Granite Construction Inc

NYSE:GVA

Earnings Call Transcript 2021-Q2

[Operator]

Good morning. My name is Matt and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Inc. 2021 Second Quarter Conference Call. This call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to Vice President of Investor Relations, Mike Barker.

[Mike Barker, Vice President, Investor Relations]

Good morning and thank you for joining us. I am pleased to be here today with President and CEO, Kyle Larkin and Executive Vice President and Chief Financial Officer, Lisa Curtis.

Please note that today’s earnings presentation will be available on our Events and Presentations page of our Investor Relations website. We begin today with an overview of the company’s Safe Harbor language. Some of the discussion today may include forward-looking statements with the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, growth, demand, strategic plans, circumstances, activities, performance, outcomes, outlook, guidance, Committed and Awarded Projects, or CAP and results.

Actual results could differ materially from 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 forward-looking statements. The company assumes no obligation to update forward-looking statements, whether they are results of new information, future events or otherwise, except as required by law.

Certain non-GAAP measures maybe discussed during today’s call and from time-to-time by the company’s executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income or loss and adjusted earnings or loss per share. Reconciliations of non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our Investor Relations website.

Now, I would like to turn the call over to Kyle Larkin.

[Kyle Larkin, President and Chief Executive Officer]

Good morning and welcome. In past calls as part of our cultural reinvigoration and our refreshed core values, I have provided an overview of our core values of safety, inclusion and sustainability and how they drive our culture and actions everyday at Granite. Today, I will discuss our remaining two core values of integrity and excellence and how our teams integrate these two values into their daily work.

Integrity is the foundation of core value, which underpins all other values. We operate with integrity in the highest ethical standards. We know and do what is right, and we expect all of our employees to speak up when something is not right. The Audit Committee investigation completed this year identified areas where we did not live up to the high expectations that we set as a company. To ensure that we are following best practices, this year, we rolled out a cultural reinvigoration across the entire company, and we have clarified and strengthened our employees’ understanding and commitment to integrity in everything we do. Acting with integrity means doing the right thing all the time, honoring our commitments, holding each other accountable and voicing our opinions, questions and concerns in a respectful and transparent way. Acting with integrity allows us to attract and retain the best employees and enables us to be the best builders and material producers for our clients as we approach our second 100 years.

Excellence has been a focus within Granite’s culture since our beginning in 1922 and it’s now a core value. This is an area where we are not willing to compromise. At Granite, excellence is achieved through a high-performance culture of continuous improvement, innovation and quality in all aspects of our work. Through excellence, we strive to be our customers’ contractor of choice, generate efficiencies that drive bottom line results and transform how we bring value to our stakeholders. There are many examples of excellence through innovation, and technology across the company.

We use technology to automate our materials facilities and to provide remote visibility to identify potential issues. We employed 3D modeling and augmented reality to visualize projects in the design phase and enhance productivity in the construction phase. We use technology to enhance safety and save lives by preventing work zone intrusions and enhancing traffic control systems. And finally, we use data analytics as a guide to help us make better decisions for increased production, more accurate scheduling and improving safety. These are just a few of the areas where we are focused on using technology to change the way we work and add more value to our clients and consistent profitability for our shareholders.

Underlying the core value of excellence is our focus on lean principles. We are revisiting means and methods that promote efficiency throughout our operations and support functions as we enhance competitive advantages by being lean. Our goal is to get a little better every day by empowering our teams to challenge the status quo, promote new ideas and technologies and streamline execution through doing things the right way the first time and eliminating rework. I am energized to talk to our teams across the country who are innovating in driving excellence in all parts of Granite. We have already made good progress. We will continue to innovate as we renew our emphasis on excellence.

Okay. Let’s get into our business segments, starting with Transportation. The Transportation segment includes results of our core businesses and continues to be the primary driver of our revenue and gross profit. In the second quarter, we saw a continuation of our strong first quarter results led by the performance of our California and Northwest operating groups and by solid execution by the Heavy Civil Operating Group as it works through the old risk portfolio or ORP.

Within the ORP, as Lisa will discuss further, our teams are currently doing a great job moving the projects forward. As a reminder, the ORP is comprised of projects within our Transportation segment, which do not fit our current strategy due to their higher risk nature. As I have stated previously, we are no longer pursuing design-build mega projects and non-sponsored joint venture projects. The risks inherent in these mega projects related to design, duration, size and partners are no longer acceptable within our strategy.

