Granite Construction - Q1 2016
April 29, 2016
Transcript
Operator (participant)
Good morning. My name is Allyson, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations First Quarter 2016 Earnings Conference Call.
All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question-and-answer period. To ask a question, please press star, then one. 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 Director of Investor Relations, Ron Botoff. Sir, the floor is yours.
Ron Botoff (Director of Investor Relations)
Welcome to the Granite Construction Incorporated First Quarter 2016 Earnings Conference Call. I'm here today with our President and Chief Executive Officer, Jim Roberts, and our Executive Vice President and Chief Financial Officer, Laurel Krzeminski. We begin today with an overview of the company's safe harbor language. Some of the discussion today may include forward-looking statements.
Actual results could differ materially from the statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements whether as a result of new information, future events, or otherwise.
Certain non-GAAP measures may be discussed during the call and from time to time by the company's executives. Please note that a reconciliation of certain non-GAAP measures is included as part of our earnings press release.
For more information, visit our investor relations website at investor.graniteconstruction.com. Thank you. Now I would like to turn the call over to Granite Construction Incorporated Chief Executive Officer, Jim Roberts.
Jim Roberts (CEO)
Thank you, Ron, and good morning, everyone. Next week marks the Third Annual Construction Industry Safety Week. Granite, along with dozens of other construction companies from coast to coast, will gather on job sites to share stories, to probe for safer ways to build work, and to reach out to our communities to raise awareness, all in an effort to reduce job site incidents and to ensure our employees go home safely each and every day.
We are proud to be a leader in this effort and proud to be part of this great construction community. While our teams are off to a solid start in 2016, we continue to challenge our people to work more safely every single day.
Before I discuss our operating results in the quarter, I must congratulate Granite employees for their everyday commitment to do business the right way, a crucial component of being named one of Ethisphere Institute's World's Most Ethical Companies for the seventh consecutive year. Our employees' commitment also is reflected in our recent recognition on Forbes list of America's Best Midsize Employers.
Such recognition enables us to continue to focus on setting a high bar in all that we do. Now moving to our performance in the first quarter of 2016. Results reflect steady market conditions and strong execution, which produced a solid overall performance. Our geographic and end market diversification continues to help balance the risks and returns in our portfolio of businesses.
This quarter, key parts of our vertically integrated business in Kenny, especially California and Kenny Power, delivered consistent, strong results that largely offset seasonal challenges in the construction materials segment and some ongoing challenges in large projects. Beginning today with the construction materials segment, steady performance and efficiencies are the order of the day in the construction materials segment, the leading indicator of Granite's vertically integrated business.
The business continues to perform solidly, reporting a loss of just over $1 million in the quarter, about a $2 million swing from last year. That was despite cold, wet weather that impacted both internal and external demand and resulted in revenue down almost 17% from the first quarter of 2015. Wet weather also provided us a window of time we did not get last year, allowing us to invest in some growth-focused maintenance and upgrades.
These costs also impacted first quarter segment margin. We expect the maintenance and upgrades early this year are well-timed to help propel our plants and to facilitate strong production for the remainder of the year. Although first quarter volumes declined compared to last year, we expect that work simply has been delayed until weather allows the work to be built.
We expect to use the balance of the calendar year to recapture this opportunity. Across geographies in the construction materials segment, committed volume levels are strong and growing, and this portion of our business is poised to grow solidly again in 2016. This business continues to benefit from gains in quality, efficiency, and from our renewed customer focus. The construction materials segment remains firmly on its path of steady, profitable growth.
Next, moving to the construction segment, the larger portion of our vertically integrated business, and where a good portion of our Kenny work is reported. During the quarter, strong performance in California and our power businesses helped segment profitability improve about 200 basis points year-over-year to nearly 13% in the quarter.
We produced consistent, solid results despite tepid public spending trends that continued in the first quarter. The business also overcame unwelcome wet weather in the west in the first quarter of 2016, delivering year-over-year gross margin improvement for the eighth consecutive quarter and the eleventh quarter out of the past 13. The businesses in the construction segment continue to recover and perform well. This is the biggest near-term driver of our growth.
We are winning and building profitable work not only in transportation but also in the power market, including transmission and distribution projects and renewable energy projects. In addition, water, commercial developments, and industrial expansion all continue to fuel our growth. This diversification, coupled with a renewed focus on transportation funding, is now driving results in the construction segment that we anticipate will continue to progress.
In the large project segment, Granite employees and joint venture teams continue bidding, winning, and building some of the largest and most complex infrastructure projects in the country. Performance overall was a bit uneven during the first quarter, with certain projects impacted by weather, production, design scope, and owner-related issues. The Tappan Zee Bridge, IH-35E in Texas, I-4 Ultimate in Florida, and the Pennsylvania Rapid Bridge replacement continue to represent the majority of our large project segment revenue.
Our project portfolio is growing, keeping portfolio maturity at an early stage. During the first quarter, we booked into backlog our portion of the Loop 202 South Mountain Freeway in Phoenix and our Alabama I-59/20 interchange project in Birmingham. These projects added nearly $500 million to segment backlog in the first quarter, pushing it to a record level of $2.4 billion.
We are also finalizing the contract on a $280 million tunnel project in Hartford, Connecticut, that we expect to book into backlog in the second quarter. Granite will continue to pursue numerous significant bidding opportunities, whether as a sole contractor or as a highly desired partner. In prioritizing future North American projects, we expect to build and maintain a broad roster of at least $10 billion-$20 billion of bidding opportunities over a rolling two-year period.
Our recent wins and existing backlog allow us to be more selective on the projects that we bid. In recent years, the scope and scale of projects has grown significantly in alignment with increased levels of aggressive competition. Ultimately, these factors have raised contractual risk, leading to an imbalance of risk and returns in both the design and construction phases of projects.
