Granite Construction Incorporated (GVA) Q3 2017 Earnings Report, Transcript and Summary

Good morning. My name is Andrea 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 2017 Earnings Conference Call. Today’s call is being recorded. 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. [Operator Instructions]. 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 Vice President of Investor Relations and Government Affairs, Mr. Ron Botoff. Sir, the floor is yours.

Welcome to the Granite Construction Incorporated third quarter 2017 earnings conference call. I am pleased to be here today with President and Chief Executive Officer, Jim Roberts; and Executive Vice President and Chief Financial Officer, Laurel Krzeminski. We begin today with an overview of the company’s Safe Harbor language. Some of the discussion today may include forward-looking statements. 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, please visit our Investor Relations website at investor.graniteconstruction.com. Thank you. Now, I would like to turn the call over to Granite Construction, Incorporated Chief Executive Officer, Jim Roberts.

Thank you, Ron and good morning, everyone, and thank you for joining us to discuss our third quarter results. Today, I begin by thanking Granite employees and teams for their effort and execution in the third quarter, which resulted in a top-line performance, as well as improved bottom-line results. Safety performance remains steady and though we need to finish strongly to get there. We still target 2017 to be the safest year in our company’s history. With that mind, we expect our teams to maintain a consistent safety focus enabling are very busy people to finish the 2017 construction year by getting everyone home safely every single day. This year’s growth and outlook continues to be supported by steady economic print and steady to improving funding environments. Across geographies by the public demand continues to trend positively. So even with another quarter of strong growth bookings remain strong and again we posted another all-time company backlog record at quarter’s end of $4.2 billion. Before I give the call over to Laurel to discuss our results and guidance, let’s focus first on our operational performance and on our growth outlook. I begin today with a large project construction segment. In the third quarter performance was impacted by accelerated work on a number of challenging projects that representative significant amount of segment revenue. We are working diligently to finish these projects as quickly as possible in the remainder of 2017 and 2018. We continue to focus on project selection, partner selection, project duration and owner dynamics was significantly higher return expectations and our sights and in our bids. Looking ahead, steady performance across the newer project in our large project portfolio combined with the steady stream of project wins provides our teams with diverse opportunities to improve operational and financial performance. We were pleased to add two projects to segment backlog in the quarter. Our federal group was awarded a $165 million contract by the Naval Facilities Engineering Command Pacific that are known as NAVFAC. for the Finegayan Utilities and Site Improvements Phase I project in Guam. Granite is the consolidating partner with 55% of the contract. We also recently were awarded a nearly $410 million bridge project near Chesapeake Virginia. We've a 50% share of this granite land and consolidated project; these solid additions are right in line with our focus to reshape our project portfolio with smaller granite sponsored jobs. Next our construction segment continued its strong performance in the third quarter, solid execution on near record backlog continued to fuel our team strong results. The diverse businesses that comprised the construction segment delivered nearly 25% revenue growth in the quarter and margins expanded in the quarter to a very healthy 15.8% resulting from nearly 28% gross profit growth. While some of this pickup in activity certainly has tied the recovery from our muddy first quarter, strong project bookings continue to be order of the day. Markets continue to offer broad opportunities and our teams continue to capitalize, so even though we've burned some backlog in the quarter, construction segment backlog above the $1 billion mark with the sixth consecutive quarter bodes well for our outlook. Next moving to the construction materials segment, clear solid demand across most of the west gave our teams the opportunity to recover most of the ground we gave up in the first quarter, getting the benefit of both price and volume improvement in the third quarter this business started to flex a little muscle with margins finishing above 17%. Pleasingly we continue to expect demand and committed volumes will improve, which should allow the construction materials segment to deliver improved results this year in 2018 and beyond. As a reminder our materials [indiscernible] continue to operate with utilization well below capacity, thus our materials business is poised to capitalized on significant increases in demand ultimately allowing us to deliver sustained operational and financial improvement. So, what is the force of our confidence and the strength of the positive trends. Well most of you on this call are aware public transportation infrastructure spending is growing, increased long term funding commitments have been dominated by actions taken at the local and state level. This is happening today and this positive trend will be bolstered by any incremental investment commitment from the administration and from Congress. I recently had the privilege to testify before the House Transportation and Infrastructure Subcommittee on highways and trains and on behalf of construction coalition, a partnership of 31 national association and construction unions. My visit to Washington DC also allowed me the chance to meet some of our elected officials in the House of Representatives, both [intermediate testimony] and in medians of members, we emphasized the need for Congress to lead the way to fix the permanent funding deficit in our nation's highway trust fund, given the pace of both mobility and technological change we suggested that all potential funding options should be on the table and we emphasized that funding options should create long term solutions to stabilize and appropriately leverage better investments. We also discussed and suggested some practical reforms to ensure efficient project delivery and we listened with great interest about potential congressional and administration plans and timelines. We also highlighted the unique opportunity and responsibility the administration and Congress have to provide the leadership necessary to deliver a promised well-funded long term federal infrastructure investment bill. This investment will be incremental to the significant drivers of today's positive state and local public funding trends. Importantly we talked about the results of inaction and action, congressional inaction in the form of highly trust fund uncertainty spurred action from states and local authorities to take local responsibility. As a result, states responded with decisive action from New Jersey to Texas to Indiana to California and Washington. In the past few years more than half of this base of our union have increased their commitments to transportation and infrastructure investment. I'm challenging the Granite teams to remains disciplined in response to improve demand and I'm reinforcing what Granite's business leaders at the products and the service we provide, create much more value and are worth far more than recent industry pricing and performance results reflect. We must focus on raising our expectations. Across the country but clearly in both the states of Washington and California, our businesses are extremely well positioned to continue to benefit from the balance of steady private market demand and increased public investment. I'm confident that positive demand trends will give Granite teams the chance to improve both top and bottom line results. I hand it to Laurel, with some more detail on our results and our 2017 outlook.