The Heavy Civil Operating Group continues to pursue projects under our new risk criteria. They are significantly different than projects in the ORP. We are now pursuing best value procurement projects such as CMGC projects as well as bid build projects and smaller, less complex design-build projects where the risks are well understood and priced into the bid. We are leveraging a model that has worked well for our vertically integrated groups and pursuing projects where we believe we have a competitive advantage. Both of our vertically integrated groups recognized revenue increases during the quarter as compared to prior year. Transportation cap for our vertically integrated businesses also ended the quarter strong, led by the California Group with an increase in cap of 25% year-over-year to $1.2 billion as of the second quarter.

Our teams continue to do an excellent job of working with state and local municipalities to secure projects suited to our expertise. With the spending of SB 1 expected to increase from an annual average of $4.4 billion in 2017 through 2021 to an annual average of $6 billion for 2022 through 2027. We believe we are well positioned to continue to grow our business in California.

For infrastructure funding, we continue to monitor the discussions in Washington as Congress debates and infrastructure bill. While we are hopeful that an agreement will be reached in the near term, we believe a deal will most likely not be completed until the fourth quarter, resulting in the need for another continuing resolution of the FAST Act at the end of the third quarter. The current funding environments in our markets are robust at the state and local levels, and there are many opportunities we are pursuing. A federal bill will only serve to strengthen the environment further with meaningful impact starting to be felt in mid to late 2022 and then building into 2023 and beyond.

Turning to the Water segment, the business climate has largely recovered from the pandemic-related decline. The Water Resources division of our Water and Mineral Services Operating Group, which provides water supply and maintenance services across the U.S., has been very active with drought conditions covering most of the Western states. The drought in the West shows no sign of relief and is expected to continue through the summer and into fall. This should result in a busy schedule for our teams in this division for the remainder of the year. Segment cap as of the second quarter stands at $532 million, including the addition of the $160 million Leon Hurse Dam project during the quarter. This is an increase of 129% year-over-year from Water segment cap of $232 million as of the second quarter of 2020. Whether it is the Water and Mineral Services Group, the vertically integrated groups or the Heavy Civil Group, there are many opportunities in the water end market that we are pursuing. The market for this segment continues to be strong and draft legislation, such as The Drinking Water and Wastewater Infrastructure Act will further the positive environment if completed.

Moving to the Specialty segment, both the private and public markets spur a strong increase in activity in this segment in the second quarter. This was led by recovery of the mineral exploration business within the Water and Mineral Services Group. This business line has been largely shut down in the prior year quarter. In 2021, commodity prices are driving increased mineral exploration by mining clients. In the second quarter, we began and ended with a Specialty cap of over $1 billion. The markets that continue to drive this segment include public work with the U.S. government, such as our projects with the U.S. military in Guam, private projects within the mining industry, such as mineral exploration, civil construction and reclamation projects, site development work for private clients such as data center work for technology companies and renewable and solar energy projects where opportunities are increasing with the country’s focus on expanding energy from renewable sources.

The growth in cap in our Specialty segment as well as in the Water segment highlights our team’s ability to execute on horizontal civil construction projects across end markets for both public and private owners. In the future, we will continue to grow cap by leveraging our team’s capabilities and expertise where we believe we have the greatest competitive advantage regardless of the end market.

In the Materials segment, the second quarter continued the themes of the first quarter with demand driving volume increases for the same period year-over-year in aggregates of 42% and asphalt to 25%, including both internal and external construction material sales. These increases were broad across our locations in both the vertically integrated groups with California leading the way. This is an impressive increase in volume when compared to a strong second quarter of 2020. Our investments in new aggregate and asphalt plants in California in the last year helped position us to respond to the increased demand. In addition, we continue to invest in technologies to make our facilities as efficient as possible through automation, innovative energy conservation projects and water recycling initiatives. It’s exciting to see the improvements, innovation is driving at our materials facilities and there are many more in progress to be implemented in the coming months.

As of the second quarter, our consolidated cap was $4.4 billion. Our cap from our vertically integrated operating groups within the Transportation segment continues to grow, cap from the Heavy Civil Operating Group continues to decrease in this segment has intended. This decrease in cap in the Transportation segment is offset by increases in cap in our Specialty and Water segments as we leverage our diverse expertise and strong customer relationships to pursue projects across all our end markets.