We are working hard to mitigate this imbalance going forward. Granite teams across the country are working diligently to improve performance and deliver improved results throughout the remainder of 2016. As projects mature and we are able to mitigate risks, both project and segment profitability should improve significantly. But given current operational performance and portfolio maturity, we do not expect to achieve our longer-term margin expectations until next year.
For a change, it is quite nice to not speak about Congress, but our quarterly call would not be the same without at least a short update on trends impacting public funding in general. Massive infrastructure investment catch-ups remain necessities across the country as underinvestment has ruled the day for years.
Of course, as we mentioned in recent quarters, recent state actions to increase transportation funding are just now beginning to impact the market. We continue to expect the recently passed federal highway bill, known as the FAST Act, to provide its initial impact for Granite in the second half of 2016 and heighten bidding activity while gaining even more momentum in 2017. So as bidding activity picks up in alignment with our expectations, we are committed to optimize these opportunities for Granite.
We are helping lead the charge in California, where construction, industry, and labor leaders are working shoulder to shoulder to build legislative support for a long-term incremental commitment to transportation investment of at least an additional $40 billion over the next 10 years. We remain hopeful to garner a significant commitment in California from the governor and the legislature this year.
We are relentlessly focused on safety, execution, diversification, and continuous improvement to spur efficiency and drive growth across geographies and across end markets. We believe that 2016 provides us with an environment of steady, modest growth, and we remain focused on opportunities for acceleration in 2017 and beyond. So with that, I will turn the call over to Laurel to discuss more details of our results and our 2016 outlook. Laurel?
Laurel Krzeminski (CFO)
Thank you, Jim, and good morning, everyone. First quarter 2016 revenues were $439.5 million, up 4.6% from last year. Loss per share in the quarter was $0.28 compared to $0.22 in 2015. Despite gross profit increasing to $39.2 million, total company gross profit margin decreased 33 basis points year-over-year in the first quarter to 8.9%.
Particular strength in the construction segment, which included double-digit revenue growth, was offset by seasonal impacts to our construction materials segment and weaker large project segment results. Notably, first quarter 2016 results show that our core business segments are operating at a higher level, as reflected in the reduction of recognized claims revenue from last year.
This year, total claim recognition was $2.8 million in the first quarter, a nearly $7 million year-over-year decline from last year when we implemented an accounting policy change for contract claim recognition.
Last year's total first quarter claim recognition of $9.7 million largely was a one-time catch-up from the accounting change from prior periods, split about 70/30 between the construction and large project segments. First quarter SG&A expenses increased 10% year-over-year to $56.1 million, driven primarily by increased compensation expenses.
While we used cash as we normally do in the first quarter, the balance sheet remained strong, with $314 million in cash and marketable securities at the end of the quarter. We continue to invest across our business in opportunities for growth and efficiencies, as suggested by the first quarter spending ramp of both CapEx, plant maintenance, and upgrades, invested to support a strong second quarter start and execution on our growing backlog. Total contracts backlog at the end of the first quarter finished at an all-time record of $3.4 billion, up 15.3% from last year and 16.4% sequentially.
Large project construction backlog increased 9.1% year-over-year and 16.5% sequentially to $2.4 billion. In the construction segment, backlog surged to $1 billion, up more than 33.5% from last year and up 16.2% sequentially.
This new work reflects a balance of bookings across segments, end markets, and geographies, and it is the most positive sign we have seen in years in the largest segment of our business. It also is a clear reflection of the success of our diversification efforts. We're at the start of a nice uptick in new end markets in which we focused. This has been anticipated for quite some time, and it is now occurring.
As Jim mentioned, backlog now includes our $284 million portion of the Arizona 202 project, as well as our $208 million I-59/20 project, but it does not yet include the $280 million Hartford Tunnel project, which we expect to enter into backlog in the second quarter. Looking at the segment detail, first quarter construction segment revenues increased 11.1% to $209.5 million, with gross profit margin of 12.9%, up nearly 200 basis points from 10.9% last year.
Segment revenue and profit improvement was driven both by increased demand and improved execution. Solid performance continues to be the order of the day. This resilience is reflected in the segment delivering its eighth consecutive quarter of margin improvement. Large project segment revenues increased 2.7% in the quarter to $195.4 million. First quarter segment margin of 6.9% declined 230 basis points from 9.2% last year, a reflection of the performance factors Jim mentioned.
Even as our new projects mature through 2016, the large project portfolio remains weighted towards projects still earlier in progression. In fact, today's large project portfolio is the largest, most diverse, most complex, and least mature portfolio we have ever had. New project teams are focused on efficient project kickoffs, and teams on our maturing projects are focused on opportunities for improved performance.
As Jim noted, given current operational performance and portfolio maturity, segment growth margins likely will remain below our full project lifecycle mid-teens expectations for the remainder of 2016. Moving on now to construction materials, where revenues in the segment decreased about 17% in the first quarter to $34.5 million as cold, wet weather limited paving work and less demand in the quarter across many Western markets. Overall, the business reported a gross loss of $1.2 million.
Last year, the segment delivered a small positive gross profit in the first quarter enabled by mild weather in the west. Execution and the business environment remain significantly improved from prior trough levels in recent years. Improving operational performance and greater efficiencies guide our expectations for continued growth in this business.
In addition, we've compiled a nice increase in our committed volumes for 2016, which will help offset the slow start from weather we experienced in the first quarter. For Granite, our expectations for the year remain unchanged. We expect mid-single-digit consolidated revenue growth in 2016, with EBITDA margin in a range of 6%-8%, with overall 2016 profitability to grow in line with revenue. Now, before we take your questions, let me turn the call back to Jim.
