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Granite Construction Inc
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Good morning. My name is William and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Fourth Quarter 2017 Earnings Conference Call. All participants 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. Thank you, the floor is yours.
Thank you. Welcome to the Granite Construction Incorporated fourth quarter and fiscal year 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. These forward-looking statements are estimates reflecting the best judgment of senior management and reflect our current expectations regarding future events, occurrences, circumstances, activities, performance, outcomes and results. 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, visit our Investor Relations website at investor.graniteconstruction.com. Thank you.
Now, it is my pleasure to turn the call over to Granite Construction Incorporated Chief Executive Officer, Jim Roberts.
Thank you, Ron very much. Good morning, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2017 results. We delivered another strong year in 2017, but before we discuss our result I want to quickly touch on the exciting announcement we made earlier this week regarding our agreement to acquire Layne Christensen.
On Wednesday, we announced an agreement to acquire Layne in an All-Star merger transaction valued at $565 million, this creative transaction brings together two complementary organizations, create a compelling platform for growth and deliver significant benefits for shareholders, employees and customers of both companies. And with the addition of Layne’s businesses we will expand our presence and strengthen our capabilities in the attractive water and wastewater markets.
We are encouraged by the early positive feedback we have received from employees, shareholders and customers who all benefit from our expanded capabilities and geographic reach.
Turning now to our results, we are extremely proud how Granite employees and teams responded to challenges in 2017 and we are enthusiastic about the diverse opportunities in front of us to build upon a year of such tremendous growth.
Across the country in 2017, we were inundated by storms, floods and fires. Mother nature certainly was not kind to our country or to our industry over the past year. The Granite family displayed its resilience, passion and focus along with incredible compassion in helping our neighbors.
After this barrage which included an early wet end to 2016 and an even better start to 2017, we finally got a bit of a break late in the year as mild fourth quarter weather supplied some extra time for our teams to execute on record backlog.
I congratulate Granite teams for their focus, effort, enthusiasm and ultimately for their execution throughout the fourth quarter and the entire year. These efforts produced solid quarter results and upon a strong finish two year of exceptional top line growth, solid cost controls and improved bottom line results.
Most importantly, of course our teams work safely and responsibly, displaying our core values in their work every single day. Our focus on safety performance is unwavering. We believe our goal of zero injuries is attainable and we will continue to invest in and to promote safety and training for all of our people.
We are tirelessly committed to working to ensure we get everyone home safely, every single day. On Monday, we proudly announced that for the ninth consecutive year, Granite was named by Ethisphere Institute as one of the 2018 World’s Most Ethical Companies.
Our strong culture also reflects in our recent certification as a great workplace by the independent analyst at great place to work. Thank you to all of our employees. You are the reason behind this important recognition.
Now before I hand the call over to Laurel to discuss the details of our results and guidance, let’s spend a few minutes discussing our performance some of the drivers of our visibility and outlook and how this positions Granite for growth in 2018 and beyond.
With private and public demand continuing a positive trend, we finished 2017 with record year-end backlog of $3.72 billion. As I noted mild fourth quarter weather allowed to work longer. This resulted in much of the sequential backlog burned from the third quarter’s all-time record of $4.2 billion. This transitory trend occurred in advance of a significant expected an observed uptick in lettings and related spending at the beginning of this year, especially here in California.
Encouragingly across the company, the operational update has not changed. Granite teams continued to execute a high level. Our teams today are consistently delivering results while balancing broad, diverse growth opportunities across the enterprise and across the country.
Let’s start today with the construction segment. Here we again have exhibited excellent top line growth and solid cost control and we posted another strong performance in the fourth four. As I noted a much milder start to the winter across much of the West allowed our teams more time to efficiently work through near record backlog fueling another quarter of outstanding revenue growth, profit growth and mid-teens margin performance.
While the strong performance translated into some backlog burn in the quarter, construction segment backlog remains historically healthy at nearly 900 million. Private demand remained steady, and public weddings are picking up as we speak. As a result, our outlook remains very strong and after a year of such significant revenue growth in some areas, our teams are empathizing balance of discipline to create and encourage improved profitability while continuing to grow.
That said, much of the balance in this segment emanates from the effort and emphasis on diversification and on project returns more aligned to increase long-term demand and lower overall project risk profiles. We are seeing this balance in markets ranging from public lettings, and publicly funded alternative procurement projects such as CMGC to a recent uptick in mining work and steady demand for private industrial development.
These positive trends are the drivers of balance and profitability. Encouragingly, these trends are not meaningfully different whether in the state of Washington, the Southeast, the Midwest or in California.
Across geographies and markets, and the customers we serve, we continue to target disciplined profitable growth in 2018 and beyond. Next, moving to the construction materials segment. Clearly, this is the part of our business, most susceptible to seasonality, improved demand and mild weather across much of the West in the second half of year especially in Q4 allow Granite teams the chance to more than make up for our start to 2017.
As we saw last quarter, we got the benefit of both price and volume improvement again in the fourth quarter, which translated into strong topline growth and stronger profit improvement within 2016. The broad outlook for this part of our business continues to come into improved focus. We have noted for some time that our material facilities continue to operate below both capacity and optimal utilization.
With public spending at the state and local level now increasing, demand and committed volumes are expected to improve. The construction materials segment remains well-positioned to improve results in 2018 and beyond. But finished today in the large projects construction segment, where we anticipate significant performance and profit improvement in 2018.
As we have seen from much of the past couple of years, performance was impacted by accelerated work on a number of challenging projects. These project again represented a significant amount of segment revenue in the quarter but as expected, we are near substantial completion on two of these projects and we are working towards substantial completion of two additional projects in 2018.
So as we work through these projects as quickly as possible, we expect the negative drag from acceleration should lessen throughout the year. The solid starts and steady performance in the newer portion of our large project portfolio gives our team significant opportunities to deliver operational and financial performance improvement.