Across our footprint of regional offices, we continue to capitalize on our local relationships and market intelligence to be the contractor of choice for both public and private owners. With the decrease in the ORP, higher risk design-build cap continues to decline as we continue our efforts to transform the Heavy Civil Operating Group and the overall risk profile of the company.

With that, I will turn it over to Lisa to discuss our financial results. Lisa?

[Lisa Curtis]

Thank you, Kyle. Starting with revenue and gross profit, the second quarter delivered strong results on both fronts. Second quarter consolidated revenue grew 5% year-over-year to $964 million, with gross profit increasing 32% year-over-year to $117 million with a gross profit margin of 12%.

In our Transportation segment, revenue was down $10 million year-over-year to $525 million as increases in the California and Northwest operating group were more than offset by decreases in the Heavy Civil Operating Group. This revenue shift was expected as we execute our plan to transform and de-risk the Heavy Civil Operating Group portfolio. Transportation gross profit for the quarter increased 91% to $60 million, resulting in a gross profit margin of 11%, up from 6% in the same prior year period. The increase in gross profit was primarily due to fewer project losses from the ORP in the current year.

Gross profit from the ORP in the second quarter of 2021 was $2.5 million on $116 million compared to gross losses of $35 million in the second quarter of 2020. ORP cap decreased by $112 million during the quarter which keeps us on pace to meet our previously discussed expected project burn of $425 million to $475 million during 2021. As a reminder, the projects within the portfolio remain challenging and complex, and there have been gains and fades that have, to date, largely offset during 2021. We are optimistic that our team’s solid performance will continue for the remainder of the year.

In our Water segment, second quarter revenue increased 3% for the same period year-over-year, driven by continued recovery from the COVID-19 pandemic and strong demand for water supply and maintenance services amidst the drought conditions across the Western United States. Water gross profit for the second quarter decreased 16% to $11 million, resulting in a gross profit margin of 9%. This decrease in gross profit was primarily due to $5.3 million in write-downs on 2 projects, while not individually material, they were impactful to the segment results for the quarter.

Moving to the Specialty segment, second quarter revenue increased 15% over the same period year-over-year to $200 million led by the recovery of mineral exploration within the mining industry and progress on a federal site development project that is being constructed by our Heavy Civil Operating Group. Specialty gross profit decreased 4% to $24 million, ending the quarter with a gross profit margin of 12%. The decrease is primarily due to ongoing disputed work on a previously disclosed tunnel project.

Finally, the Materials segment continued their exceptional performance into the second quarter with a revenue increase of 30% over the same period year-over-year to $125 million. This increase was largely driven by strong sales in both the California and Northwest operating groups. Volumes are key in this segment. Materials gross profit increased 17% to $22 million, resulting in a gross profit margin of 18% in the quarter. The increase in gross profit was primarily related to higher volumes across the business, led by the California Group. Gross profit margin in the quarter decreased from the same period year-over-year due in part to the benefit received in 2020 from decreasing oil prices.

Turning now to our non-GAAP financial metrics, adjusted EBITDA for the second quarter increased $30 million year-over-year to $80 million, resulting in an adjusted EBITDA margin of 8% for the quarter. At the end of the second quarter, we closed on the sale of an office building, including adjacent property and recognized a gain on sale of $30 million. This gain on sale is included in EBITDA but has been removed from adjusted EBITDA. This asset sale was completed as part of our ongoing asset optimization plan. The increase in adjusted EBITDA year-over-year during the quarter was largely driven by the improvement in project execution in the Transportation segment’s ORP. Our second quarter resulted in an adjusted net income of $42 million, which was a $23 million improvement from an adjusted net income of $19 million for the same period in the prior year. As with adjusted EBITDA, the gain on sale of the property has been excluded from adjusted net income this quarter.

The second quarter of 2021 marks the first time we are showing accounting dilution and our diluted earnings per share related to our convertible notes as our average share price reached above the stipulated conversion price of $31.47. As a reminder, when we issued our convertible notes at the end of October 2019, we simultaneously entered into a purchased equity derivative instrument to mitigate the impacts of dilution from the convertible notes. However, under U.S. GAAP, we are currently not able to recognize the dilution mitigation of the derivative. Because there is no actual dilution when factoring in the derivative until our average share price is above $53.44. We have removed the potential dilution from our adjusted weighted average diluted shares outstanding in both the quarter and year-to-date periods. The reductions of potential shares for the 3 and 6-month periods were 1.5 million and 1 million shares respectively.