Jim Roberts (CEO)
Okay. Well, thank you, Laurel. Before your questions, just a quick recap of where we stand today. As you can see, our business remains on solid ground. For the leading indicator of our business, the construction materials segment, the stable economic environment continues to support growth, with solid committed volumes pointing to expansion in 2016 and in 2017.
Strong backlog trends, especially the $1 billion all-time record total in the construction segment, reflect the impact and balance provided by the strength of the market for smaller turn work, as well as diversification delivering results. Both the west and Kenny will see improvements in 2016 and in 2017, and we expect this will be the main driver of our overall growth. We continue to focus on opportunities in large projects to improve execution, achieve expectations, and deliver improved results.
We are working to ensure increased public funding in states across the country with a strong California focus. Lastly, continuous improvement is driving efficiencies in all areas of our business. It is beginning to become ingrained in our culture to simply make us a better company. Okay. With that, we'll be happy to take your questions.
Operator (participant)
To ask a question, please press star, then one. Please limit yourself to one question and one follow-up, and jump back in the queue if you have additional questions. Our first question will come from Jerry Revich of Goldman Sachs. Please go ahead.
Speaker 12
Hi, good morning. This is actually Ben and Jessie on behalf of Jerry. Can you talk about the pace of revenue?
Jim Roberts (CEO)
Yes, sir.
Speaker 12
Hi. Can you talk about the pace of revenue burn that you would expect for the current list of projects in your large construction backlog as we progress throughout 2016?
Jim Roberts (CEO)
Well, I think that, as you can tell, even in the first quarter, the revenue burn was higher than last year. I think you're going to see a very consistent burn on that revenue as well, especially on the jobs that are in maturity today. We do expect large projects to be a larger revenue producer this year than last year.
Speaker 12
Okay. Thanks. That's helpful. The book-to-bill in large construction was really high in the quarter. Were any orders pulled forward into Q1 that you had expected to be booked later in the year?
Jim Roberts (CEO)
No. Not at all. Actually, it's interesting because those jobs, the Arizona 202 job, actually was awarded quite quickly relative to a project of that size. That's a $900-something million job that was awarded in the same quarter it was announced.
So nothing was pulled up. In fact, the one project that we mentioned, the Hartford Tunnel job, was actually opened in the first quarter, and actually that will be delayed relative to an award to the second quarter. So I think everything's pretty much in line with the typical 30-60-day after the notification that you're the successful bidder is typically when you're going to get an award.
Speaker 12
Okay. Thanks a lot.
Jim Roberts (CEO)
You betcha.
Operator (participant)
Our next question will come from Michael Dudas of Sterne Agee. Please go ahead.
Michael Dudas (Managing Director, Equity Research)
Good morning, Jim, Laurel, and Ron.
Jim Roberts (CEO)
Hey, good morning, Mike.
Laurel Krzeminski (CFO)
Good morning.
Ron Botoff (Director of Investor Relations)
Good morning, Mike.
Michael Dudas (Managing Director, Equity Research)
First, Jim, I wanted to have you elaborate a little bit on, in your prepared remarks, you talked about in your large project segment prioritizing future business going forward, which seems like a positive thing, but also about, in design-build construction, some of the risk imbalances that you're seeing in the market.
Can you maybe talk a little bit more about that? Whether it's at Granite you're trying to handle the risk and reward issue, or is the competitive nature still to the point where it's still better for you to wait to kind of bid on projects if there's too many people chasing?
Jim Roberts (CEO)
Okay. So, Mike, those are two important parts of our large projects business. And let me just kind of tackle them together, future bids and the design construction issues. I think that what we're seeing today is we have a very nice, robust backlog.
It's good backlog. It's the kind of work we want. It's very diverse in nature. Some is in the tunnel business, some is in the transportation business. And those are different kinds of work, but again, also very large work. But what we're trying to do now is analyze the projects that we think will create the most value for Granite relative to the risk associated with the work. Let me give you some examples.
If you think about it and you look at a billion-dollar job and you have a five-year ability to build it, that's a different job than a billion-dollar job that you can go build in two years, and you can turn it faster. We are diving into the contractual details to make sure the way that our obligations to the owner are set up so that we don't feel we're being held liable for things that should not be.
We should not be held liable when you get down into the details of the contract. It could be liquidated damages. It could be different O&M issues. We think that we're in a position today, Mike, where it's important to just go work on backlog that is really going to allow a larger return relative to risk than other projects.
It's great to have about, right now we've got $17 billion that we're looking at over the next 18 months. We don't need to go overly aggressive on that work, but we will look and we will be aggressive on the type of work in the geographies that we want to be working in, and also tying it in with the people that we have on our bench, so to speak, to deliver the work.
We are also being very focused on having the right partner on our work. That is very important because we want those partners that have the same kind of interest that we do, the same kind of margin expectations, and the same kind of risk expectations. It's really nice to be in this position today.
We're going to pick and choose the large projects that can create really the value outweighs the risk. That's it. Again, we haven't probably been in that position in a long time.
Michael Dudas (Managing Director, Equity Research)
That sounds encouraging. My follow-up, Jim, is back to California and special session and legislative issues. You mentioned, is there an opportunity for a solution by fiscal year June, or are you talking about throughout 2016? And are there more increased concerns about funding versus gas tax reductions and some of the fracturedness between what the governor and what the Republicans want to, how to fund such projects?
Jim Roberts (CEO)
Okay. So the answer is yes, yes, yes, and yes relative to all those issues. So let me tell you a little bit about what's going on in California. And this is a big issue for Granite, knowing that that is still a third of our business, or a little less than a third almost, is still in the California market. And we're the biggest player in the DOT market with the most projects of any other company here.