Thank you, Jim, and good morning, everyone. Third quarter 2017 revenues were $957.1 million, up 19.1% from last year. Diluted earnings per share in the quarter was $1.14 of almost 24% from last year. Gross profit in the third quarter increased 6.4% to $114.5 million, with company gross profit margin of 12% filled by continued strong performance in our construction and construction material segments was now made up much as a stager from first quarter whether as year to date growth profit totaled $214.2. Year to date company gross profit margin at 9.8% remains about 210 basis points down from last year driven almost exclusively by large project construction under performance. Third quarter SG&A expenses decreased 8.7% year-over-year to $49.5 million. On a year to date basis SG&A as a percentage of revenue was 7.4%, down almost to 120 basis points from last year as our core cost structure provides scale benefits. Our intentional efforts to stream line overhead are paying off. As a result, we produced high team's revenue growth to three quarter of 2017 while selling, general and administrative expenses have increased only 2%. We expect continue benefit from the balance of strong growth and disciplined cost control. The balance sheet remains strong with $303 million in cash and marketable securities at the end of the quarter, up more than $45 million from last year. Company contract backlog again this quarter, at an all-time record level ending September of 12.5% from last year at 4.23 billion. Large Projects Construction segment backlog finished at a 3.1 billion up 16.4% year-over-year reflecting the addition of the two new consolidated projects Jim mentioned. In the Construction segment, backlog finished at $1.13 billion, reflecting another solid booking quarter up 3% from last year. Backlog continues to reflect broad bookings across our businesses, and markets and geographies. Remember this does not get include any impact from California's recently passed SB1 transportation funding legislation. Looking at the segment detail. Third quarter Construction segment revenues increased 24.6% to $579.1 million from last year. Gross profit increased 27.7% year-over-year to 91.3 million resulting in gross profit margin of 15.8% up nearly 40 basis points from last year. Capitalizing on private market opportunity continues to be a key driver in our construction segment discussed with strong third quarter bookings in West and Midwest leading the way. These businesses continue to operated high level and we are pleased to expressed continued top and bottom-line growth in this segment. Large project segment revenues increased 12.2% in the quarter to 279.8 million. Third quarter gross profit is 2.3% and year-to-date margin at 1.3% remain significantly lower on a year-over-year basis reflecting the performance of mature projects we have discussed for some time. Our focus on large projects Construction segment performance improvement remains unrelenting and it will take well into 2018 to deliver significantly improved returns. Moving now to Construction Materials where segment revenues increased 9.1% year-over-year to 98.1 million in the third quarter. Materials gross profit rose 33% year-over-year resulting in gross profit margin of 17.1% up more than 300 basis points. Steady to improving demand in pricing across geographies in the west continues to fill revenue and profit growth and our operational outlook remains healthy coupled with strong execution demand growth will help our materials businesses delivered continues top and bottom-line improvement. With that, I’d finish with our outlook. Our expectations remain mid to high-teens consolidated revenue growth and consolidated EBITDA margin of 6% to 6.5%. Now before we take your questions, let me turn the call back to Jim.