Now, turning to cash and liquidity, our cash and marketable securities balance remains very strong at $404 million as of the end of the second quarter, which is up $109 million compared to the same period in the prior year and down sequentially for $464 million in the first quarter. Our current period cash balance includes $40 million received from the office property sale. Our business is seasonal with the summer months being our busiest construction season and with projects ramping up in the second quarter. As expected, although we saw this dynamic during the second quarter with an outflow of cash, I am pleased with our cash position going into the second half of the year.

Now, let me provide a brief update on the shareholder litigation settlement. We have not yet received preliminary court approval and have, therefore, not paid our portion of the settlement as of the end of the second quarter. As such, the settlement liability of $129 million remains on the balance sheet in accrued expenses with an offsetting insurance receivable for the portion of the settlement that is covered by insurance in the amount of $63 million. At the beginning of the year, we provided expected annual CapEx of $80 million to $100 million. I am increasing this expectation to $105 million to $115 million for the year. The primary driver of the increase in CapEx relates to the recently awarded tunnel project. Our total SG&A for the quarter was $74 million or just under 8% of revenue compared to $78 million or 8.5% of revenue in the same prior year period. We are focused on improving efficiency across our administrative departments as we work to meet our expected SG&A expense of 8.5% to 9% of revenue for the full year.

I am pleased with our performance through the second quarter, but with the majority of our construction season still in front of us, potential for adverse weather in the fourth quarter, coupled with approximately $470 million of our ORP still in cap, I am reiterating our guidance for the full fiscal year of 5.5% to 7.5% adjusted EBITDA margin. We will reassess the guidance following the third quarter.

With that, I will turn it back over to Kyle for closing remarks.

[Kyle Larkin, President and Chief Executive Officer]

Thanks, Lisa. Let me close with the following points. We had a strong second quarter highlighted by solid execution in the ORP and we are making progress in all segments towards mid-teens gross margins. We are pleased with our cap moving into the second half of the year. It demonstrates our strength as a diversified horizontal civil contractor and illustrates how we provide value across end markets, geographies and types of customers. We will continue to grow the business of transportation, but also in other end markets by leveraging our relationships, expertise and vertically integrated structure. Our cash and balance sheet remains strong as we head into the second half of the year. And finally, we continue to be optimistic about the funding environment in the public markets and the strength of the economy in the private market. And we look for greater expansion when our Federal infrastructure bill was completed.

Operator, I will now turn it back to you for questions.

[Operator]

[Operator Instructions] Our first question will come from Brent Thielman with D.A. Davidson. Please go ahead.

[Brent Thielman, D.A. Davidson]

Thank you. Good morning.

[Kyle Larkin, President and Chief Executive Officer]

Good morning Brent.

[Lisa Curtis]

Good morning Brent.

[Brent Thielman, D.A. Davidson]

Kyle, I wanted to get your thoughts just on cap. I mean it looks like you are picking up a lot of work, but obviously working through the ORP. Do you think it sort of holds at these levels as we move through the remainder of the year as you continue to burn off that old work?

[Kyle Larkin, President and Chief Executive Officer]

Yes, great question, Brent. And so we have seen, as you saw, a decrease in cap and probably the Heavy Civil Group’s cap in terms of transportation, and that was something that we were doing really intentionally as we kind of changed what we were pursuing from a risk profile perspective within the Heavy Civil Group. So, that was anticipated. And then what we saw on the other side is our vertically integrated businesses working really hard to pick up cap within transportation. I think they are up about $200-and-so-million on cap on their end. So, we are seeing nice improvement in the vertically integrated business. We are seeing a drop in transportation because we are burning through that ORP as we planned. But just as a reminder, we are focused within the Heavy Civil Group, really pursuing projects, not just in the Transportation segment, but within all of our segments. So, when we picked up that recent Leon Hurse Dam project that is just an example of how the Heavy Civil Group is now transitioning over to really looking at projects outside where they typically have been, which is really encouraging for us. So, I think really to get back to your question, we feel good about our cap. There is a really nice pipeline of projects that are out there. So, when we look at our Heavy Civil Group projects in the pipeline today, even though we really changed the risk profile of the projects that we are pursuing, we are still – we still have the same number of opportunities out there in terms of dollar amount to bid that we had in prior years. So, there is still a really healthy pipeline of larger projects that fit within the risk criteria that we have established. So, we feel really good about where we are headed in terms of cap.

