GVA
#Okay.
The biggest driver of the increase in SG&A is personnel-related costs, primarily incentive comps and then the typical normal increase in salaries and burdens.
(inaudible) as far as how you should look at it, I would say at about the same percentage of revenue as we currently have.
Our objective is to grow revenue without growing SG&A a lot.
So, we want to hold the percentage that we have and begin to work that down as we grow the topline.
Yes, I think that as I mentioned a little bit, <UNK>, earlier, the private sector is driving that.
There is just no doubt about it.
The expansion in the commercial markets, the renewable markets, the underground markets with some private clients have really jumped up in the last 12 months.
And so, that's what's driving the big returns today and that's what's going to drive the bigger returns down the road.
The DOTs and the public sector markets are typically more commodity markets that drive lower GPMs.
But I actually think that the private sector is growing nicely and although I wouldn't expect 20% every quarter, as I mentioned, you get into the mid-teen margins in Construction and you're doing a really nice job.
So the Granite teams did a really nice job in 2015.
And I also think that our people are just doing a better job in the field.
They're executing at a substantially higher level.
We've enacted our continuous improvement program and the people in Granite are just taking the execution issues to heart and they're just operating better than their competitors.
And that does make a huge difference in a couple of points here and there in the Construction business and as you can see, when you can move up into a 20% margin, that means you're executing at a high level.
The other thing that happened in the west, which is where most of our construction work is, it was a pretty mild winter through December.
We didn't get a lot of rain.
We got a lot of rain in January, but on the whole West Coast, we had nice weather and they got to operate consistently through say mid-December, which makes it a nice fourth quarter.
So, that does help.
Yes.
So, remember what they did up there last year, they passed a 16-year or a 10-year $16 billion bill, yes, 16 to 16, that's right.
So, it was $1 billion a year.
We are seeing releases already.
One thing that will happen in a state like Washington, any of the northern states that have a winner attached to them, what you'll see is a very competitive bidding environment in the first quarter.
You'll see lots of work out to bid typically and you'll see more bidders in the first quarter.
So, I think it's yet to be determined, <UNK>, exactly how that $1 billion a year additional program will hit the Street and how it will affect the bidding environment, but the Washington market is healthy.
It's got a very strong private sector, it's very diversified from the east to the west, the Cascades that lie in between and I think you're going to see that continue to make it healthier, especially when the FAST Act ties in at the same time later on in the year.
That's going to be a really nice addition to the Washington program, because as I mentioned before, I see the FAST Act starting to hit the streets in the third and fourth quarter of this year and then you got the $1 billion year program (inaudible) on top of that.
I think you're going to see Washington do some really nice things.
Yes, sure, <UNK>.
So, the business is ---+ we ought to break it in Granite into two components for our Materials business.
First of all, the aggregates business, which is much easier to track, because you have a very static number of inputs to it, you have aggregates, you're extracting from the ground and you're using a host of different methodologies to crush and make product.
That ---+ those products have risen in pricing somewhere I would say 3% to 5%.
Last year, we see similar type increases.
This year, maybe more.
And it's a nice methodical market and I like where it's going.
I think that could have an inflection point later in the year again if we start seeing the volume demand from both private and public hitting at the same time.
We haven't seen that yet, but we have seen a healthy volume increase about 10% year-to-year in that end of the market, which is healthy, which has helped the pricing.
Now, the second part of the business is a very interesting part of the business and that's the asphalt business.
The asphalt business has, as you would imagine, driven heavily by crude pricing, which liquid asphalt is a major component of asphalt and it's the bottom of the barrel out of the refinery.
And as those prices dropped tremendously over the last 18 months, so therefore, has the pricing for asphalt.
The key ingredient there is to be able to not price the asphalt with the full reduction in price of liquid and capture some upside in the gross profit margin and our businesses have been able to do that and I think they are ---+ and continue to be able to do that.