Thank you very much, Laurel. The positive funding trends feeling today’s growth and undeniable. Local estate entities are stepping up to do their part to invest. Private market activity continues to provide our teams with diverse growth opportunities. And now we believe the next logical investment, they needs to M&A from the federal resources. Our outlook and market visibility continues to point of significantly improved results for Granite, our shareholders and our employees in the next few years. And, with that, we’ll be very happy to take your questions.

We will now begin the question-and-answer session. [Operator Instructions]. Our first question is from Jerry Revich of Goldman Sachs. Please go ahead.

So, your EBITDA margin guidance implies EBITDA is up 10 million sequentially and looking margins in the fourth quarter. That’s a little bit in more seasonality. Can you talk about what’s driving that?

Well, I think that the key ingredient to the overall projected for the year as the momentum we have today already. We’re coming off of about very healthy third quarter and in the fourth quarter healthy. And really the key ingredients to finish the year is going to be one and fours. We have the backlog, we’ve got the momentum in all parts of our business and as long as whether it maintains we’re going to be very healthy fourth quarter.

Our next question comes from Mike Shlisky of Seaport Global Securities. Please go ahead.

So, I wanted to just get a quick update you’re going to were a few weeks out or we’re going to have out from Election Day. Kind of what states are you watching right now for any further gasoline tax changes or other infrastructure spending referendums or is it really all about what the Federal Government does from this point forward?

Yes. Mike, I think that upon our outlook today there's nothing significant that we expect to have in the November elections but there're obviously the fit is the very important relative to a longer term investment infrastructure bill and also there are some issues that will be arriving next year of which one key ingredient in the next major elections will be the constitutional amendment to make sure that all the funds for SB1 in California are dedicated to transportation so that will be a probably one of the biggest next issues we see in the ballot box for transportation funding, next June.

And my follow-up just wanted to get some more color on the SG&A cadence here, it was great that was down 9% year-over-year, certainly very solid, it's been up various quarters down, I kind of want to get a sense as to as you have these cost structure changes is there any change to what you're doing sort of long term run rate is and any chance to the seasonality of how you might incur your SG&A kind of each quarter throughout the year going forward?

So, SG&A is seasonal as you know and we don't expect the seasonality to change however there are some costs that aren't dependent on that like pre-bid costs and large projects that we bid and things like that and so that actually was down in the third quarter which added to the favorability and then of course the other really significant variable is how long we can work during the year which is what drives some of the seasonality and how best we can utilize our employees but we believe that the actions we've taken over the last couple of years to become more efficient as a company allow us to be scalable without having to grow our SG&A at the same rate that we grow our cost line, so we expect to continue to see that come down as a percentage of revenue.

The other thing is that we're trending down below the 8% mark we expect to stay down below 8% and that would-be kind of the first time in the history a company that we -- in the recent history modern history that we've been able to maintain that kind of an SG&A on a percentage of revenue so as we continue to see the improve on the top side I think you're going to continue to see the improvement in the SG&A or percentage of revenue line.

Our next question comes from Michael Dudas of Vertical Research. Please go ahead.

Turning to SB 1 and the boil over the next few quarters will have some interesting discussion about California politics, I'm guessing as you get the new governor or as such, but how does the funding look so far from July 1st start any change or update on how you think the monies are going to fall through in projects being led and Granite's strategy in attacking the opportunities that least are going to start to show up say over the next six to 12 months?

So, Mike just as a reminder for everybody, I may know as much about SB 1 as you do here, that $52 billion 10-year bill is intended to average about $5 billion a year over next 10 years, the run rate in this first fiscal year, July 1st through June 30th of 2018 has about a $2.8 billion addition to the current size of the transportation program. The intention was originally to wait and make sure that there was funding for it and then in the more recent time what they did they moved some of the work up to the front half of the fiscal year suggesting they would give some projects out early or I would say late this calendar year but early in the fiscal year. I would suggest that the real increase will start here in the fourth quarter and first quarter and we will probably start seeing some backlog increase in California, I would say about mid-year. By the time you get the work out a bid and physically get it booked and everything and start it, it will be somewhere midyear. Now strategically speaking, it’s a really good question because what we know and history will tell us is that a big portion of our competition will go up quite fast and we will, I wouldn’t say sit on the side lines, we're going to be testing the market out continually, making sure that there is an increased expectation from our business units in terms of margins going forward in the state of California. So, we may or may not pick up some of the early work, I think it will have a nice impact for our business in 2018 but depending on how the rest of the market reacts it will determine whether it's in that middle of the year or in the end of the year. The thing to think about also in California is that not only does the SB 1 hit the market place nicely in 2018, the private market is pretty healthy, in fact it's very healthy and so we're going to make sure that as we look into the market for 2018 that we don’t load up with some very lower margin type public work because the private work typically been our higher margin work as well.