The market remains robust and our emphasis remains targeted to discipline project selection, partner selection, project duration and owner dynamics, all while keenly focused on associated risk and appropriate returns.
As has been the case for a number of quarters now, our visibility and our long-term growth outlook is supported by steady economic trends and steady to improving funding environments.
Probably the most encouraging thing about performance over the past few years has been the consistency and alignment of both demand and execution across our businesses. In the matter of just the past half-dozen quarters, Granite’s operating dynamics have changed consistently to the positive.
As a result, our businesses today are well-positioned for growth, for investment and for improved profitability. Coming off a year of strong growth, and with many positive demand dynamics in play today, some may ask so when is the peak? Just for a moment, we consider a little context in the form of national demand for asphalt paving.
Historical data is from the national asphalt paving association. In the U.S. peak tonnage production for the asphalt pavement industry was about 550 million tons produced nationally in 2006; demand cratered bottoming in 2013, with 330 million tons produced nationally, down 40% from peak.
By the end of 2017, we are slowly recovered to about 378 million tons up about 15% from the bottom, but still more than 31% below prior peak demand. Today, the increase state and local funding we have talked about for so long finally is walking onto our door steps around the country.
California’s $52 billion SP1 transportation bill was passed in April and we are beginning to see this legislation in action. The 2017, 2018 California budget included an increase in state transportation capital funding from less than 2 billion in fiscal 2016, 2017 to more than 4.5 billion this year with most of the increase in the current January to June period.
The 2018, 2019 budget at an incremental $1.7 billion. At the decade long SB1 investment to the nearly 190 billion of long term of local measures, passed by voters in California and Washington state in November of 2016 and it illustrates that we have a very nice road ahead.
At the same time, after federal transportation funding has been stalled, since passage of the FAST ACT in December 2015, Congress and the administration finally acted to end more than six years of continuing resolution and sequester limited funding by passing two year budget legislation. This bolsters both FAST ACT spending by about 900 million over the last fiscal year and it commits $10 billion a year towards incremental infrastructure investment.
We will not know how these funds will be allocated or what type of projects will be funded until Congress passes a separate Omnibus Appropriations bill most likely in March. We expect a significant portion will flow through the existing Federal highway program, at that time, the state highway agencies will know their full year budget and start awarding contracts.
This notably was a two year deal providing improved visibility and certainty t hat we have not had in a long time at the federal level. Though some progress has been made, but we continue to emphasize the need for Congress to take a leadership role to deliver a permanent funding fixed to the deficit in our nation’s highway trust fund.
Just last month, the U.S. Chamber of Commerce called for an increase in the federal gas tax of $0.25 a gallon phased in over five years. The business group and many others have long been calling for a boost in the gas tax which has not been increased since 1993.
We continue to emphasize the need for and the benefits derived from appropriate levels of investment in our service transportation network, some of our nations and our society’s most valuable assets.
Congress can accomplish this and much more by championing our well-funded, long-term federal infrastructure investment bill. Unfortunately, neither of these critical national areas were part of the recently passed H.R. 1, commonly referred to The Tax Cuts and Jobs Act which passed in December.
Of course the good news is that as we have noted some time, any federal investment in this area will be incremental to the significant drivers of today positive state and local public funding trends.
From vehicle mileage tracking to increase interest in tolling, after more than half the states in the union passed transportation legislation over the past five years, the focus is moving beyond just gas tax increases.
A number of states that do not currently have tolls are considering a variety of options. Connecticut, Michigan, Wyoming and other states are considering tolling as a new, effective, and dedicated way to pay for new infrastructure and fund existing infrastructure and related long-term maintenance.
These positive trends and consistent performance together strengthen the confidence and our outlook for disciplined profitable growth. Granite again last year with lofty, safety execution growth and profitability goals. After an outstanding 2017, we again are challenging our teams to raise the bar even higher and capture the growing opportunities in front of us in 2018 and beyond.
And now I hand it to Laurel with some more detail on our 2018 outlook. Laurel?
Thank you, Jim and good morning everyone. For the year, consolidated revenue of $2.99 billion represents a new high watermark for Granite reflecting an increase of nearly 19% year-over-year and in line with the guidance we provided.
Fourth quarter 2017 revenue of $801.3 million up more than 20% from last year represents an all-time Q4 revenue record.
Diluted earnings per share in the quarter increased 103% year-over-year to $0.81 a strong contributor to 2017 diluted earnings per share of $1.71 up 20.5% from $1.42 per share in 2016.
Fourth quarter net income includes a $3.7 million benefit or $0.09 per share from the year-end adjustment to deferred taxes required by the recently passed tax legislation.
Gross profit increased nearly 24% year-over-year to $100.7 million in the fourth quarter driven primarily by the strong performance of our vertically integrated in the West, as mild late 2017 weather allowed us to work later and more efficiently than in 2016.
This strong Q4 performance was key to an annual gross profit increase of 4.5% year-over-year to $314.9 million in 2017, again driven by improved performance in the construction and construction materials segment.
Gross profit margin in 2017 was 10.5% compared with 12% in 2016 with the difference driven primarily by large project construction performance. That said, gross profit in the fourth quarter expanded about 40 basis points year-over-year to 12.6% with construction and construction material segment performance outweighing continued margin drag from the large project construction segment.
We are particularly proud of cost control performance throughout the year and efforts to streamline overhead have produced results. Despite 20% revenue growth, fourth quarter 2017 SG&A decreased slightly 0.5% year-over-year to $59.1 million.
More importantly though, on a year-to-date basis, SG&A spending increased only 1.6% to $222.8 million and as a percentage of revenue it was 7.5% in 2017 down more than 125 basis points from last year.