That is a very healthy market as well, but what happens with the asphalt market is the big volume from that market is typically driven by public projects.
You get very large, we call it, asphalt overlays [and whether Granite does and we're a] third-party, we really like to sell products to the end of very large arenas there, so that we can get some fixed volumes in our plants.
So, I think again in the Materials business and the asphalt business especially, once you see the public sector gearing up and you start seeing more of the surface work coming into play, I think you're going to see that part of the Materials business, the asphalt side, maybe reach an inflection point at the end of this year or beginning of next year.
It's pretty much in line.
It might be down a little bit, but what happens is that we have a whole bunch of them in the hopper that we haven't made our minds up on yet.
So, you could get one $3 billion project and go through what we call our Large Projects committee and get it approved and then it would change, it would add $3 billion to that list.
I would suggest this <UNK>, it is robust, we're being very choosy and we're turning opportunities away and the amount of work that we're going to bid is going to be in line with what our capabilities are.
Okay, that's an interesting question, because that's what we use to chat about 10 years ago that do we have a capacity issue, is there some saturation point in your business that you're going to not be able to do any more and you're going to turn work away.
And the key ingredient is exactly what you said is that you start optimizing your margin expectations long before you reach a saturation point, so that you don't fill yourself up with lower margin work and then lose the opportunities in a higher margin work.
I will tell you with the businesses that we have across the country, we have a huge opportunity to increase the amount of work we do in the Construction Materials segment.
We are nowhere near capacity, but it is smart business to watch what goes on in the markets, and not reach capacity too quickly because what we have seen historically is that our competitors are smaller, they have less elasticity in their business, and they tend to fill up faster when the markets improve and then there is a significant change in the pricing, that inflection point.
So, I don't see a capacity issue with Granite today.
I think that it is a good business to continually move prices up, find out where that pressure point is, and I think we're going to be working that very hard over the next ---+ in 2016.
Well, I'll say it's both, you're getting some other industries, there is an influx of workers from the other industries, no doubt.
The upstream oil industry has allowed some opportunities for those individuals to move into the Construction segment, which is good, but of course that's not in all geographic parts of the country.
The other thing that we've seen is that when we are on prevailing wage jobs, which is a big chunk of our work, we typically are able to get craft workers, because the wage rates that we're providing those craft workers is higher than the open shop or non-prevailing wage work in the same geographic market.
I would suggest that there is an equal pressure point on talented professionals in the industry.
And when you start obtaining large work and unique 30, 40 engineers, different types of capabilities, scheduling, quality, safety, the technical side of the professional business I think is going to be actually reach a saturation point before the craft level does.
So, there is a duplicate of concerns.
But as long as you're willing to reward those people properly, I think those kind of companies are going to make it through this nice upward pick in the market.
But if you're going to stay on the cheap side, you're going to have a problem obtaining and retaining people.
Absolutely.
Yes, we're doing some big work in Dallas and it has affected, that's the IH-35 job, it has absolutely affected that job.
We've had a big ---+ we had a big wet year at the beginning of last year as well that had a significant negative effect in Texas, then it dried out, we made huge progress.
But I would say that that job ---+ one job there in Dallas itself has been affected by rain over the last 12 months.
Well, I would say, <UNK> ---+ by the way, good to hear from you, I would say that it's pretty similar to where it's been, it may be not even getting bigger.
The overall market size is growing.
And the question obviously is when we give you a $60 billion number, it's ---+ those are things that are in our hopper that we're looking at and that we know are out there and that we're tracking.
And it could be two or three years down the road before that actually comes into play and there are also times where the owner decides to go different route, break the project up into smaller projects or they can't get the permits to actually build the work, but I don't see that changing.
I actually see the amount of construction work growing, the thinking about the marketplace on construction, that's a $75 million and less on the Granite portfolio side.
I think that long-term outlook for work is actually growing quite a bit.
The other thing that's happening is that we're looking at a more diversified kind of pile of work out there in the US.