And we are heavily involved right now in a very strong industry-wide—we've teamed up with labor to focus on legislatively trying to get something done prior to the end of this fiscal year, which is June 30th. And we are still in a special session, Mike, which means that transportation has been allowed to be followed outside of the normal session, which allows it to move faster.
So we are working hard. We've got one bill that we're trying to work with the author of to get on the floor here as quickly as possible so that it can be heard in the special session before we get into the budget cycle and the end of the fiscal year. If that does not occur, then we are looking at the governor to help us in his budget to try to put into play a nice-sized bill in his budget himself.
And if that doesn't take place, then we are looking at even trying to get something completed by the end of the year. We have kind of reinvigorated the entire industry, labor, and we have a very strong coalition today. And I would say over the last two months, Mike, the wheels are turning heavily.
I think over the next six weeks, or I'll say two months probably, the efforts are going to be every single day working with the legislature in California and the governor to try to get something done. Let me mention one more thing. The low end of the bill in California is about $3.6 billion, which is the governor's proposal.
Now, note that that is additional work compared to what we call a $2.3 billion program today. The latest bill that just came out for overall reading is about a $5.5 billion a year bill. You start even putting somewhere in between there and you get a $4.5 billion-$5 billion bill. These are all 10-year bills. These are $5 billion for 10 years or $50 billion overall.
Even if you went down to the lower level, you would be having a huge increase in the overall spending in the state of California. We're not comfortable it's going to happen yet. We're confident we're going to make tremendous progress in the next two months. We have ramped up our efforts to try to really put a lot of pressure on those people that make those decisions because we think this is imperative for the future of California. I think we're getting a lot of traction.
Michael Dudas (Managing Director, Equity Research)
Jim, I really appreciate your thoughts on that. Thank you very much.
Jim Roberts (CEO)
Okay, Mike.
Operator (participant)
Our next question will come from Nick Coppola of Thompson Research Group. Please go ahead.
Steven Ramsey (Deputy Director of Research)
Good morning. This is Steven Ramsey on for Nick. Can you talk a little bit about project progression, large projects? And really, you said it was still tilted towards the early stage. Can you maybe help us think about margins this year compared to last year?
Jim Roberts (CEO)
Okay. So it's interesting because when you look at the large project portfolio, there's a couple of things that we should, and I think we've been trying to share this information with everybody. And I think it changes, obviously, every quarter when you pick up new work and you progress on the older work. But one of the things we noticed, we actually went back and did some historical analytics here relative to all of our large project work.
And this is the most early-stage maturity of our overall portfolio that we can ever find, which means that in the early parts of our projects, we actually have a contingency that we put aside for potential problems on jobs or potential issues of milestones that occur. And we don't typically release those contingencies until later in the project.
So as we've said before, the first half of every project will probably show up at a lower margin than the back half. The other thing that's happening in our large projects business is that we're finding that these owner-related issues with these complex projects tend to be pushed, resolution tends to be pushed to the tail end of the project.
So what we're finding is global settlements as we get to the last 10%-15% of the project, where that also changes the margin on those projects, but it's pushed towards the end of the project. And we have several of those going on in our large projects today. So I think, in general, what we're seeing is that that complete margin expectation isn't really occurring until we get back to maybe the last 25% of the job.
So as we continue this early maturity, we're probably going to see results. And I'm going to say similar to last year as we go forward through 2016, with it continuing to ramp up in 2017 and beyond.
Operator (participant)
Our next question will come from Adam Thalhimer of BB&T Capital Markets. Please go ahead.
Adam Thalhimer (Director of Research)
Hey, good morning, guys.
Jim Roberts (CEO)
Morning, Adam.
Adam Thalhimer (Director of Research)
Can you just reiterate what the long-term targets are for gross margins in both segments?
Jim Roberts (CEO)
Well, okay. So maybe I'll look at all three segments here. Large projects, we've been saying mid-teens. We believe that is where that needs to be. I think on large projects, it does depend on the type of work our overall portfolio is. Some projects actually are higher. Some projects are lower. And depending on our mix, we do believe that mid-teens is the appropriate returns. In the construction segment, we have been saying the low-teens, although we're doing a little better than that right now.
And historically, the low-teens have been a really nice margin in the construction business. But if the markets continue to change, that could improve. But right now, I would say still the low-teens for that business. In the construction material segment, I would say the mid-teens is a very reasonable return that's consistent with what we've been saying over time.
It's been as high as 20%, and it's been as low as 3%. The construction material segment is the segment that is probably more indicative of the overall economy. As these state revenues and budgets start balancing and getting better and better, that again is the bellwether of how we see our overall business performing. As you can see, last year, our materials business was doing quite nicely, and we continue to expect it to do quite nicely this year. Mid-teens, low-teens, and mid-teens are probably the most reasonable expectations for those segments.
Adam Thalhimer (Director of Research)
Okay. That's helpful, Jim. And then on the weather, within California, where were you most impacted?
Jim Roberts (CEO)
Well, we were mostly in the north, but it actually hit the whole state, which was in the overall scheme of things, Adam, it was a good thing. The state had been in a long-term drought, and this water is now filling up the reservoirs, which is going to be long-term a really good thing for our business in California. And actually did a couple of things.
The weather was very wet in January and very wet in March. It actually subsided a little bit in February. But the large rains, it really didn't give you a chance to work in February because everything was so wet from January. But it did allow us some time to get our plant maintenance and upgrades done in the first quarter, which we really hadn't done in a while.
That certainly affected the segment margins, but it also put us in a stronger position for the remainder of the year. The weather, although I would say from the middle of the state north was a big hit, it still hit the southern part of the state. It moves over into our Nevada market and our Utah market as well. It's the same basic storm channel there. Just a delay in the materials business is really the bigger issue from the California side.