Now I'm encourage to hear about the public market side and follow up you mentioned about whether and we're hoping for that, any observations on any activity that you're involved with or may have more involvement in Texas Florida given the weather we witnessed in last quarter.

I mean I think certainly, some of our people were negatively impacted and we reached out to all of them and help them through this difficult time. In both the Southern Texas and the Florida markets, we have worked there, we have employees there, some of our work was impacted from the events but none of our work was significantly impacted. From that though we did get and we’re in that middle of getting some emergency work prepares, interestingly enough some kind of work that maybe you wouldn’t think about, underground repairs. We got some of that work, so most of the upgrades or the bigger work from the emergency side is still to come, because they got to design it and they got to get the funding in place for it but the work we had was not significantly affected and we’re starting to see an uptake in some of the emergency work.

So that could add some project opportunities in 2018, as it sounds like.

In those market themselves.

In those markets.

Right.

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

So, in the past you talked about the construction segment as being a mid-teens and margin business if I recall correctly and just, with the volume you're expecting a slightly improvement, do you got an opportunity to outperform that and just comping versus where you have been over the last couple of years, it seems a reasonable expectation but maybe just talk around that.

Well I think that Nick as the market gets better, we're going to try to capitalize on every drop of what's available in the market place, no doubt about it. And if the run rate of the public sector continues to escalate and the private market stays healthy at the same time, absolutely we could get returns above the mid-teens. But they’ve got a both happen to the same time. Historically when we gotten close to 20% gross margin in the construction business, we had both a very healthy private and public sector simultaneously. The outlook is good, but I would not suggest that we’re get there, because it’s all going to be considered timing.

And then, I guess another margin question, but on large projects. Can you just help us think through the progress of, I guess confusion of these jobs and how long it's going to take to get back to more normalized levels. I think if you help me just kind of think through where, just the steps there?

Absolutely. Just as a reminder in our large projects business anything below double-digits in a significant disappointment to us. So currently, we are disappointed in the results, we have a drag on segment performance from accelerating and writing down a small number of our projects. All of those projects are at least 80% complete. So, we expect two of the projects to wrap up late this year. Another project that should finish in late-2018 and as that occurs, what you should see in our large project business is over starting in 2018, you should see the margins start to increase on a quarter-to-quarter basis getting us back into the high-single-digit possibly low-double-digit range by Q4 2018. Very sequentially, the older ones drop off, the newer once kick-in. The newer projects we have booked or at a very nice margin. And it’s pretty much the same as we’ve said for the last several quarters, it’s going to take just the next three, four quarters to continue to burn it all off and really change the portfolio mix to the newer projects taking a larger portion of the portfolio. But realistically it’s going to take a little while longer and our large project people are doing a great job burning off the older work as fastest as they can.

And I guess a follow-up to that focusing on the newer projects. Can you talk about what, where your focus is, I think you talk about smaller Granite sponsored jobs? Help us think about the profile of the newer backlog?

So, we made some statements probably over the last two or three quarters. That will make ourselves into this run and I’ll say from 12, 13 and 14. We got cut up in a lot of these very, very large and I call them the billion dollars plus make jobs. And on the surface, they look like the right opportunity for the industry. I would say across the industry, they have been very difficult projects for the industry to build profitability. And they’ve been difficult projects for the owners as well. So, as we have continued to wind down these larger projects, we’ve noted in the bidding environment we’re actually more competitive in the smaller work and I don’t mean small, I’ll call it half a billion on average or maybe a little smaller than that. We do much better when we are the sponsor. And even if we can get even a little smaller, we do very well and we are bidding them solely as Granite. The other thing that we’re planning out is that we like the faster pace jobs, the once we can get in and out in the shorter period of time, maybe a two to three-year job versus four, five or six-year job. So, all of the jobs that we've recently put into our backlog are of that nature, so we're really sticking to our strategic plan on large projects and that's why we're really confident that by the middle of next year we're going to start seeing the turnaround and we're going to see some nice results by the end of next year.

And just to add the backlog, in the backlog is $400 million of our partner share of backlog since we moved more to consolidated and Granite running project, and that compares to about $155 million same time last year, so it's double the percent from around 6% to 13% in the current backlog.