So, we're not just looking at a big transportation project anymore, we're looking at big power projects, we're looking at big water facilities.
And as we expand our horizons and diversifying, I think that what you're going to see is that pot and we can talk about this in the future, the size of that overall long-term tracking is going to get bigger and bigger.
I think that yes and no.
I think certainly the oil sector and the crude pricing has caused some revenue issues in certain states.
And I mentioned in my remarks that the drop in crude and the Board of Equalization just dropped some significant gas tax requirements in the State of California, and you think about a state that we do have a nice business in that has been hit with the ---+ because of oil entry is Alaska.
That's a very focused state on oil and energy and that has hit that state.
Now, we've done quite well up there and we anticipate doing quite well, but certainly it puts struggles on states like that.
But it's interesting in the power market, we're actually seeing our power business having tremendous opportunities by changing the transmission and distribution systems and looking at new power lines and decommissioning lines and expansion in right away projects and the construction management portion that we do.
So, the oil and gas side and the related energy side, except for the gas tax reduction in the State of Alaska, has actually helped our power business.
Yes, thanks <UNK>.
Thanks.
I wouldn't call it really a huge headwind, I would call a lack of what I would want to see is a huge tailwind.
There's plenty of work in California, the private sector is alive and well in California.
I'm just frustrated that California can't get if I call it top [debt] center and get moving on a very proactive environment where we know that this work has to get done.
So, California is one of our stronger states right now overall and the way that we're performing business, the bottom line, the revenue and everything else, it just has another significant notch up that it can go when the politicians do what they're supposed to do.
I think there will be spring lettings, but remember what happens, <UNK>, a spring wedding, which is typically you've got more states, you got a minimum requirement of 30 to 60 days of public announcement to actually put a public bid out and then you've got somewhere between 30 and 90 days to award the job typically inside the contract and then you've got another 30 days before the notice to proceed and you physically get out on the grade.
So, that's why I was saying that I think we'll start seeing the positive effects of it late in the year, but we absolutely can see some spring weddings.
But you still won't see the financial effects of that until later in the year.
Well, what we mentioned there was that it should be somewhere in between.
We said that it should be better than last year, but we don't see it at the mid-teens range in 2016.
We've got some early progression projects.
And again, we've mentioned before that at the early part of our projects we hold some monies back to try to make sure that the jobs are heading in the right direction.
And when the portfolio mix is still young, you're going to naturally have a lower margin expectation.
So, we mentioned 2017 is when we start seeing getting back to the typical expectation, 2016 will be somewhat as a progression from where 2015 was and in between 2015 and 2017.
Well, they are very complicated jobs, complex inside and outside, but all four of them are progressing quite well.
Again, only two of them are over the 50% mark and two of them are early in the stage, just the I-4 is very early in the stage and the Pennsylvania job is in the first quarter quartile of its stage.
So again, we expect lower margins while they're in those early stages.
And the Tappan Zee is progressing quite well.
It has had a very nice 2015.
Weather certainly helped in 2014 and the previous two winters did not help that job.
And I think I-35 has progressed quite nicely in the second half of the year.
It got stung with some serious range in the first half of the year and is progressing well now as well.
But what happens is that when you get your new work, now you're start having to add on, you got the 202, which is a really nice win for Granite, you got the Alabama I-59, I-20 job, another nice win.
Now you got to mix those young ones back into the portfolio.
So, I think that our projects are going well.
I think that you're going to see that we're going to continue to increase the backlog and progression will be a combination of how well we execute and how well really we can get to work in some of those locations where we've got some significant winners.
New York so far is good, Pennsylvania is kind of come and go, I know they got some weather hitting them right now.
But overall, I think our large project progression in 2016 should improve from 2015.
Okay, once you hit the cash side first, <UNK>.
Sure.
So, we have private placement notes that have five years of $40 million of payments and the first payment was due in December of 2015.