Adam Thalhimer (Director of Research)
Okay. Very helpful. Thanks, Jim.
Jim Roberts (CEO)
Okay, Adam. Thanks.
Operator (participant)
Our next question will come from Joe Giordano of Cowen. Please go ahead.
Joe Giordano (Assistant VP)
Hey, guys. Thanks for taking my questions here.
Michael Dudas (Managing Director, Equity Research)
Sure, Joe.
Joe Giordano (Assistant VP)
I just wanted to talk about capital deployment a little bit. You've been talking about it on most of your recent calls. Have you seen private company valuations, maybe particularly on the materials side as you look to expand that further east? As commodity prices have moved up here, have you seen valuations start to move away?
Jim Roberts (CEO)
Well, we haven't done a whole lot of individual valuations, but the answer is probably no. And I'm going to tell you why. Every one of these vertically integrated businesses typically comes from a family-oriented environment. And what happens is that when they decide to pass the company on outside of the family, it's a time frame where it's fairly emotional.
And I actually think those multiples have been healthy for even during the downturn. The bigger issue here is more of if they start seeing significantly increased earnings with the same multiples, then you're going to see some pricing differential. But I don't think the marketplace has changed much. When one of those businesses becomes available, it's strictly the right fit more than anything. It comes down to the right fit and a negotiated number for a whole host of reasons.
One of the things that I've also seen in those businesses is that the quality of the reserves, the physical assets, certainly the management will drive significant different results in terms of the multiples. I don't think there is a change in the multiples. It's going to be the individual business.
Joe Giordano (Assistant VP)
Okay. Great. Maybe on the large project side, is there any way you can get into some of the detail on the execution and owner-related issues that you've been seeing to give us a better sense of this is normal course of business stuff or it's hard to judge a trend on any one quarter on your projects? But just so we have an understanding there.
Jim Roberts (CEO)
Yeah. I don't like to dive into the individual projects themselves, but let me just give you kind of a higher-level typical situation that will occur. On these big mega complex jobs, they'll have a combination of, I would say, design issues, schedule issues, and then owner scope revisions. And those are the biggest drivers of changes on these jobs.
Typically, what happens is that we plow through all of those issues during the first half of the job, and we just keep moving forward. We work with our designers to try to resolve issues with them as the project progresses. We work with the owner to try to resolve scheduling conflicts if something that they wanted or let's call it weather or design change is going to impact the schedule.
We tend to work with them to try to say, "Okay, what's a reasonable schedule?" A lot of times, force majeure, which would be an act of God of some nature, comes into play where we would be compensated for both potentially time and money. Those issues are negotiated over time. And then the owner a lot of times changes what they want.
And that's kind of the one where when those things occur, contractually, they tell us to keep plowing forward while we're building the job. And then what we'll look at is the plus and minuses at the end of the job, and I call those global settlements. And those tend to take place in the last, I'll call it, 25% of the job. You put all these things on, I'll call it a score sheet.
You put them over on the right-hand side of the table and say, "Okay, well, if you can meet your goals, your schedules, the upgraded designs and everything," and then we'll look at global settlement terms at the end of the job. So that's why a lot of these things we plow ahead during the first half of the job, keep things in order financially and schedule-wise, and then work towards resolution on the tail end of the jobs.
Joe Giordano (Assistant VP)
Okay. That's very helpful. And then maybe one last quick one on me. Did the mild winter in the Northeast bring forward any work on Tappan Zee? And where would you say that project is in terms of percentage completion at this point?
Jim Roberts (CEO)
Yeah. That job actually did progress very nicely over the winter, and it was fairly mild weather. Of course, now that's an offset to what we saw the previous two winters, which were really, really poor. But it was a very good winter on that job.
It's about 65% complete right now, and it is progressing along very nicely with anticipated traffic switch next year. So things on Tappan Zee, you're exactly right. And that was one case where we actually had some nice advancement during the winter, which we hadn't had for several years.
Joe Giordano (Assistant VP)
Good. Thanks, guys.
Jim Roberts (CEO)
Okay, Joe. Thank you.
Operator (participant)
Our next question will come from Sameer Rathod of Macquarie. Please go ahead.
Sameer Rathod (SVP, Equity Research)
Hi. Good morning. Quick question.
Jim Roberts (CEO)
Hi, Sameer.
Sameer Rathod (SVP, Equity Research)
Good morning.
How do you think about capacity and capacity constraints now that the backlog is at all-time highs? I saw CapEx picked up year-over-year. Maybe just some thoughts on how you guys are thinking about the pace and capacity you guys have.
Jim Roberts (CEO)
Okay. So I would put it into the buckets of the segments if we're going to talk about capacity. Let's go to large projects first. Large projects is, again, I wouldn't look at volume as a capacity issue because we certainly have the financial capacity to bond a lot of work, and that is not the issue. We have the financial capacity to fund the job from an equity position.
What we're going to find on large projects, it comes down more to people. The type of work that we go out and bid and build will depend on, and I said it earlier, on the people we have inside the organization to physically go build that work. So I think it's going to depend in large projects on the type of work that we're out pursuing relative to our people that we have.
We have a lot of capacity in that business. Certain projects, as they close out, we want to overlap new projects with old projects. We've expanded our capacity over the last several years as well as on these large projects. I mentioned it several calls ago, Sameer. We've been putting deputy project managers, second and third-tier level project managers on these larger projects to develop them so that they can be project managers on the top slots on big jobs going forward.