We continue to expect our core cost structure to provide scale benefits. Granite’s balance sheet remained strong with $366.5 million in cash and marketable securities at the end of the year up solidly from last year, the result of strong Q4 and 2017 operating cash flow performance. A milder start to the winter provided our teams with an opportunity to work efficiently later in the year on near record backlog.
In addition, we also continued ramping recent large projects wins and accelerating mature projects late in the year. As a result, total contract backlog moved down sequentially from last quarter’s all time record level but still finished at $3.7 billion another year-end record.
Large project construction segment backlog finished at $2.82 billion, up 15% year-over-year reflecting the net addition of new consolidated and Granite only projects. In the construction segment, backlog finished at $897 million reflecting mild Q4 weather and modestly weaker public letting and bookings in the quarter especially in California.
Backlog again reflects broad bookings across our businesses end markets and geographies. Today our background includes only a handful of early project from California’s recently passed SB1 transportation funding legislation.
Looking at the segment detail, in the fourth quarter, construction segment revenues increased 19.4% to $429.4 million. For 2017, segment revenue totaled $1.66 billion up 21.9% from last year.
Gross profit increased 5.7% in the fourth quarter to $65.2 million an 18.1% year-over-year to $247 million in 2017. For the quarter, the result was gross profit margin in line with our mid teen expectations at 15.2% down about 200 basis points from last year.
For the year, gross margin declined about 50 basis point to 14.8%. Large project segment revenues increased 18.2% in the fourth quarter and 15.2% in 2017 to $290.9 million and $1.03 billion respectively.
Fourth-quarter gross profit margin of 7% reflects about 150 basis points of year-over-year improvement. 2017 gross profit margin finished at 2.9% down more than 400 basis points from last year, and again reflecting the project portfolio dynamics we have discussed for some time.
Our focus on large project construction segment performance improvement remains unrelenting and we anticipate significantly improved returns in the back half of 2018.
Moving now to construction materials, where segment revenues increased 33% year-over-year to $80.9 million in the fourth quarter with profit up nearly 150% year-over-year. This translated into gross profit margin of 18.7% up nearly 870 basis points.
In 2017, materials revenue increased to $292.8 million, up 12.1% from last year. Gross profit increased 36% year-over-year resulting in gross profit margin of 13% up about 230 basis points and finally returning to the mid-teens minimum level we have anticipated for a number of years.
Solid demand, pricing discipline and a steady focus on investment and cost control continue to feel are healthy, operational and financial outlook across the business. Now before I turn to our 2018 outlook, let me offer just a little more color on a few notable items as we enter the year.
Let’s start with overhead. After an outstanding year of growth in cost management, we expect our SG&A as a percent of revenue to be in line with last year’s 7.5% level, hopefully even slightly better.
We expect to continue to invest in selling expenses, as we grow our business and we are confident that G&A portion is more scalable. In 2018, we expect the capital expenditure’s requirement of 2.5% to 3% of revenue and we expect depreciation should increase to $75 million to $80 million.
Finally, on taxes and the impacts on the tax legislation. We expect our tax rate which dropped from the historical low of 30 percentage range to 27.4% in 2017 to settle around the mid-20s percentage level reflecting the impact of the 21% federal rate offset by the loss of certain tax deductions.
With that, I finished with outlook which does not include any potential impact from this week’s announced transaction. Our expectations for 2018 are; high single to low double-digit consolidated revenue growth and consolidated EBITDA margin of 7% to 8%.
Now before we take your questions, let me to call back to Jim.
Thank you very much Laurel. In sum, we ended the year on a great note with strong momentum and believe the opportunity for Granite has never been greater. We continue to focus on delivering improved results for Granite, our shareholders and our employees in 2018 and well beyond.
And with that, we’ll be happy to take your questions.
[Operator Instructions]. Our first question is from Jerry Revich with Goldman Sachs. Please go ahead.
Hi, this is Corinne Jenkins on for Jerry Revich. It sounds like you guys are starting to see a ramp up in SB1 awards in California. Can you talk about how the pace of that compares to what you had originally expected. And if we should still think about the awards flowing due to the revenue in the back half of the year?
You bet, thank you, that’s a good question. There is no doubt that when SB1 passed in April last year that we weren’t certain when the investments were going to really start hitting the books. We had hoped that we knew it’s either going to be the fourth quarter or first quarter of this year. If things did get pushed or were a little slower than we had hoped for, so we didn’t see a lot of action in the fourth quarter of 2017 and that’s noted I think in our construction backlog and our discussions earlier.
So I do see the original $2.8 billion infusion for the 2017, 2018 budget having a heavy waiting in the first half of this year, because it’s been delayed. And then as a note, and I hope I made it clear that there’s another $1.7 billion starting in July 1. So that would mean $4.5 billion above the original Caltrans budget from two years ago. So to answer the question, I think what you are going to see is you are going to see lettings heavily begin now in the first quarter. They will continue to ramp up every quarter as we go through the year and I think you are going to see it physically on our books in the second half of the year.
And I think we are already seeing the lettings are out, we just haven’t seen the bids physically conclude yet. So I would tell you that, you’re going to see a lot of action on the Caltrans websites during the first half of the year and then hitting our books in the second half of the year.
Great. Thank you.
Thank you.
And then separately can you just update us on the progress of those legacy projects, I thought you were expecting to drop out two of them in 2017, they are just tying up some loose ends, and then is there anything we could should keep in mind between like the two projects that you are wrapping up and that three projects that you sought to finish?
Yes, I think we did mention that we did complete two of them at the end of 2017, wrapped them up. We also have a couple of them that were concluding in the first half of this year and that’s why we suggested that they are going to end up being somewhat of a continued drag on the earnings of large project for the first part of the year. And then I think we’ve been consistent in saying that it isn’t just the completion of these older projects that are struggling, it’s also the ramping up of the newer projects that will help offset and adjust the portfolio.