We refinanced our credit facility in the fourth quarter in October and as part of that, we took a portion of it as a term loan and we used $30 million of that term loan to pay off some of the $40 million and then used cash for the remainder of it.
And so, every year we will ---+ and our plans for 2016 are similar to what we did in 2015.
And then the other thing that happens with that new credit facility, obviously larger than our old credit facility, it ties nicely into the second question, the M&A side and we certainly are considering expanding the business through acquisition.
We are in the market to look and see what's out there.
We like and I've mentioned it before diversifying geographically and in both end markets.
Diversifying into the water market I think is really top in our list, geographically diversifying our vertically integrated business is top on our list.
And I think one of the things I've always said that's really important is that you do not move into the acquisition mode before you are efficient and effective in your core business at all times, and I'm happy to say that.
I think our teams have done a tremendous job in 2015 becoming more efficient, more effective and our strategic plan is to grow both organically and through acquisitions.
The majority of it.
I would suggest that when we start looking at large projects work now, <UNK>, there are very few jobs.
Remember our threshold is $75 million and most of the jobs today in this environment are way over $75 million and most of them are design build.
I'll give you an example of one that's not, that's actually bidding today is a job in Hartford, Connecticut, which is somewhere between $200 million and $400 million tunnel job, that is a bid build.
So, different types of jobs are taking on different contractual outlooks.
Tunnels are typically bid build, the other projects we're looking at are almost all design build nowadays, all the big ones.
Well, okay, so that is a very strong topic of discussion inside Granite as well, and it's a very strategic question, <UNK>.
It's actually a really good question, because there is a combination of things that you have to look out when you call yourself a sponsor or a non-sponsor on a joint venture, and when you get into design build, you have to make sure that if you're going to sponsor a job that you have the personnel to lead the job and that could be up to 40 or 50 people, and I mentioned the engineering staff and those people that you're going to need to put on a project in order to be the lead player.
So, you need to have those people available if you're going to lead $1 billion job and be the sponsor.
The second thing that you need to be a sponsor is to make sure that you can handle the cash requirements of a large project.
A lot of these projects will start with the cash call and equity infusion and if you're going to be a 50% or 60% partner, you need to do some very strong cash flow curves on these jobs to determine what kind of cash the company is willing to infuse in the job before you get to distribution.
Now, secondarily ---+ so that's part one.
Part two is, a lot of times, you can obligate yourself to a partner on the premise that if you are a non-sponsor or you are taking a smaller role today that you promise your partner you're going to take a larger role, you're down the road.
And because that takes a lot of different requirements from the partners and sometimes there's not an even percentage of effort going into play, you could be a 40% partner and put in 60% of the assets and the resources.
So you have to sometime sponsor, sometimes non-sponsor.
I think you're going to see Granite on jobs, $500 million to $600 million and lower typically be the sponsor and I think that when we get to the larger jobs, we would like to increase the size of projects that we're sponsoring, we're healthy, we're developing a lot of people in the field today, and I mentioned this earlier, in role, so that they can actually run these billion dollar jobs going forward.
And when they become completed on the jobs are on and they become available into Granite for future work, I think you're going to see us bidding and sponsoring larger projects going down the road.
It's about 60% external, 40% internal.
Well, it's really important, <UNK>, that is so ---+ such a big deal, especially in the Large Projects business.
And I'll tell you what really surfaces in choosing and not choosing a job.
Number one, can you get the right team, are you in the game early, do you have the right partners, and does that allow you an advantageous position in on the project.
Secondarily, we look heavily at the contractual documents themselves, how will they set up, does this owner provide reasonable cash flow, does this owner have a dispute resolution program that is fair or they have the judge and jury with a dispute.
And also we look at the history of how we've done with these agencies across the country.
We dealt with the majority of these bigger agencies across the country and we know how they treat people.
The other thing we look at is when we go into a large job, we go okay, who are the competitors on this job and can we be competitor.
