2017, can you give us a sense of what you're expecting to have to invest in working capital to support that growth?

Sure. To answer your first question, we do expect operating cash flow to move in the normal seasonal trend this year. So --.

It will be positive for the whole year, right.

Right.

Yes.

The sort of wild card at this point is what jobs we're going to win on the large project side, whether they'll be sponsored or non-sponsored. You know, we picked up two new sponsored jobs this year and so what happens is our working capital and our CapEx and all of those things go up associated with us having our partners' portion on our books in the case of the non-sponsored joint ventures it's different but we give our cash out to our partners. So it's going to depend, what our portfolio looks like next year so can't really provide you any guidance relative to that, but, we have a strong balance sheet and capital structure and we're very confident that it will maintain that.

Okay. And in terms of capital expenditures, they've ramped up, I think you've talked in the past about $70 million, $75 million sort of range. Is that still a good expectation?

This year we expect to spend between $80 million and $90 million. We have two new tunnel large project joint ventures and sometimes when you have a tunnel joint venture you have to purchase a tunnel boring machine and those are relatively expensive so, you know, we're, it depends entirely on what the needs are, but we'll provide you as much information as we can as we go along.

Thank you.

The good part here, John, is that our businesses are feeling as though those capital expenditures are needed to be able to prepare themselves for what the upcoming workload is too. Which is a good sign, because I will tell you, over the last six or seven years, John, this as well as anybody, there just hasn't been that demand out there for those products. As our business units start feeling more bullish in local environments they're starting to ask for more CapEx, which is a good sign.

Thank you. And the next question comes from Joe Giordano with Cowen and Company.

Hi, guys, this is Tristan for Joe today. Thanks for taking the question. I was wondering and you expect to get any benefits from the New Jersey gas tax increase?

Yes, I saw that and I follow that a little bit but I really don't think that's going to have a large effect on Granite. We've done some transportation work in New Jersey, not a lot. So I would say if there's a large project that might help infuse some monies over into that might help, but I haven't followed it that closely. It would be more of a transportation issue than, I think, than most of the work that we're actually focused on in New York. But it's a good deal. I was happy to see that pass. I think those are the kind of things that the individual states are working on, that they understand now that they're in charge of their own destiny and they are focused on getting their infrastructure investments ramped up. So it was a good thing to see, and I think nationally it helped highlight what other states should be doing as well.

Okay, thanks. And then I've heard about some project delays in the press and I was wondering if that affects you, if you have any comments on that, if you see anything like this?

Project delays. Well, okay. In general? There's always project delays. To me there's always project delays or milestones or issues, but I would suggest to you that with all our projects that our job is to try to work with the owner, satisfy the owners' expectations on schedules, and some delays are because the owner had a delay, because they couldn't contractually meet certain requirements for environmental or permits or things like that. And some of them are our own delays relative to productivity. But I don't think there's anything significant that's going to have a positive or a negative.

Okay, thanks, guys. And congrats on the great quarter.

Thank you. And the next question comes from Brian Rafri with Morgan Dempsey.

Hi, when you look going forward you kind of gave us a strategic look. You've got a sizable backlog, you've got a robust pipeline accelerating, you've got the fast money potentially coming through. Is your thought process going forward the next three, four years that we're going to have to build up some unit volume capacity or are you going to stay at kind of the current capacity and say, hey, we're going to be much more looking at leveraging accretive margin? We're going to be much more selective? We’re not as much worried about unit volume capacity on, you know, with I think you said 20 billion in potential pipeline.

Okay. So I want to make sure that it's not an either/or question. Because I think for us, Brian, it's a combination of both. And when we talk about increasing our margin expectations, I think that's across all segments. Large projects has been lagging obviously. That's very notable. But still even with our construction segment at mid-teen margins today, that can work its way up higher. Our materials margins can work their way up higher. But simultaneously, I think that we are ready for a volume, a growth spurt as well. And so I see a combination of both. And that's the idea to do a methodical growth over the next five years with the anticipated stronger investment in infrastructure. And remember, one of the things that we've been working on is our continuous improvement program, which we're starting to see that take nice effect into our construction materials business with higher margins there. So I wouldn't say it's one or the other, Brian. I'd say it's both, and that's where we expect our business to go.

Okay. And from the standpoint of that metered, very, you know, graduated capacity expansion, is that, historically you guys have talked bench strength with, you know, employees, with knowledge based versus say just bulldozers and tunnel boring machinery. Is it more on the people side in capacity, or is it more on the machinery side?

I would suggest this, that's a very right-on observation, Brian. It is about people in this business. It is all about people. And we do build our bench strength accordingly. We've actually got people on projects today in number two positions so that they can be in number one position in the next two years. And that's why methodical growth is so important. Because if you outpace, your growth out paces your people's capabilities, you will get yourself in trouble, and we are working very hard. We've been focusing on talent development in Granite, we've been focusing on significant recruitment in Granite. Yes, we have a little higher SG&A today. It's in anticipation of growing the company.

Let me ask relative to the materials side, when you start shifting from external to internal usage, does that shift in sourcing internally your own materials, does that give you a bid date cost leverage? How much would that be? Or is it just really kind of the strategic availability of those materials and timing and delivery?

Yes, I would say there's a slight cost advantage. I don't think it's height. It's absolutely strategic. That is by far the biggest advantage you have. When you know that you are going to put down 3,000, 4,000, 5,000 tons of asphalt a day and you know that asphalt plant is dedicated to your job and you know what's going on in advance relative that facility's capabilities, it gives you a very strong strategic advantage on bid day. So, and we do try to price to ourselves very close to market if at all possible. There are some tax advantages that we certainly taking into consideration but it's a strategic advantage more than a pricing advantage.

Okay. Let me ask from the standpoint, you talked -- and you've done a very good job kind of articulating over the years the political side. Do you see kind of a shift in the infrastructure spending, a migration from the federal to more of a state and local level? I mean, we used to put people on the moon, built Hoover Dam, fought two major World Wars and these guys in Washington can't put a stamp on an envelope. Is that really the new reality that you're really going to look at more local funding and more state DOT funding even though you've got the highway bill umbrella.

Okay. So, again, Brian, you know the business, you know you what's going on, and I should have said that earlier. But here's the deal. I think that in this interim environment, while the Feds are basically inactive, that the states and the local communities have taken the infrastructure investment into their own hands. But I think what we're going to see is that the Feds have realized that they've fallen down and they haven't done their job. They've been relying on what their forefathers built in the '50s, '60s, '70s and I think you're going to see action in the next several years that's going to suggest they are going to take a new look on our investments in infrastructure as well. So short-term, absolutely, states and local communities are going to step up and fill the void. I actually have confidence that over a period of time here, in the next year or two -- and, remember, every time you have a presidential election it's in the second year of the election cycle after the new president comes on board that is where they start making major investments into the infrastructure of our country. So it could be a all three lining up here, all the stars aligning properly with the Feds chiming back in the next year.

Okay. Thanks, guys. Great quarter.

Okay, Brian.

This is the end of our Q&A, and now I'd like to return the call back over to our hosts.

Well, everybody, thank you for your questions. I offer my personal thank you to our employees for their efforts and performance. To Granite teams across the country, please focus on finishing the year safely as well as beginning 2017 with a commitment that every employee goes home safely each and every day. To the Granite investment community, especially our shareholders, we greatly appreciate your support and your feedback. As always, Laurel, Ron, and I are available for follow up if you have any questions.

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