Those really started taking off here in the first quarter. So we are heavily invested and work all across the country and it seems that the projects all seem to start a little slower than we anticipate. But once they get going the velocity really picks up rapidly, so I think we are on target to do exactly what we said. We finished two at the end of last year, the other two projects will be, I wouldn’t say completed in the first half of the year, but a big chunk of them completed in the first half of the year and the newer projects are ramping up as we speak.
Great. Thank you so much.
Thank you.
And the next question today will be from Kathryn Thompson with Thompson Research Group. Please go ahead.
Hey guys, this is Steven on for Kathryn. I was just wondering if there was a desired breakout for backlog or sales between large projects in construction, obviously you want to see growth in both and that’s somewhat uncontrollable, but with demand out there and better pricing, more selection, wondered if there was a target range.
Well okay Steven. So I mean it’s a very good question. Where do you see the backlog moving? As you can tell, with the 3.7, 2.8 of it’s in large projects, today 900 of it is construction. I think the really important thing that we should always remember about backlog.
Backlog in the construction segment although sequentially moving up, it will move slower up or much slower down because of the burn ratio. And one of the things that I’ve seen in more recent times is that as we get into these maintenance projects, which is where SB1 and a lot of the states are focusing now, these are going to be really fast burn projects. So you see us even in and now I can say the first quarter because weather may not allow it, but in the second and third quarter, you could see us pull some big revenue in construction and I have a lot of change in our backlog, because we could be bid and burn it actually in the same quarter. So we are very, I’m going to say conservatively cautious on the large projects. We are very disciplined in our approach on large projects. When it comes to the construction side of the business we do like quick time jobs that will continue to keep our – I’m going to call it our cruise eligible for more work later in the year, so you never get tied up with work for too long because the opportunities are going to get better and better and better.
So I would say, keep watching, the revenue versus backlog and construction and then I would suggest you that the overall backlog in large projects is more about quality backlog than the size of the backlog.
Very helpful, thanks. And then, just thinking about the impact of SB1, should we think of that impact implying greater percentage sales growth in the second half than in the first half for all three segments?
So Steven, I would focus more on construction and materials. We are noting that that SB1 is flowing into some large projects. Remember the definition of a large project and Granite is any project greater than 75 million. So, so yes there is be some of that but remember also on a larger projects, you don’t get those ramping up as quickly into your books as you do the smaller projects. The other thing I would say that SB1 is doing and I mentioned it briefly in our earlier discussion is that California is moving in the direction of alternative procurement possibilities, which is really nice. And these don’t even have to be large projects. They can be $50 million jobs and that could flow, you can see that flowing into our books by the end of the year as well.
So you are going to see more movement in construction and materials related to SB1, you might see some nice movement in backlog on large projects from 2 [Ph] to SB1 but literally the revenue affect will be in construction materials.
Great. Thank you.
Thank you.
And our next questioner today will be Alex Rygiel with B. Riley FBR. Please go ahead.
Very nice quarter, Jim, Laurel.
Thank you Alex.
Jim, I didn't quite understand, maybe I missed it, but you mentioned that in the fourth quarter, there were modestly weaker public lettings. Not quite sure I exactly understand why was that the case.
Well, that’s a – let me reiterate kind of what happened and I was really focusing there on California. And I think I said that California was weaker in the fourth quarter. I think that the first question was really an alignment with that today, was that we weren’t sure when the SB1 monies were really going to hit The Street. We know that there is a $2.8 billion increase in the California budget in the fiscal year, that concludes on June 30th, we just didn’t know how quickly they could get the money to The Street. They didn't get it to The Street as quickly as we had hoped.
So really what we are suggesting in the comment was that some of the SB1 monies got pushed into the first and second quarter of 2018 in lieu of the fourth quarter 2017. So, and also remember that in SB1 a lot of the tax collection the increased tax revenues when we started accruing in the month of November. So the City of California might have suggested to themselves that let’s not put missed up on The Street until we literally have the tax revenues to offset it. So that’s what I was trying to suggest that really we had a little slower movement on the SB1 than we had in – not necessary anticipated, we had kind of hoped for a little stronger push in the fourth quarter but all that does is suggest that there is a big onslaught or bidding that has already started and it is going to be very heavy and I’m going to take you through the entire 2018 year on California, because not only do we have to finish in the first half of the year what didn’t get done in the backhalf of last year, we’ve got another 1.7 billion added to that going into the new fiscal year.
And then as it relates to the more broader macro U.S. environment for Large Projects, there have been quite a few that have been, call it, the mega projects of $1 billion-plus in size, quite a few that had been let out and awarded over the last month or 2. Can you characterize the competitive environment there and how you see capacity being constrained and pricing developing over the coming 1 to 2 years?
Yes, sure Alex I think that, I think you’ re right that we continue to see these mega projects all over the U.S. and I think that for us, for Granite, we continue to see an insatiable appetite from very large firms, global and U.S., to get involved in these mega projects. I’m going to let’s suggest anything over billion as a mega project. And they are still very competitive, they are very complex and that core group of, we’ll say half a dozen to a maybe 10 competitors continue in our opinion to be overly competitive and overly aggressive on that work.
So we have and as previously stated, stayed away from that work over the last six months, we have been focusing on I’m not going to say smaller, but I’m going to say anywhere probably less than a billion. We’ve been focusing on Granite led projects or Granite only projects and we’ve been very disciplined as to the projects we bid and I mentioned this in our discussion earlier, with our partner selection with the owners we have very good experiences with some owners and we do not have great experiences with others. We look at the cash flow dynamics, we look at the specifications. We don't have a great position today, Alex, to not have to go after volume. Volume is out there and it can be obtained through a host of varieties, and the way we’re doing it today is less than a 1 billion Granite led, disciplined, higher-margin expectations than ever before, and really looking at the dynamics of the owners and the partners.