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

Jim thank you for the guidance -- quarterly guidance on the large project completion timeline and margin expectation timeline, how has that timeline changed from three or six months ago, if at all?

Not really a whole lot Alex maybe a quarter plus or minus, I will tell you the positive what I'm happy about what happened in the last six months is that we've been able to book some nice wins, that will help offset some of those older mature projects sooner than maybe what have happened if we had not booked the nice projects this year, so really not a big difference in the completion of the mature projects but probably a positive change in the addition of the new positive bookings.

And can you comment a little bit about Kenny backlog related to Kenny talk a little bit more about the diversification strategy and some of the benefits you're seeing there?

So, just as a reminder the Kenny business which we purchased at the end of 2013, is really consists of four different businesses and we have and I'll go through each one real quick but I'll remind you of what they do, they have a power business which is mostly construction management, they have a tunnel division which is building some of the more complicated complex tunnel jobs across the country; we've have an underground division which is focusing on pipeline rehabilitation, lining work and then we've a civil business in Chicago. Let me kind of move into each one of them real briefly, by the way we're very happy with the Kenny business, they're really ramped up, their revenues are ramping up, and in all four of those business units we're starting to see a nice increase in their markets just as we are in the transportation market in the western part of the U.S. as well. The power business again we're construction managers, so we provide management services into that for a lot of the larger utilities across the country that's a healthy business, it is a very people oriented business from program management, materials management and that business is growing at a very steady pace and again it's a little more difficult with that business to grow at over -- overly as fast as the rest of the business because it is relative to the number or employees that we have on the business but doing quite well. The tunnel business is doing excellent, we have -- we carry typically three to four tunnel projects in our portfolio simultaneously, we're busy today we got projects in Connecticut, in Ohio, in Illinois, we're bidding across the country and some of that work is in our large project segment, some of the work is in the construction segment but it is very good work and very nice margin work. The underground, the in liner type work of what we aligned pipes and pipeline rehabilitation is one of our shining stars historically, it has been a higher margin business, we're moving that business into other parts of the country, outside of just the Illinois market, so again growing that business geographically and then the civil market that we brought over from the Kenny family is we've grown that business significantly into the Illinois and surrounding states markets, where we are doing a lot of what you would expect a typical granite type work around that surrounding area and its growing quite nicely as well. So, we’re very happy with the Kenny business. And it gives us that geographic diversity that we needed in our company to get into the Mid-West.

I was just going to add in the construction backlog and the queue will be out later today, you will be able to see the details but the amount of private work in our backlog is up about a $100 million and Kenny is contributing to that, so you will see more of details there but that’s really positive for us.

And thank you for your comments on the hurricane and one that, any comment on the wildfire in California, that could affect your business or did.

First of all, the fires in California were just absolutely devastating, tragic. We didn’t have any businesses in the heart of the fire zone, we definitely have some businesses North and South of that, directly north. One of our offices located up in Ukiah. We have a lot of employees that were affected. But I think in general, it did not have a significant negative effect on our business in Northern California. I will tell you, -- I can tell you how proud I'm both in the hurricanes and fire people in Granite that were affected, a lot of other families in Granite took in those families from people who were affected. And so, we're working as one big family to make sure everybody gets taken care of properly and as far as I know today, we do not have people in Northern California, displaced out of their homes as if we speak. But I will tell you we had a lot of people that in that area that literally left the area, even if their home wasn’t damaged, the left the area because of the hazards of smoke inhalation.

Our next question comes from Robert Burleson of Canaccord. Please go ahead.

Most of my questions is been answered but just, I was following may be if we can preempt any potential investor concern around the repeal of SB 1, if you can kind walk us through the mechanics of the constitutionality of the transportation, the gas taxes [indiscernible] funding and how they are -- if there is any risk of that being replead.

Sure Bobby, so as most everybody knows on April 6, of this last year legislature passed SB 1 and it really was an issue for the general public relative to the gas tax, diesel tax, registration fees vehicle, license fees. The gas tax will begin on November 1. There was a very small group of people that are quite vocal, that are attempting to repeat it and a lot of cases what the lot of things are done legislatively people certainly have the right to voice their opinions. Today it's in a signature gathering environment, they got to raise money, they got to get that on the ballet and I would suggest that we’re quite confident that, we will moving forward with SB 1 just as plans. But as always, there is always the possibility that some could happen. We’re pretty confident that SB 1 will move along as planned.