I think it's just going to depend on large projects on the type of work. In the construction segment, we have a tremendous amount of elasticity. I don't see capacity being an issue in that business. We have a much stronger ability to ramp up that business. Those who have followed Granite historically know that that business was bigger seven, eight years ago.
When we had the recessionary environment, that certainly contracted that business. Yeah, I think there's tremendous growth. I mentioned it in the script part of this discussion that that's the biggest overall growth component of our business is the construction segment. And we have capacity to grow that significantly.
On the materials segment, similar to the construction segment, I mentioned that we've been upgrading our plants, doing maintenance and upgrading them. We are nowhere near capacity at all in our materials business. Now, I say that overall. Certainly, there are certain plants that have a higher level of utilization than others.
But again, we have come way off of our all-time highs in the materials business, and we're now starting to see it ramp back up. I don't think you're going to see any capacity issues on that part of the business for quite some time.
Sameer Rathod (SVP, Equity Research)
Okay. Thank you.
Jim Roberts (CEO)
You bet.
Operator (participant)
Our next question will come from William Bremer of Maxim. Please go ahead.
William Bremer (Special Situation Equity Research Analyst)
Good morning, Jim. William.
Jim Roberts (CEO)
Good morning.
William Bremer (Special Situation Equity Research Analyst)
My first question is based on, hey, I just want to say, hey, great color on the potential leverage of your personnel. I think that's been a key, and that's a key driver going into fiscal 2017. Can you give me a little sense of the visibility of your pricing there on the potential projects that will be going into your mix?
Jim Roberts (CEO)
Okay. If I heard that right, it's relative to the pricing going forward?
William Bremer (Special Situation Equity Research Analyst)
That's correct.
Jim Roberts (CEO)
Okay. So again, I think let's talk about, let's go back to the segments again and look at it. On the large projects segment, I think that this is where I mentioned earlier that there's been an imbalance in the pricing versus the risk.
And certainly, our expectations are that as we go into individual contractual risk and we look at the documents themselves, that we're going to be making sure that large projects is priced to offset any potential risk on the job. So you're going to see large project expectations inside the day-to-day bidding go up on the projects that have higher risk.
I'm not sure that that has happened over the last, I'll say, five years, but that market is starting to get to a point now where I think all of the players in that market understand that there is more risk on these complex jobs.
I know from a Granite perspective, we believe that the returns on those projects need to go higher. We're going to see an increase there. On the construction segment, this is going to depend on how fast work gets into the marketplace. If we are correct with the FAST Act and we see these state budgets continuing to stay healthy, what we're going to see is competitors reaching a saturation point.
And this is what I mentioned that we'll start seeing the benefit of it in the back half of 2016, but probably the financial benefit of it in 2017 is that you're going to start seeing smaller companies reach that capacity issue. They're going to literally not be bidding work. It will take time for us to know and lead this market change.
And then you see pricing change towards the end of the year and the beginning of next year. We're starting to see it take place a little bit today. We look at the bid list every single day. And in some markets, the bid lists are long. In some markets, the bid lists are short. But there's going to be some pricing change in that market. But I will say this.
Today, you start looking at in the low teens already in the construction business. It's performing fairly well already. So a couple more points out of that business would be a really nice change, and that would be very healthy in that environment. In the materials business, this is where the biggest movement needs to be made.
The overall materials business should be in the mid-teens to the low 20s. This is where the gross profit margins need to get to because of the large asset investment in that business. And that's where we used to be. We're working hard to get back there. And again, I think you're going to see us.
We'll sacrifice revenue on the materials side to start moving up our gross profit expectations. And that's happened several times last year. You're going to see several more price increases this year. As that market continues to grow, you're going to see a lot of combination of price increases each year in 2016 and in 2017.
William Bremer (Special Situation Equity Research Analyst)
Great color, Jim. Thank you. My follow-up is based on any particular surprises of one particular state or region that you're seeing the speed and the commitment of these projects coming through faster than what you anticipated?
Jim Roberts (CEO)
Well, I don't typically like to dive into individual states. The reason I dive into California in general is because it's a big part of our business. And I would say in general, and I mentioned it, is that that part of the business is getting stronger.
So I would say outside of California, I think things are pretty much as expected. In California, especially if we can get a transportation bill passed, that's probably where the biggest swiftest change will take place. And right now, I'm very happy with what's going on in California compared to where we were two or three years ago. That's probably the biggest state change overall in the entire Granite portfolio.
William Bremer (Special Situation Equity Research Analyst)
Thank you for the color.
Jim Roberts (CEO)
Okay.
Operator (participant)
As a reminder to ask a question, please press star, then one. Our next question will come from Brian Rafn of Morgan Dempsey. Please go ahead.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Good morning, Jim.
Jim Roberts (CEO)
Hi, Brian. How are you?
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Good. See, you talked about finally after the FAST Act replacing SAFETEA-LU, I think it was like 29 extensions and a world war ago. Does that add a, as it begins to build out third, fourth quarter, does that add some margin accretion for you guys, say, two, three years out? Do you see that? And maybe that's the expectation for the margin increase on the quarry materials side and maybe in the construction side?
Jim Roberts (CEO)
Okay. That's part of it. I do, Brian, I think it was actually 35 extensions, not 29.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Was it 35?
Jim Roberts (CEO)
But it was a lot. It was a heck of a lot. Yes, I think that, as I mentioned, there's two things that are driving the value creation in the construction segment. There's the higher margin expectation due to the transportation, due to the FAST Act. And I'll talk about that a little more in a second. But the other thing that I don't want to miss out on is the diversification efforts that we've made in that business.
By moving into the power segment, the T&D work is strong. The renewable energy work is strong. We've beefed up our commercial developments. We've beefed up our business development to work with more private owners. That has increased. The private side, typically, the work we do for the private entities is higher margin work than the work we do for the DOTs.