That’s very helpful. Thank you very much. Good luck in 2018.
Thank you, Alex.
And our next questioner is Michael Dudas with Vertical Research Partners. Please go ahead.
Good morning, Laurel.
Good morning.
Long time I’ll speak.
It’s been a couple of days Mike.
Yes. I know. So, Jim, it’s encouraging, we hear words discipline and focus coming from you coming from you, which I think is very helpful as we look at the margins going forward. Can you maybe elaborate little more on your federal business and your private-sector business and how that can be dynamics relative to projects and margin flow in 2018 and beyond?
You bet. And I hope when you said that it's interesting that you Jim listen to talk about this point. I hope it’s because you mean that I’m always talking about discipline Mike.
Absolutely, 100%.
There you go. Just making sure. So when it comes to of federal this is a growth opportunity and a diversification opportunity for Granite. We started maybe five years ago from scratch. And it’s had a really nice ramp-up over the last – I’m going to say 18 months. And we did this very similar to getting into the water and wastewater infrastructure environment plus you diversify the funding mechanisms of which we go attack the revenue.
The federal programs in place today are out that we’re researching for, are outside of the transportation sector. They are funded through the DoD mostly, and the DoE and they are -- that separate funding stream is imperative for us to diversify our opportunities from financing and funding. So, what we see here is about as this administration and Congress has boosted military spending, is focused on military spending, we think it is another opportunity for us to expand our business.
We’re currently had some very large workout on Guam. We performed work in Colorado last year, in Tennessee last year, in California last year. We’re doing our federal business in conjunction with the rest of the Granite portfolio. So I don't expect it to be a huge component of Granite over the next couple years. I think you’re going to see us modestly bring it up into a business that we may report out separately over time because it will grow into that kind of a business.
I don't see that happening for a couple years, but we're doing a lot of work in alignment with our other business units, but learning how to be a real federal contractor. The federal contracting business is a far cry from being a DoT contractor or any kind of other contractor that you're working with basic public agencies or the private sector. So unique environment, unique procurement methods and constantly understanding what the federal government wants as a different program.
When you move in the private sector, what we’re seeing there is first of all historically we would have said -- private-sector, the first thing would’ve been doing is drawn ourselves to residential and say what’s going on our residential market, That what drives the private sector. That’s not today. It is amazing how we see this rebound and think about that asphalt paving ton thing that I mentioned to you during the earlier discussion. That was a lot of -- that was driven by the private sector in residential. And you see it hasn’t come back anywhere close to what was about 12 years ago.
So the private sector today is being driven by industrial and commercial sector, not by residential. And we’re working very hard to do, Mike, is to negotiate work and not have to be the low price provider, but the high-quality provider. And I’m happy to say we’re doing a lot more negotiated work today than in the history of Granite. I see that getting bigger and bigger. We’re going along with the big commercial operators and the big industrial operators across the country with repetitive work negotiated work. We’re using alternative procurement things such as CM/GC, CM at risk and those of the kind of things we want to work within the private sector.
And Mike, about 27% of our construction revenue is from private work.
Yes, which one – how many – couple of years ago, Laurel, I mean it was…
Below 20 I think. Last year it was 25, so it’s been consistently.
Growing.
Yes. And we’ve got 25, almost 26% of our backlog, construction backlog is private work, so…
That sounds encouraging. I'm guessing that will pickup utilized, backlog grows maybe as well, and just to qualify the federal work, it shows up in construction?
It shows up in both categories, Mike, obviously depending on the size of the work. The work we have out, the big project we have out in Guam we’ll show up in large projects. Some of the smaller work we’ve been doing in Tennessee, Colorado, California, Washington State, almost all of that showed up in construction last year.
Thank you. And my follow-up for Laurel, your team should be commended, terrific focus on the SG&A and keeping the selling cost down and shown the leverage running through. On the capital side how -- on the capital spending side looking at your equipment, the yellow metal, what – can you remind us little bit on the age front, given the opportunities that you were projecting over the next several years. Is it going to be little bit more requirement for equipment, different types of equipment? Is there replacement cycle for you guys, just give a little sense of how your spending, what you guys are thinking about?
Sure, Mike. I think that it’s a really good visionary look as to how you grow the company this fast and what you do with CapEx in order to support it maybe lead the effort as well. We talked about 3% rate for CapEx in a lot of respect this what we’ve been historically doing. One of the things I would say that we’ve done that I’m very proud of over the last three or four years, we've already ramped up CapEx. And we have invested in our iron already. One thing that a lot of people don't probably realize about Granite, we actually carry this corporate pool of equipment.
We are one of the largest scraper fleets, big dozer fleets, big excavators that we carry at the corporate level that is utilized throughout all the business units across the country. We’ve kept that intact during the downturn specifically for the reason that we are -- where we are today. And we had tremendous underutilization of I call it those of you listening who are into the big yellow wire, the 631s, the 651s, the D10s [ph], we had a big host of that equipment that is now starting to enter the utilization, and we've been talking about that for quite some time. Our plans are underutilized.
You probably haven’t talked enough about our rolling stock has been underutilized simultaneously. And so for us I think we can maintain a very, very similar CapEx ratio to revenue because we’re going to start pulling out and using a lot of the assets and hire utilization that we’ve been doing previously.
Excellent, encouraging. Thanks, Jim. Thanks Laurel.
Thanks Mike.
And our next questioner today will be Joe Giordano with Cowen. Please go ahead.
Hey, guys. This is Tristan for Joe. Thanks for taking the question. Jim, I would like to get your opinion on the efforts to repeal SB1. Let’s just say the term repeal initiative doesn't make the ballot in November or get voted down. How likely do you think we could see another measure to repeal the law in two years?