And if there is somebody that we know has an advantaged position over Granite, then we're not going to spend millions bidding a job that we really don't think we have a great shot at getting the job.
So, there is a host of issues that go into consideration and we actually have a complete committee in Granite that's led by our COO and our Head of our Large Projects group and we have ---+ we look at risk mitigation through our risk department.
We have our legal department heavily involved in terms of how the contracts read, we have our business development group in there to look at the partnerships with not only our joint venture partners, but our engineering partners.
It's a very comprehensive group that looks at all the opportunities and says, okay, this one you have a chance for obtaining the work and you have a really good chance of getting the margin that Granite needs in order to come out the back end of the job.
Okay, so I think there's two parts to that question, <UNK>.
First of all, I think in Large Projects, there is always going to be mobility.
Our people have to go to where those specialized large projects are and that's what our people sign up for, and they know that and they're very good at that.
Now, when you go to the Construction business, when you start seeing the local markets get healthier which they are, then I think you're going to start seeing less mobility of those people, because they're going to be in a market where they look out in front of them and see five, 10 years of growth in the local market and they know that they can create significant value for the Company staying in that local market, the Company is happy with it and we let them stay in those local market.
So, two parts of the question, the smaller work is going to be less mobility required due to the strength of local markets today, Large Projects will always have mobility.
Well, you nailed it, a lot of it.
It is the fact that the ---+ what happens in those local markets and you put a geographic boundary around the local market, <UNK> and you say, okay, what's the health of the state and then you dial into what's the health of the county or the larger mix jurisdiction and what's the health of local municipality.
What's going on in the private sector in residential, residential, by the way, I would say is not something that is driving our business today, but with significant opportunities, we are seeing development starting and I'm going to say starting to be built again, but the commercial market is very strong.
But what else we've done over the last five years is diversified into other parts of the business.
We're doing a lot of work directly for the larger rail companies today.
We're working for water facilities today that we didn't do, we're doing pipeline rehabilitation that we didn't do, we're seeing the renewable energy business that we didn't do.
And the other thing that we've actually migrated into and most of it is $75 million or less is in the federal market.
We've actually gone to a whole new client.
We got a nice couple of jobs bidding (inaudible) coming up in the next couple of months.
So, we've diversified our portfolio and that's the strength of the Construction business today that we didn't have five years ago, <UNK>.
Sure.
I think our CapEx is definitely going up.
We've been typically in the 2% to 3% of revenue range and will stay within that range, but they started migrating towards the upper end as we start building new work.
The other thing that happens is and I will tell you one thing that's changed in our portfolio of capital expenditures is the tunneling industry.
So, when we go out and sponsor a large project, we now have to go out and buy these very, very intricate tunnel boring machines that can be $20 million each.
Now, we typically get paid by the owner very quickly, because they understand the cash requirements but that makes a very quick change in the overall volume of capital expenditures and those are quick turn items.
So, that's not a big deal.
I will say this that we've done a complete kind of reboot of our capital expenditure program inside of Granite and we're ordering equipment now in the fall of the previous year for delivery in the spring.
And that was something that I commend our COO, head of our equipment apartment and our local businesses are just planning better now.
And so, you give a six-month lead time, but you got to be that far in advance of the business.
There's another question that I better address.
So, what happens if Trump gets elected, do we have bridge building abilities, I heard that one in the background, and we've got tremendous bridge building abilities, and that's what we do.
So, certainly we are ready for the next elected official to help us to help build bridges and entire infrastructure in the US.
Okay, very good.
Well, thank you for your questions today and thank you again to all the Granite employees for working safely, working hard and living our core values every single day.
We look forward to seeing a few of you in San Francisco on Monday, Denver on Tuesday and Chicago in few weeks from now and as always, <UNK>, <UNK>, and I are available for follow-up if any of you have any questions at all.
Thank you.
Have a good day.