[Brent Thielman, D.A. Davidson]

Okay. That’s helpful. And I apologize if you mentioned this, Lisa, but the $470 million that’s still in there for the ORP, can you say how much you expect to burn off this year and what you would expect for 2022?

[Lisa Curtis]

Yes, definitely. So for the remainder of the year, what we have talked about, that we have kept our burn rate thus far that we talked about at the beginning of the year. So, we have burned a little over $200 million year-to-date through June. So, for the remainder of the year and into – a little bit into 2023, we will have $225 million to $275 million to burn, again, with the majority of that burning in 2022 and about $50 or some-odd million burning into 2023. And again, what we talked about that – what we have in our guidance at 0% margin.

[Brent Thielman, D.A. Davidson]

Okay, great. And then I would love to just get your expectations for the water business as we move into the second half of the year. It seems like you have been challenged to kind of get back to the levels of profitability that I know you are expecting from it. But it sounds like you are picking up some new good work there. So, what’s the expectation for water because it seems like some of the bigger-picture factors are starting to align for it?

[Kyle Larkin, President and Chief Executive Officer]

Yes, it is. And I think certainly with the pandemic last year, our Water segment was hit hard. There was a pullback in terms of spending for municipalities as well as on our well drilling business. So, we saw the water business take a little bit of a pandemic-related hit in 2020. It’s since recovered. I think certainly with the drought conditions that we have seen out in the West that’s really shored up our well drilling business, and we are seeing nice improvement there. And then we are seeing increased spend again in the rest of our water business. And that includes whether it’s the Leon Hurse Dam, our cured-in-place pipe business as well as well drilling. So, we see really nice improvement getting back to where things were at pre-pandemic.

[Brent Thielman, D.A. Davidson]

Okay. And then just the last one is on the materials profit margin. Headwind attached to commodity prices, I assume that’s sort of baked into the guidance for the second half of the year as far as you guys can see today, that should continue in the short-term?

[Kyle Larkin, President and Chief Executive Officer]

Yes, we feel really good. I think if you look at Q2, our performance in materials business was strong. It might be down just slightly from where we were at in Q2 last year. But we feel really good about kind of the 18% margins in that business. We had nice volumes in Q2. And so we did have really nice weather in Q1 and again in Q2. And I think our teams have done a really nice job of selling and producing materials in that segment. We think moving forward for the rest of the year, we think things will be a lot of alignment with where we were at last year. So, we will finish the year in alignment with where we were at in 2020. That said, I would probably caution that certainly, in Q4, there could be some weather challenges that might be out in front of us. And that’s not just for materials, but our entire business. Q4 is always a little bit of a wildcard, but we are going to see from a weather perspective. Last year, in 2020, we had a really dry Q4.

[Brent Thielman, D.A. Davidson]

Okay. Thank you for taking the question.

[Kyle Larkin, President and Chief Executive Officer]

Thank you.

[Lisa Curtis]

Thank you, Brent.

[Operator]

Our next question will come from Michael Dudas with Vertical Research Partners. Please go ahead.

[Michael Dudas, Vertical Research Partners]

Hi. Good morning Mike, Kyle and Lisa.

[Kyle Larkin, President and Chief Executive Officer]

Good morning.

[Lisa Curtis]

Good morning.

[Michael Dudas, Vertical Research Partners]

So, maybe a couple on the materials side any observations on pricing? And also, is there a concern like as things pick up over the next 12 months, 18 months, 24 months and more projects and larger projects. We are seeing a lot of tightness in certainly different markets for a lot of materials. How you can see that? Do you get a sense of that or how you guys are planning for that?

[Kyle Larkin, President and Chief Executive Officer]

So, if I get back to really the materials margin and the materials business question. So, from a – I guess from a supply side standpoint, we have been able to really pass on the cost of the oil increases, diesel increases on to our customers. That’s been something that we have been able to do. If you kind of go back into 2020, we saw oil prices and diesel prices drop. And so our pricing was fixed, and we are able to kind of get a little bit of a pickup on that end of things. But as we look into this year, really trying to pass those costs on to our customers and we have been able to do that. We have seen price increase pretty much in line with our cost increases. So further out, Mike, I am not sure we have the visibility yet in certainly 18 months and 24 months. I would say that certainly, if the Federal bill is passed, we are going to see an opportunity where that might be something that we can see more meaningful price increases down the road.

[Michael Dudas, Vertical Research Partners]

Turning to your specialty business, some of the – interesting, there has been an uptick activity certainly in the mining side on exploration, given where metal prices are in capital, especially in Nevada, Utah and Arizona. Are you – any other areas on the private sector side that you might see some improved maybe potential bookings? And the size of the bookings, is that going to pull in some of your Heavy Civil folks as well as you are thinking about where they are going to be allocated on some of the larger risk-mitigated projects?

[Kyle Larkin, President and Chief Executive Officer]

I think in the Specialty segment, you can see our cap increase. I think that just really kind of tells you the strength of what we think is predominantly private type of work. So, we see really nice strong market opportunities in the private market. The Heavy Civil Group doesn’t necessarily participate a whole lot today in that private market certainly an opportunity as we kind of partner across different groups internally. But all-in-all, we are seeing private market increases on site development, data center work opportunities that’s really across the board. And really, almost all of our groups and businesses have an opportunity to participate.

[Michael Dudas, Vertical Research Partners]

I appreciate it. Thanks Kyle.

[Kyle Larkin, President and Chief Executive Officer]

Thank you.

[Operator]

Our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead.

[Steven Ramsey, Thompson Research Group]

Hey. Good morning everyone.

[Lisa Curtis]

Good morning.

[Steven Ramsey, Thompson Research Group]

Maybe to start with – good morning, maybe to start with on the residential side, clearly, extending times between start of a home and finish due to labor and supply constraints, is that happening in your project set either currently or in the cap, where you are seeing extended times?

[Kyle Larkin, President and Chief Executive Officer]

I would say no, we are not seeing anything out of the ordinary. Typically, when a project comes out to bid, it’s a bid process, will take somewhere between, say, four weeks, five weeks to eight weeks. We have actually provided a price or a proposal. Typically there is 60 days, 90 days to award to when we start that work. And that’s pretty consistent. Some owners can turn projects from letting to actually performing the work a little bit quicker. But that hasn’t really changed for us at all a whole lot.

[Lisa Curtis]

And Steven, I would add that on the labor side for our Western states, a lot of that labor comes from the Union pool. And so that really helps from a stability perspective to have the labor that we need to build the work.

[Kyle Larkin, President and Chief Executive Officer]

Yes. And I will just add that we are in a lot of our markets. We have been in our markets for a long time. So, we had really strong relationships with our Union partners out in the West. We also have a lot of our craft employees who have been with the company for years. And so we have the opportunity to have lots of different types of projects and work out in front of ourselves, which provides that continuity of work for our employees, which they value. And so we do have longevity in terms of our craft workforce. And then you add that with our safety performance, we believe we are an employer of choice for our craft teams.

[Steven Ramsey, Thompson Research Group]

Okay, great. And then I wanted to ask about vertically integrated cap up $200 million, excluding specialty, so further strength there. Can you maybe describe the magnitude of this kind of increase relative to total vertically integrated cap? And then is that broad-based? I am just trying to put it in the context of that $200 million exceeds the first revenue for the materials division. I mean that it’s got a signal pretty strong volumes ahead for materials. Curious if that foreshadow strong results well into 2022 or if that burns off this year?

[Kyle Larkin, President and Chief Executive Officer]

So, maybe make sure I understand the question. The question is, is our vertically integrated cap growing pace is significant. And especially when you look at the aggregate business, and the volume increases; is an indicator that we are really getting back into a healthier market and now it’s going to continue, is that what maybe your question is?

[Steven Ramsey, Thompson Research Group]

Exactly. And then kind of to pin down to vertically integrated, is this level of growth outsized versus the norm for vertically integrated?

[Kyle Larkin, President and Chief Executive Officer]

Well, I don’t think it’s necessarily outside the norm. I think it’s kind of in line with what we anticipated. But I will say that the pipeline of projects that we are bidding they are smaller, say, under what we would call a large project or $150 million, is up significantly year-over-year. Now that’s coming off of a pandemic year in 2020. So, that shouldn’t be a huge surprise. But we are back at pre-pandemic bid levels. I think we were really concerned last year about state funding, that has not lived up to kind of what our worries were. There are some states a little more challenged than others. But we are still seeing really strong funding in the states that we are in within the VI businesses. So, I would say that we expect that to continue. We think that there is really a nice pipeline of projects, more than we have seen in a long time. We are also really, I guess, excited about what we are seeing in California. And we are seeing an increase in our California market where their spending is around $6 billion over the next 6 years to 7 years or so. So, we are seeing really nice annual spend within the California market. And so we think we have a really healthy environment that we are pursuing today.