Tristan, I think, look back up a little bit on SB1, maybe a lot of the listeners don’t understand what that is, because I think it is a very, very good question and it is an issue. SB1 was passed by through the legislature in April of 2017, and then literally the tax flow on the gas and diesel taxes started in November and the registration fee increases began on January 1 of this year, again possible reason for some of the delay of the work which is not flowing nicely.
So what they did is there was a small political group and I’m going to call them for political reasons are out of the company to gather signatures to get a repeal of SB1 in place. With a political movement to really try to get certain voters to the ballot box, to try to help out some political groupings during the overall election in November. So they’ve to gather somewhere around 580,000 signatures by sometime in March. And if they do then they also have to gather a tremendous amount of funding to put it on the ballot in November.
Now, two things; if do I think it's going to get signatures, I’d say that’s 50-50. They’ve done what I understand a commendable job today getting signatures. That’s kind of an easy part, because if you put it across the front page of the piece of paper and said you want your tax reduce. 90% of the population is going sign on something. But do I think that they’re going to literally get funding and be able to mount any kind of a campaign for November, I think that’s far cry. That’s a very difficult thing to do.
One other thing is happening right now is the State of California is that the original ACA which is constitutional amendment to make sure that all of those legislative appropriated funds be dedicated to transportation. That is on the ballot in June, it’s upcoming June as Proposition 69. So what happens is it takes away huge party argument of the small group that is proposing to repeal SB1. They are using as an argument that historically in the State of California the legislature has taken money and thrown it into the general fund although suggested to be used for another portion of work or in this case transportation.
They’re free and they’re saying they would steal it, put in the general fund and use it to find a lot of the entitlement programs in the State of California. Well in June, Prop 69 will be on the ballot, constitutional amendment will be passed that this money cannot be taken from the transportation budget to be moved in the general fund. And I think they lose their argument right there. And so I think that, yes, they could get the signatures. Let’s get them in June with the ACA5 know as Prop 69 today and then I think it’s a whole different animal from that point forward.
So, could they -- if they get defeated in November, could they come back. Yes, but highly, highly unlikely, they will lose all their momentum. They will lose all the funding and the real initiative here really is not about SB1. It’s about getting a certain type of voter to the ballot box to vote for the other candidates in certain districts in the State of California. So I do not see it happening again, and I am very confident that we will move along as planned for the remainder of the year. There’ll might be discussion there.
This is great. I appreciate the details. That was actually my follow-up was going to be on the ACA5, so I appreciate you talking about this. But so just as it relates to this I was under the impression then when SB1 was approved that funding was already allocated o transportation projects?
It is – so it absolutely yes. So the 19th amendment already protects a 100% of the gas tax monies for transportation. That’s already been in place. It’s actually Article 19. That’s already in place. But there is some emergency legislative things and the governor could pull funding very out of the ordinary could move money around. Prop 69 will disallow that to happen under any circumstance.
All right. Great. Thank you so much.
Thank you.
And our next questioner today will be Bobby Burleson with Canaccord. Please go ahead.
Good morning.
Good morning, Bobby.
Just looking at the recently announced acquisition, clearly diversification remains a strategic focus. Wondering what the optimal business mix is in terms of funding sources, any other way that you want to describe it as you look out over the next few years where you'd like to be?
Yes. So, thank you for that, because that’s really important to what we have been talking about for the last several years is really diversifying the funding that supports the work that Granite does across the country. And when you look at the acquisition of Layne and you start putting immediately the water sector starts really adding up to about 14% of the Granite mix, you look at the materials business at about 8% of the mix, you look at construction at about 50% and you look at large projects at about 30%.
I think you then need to break it out. We need to break it out into segment type where is the workload, where is the funding mechanisms coming from. So I’d love to see this down the road, Bobby, have one of those segments of the pie chart say federal on it, because that’s different than everything else. I’d like to see water grow. And then I’d like to say that the rest of it relative transportation really starts taking on a bigger picture nationally the next component of our portfolio of growth is to add more VI businesses across the country and really I think is diversifying within those segments is so important.
So when you diversify geographically and you diversify by revenue type is so important. What we went through in 2009 and 2010, I never want to see Granite have to go through that again. Even if the market and the macroeconomic environment has gone through it, what we’re are attempting to do in both the water infrastructure market and the transportation infrastructure market and I’ll call it the civil infrastructure market with federal and some other things is to diversify our customers, diversify the geographies and diversify the funding streams. Those are so important. So for us we call ourselves now, Bobby, an infrastructure solutions company.
And it’s not just transportation, it’s not just water, you’re going to see us moving into like great question on the federal today, the entire infrastructure in the U.S. and I’d say in the Americas is our focus. And that’s where we’re heading. So, when you look at the portfolio mix, we have to look it at several different ways, Bobby.
Okay, great. Thanks for that. And then, just curious any update from Granite’s perspectives on labor availability, your skilled versus unskilled, and how you guys are positioned vis-à -vis any shortages or wage inflation that you see currently in on the horizon?
Yes. I think that, it’s been a major topic for I’d say last two years and anticipation of a substantial ramp-up. And my response has historically been and that isn’t changing much is that when we are a very strong player in a market such as we are, and I’m going to stay in the majority of the locations that we work in the U.S. we actually have people who want to come work for us. So what we’re seeing as the markets heat up, Bobby, is we’re start to see migration from a lot of our competitors and I’m talking mostly here about our hourly workforce into Granite workforce.
We are not the low wage company. We pay higher wages and we pay high benefits. And I think that when people start noticing that the construction industry is a nice place to make a living. I think you’re going to see more new entrants into the market, but currently we've done very well being able to provide the labor for the work that we foresee and I’m saying at least till 2018 by really using – being attractive company for the industry to work for. But I will say this, that what we need in this industry is to understand that there was a migration away from the industry in 2009, 2010 when people couldn’t make a living. They struggled because not only Granite but most construction companies in the U.S. couldn’t guarantee 40 hours a week, let alone 50 or 60 hours a week in order for people to make a good living.