So as the FAST Act kicks in in the back half of 2016, what we're looking for is the DOT work to get better margins out of it. That is really, really important. The other thing that we've done on the construction side is we've been on the sidelines in the mining business for a while. That has not been strong. It's starting to come back a little bit.
We've got some rail projects that we're working on, and we've expanded quite a bit with some new personnel adds recently in the water side of our business. I think there's a combination of the FAST Act will increase the DOT margins, but it's really important that we stay focused on diversification even when that transportation market gets stronger.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Yeah. Well, let me ask you. You guys have talked over really the last decade about having certainly discipline on bid day. You had some comments. You talked about mitigating risk and kind of going back and looking at that. Would you say across Granite's diversity of portfolio, obviously, you guys have had a long legacy history on the transit side, whether it's canals or bridges or roads or highways or turnpikes?
As you start looking at solar and military bases and mining and railroad and water and tunnels, is there a bit of a gap in your experience of risk mitigation in some of those new areas, or is it just kind of a secular emphasis to, as business builds up, that we got to maintain this quality?
Jim Roberts (CEO)
Well, I think that it's actually interesting. I would suggest that we're probably, when we move into newer markets, and let's talk about the water market. I wouldn't call it new, but I would say the emphasis might be new. The solar market, which we are very strong in today, we've been doing that now for probably three-five years.
You get into the tunnel market, remember when we bought Kenny, they have some of the most experienced, highly talented people in the entire country in the tunnel business. But I do think, I actually think that we are experiencing in those areas some of the higher margins and some significant discipline in the bidding environments. I think where sometimes you get more aggressive is in the day-to-day work that you do so much of that you get overcomfortable with it.
That's where actually I see the transportation sector is where I see the highest increases from where we are today, from where we're going to go. I think that's where the higher margins we're going to see even more and more. The new stuff that you talked about is the higher margin work already.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Okay. All right. That's good. That's good. In the construction, the old Branch turn business, you talked certainly about complexity and diversity. I kind of think of that as the heavy civil or the large project side. When you look just at the turn business, how the residential construction, private housing, that type of thing, how would you describe certainly the diversity in that faster turn business?
Jim Roberts (CEO)
Well, I'm going to tell you, Brian, I think the diversity today is stronger than it's been in the history of the company. And that's, I think, what's creating that value. If you look at this point in time of the year and we're at a 12.9% margin, that just hasn't happened in that business because we're not focused on one type of work.
When we move, we have a very large renewable energy team now. When we look at the T&D business and the type of work we're doing there, a big chunk of staff augmentation, that's totally different. When we get into the lining business and the water business, we can do that in the winter months where we can't do a lot of the surface work in the winter months.
I think the diversification play is the strongest part of our construction business today with the potential ramp-up of transportation coming back where it belongs. This is why I continue to say that I think the construction segment is the main driver of our growth going forward.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Okay. On that construction side, I think you said low-teens-type gross margins. If you go back to the halcyon days of 2017, 2018, 2019, is there a possibility of that returning, or do you think you really need a strong private economy?
Jim Roberts (CEO)
Well, I think that there's a possibility of getting back, and I'm just going to go to mid-teens and not get too far over my skis here, Brian, on high teens. But I do think you nailed it. Back in the mid-2000s, when we were really cranking, we had a strong public sector and a strong private sector. I'm going to suggest to you today, outside of housing, the private sector is becoming fairly healthy.
What we don't have today is a real healthy public sector. And that's why I continue to say by the time the FAST Act kicks in, if we can continue to have a healthy private sector, that's when we're going to see the margin creep up and the volume creep up on the construction side. And that's why we're targeting late 2016 and then 2017 for the benefit of it.
I do think we're going to get improved numbers. I don't know if it's going to get to where it was 10 years ago, but we're heading in a good direction.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Not sure. When you talked, certainly a question about capacity, and you talked about bonding and working capital equity and that, and then you really talked about the physical capacity. If you were to divide that physical capacity between human components, the bench strength of, say, engineers, expediters, welders, machinery drivers versus the capital stock side of bulldozers, backhoes, graders, how is your capacity between the human component and what you might have to do on a CapEx side?
Jim Roberts (CEO)
Well, I think there's no doubt in my mind that the driving force in this industry and in Granite will be the human capacity. We can get all the equipment we want. We've got a healthy balance sheet. That is not the issue, Brian. This is a people business.
It's going to continue to come down to people. That's it. And you've got to have people on the bench. You've got to be patient. You've got to train them. You have to develop them. And you have to give them opportunities. And that's what's going to allow Granite to grow.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Yeah. Let's say go back five, six years and kind of the depth drop. You talked about having the aptitude to have more mobility in some of your manpower, shipping people across the country. As business ramps up and you start getting back to really decent gross margins, might there be a little more stationary where you're not having to shift manpower around the country or around the region as business lifts for everyone?
Jim Roberts (CEO)
Well, Brian, I think actually there's another reason why I think people are less mobile today. I don't think they're going to be as mobile as they were 10, 20 years ago. I just think it is an issue, generational issue, where people don't want to be mobile. I do think that as the economic environments get more healthy in different geographic areas, the mobility range will be minimized.
That's good. I do say this though, that in the large projects business, that is going to continue to be where the mobile workforce is going to be needed. On the construction and the materials side, that's much less mobile than people were 10, 20 years ago. As the economies get healthier and healthier, I think you're going to see people sticking at home.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Yeah. Your California wage, San Francisco, this $15 minimum wage labor, does that hit at all any of the lower rungs of your work crews?
Jim Roberts (CEO)
No. In fact, I think it's really good for Granite because the wage rates that we pay are typically well above that, way above that, especially in California. It's not going to have any negative impact on us at all. I don't think it's going to have a huge impact on the construction industry in general. People at those wages, there's very few people being paid at those wages or below.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Yeah. When you talked about the materials side, Jim, you talked about kind of with the wet weather, you took some time for maintenance and upgrades. Was that rebuilding hot mix plants? Were you adding capacity there, replacing stuff that was worn out, or was it service parts, repairs? What kind of a granular, what were you actually doing?
Jim Roberts (CEO)
Well, all of the above. Yeah. I'll give you an example. You take a hot mix plant and you put a new drum on it, Brian, and that's the main component of how you dry the aggregates. And typically, when you put a new drum on it, you tend to upgrade them and make them bigger so they have more capacity to them. You look at a big rock plant and you change out crushers and liners and belts.
And typically, you're doing it to really, number one, to increase the utilization so that you go from a 95% utilization of a facility to a 98% utilization for the remainder of the year. That's a big deal. So it's a combination of both. We did use the first quarter to build one big new facility. And it is online. I think mid-April it came online.
And so that was nice to have that weather allow us to get that done. But it's a host of reasons. It's capacity and upgrading utilization.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
Okay. I have just one more strategic question for you. Are there still, from a design-build standpoint, is it still really kind of a half a dozen players where it's kind of an oligopoly and Granite really specializes in that? And then also, as business lifts up, might there be some opportunity to kind of resurrect that, the east of the Mississippi River, the vertical integration with adding quarry materials with certainly the construction side?
Jim Roberts (CEO)
Okay. Two questions. First of all, I wouldn't call it an oligopoly. But I would say that there is maybe 10 major players that bid on everything all over the country in some respects. And certainly, we're one of them, and that hasn't changed. But it's still an aggressive market.
And that's what I was saying earlier, is that in the large projects market, I think what's going to have to happen there is a lot of the competitors that have a lot of backlog are just going to need to build out their backlog. And I think they'll end up seeing some of their contractual risks. Granite knows it's already in these contracts. And I think that's going to help the market a little bit, letting them build out some of their work.
As far as the vertically integrated business east of Mississippi, we are looking and we want to move there. And I've mentioned that before. And Brian, if you know of anybody, please let me know.
Brian Rafn (Principal, Director of Research, and Portfolio Manager)
All right. Thanks, Jim. Good to start. Yep.
Jim Roberts (CEO)
All right, Brian. Thank you.
Operator (participant)
Our next question is a follow-up from Sameer Rathod of Macquarie. Please go ahead.
Sameer Rathod (SVP, Equity Research)
Yeah. Just one quick housekeeping question. Did you guys mention the project pipeline that you have for the next four quarters? Is it still $15 billion, or has that amount changed?
Jim Roberts (CEO)
Well, I mentioned just in the comments a little bit later here that we have about a $17 billion pipeline for the next, I'll say, through 2017, which is typical. I'm calling a two-year or 18-month outlook, somewhere between $10 billion-$20 billion being a common reasonable pipeline. And if you have individual jobs that you want to know about, Sameer, I'm happy to chat with you. I got a whole long list of them sitting in front of me here.
Sameer Rathod (SVP, Equity Research)
Okay. No, that's it. Thank you.
Jim Roberts (CEO)
Okay, Sameer. Thank you.
Operator (participant)
We have another follow-up from Brian Rafn of Morgan Dempsey. Please go ahead.
Ryan Hamilton (Portfolio Manager)
Hey, Jim. It's Ryan Hamilton. How are you?
Jim Roberts (CEO)
Fine. Ryan, how are you?
Ryan Hamilton (Portfolio Manager)
Good. I know you guys don't spend a whole lot of time talking about your business in Canada, but I was reading they recently passed a $125 billion bill they're using for infrastructure. Is that opening up any additional opportunities in Canada?
Jim Roberts (CEO)
Well, it has from a discussion standpoint. We certainly have been approached by partners in the Canadian market to go north of the border. Certainly, there are Canadian partners that we have brought down south of the border.
I don't think that it's something that is going to happen overnight, but I do think that moving up into that marketplace is part of our geographic diversification plan for large projects. Again, we have relationships with a lot of very strong Canadian contractors. That's how we would first go up there as a joint venture partner.
Ryan Hamilton (Portfolio Manager)
Sure. That's great. And then I've just got one more on the materials side. Can you kind of break down what's internal and external?
Jim Roberts (CEO)
Well, again, it was such a slow quarter with the weather. It really wasn't a big deal. It's running about 60% external, 40% internal. But again, with the minor amount of work that was done due to the weather, I think that in the stronger environment, Ryan, you're going to continue to see a very strong external market, which typically is healthier, shows a healthy external market, which is a healthy economic environment.
And I think that last year, we saw an uptick in the external portion of our business as well. So it's definitely in a pretty good stage today. And we're looking at really beefing up our customer focus and our third-party focus.
Ryan Hamilton (Portfolio Manager)
Great. Thanks again. Keep up the good work.
Jim Roberts (CEO)
Okay, Ryan. Thank you.
Operator (participant)
This is the end of Q&A, and I would now like to turn the call back over to our host.
Jim Roberts (CEO)
Okay, everybody. Well, thank you for and thank you for all those questions. They were excellent. Remember, the safety of our employees is not just a priority, but it is a core value here at Granite. As we look ahead to our Industry Safety Week next week, I thank Granite teams from coast to coast for a solid start to the year as we target 2016 to be the safest year in our company's history.
All of our investors, `Laurel, Ron, and I are available for follow-up. If you have any further questions, Laurel and Ron will be on the road next week in New York, Boston, and Florida. Please reach out to see if they still have any availability in their schedule. Thank you, everyone.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.