And then just you touched on the California wildfires. But I was wondering, it is leaving in the Bay area, I noticed there are some gravel pits and kind of some smaller players maybe in the materials world that are Napa area. And I’m wondering if you guys have noted any disruption maybe to activity for competitors in the region. And I think you have positive access to facilities [indiscernible] also mentioned where maybe you could pick-up some of that volume is very dynamic like that that’s emerging?

Well, I will say this Bobby that, they is no doubt that there were several players that were impacted from the fires. We know quite well and in fact some of them partner with, some of, we provide aggregates to their businesses and some of our main supplier aggregates to our businesses. I have not heard of any business in the Napa area itself, that is basically shutdown, because in the fires. I do know that is slowdown some of the actual work in the area for a short while. But I’m not, I am just not aware of any individual business. But it’s a really good point and I know that our people in the Ukiah and North Bay area were closer with and I’m going to actually reach out after this to find out if they heard anything from our competitors, but nothing of significance Bobby at this time.

Our next question comes from Brent Thielman of D. A. Davidson. Please go ahead.

Jim, on a large project business, in the new bid you are out pursuing are you seen or starting to see gross profit, margin, bid opportunities out there? Is kind of good as they heydays of '07 to '09 for that business. And I guess is, secondarily can these $0.5 billion jobs year after get you there?

Yes. So, first let’s talk about margins. I think the interesting part about the large projects business is that the market, the individual jobs are so unique Brent, that really the margin comes down to the ability to be innovative of, in the design and in the approach to the bid. So, the margin expectations, there is no doubt in my mind about the market today can definitely support our margin expectations. And we’re seeing that in the bids that we’ve been winning this year so far. And there is no doubt in my mind as well that doing a $0.5 billion job or several of them versus a $1 billion job will get us where we want to get and that’s exactly our strategy. We think it’s actually a better diversification plan. We think, we can actually move faster and get more acceleration in that business by doing several jobs versus one job. So, I think the strategy is already starting to pay off and I think the margins are going to be there.

And the majority of the opportunities, you see in the large project et cetera. As it defines the certain regions or is it spreading out more across the country?

That business is always being spread out. And I was going through the, in preparation for a discussion today, I was going through our list of all the jobs we have, over the next 12 to 18 months. It just happens to slowdown and it’s very diverse. I mean, the one program that’s actually picking up now too is federal and you can see is over in Guam with an $8 billion program built out over the next 8 years there, that’s an addition to what we -- well actually its -- either we talked about maybe several years ago, it never happened but now it's back, so there's a huge geographic zone for this work and it's all across the U.S. in fact we've been in a couple of big highway jobs in Southern California, we've got some jobs in Texas, the Southeast is busy, we picked up a nice bridge job in New York, bidding more work in New York, it's just all over the country and that's why I think I like this $0.5 billion range because there's more geographic diversity in those kind of projects.

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

Laurel, I was wondering if you could frame out maybe the opportunity as you run down these projects that are holding back their margins in large projects, can you frame out the opportunities for potential reimbursement as you work with the owners to kind of figure out compensation for the scope changes and things like that?

Well maybe that's more in my path then Laurels, [indiscernible], so I guarantee you see a lot more up to speed on a whole bunch of the financial stuff but relative to the individual projects Joe, I'll give you an example of a host of issues that are out there, at times owners will ask us to accelerate a job, I don't need a schedule, so we do and we hold the discussion and the financial implications of it in advance until we know all of our costs associated with acceleration of getting work done. So, what that does is it pushes the resolution to the end of the job and in the meantime we obviously take a financial impediment to begin with so those are majority of the issues we've out there, are either acceleration issues or simultaneously an owner directed change where we've not been compensated for as of yet; it could be a scheduling issue itself that maybe the owner thinks that we should have finished the job earlier and they're charging us for over running the time on the job but almost what we've seen on these large projects Joe and I don't care whether it is on the East Coast, West Coast is that there're are many things going on at once, that the owner would prefer to resolve the issues at the end of a job in a global type settlement so that they can take everything and put them into the melting pot at the same time and come up with a financial resolution at the end of the project and that's the problem in the interim with these jobs is that you're going to have a lower margin show into your financials until you come to a finished product resolution and almost every one of the mature projects that we've that we're struggling on today has some of those issues in them.

So, are you baking like favorable resolution of this years into your kind of the way you're talking about guidance and margin progression into next year?

No, what we do and we made it pretty clear that on any kind of resolution we'll probably weigh what we believe the resolution will be and we will book a revenue equals cost, so we try to be as straight down the middle as possible as to what the probability of receiving a certain sum is and then we do not book any margin until we physically get the resolution in place.