Now that we have a runway and we’ve always said and I was actually nice to see in some of the articles, some of the words from the administration this week that we don't need is a stimulus in this country. What we need is a dedicated path towards infrastructure investment. And if it’s long-term like we’re beginning to see here in some of the states now and if the federal government can do that then what we’re really seeing, Bobby, is a influx of migration into the construction industry because people will believe that they can make a good wage for their families.
And I do believe that from the combination of more money in the system, more consistent operating hours for those individuals and I see the wages picking up rightfully so for the hourly workforce and with that I don’t think there’s going to be a big problem. Today we have not seen it necessarily across our business, certain pockets yet, but we've all got to learn that this is going to be a big part of the country's investment going forward. We need to make sure that we pay people correctly.
And should we think about any particular susceptibility or it’s a wage inflation or protection against that when we think about your quicker turn-type work versus the longer projects that you’re winning?
Well I think it -- yes I think you are really hitting on a very important subject matter that we talk about in Granite. We do like quick turn work. We do like work that utilizes the assets that we have not only the personnel asset but the physical assets as well, so we love the quick turn maintenance work. We love quick turn bridges. We love the stuff that we can turn faster. The longer duration work certainly ties up the personnel resources for a long time and in our opinion is that we can get in and out satisfy and exceed our customers’ demands on the quick work, that would be our preference.
Great. Thank you for those very thoughtful answers.
Okay. Thank you, Bobby.
[Operator Instructions] And our next question today will come from Brent Thielman with D. A. Davidson. Please go ahead.
Thanks. Good morning.
Good morning.
Good morning, Brent.
Jim, the big uptick in lettings you'll start to see in California year to-date. I know you talk before that you’re going to be careful about what you take on early as you look for capacity to tighten up in the market. Is there anything take away from what you seen thus far in that activity? Does it look like other participants in the market are taking the similar approach maybe to a level where industry disciplined little better than you thought early on?
No. It’s really interesting and one of the things that always tell all the Granite folks is we have a system where everybody input the bid results every day. And by evening -- by the time you close up shop and you want to go see how Granite did across country or you got to do is go click on the computer, you can see all the bid results. And so I watch them every single day, Brent. I see the local smaller player still being very competitive. Is February that doesn’t surprise me at all. The bid list are still fairly healthy, but as I’ve said for a long time, what happens in that part of our business is that overnight the market changes. And so our job is to be disciplined and I’m going to say throughout the first quarter.
Although I will say that with the amount of we’re bidding we would naturally get our share of it. But I think we will get a higher share of it towards the backend of the year and I think we are absolutely targeting work that we can move through fast. There is no doubt. We want to keep our – what we call our power dry so to speak, so you don’t get tied up for several years on work with the margin and the opportunities are changing in the marketplace, and all of our regional folks understand that within the markets are very hot today.
So for the first couple months it's about disciplined and it is about making sure that we read the markets because most of the players we compete with will change their bidding perspective overnight and you won't know what obviously until you start seeing in the bid result and of a sudden it went five bidders to three bidders to two bidders or you start seeing a significant price change. Has it occurred yet? It is mid February. I’ve never seen it occur by mid February. And I’ve been doing this for a long time. But it will occur and it will occur most likely in the second quarter sometime this year as the overall workload ramps up. So discipline is the key component today and our people are doing a really nice job right now, staying focused and really getting an understanding of what's going on in the marketplace. That’s really important in the first part of the year.
That’s interesting color. And then I guess follow-up would be any flavor on the potential kind of taste of bookings opportunities you see on the large project side this, I know, some of the stuff is not in your control particular time line, but its look like more of front half weighted, back half weighted bias to the jobs you’re looking at right now?
Well, it’s pretty evenly spread, Brent, and in fact I’m pulling up a list here in front of me. One of the things that has always happen in the large projects is that we call it lumpy so to speak. So all we need is to get $500 job and all of sudden you got $500 million of backlog, and that you wait another four months before you get another one and then all of sudden pop, you get another big one.
But I will say this, right now I’m looking at about 7 billion of work bidding in our large projects business for the year. And notably there is a lot more projects because they are smaller in nature than some of those big ones we’ve talked about before and which gives us a lot more opportunity, before it was so lumpy because you are bidding 1 billion here or 2 billion here and it just made large fluctuations with broad timing between the individual big results I see this more moving in the direction of the $5 million, $600 million, $400 million work, many of them bidding each quarter. So I think you’re going to see that the average procurement of those workers kind of smooth out over time now.
Okay, great.
But again, I mean, and literally speaking we’d happy to talk about all these jobs for bidding. I can go through here and talk to you for 20 minutes on all of the jobs of bidding and they’re all over the country. They have different size project. They’re down as low as 100 million. There’s high I see there’s an $800 million job on the list. Again there is very few if any jobs over billion dollars that we think we need pursue today. And I think that is part of our strategy and it's a very disciplined approach to our large project and its working and it's working very nicely.
Okay. Thank you.
You bet.
And our last questioner for today will be Herb Buchbinder with Stifel. Please go ahead.
Can I ask you a couple of questions about Layne, I'm new to your company but I’ve been following Layne for many, many years and I’m a large shareholder here of it. Are you able to discuss the merger here at this point?
I think we can discuss the things relative to the merger, but we certainly cannot discuss the individual components of Layne because they have – they're still their own business unit, Herb, and they still run their business separately but let’s see what we can help you with your and if we can I’ll be candidly tell you, I'm sorry we can’t answer that question.
Okay. They have a nice pipe repair business which I could see not only fitting well with you, but also you should be in a position to maybe help them get more business, but two, they have mineral expiration drilling which is not seem to be a fit. And then I guess the third thing I would ask you, is why wasn't a cash transaction since you've got plenty of cash to do it that way?