[Lisa Curtis]

Yes. And one thing to keep in mind, too, Steven, is that our business is obviously cyclical. And so we have just entered our busiest construction season. So, as Kyle mentioned, award activity, lettings and actually the bidding activity has been really robust. So, that obviously has contributed to the increase. But then we are going to start kind of a little bit of a quicker burn rate as we proceed into the busy time of year for us.

[Steven Ramsey, Thompson Research Group]

Excellent. Thank you for the color.

[Kyle Larkin, President and Chief Executive Officer]

Thank you.

[Lisa Curtis]

Thank you.

[Operator]

[Operator Instructions] Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

[Jerry Revich, Goldman Sachs]

Yes. Hi, good morning everyone. I am wondering if you can talk about the SG&A outlook from here? Lisa, it looks like you are on track to be, I think, well below the low end of your target range for the year considering how back half weighted revenue is expected to be this year. So, can you just talk about the drivers of the sequential increase in SG&A that you are looking for or is that just a function of wanting to make sure we deliver on the commitment this year?

[Lisa Curtis]

Well, there is definitely an element of wanting to deliver on the commitment this year. So as you mentioned, we start off the year, the percentage of SG&A to revenue is typically a little higher and trends downward as the year progresses. So for the quarter, we are at about 7.7%. And we continue to look at our SG&A spend, ensure that we are spending our money wisely. But as we look at it for the rest of the year, I mean, there is no particular anomalies or things that we expect to have at spike, but we just want to – we kind of see a normal trend as we continue out through the rest of the year.

[Jerry Revich, Goldman Sachs]

So, that’s nice to see. And then in terms of the overall bid environment, I am wondering, can you just talk about the way the pipeline looks and any differences by region, Kyle, anything that jumps out at you in terms of the types of work that you are bidding on in one part of the footprint versus another? And if you could just comment on the competitive discipline that you are seeing in this cycle compared to a couple of years ago?

[Kyle Larkin, President and Chief Executive Officer]

Sure. And we are seeing, as I mentioned before, a really nice pipeline of projects both on the larger projects side as well as those that aren’t large projects within our VI footprint. So, we are seeing just across the board, really all parts of our business more just a better bid environment for sure, especially since what we saw last year with the pandemic, but we are back, as I mentioned a couple of times now, pre-pandemic levels, which is really nice. I do want to mention within the Heavy Civil Group that right now, there is still that really strong pipeline of projects. We are bidding work in the range of, say, $20 million to $500 million. Our average job size still remains within that around $270 million. What’s interesting is really the contracting method that we are pursuing today on the pipeline of projects, design-build is really only about 18% of the projects that we are pursuing today. Bid build is more closely around 25%. But this best value seems to see a progressive design build is actually about 60% of the contracting method of the work that we are pursuing within the Heavy Civil Group today, which is a big shift for us. So, we are excited to see that happen. I mentioned on our last call that typically, our competitors burn through backlog in Q2, Q3 and then Q4 and Q1 are a little bit more competitive on the bid environment. That held true of what we have seen in the last couple of quarters for sure in Q4 and Q1. And I mentioned on the last call that, that might have extended a little bit, and that certainly was the case with the pandemic and lower lettings across the board, a lot of the competitors burn through backlog and they were looking to pick that up in Q1. So, it did extend. I think things are kind of getting back to what we are used to in general. And so I think the market is definitely on the improvement side.

[Jerry Revich, Goldman Sachs]

I appreciate the discussion. Thanks.

[Kyle Larkin, President and Chief Executive Officer]

Thank you.

[Lisa Curtis]

Thank you.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Kyle Larkin for any closing remarks.

[Kyle Larkin, President and Chief Executive Officer]

Okay. Well, thank you for your questions. As always, I want to thank all of our employees for everything you do for Granite and for your continued focus on safety every day. Your hard work and dedication is a cornerstone of Granite’s success. And with that, thank you for your continued interest in Granite. We look forward to speaking with everyone very soon.

[Operator]

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