It's not common to have a probability that would be close to 100% so it's usually less than the cost that you're incurring today on it.

Right okay, that’s fair and then just the last on M&A, some we have talked about on every call for a couple of years here, we can talk about the outlook, is it more culture fit that you haven't sound or is it valuation that’s given you the most problems here, how anxious are you to deploy, kind of talk us through the environment now.

So, we have a dedicated team focusing on M&A. We have built that team up over the last 18 months and we continue to have very strong discussions with a host of opportunities. And it does come -- I don’t come culture has been the issue. We quickly decide, whether or not that there is a culture fit and if there is not a culture fit then we move on to other options. I think its comes down more to timing of the target, are they ready and it has come down to price at times but I will tell you that we are preserving very heavily here in this environment and we do expect to have M&A part of our business plan over the next 12 to 18 months.

Our next question comes from Sameer Rathod of Macquarie. Please go ahead.

I just had a quick question on potential bottle neck, or labor issues, are you seeing any tightness in terms of labor or in terms of your ramp up on the upcoming pipeline of projects, what kind of concerns you or how you're going to mitigate any of these factors?

The actual question, the market overall as it heats up always seems to have the labor as the bottle neck. We haven't see it significantly hit us yet, but the specific markets may be when there are three or four large projects in one metropolitan area, certainly that can cause a heat up in the market but I think that overall across the U.S. it has not been a huge issue yet. Now what happens and its good and bad having the labor as the bottle neck, but that part is obviously it could limit the amount of work to be accomplished. The good part is that it creates an environment to bring new people into the industry and we been talking about that for quite some time now that, during the downturn Sameer, people might rate it out of the construction industry but they couldn’t see the longevity of building a career and providing for their families and now as we start seeing a longer term program out in front of us 10 years in California, hopefully a longer term program coming from the fast, I think you're going at migration of healthy workforce into the industry and that’s going to ramp up overtime. But prior to that happening, what will happen is you will see a price change. You will see companies understand that if there is a labor shortage, they are going to have to price their work accordingly there may be more hours, they may not be able to build as much work, this will mostly affect the smaller companies and therefore they are going to price their work accordingly, if they have to go outside labor market, they are going to have more money on an hourly wage rate to the employees which I think is the right thing to do. so, I think short-term there might be a shortage, long-term I think it’s a real positive for the industry you get more higher paying wages and people into the industry.

Okay thank you.

The one other thing Sameer really quickly, I think it's really important the industry is really a combination of obviously both the public and private sector. In the public sector the majority of the employees are pay at a prevailing wage rate, which is very, very healthy. At the private side of the sector, survey there is lower wages and there are lower benefit packages available to a lot of those employees. So, what I think the first part of the industry that’s going to feel the impact of labor is going to be on the private sector. And they’re going to be forced to raise wages, raise benefits. Otherwise, I think there is going to be a migration of some of those employees moving from the private side over the public side. So, there is some dynamics inside the industry as well.

And we have a follow-up question from Brent Thielman of D. A. Davidson. Please go ahead.

Just a clarification on the full year EBITDA margin outlook. Just given where we’re at year-to-date, the expectations were kind of slow progress on large project margins. It seems like you’re effectively implying the construction and construction materials margin should be even stronger in 4Q. Is that appropriate?

Well, I think that, what we’re looking at, is a healthy weather, we have the momentum. And yes, I think it should be a very healthy fourth quarter and the projections are to really just keep moving for a while in the third quarter.

And Jim that construction materials margin, I mean really strong this quarter. Any benefits from mix or it’s just good workflow?

Well, I think it’s coming from a combination of volume and pricing. And I think that, one of the things we mentioned Brent in the write-up was that, our plants and I go back to remembering 10 years ago we were building bigger higher production plants to be able to handle the volume, that is running into the industry at that time. And they haven’t been utilized until just that are starting to be utilize now. So, what we’re seeing is the ability basically to turn the dial and produce more output with really very little incremental cost increase. And so, I think that’s a big part of the margin change. And going into 2018 now, we are starting to look at the pricing dynamics simultaneously. Because we believe the market will allow higher pricing in 2018 as well. So, we got a combination of the volume and the pricing that's starting to make that business move in the direction that we have been looking for, for quite some time.

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

Give us a little bit of your kind of national pipeline synopsis. What’s the total dollar value over the next, you said kind of a 12 to 18 months scenario? And then maybe just kind of highlight, maybe some of the projects you might be looking at?

Okay. Well, let me, actually it’s kind of an interesting question Brian. Because, we’re going to get pretty picky here going forward. And even speaking about, we’ve been very picky over the last several months of slowing down some of the type of work that we’ve been bidding. We’re walking away from projects today, because if they don’t provide the margin opportunity or the risk profile, it’s really not worth our time or effort. But I’ll give you host of them. We’re seeing more work in Guam, I mentioned that earlier, which is really nice to see finally. We’re starting to see some large highway work in the West California, we’ve got a $0.5 billion job of bidding here we’ve got more work in Hawaii that we are bidding and we are doing work there today. We're actually looking at some large highway work in Michigan which is unusual for us we're looking for -- we've got work in Arizona bidding, we've even got some large highway work in Arkansas bidding, we're even looking at some big tunnel work on the West Coast, it's just -- it's pretty much across the board geographically dispersed.

And then as you get down into that -- instead of $1 billion plus into the more of the hundreds of millions, do any of those jobs lead back into the construction what I would call the old [branch] division, or are they still in the heavy civil side?

I'll tell you one of the real advantages we have is if we build a project and a reminder anything over 75 million in Granite is a large project but we absolutely like that we do -- we call an internal partnership, so some of these jobs where we have a local business Brian we will internal partner, but still have the management team from large projects lead the project, but the local forces have the workforce the work in materials to be able to create a very competitive environment in those large projects in the geographic region where the business is; I would not like to see us especially at this point in time have our regional vertically integrated businesses focusing on large project work in a region, it becomes a distraction to the core to core to day to day smaller work which tends to be very high margin quick turn work, low risk work, so we will look at it and we'll use vertically integrated resources if they team with our large projects business in the same geographic environment.

Just kind of flesh out little bit the private type business, are you talking about industrial parts or residential subdivisions, what's kind of the gamut of that private area construction?

Well today over the last -- I'll say last 12 to 18 months Brian it's really been industrial parks, that is the larger portion of the work that's not been residential subdivisions although we are starting to see a little more at the beginning of the backbone work in subdivisions coming back again just starting, but that has not been in play over the last couple of years at all, it has been most of the industrial, some commercial but I would suggest private sector is mostly industrial.

And as you get down in the bigger large projects, heavy civil stuff and you get done in these more 100 million plus size jobs, do you feel frequency of less owner changes and less the accelerating times, some of things you talked about is they're less of a frequency or propensity for those problems, or do they always have?

So, interestingly enough depending on the format of the contractual relationship, so if you bid a $400 million bid build job, or you're not responsible for the design Brian but you're literally working, building something that that owner has designed typically there's less unknowns there'll be less issues but if it is a fall design bid build project you could have as many issues but what happens and this is the good part about the smaller jobs is they last shorter period of time you'll come to a conclusion much faster and that's what we want, we want to bring these items to conclusion but if you got a four or five year job it gives the owner the ability to drag it on for four or five years which is what we want to get away from.

No, I got you, from the standpoint of mix, on the kind of your aggregate material side, what might you guys be using next year or selling external versus what’s your using internal.

While interestingly enough this last year it's been about 50-50. So ideally as the market heats up, historically that has shown that it will have a high percentage of external sales and that obviously will raise the overall margin expectations at the same time. So, as we go forward, I would expect to see the external sales to get larger.

I just got one more, in all kind of the propensity from the standpoint of vertically integrate each of the Mississippi river with quarries and aggregates in that, is that still a pretty tough road to hold.

Well it’s a tough road to hold but it's absolutely what we want to do, so Brian if there is anybody you know, east of the Mississippi that is available please give me a call, because I can tell you I would love to have a vertically integrated business well, east of the Mississippi.

Our next question is from [indiscernible]. Please go ahead.

Please answer [indiscernible] and the only other question I have is, have you looked at or are you going to look at any of the damage in the Caribbean whether it be the United States properties or the French or Dutch properties.

So, Jay the answer to that is no, we have a lot of opportunities here in the mainland in Hawaii, in Guam and again although we actually been asked, I have discussed with certain lead agencies but our forces are focused on the work we have and I think the opportunities on Mainland are going to be stronger for us and fit into our game plan stronger.

This is the end of the question and answer session. I would now like to turn the call back over to our hosts.

Thank you for your questions. And a quick note for our shareholders and analysts, we'll be on the road in November and December with investor events, so please do not hesitate to reach out to see if we can get together for a visit. And thank you to all of our employees for keeping all of your fellow workers safe and for exhibiting Granite's core values every single day. As always, Laurel, Ron, and I are available for follow-up if you have any further questions. Thank you everyone.

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