Okay. Good. Yes, I think I can help on all three of those.
Good.
Yes, sure. Pipe repair, so Inliner, one of their divisions is a business that we’ve known for years and years and years, we’ve admired Layne in general for years, and certainly admire Inliner business which is actually historically been somewhat of a competitor and not really – it’s in the same space, as one of our businesses called Kenny underground and it’s in the CIPP space which is cured-in-place pipe rehabilitation program. And it is a very large sector today. It’s about an $8 billion sector throughout the U.S. Inliner is our leader in the industry. They are number two in the entire industry today.
And although our portion of the business is much smaller and we don’t have a lot of overlap either. But we absolutely – you are absolutely correct, we think the combination of the Granite businesses and the Layne businesses in the Inliner space is a really nice approach to operating, having a larger portion of that overall segment of an $8 billion market. It’s a very fragmented market today. And the combination of Layne and Granite can certainly become a major player in that market.
So that’s a big – that’s what like you said, that’s a little more of an obvious fit. The other thing it does is that we are geographically disbursed in different parts of the country. So whether it is the water resources business or the Inliner business, we really don’t overlap geographically very much. And so we think we can bring the Inliner business to certain parts of the country that are not today. And we think that the water resources portion of Layne can bring Granite at the certain parts of the country where Granite doesn’t exist today, so it’s a real strong marriage there.
The other thing you mentioned about was about mineral services and interesting enough, there is an overlap there and there is a common ground there. They are the core business in the mineral services business is helping with mine exploration and water management in the mining industry and people don’t associated Granite today in the mining industry, but we historically have been heavily involved in the mining industry and we are probably over the last five years move back into the mining industry.
And as we chatted with the Layne folks, there is a nice core overlap of customer base in the mining industry that I think we can both be very complementary and what we can do on the mineral services size, we can offer a very large, broader, complementary suite of services to the mining industry that we couldn’t do for. So it is complementary more so then we haven’t talked about it historically, but I think you will see us talking about that as we post the transaction and talk about some very strategic arrangement between the two companies that will create real value. And maybe last…
I’m sorry go ahead.
Sorry. Well, we’re going to talk about the cash. But go ahead. Herb we’ll talk about cash.
They also have international operations and joint ventures in Latin America. Are you comfortable having some businesses outside the United States and it might -- does it have much effect on your tax situation since they have unusual tax liabilities with international businesses?
Yes. So I really won’t comment on the tax issue because certainly that would be part of our work on our transition integration plan. But we have done a significant amount of due-diligence on the foreign businesses, on all components of business and we are comfortable with all parts of that business. We know their partners. We know their situations and they’ve done a really nice job. The past few years the entire business, and really one of the things that I like to make a public statement about is that Michael Lu, Michael Anderson, the entire Layne management team has done a really nice job the last couple years positioning Layne for not only growth but for increased level of profitability at the operational level and reduced structure at the SG&N level. They’ve done a really nice job and what I tell Mike and Mike and I chat a lot is that really our job now is to help them go to the next level, and we're really comfortable that we can do that.
Their new pipeline business I think you could do some of the water pipeline businesses really been a nice boost for their earnings short term, I think you could do something with that. Although [ph] make your last comment on why this is not a cash deal?
Well, okay, So, Herb, it’s obvious the business and you’ve obviously done your work with Granite. We keep a high level of cash on our balance sheet for a host of reasons and if you’re new to Granite let me explain real briefly that, when we work in with a lot of bonded projects, so it’s a little different than a Layne or some other company who might be more familiar with. What we’ve acquired through the surety system to keep a level of cash on our balance sheet at all times, because of the size of the bonded amount of work we have out play in one time.
Yes. We also have seasonality which impacts our cash balance as well.
And the seasonality does impact our cash balance and again hopefully as a GVA future shareholders and you’ll be able to notice that we will fluctuate during the summer months we’ll have lower cash balance than we will in the winter months and we’ll eat cash in the first half of the year. But we like to keep at least the 100 million on our book to satisfy the requirements of the sureties and that’s just a common agreement that we have there.
The other thing that we have talk with Layne about and with our folks as we see growth in the market place, Herb, what we’re trying to do is make sure that we retain as much cash as possible to invest in those businesses going forward. We’ve look at the Layne business. We think it’s a really good operating model. They have had capital constrains as we were able to do this transaction and hopefully complete this transaction and complete stock merger, it does save our cash to invest back in Layne and some of the growth plans in Granite without using the cash in our balance sheet for transaction, but keeping so to speak that dry power available to growth the businesses themselves.
So that’s the main reason for having it at an all-stock transaction. And I think it creates a really unlevered balance sheet with thus going forward. And we are very conservatively – very conservative company relative to the way we approach our balance sheet and or covenants, we want to stay that way. So yes we could have levered up and done it, but we think we’re just our conservative nature says, let’s keep our balance sheet clean, let’s keep it very conservative and let use that cash for growing all the companies that are underneath the Granite umbrella.
Well, plus this is that stands for the Layne holders to own the nice new company. Hopefully lot of the Layne shareholders will stay with you guys, so I think it’s a good deal for everyone. I’m glad you did it.
Thank you, Herb, and always, we're available after for questions if you anymore questions at all.
All right. Thanks a lot.
Thank you.
And this is the end of the Q&A and I would like to turn the call back over to our host.
Well, thank you very much for your questions. Just a quick note for our shareholders. We’ll be on the road next week meeting with investors in Boston, New York and Chicago, so please don’t hesitate to reach out to see if we still have room in our scheduled to meet with any of you. And thank you to all of our employees for keeping your fellow worker safe and for exhibiting Granite’s core values every single day. As always Laurel, Ron and I are available for follow-up if anybody has any further questions. Thank you everybody.
And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect.