Granite Construction - Q2 2019

Transcript

Operator (participant)

Good morning. My name is Katie, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Second Quarter 2019 conference call. This call is being recorded. 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 one. Please note, we will take one question and one follow-up question from each participant today. It is now my pleasure to turn the conference over to your host, Granite Construction's Head of Investor Relations, Lisa Curtis. Ma'am, the floor is yours.

Lisa Curtis (Head of Investor Relations)

Thank you, Katie. Welcome to the Granite Construction Incorporated Second Quarter 2019 earnings conference call. I am pleased to be here today with President and Chief Executive Officer Jim Roberts and Senior Vice President and Chief Financial Officer Jigisha Desai. Please note that today's earnings presentation references slides that are available on the events and presentations page of the Granite's Investor Relations website, investor.graniteconstruction.com. 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 current expectations and best judgment of senior management regarding future events, occurrences, growth, demand, strategic plans, circumstances, activities, performance, outcomes, guidance, backlog, committed and awarded projects, and results. Actual results could differ materially from statements made today.

Please refer to Granite's most recent 10-K and 10-Q filings for more complete descriptions of risk factors that could affect projections and assumptions. The company assumes no obligation to update forward-looking statements, whether the results of new information, future events, or otherwise. Earlier this week, we made a preliminary announcement of our results for Second Quarter 2019 and the impact related to four legacy unconsolidated heavy civil joint venture projects. Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income or loss, adjusted earnings or loss per share, committed and awarded projects, backlog or results. Please note that some metrics also may reference or exclude non-recurring acquisition-related expenses and one-time integration costs.

Reconciliations of certain non-GAAP measures are included as part of our earnings press releases and in-company presentations, which are available on our Investor Relations website. Now, I would like to turn the call over to Granite Construction Incorporated President and Chief Executive Officer Jim Roberts.

Jim Roberts (President and CEO)

Well, good morning, everyone. I thank you, Lisa, and thank you all for joining us today. Earlier this week, we provided you with a preliminary view of our second quarter 2019 results and an update of our full-year 2019 outlook, which was precipitated by unanticipated project charges in the Heavy Civil Operating Group portfolio. We acknowledge and understand that this represents a significant disappointment for all Granite stakeholders, and we understand the concerns that many of you have shared since Monday's announcement. Today, I will start with what happened in the second quarter and how we believe it represents the tail end of Granite's mega project strategic era. Then I will update you on the journey we started more than two years ago, developing a new path to diversify and to de-risk our now record portfolio of work.

With our growing portfolio in mind, I will spend just a couple of moments talking about what is next and why we believe our record committed and awarded projects, better known as CAP, is increasingly aligned with our strategic initiatives, targeting a path for more consistent, profitable results. Finally, I will spend a few minutes talking about why we remain optimistic that early cycle demand trends continue to provide wind in the sails for our end market-focused segments. So let's dive into the Q2 details. Through our quarterly project reviews and estimate-to-complete updates, our teams reported in late June that they had experienced increased project completion costs in the second quarter of 2019. These costs, which were exacerbated by scheduled delays and by the execution of disputed work, resulted in the charges reported today and in Monday's announcement.

The charges relate to the four legacy projects bid between 2012 and 2014 that we have been discussing for several years. Additionally, in early July, we received notice of an unfavorable court ruling on one of the related outstanding project disputes. As a result of these charges, which included a revenue reduction of more than $114 million in the second quarter, we have revised our full year expectations for 2019. Jigisha will discuss our results and our guidance in more detail shortly. We recognize that this quarter's results in the heavy civil group are in sharp contrast to the very positive backdrop that I just mentioned. We are taking action in the form of an accelerated strategic review of the heavy civil group operations and how we approach larger projects in our portfolio. This is not business as usual, and all options are certainly on the table.

Our immediate focus is on our talented Granite teams working to ensure that our projects are appropriately resourced to deliver bid-day margin expectations. Operationally, the near-term priority is successful project completion. But critically, the second half of 2019 has begun on a record pace, and our long-term expectations for mid-teens, consolidated gross profit margins, and solid organic growth remain intact. Well, we never expected or wanted to share this slide again. Significant wet weather had impacts across our business through May, and it was a drag on first-half results. Importantly, June marked something of an inflection point with an acceleration of activity and a spike in profitability setting the tone for what we anticipate will be record results for our business in the second half of the year.

Fortunately, the biggest impact of the wet weather is simply timing, as these delays have created additional pent-up demand to go with consistently strong bookings across the business. With an assumption, well, I will call it for hope for normal weather from here until the end of the year, we anticipate that a strong second half will allow us to achieve high single-digit revenue growth in 2019. Now, let's shift back to the Heavy Civil Operating Group. We have begun working to address risk in this portion of our business, and particularly in mitigating our exposure to mega projects for the past several years. Notably, we have discussed persistent challenges in this portion of our portfolio for some time now. Each of the four legacy projects is design-build, and each contract is fixed price, with project values ranging in excess of $1 billion to nearly $4 billion.

When performing work on this type of a contract delivery model, we are contractually obligated to continue work on the jobs and to recognize the associated cost, regardless of whether we agree that the work we have been directed to perform is within the scope of our contract. We will pursue our disputes with project owners separately. The resolution of project disputes represents a critical ongoing focus area that will take some time to resolve. Eliminating the company's remaining exposure to these mega projects is an important step that will improve the stability and trajectory of our results. Instead of entering into what we believe to be a partnering relationship, it is now clear that, especially in the context of these mega projects, the fixed-price design-build contract delivery model and the public-private partnership contract delivery model result in an untenable imbalance in risk sharing between Granite and the project owners.

These projects clearly are not aligned with our expectations or with those of our stakeholders. Two years ago, we ceased pursuing mega projects. Our project wins since early 2017 have not included any unconsolidated JV projects of any significant size. We have been deliberate in acting to limit risk by reducing the scope and duration of our contracts across the company. As a result, we have not contracted to construct any projects more than $510 million in our heavy civil group since 2017. We believe that this approach has provided teams with a meaningfully reduced exposure to risk, and our revised pricing strategies incorporate the strong counterbalance that robust demand environments continue to provide. As a result, we have walked away from projects, ceding some bids to our competitors that we might have been more willing to chase just a few years ago.

In doing so, we began our journey to avoid taking on new work with operational and financial risks that are out of line with our long-term expectations for mid-teens gross profit margins. Our procurement strategy has shifted toward negotiated work and other best value procurement methods, including construction management general contractor known as CM/GC, construction management at risk known as CMAR, and progressive design-build, all with a strong weighting on best value and technical skills. We have significantly reduced the average and overall project scope and duration of bidding opportunities, and cash flow considerations now are a critical gating item for project targets. In addition, our strategy has focused almost exclusively on sole venture Granite projects or on projects with Granite in the lead position.

By taking the lead, we are in a far better position to control our operational and financial destiny, better able to deliver consistent, profitable performance, and improve cash flow for all Granite stakeholders. However, we do understand that we have more work to do. How we get there begins with our growing, diverse portfolio of work. At mid-year 2019, Granite CAP totaled a record $4.9 billion, up more than a third year-over-year. At the end of the second quarter of this year, our current heavy civil group CAP was $1.8 billion, or approximately 37% of overall Granite CAP. This is down significantly from an average of more than 54% of our portfolio value since 2015.

With a three to four year anticipated burn rate, the heavy civil portion of transportation CAP has anticipated gross profit margins in the high single digits, reflecting the mix of steady performing projects as well as the future impact of less than $350 million of remaining work on the four legacy projects that we have discussed. We are encouraged that the substantial increase in negotiated and best value procurement project wins in our CAP is expected to accelerate the declining influence of the current heavy civil portion of transportation segment CAP. Granite's footprint and our infrastructure solutions capabilities have expanded dramatically over the past five years, both organically and through acquisitions in the water and wastewater markets. We are focusing our project pursuit efforts in markets where Granite's presence, capabilities, and resources provide strategic advantages. This is a critical driver of improved project quality and reduced project risk.

So where are we going, and what does our path look like to get us there? Our ongoing strategic review of the heavy civil group includes an even deeper emphasis on areas where we can be successful with lower risk, higher margin work. It also includes the potential exit of certain end markets in geographic markets where we have concluded that project or market conditions do not align with our nearer long-term risk and return expectations. Our focus is on projects where the owner is seeking a partner to create successful infrastructure solutions and outcomes, owners that are seeking to build their work with shared risk that allows for acceptable returns.

The changes we have made since 2017 have steered us in the right direction, and we are now accelerating our strategy in markets that do not meet our needs, redirecting resources appropriately and focusing our energies on work that creates consistent value for all Granite stakeholders. Typically, we start here, but today is a particularly good time for a reminder of what has not changed at Granite: who we are. We are America's infrastructure company, and our unwavering commitment to do things the right way every day creates value for all Granite stakeholders, from investors and employees to partners and clients. Working safely and striving for our ultimate goal of zero injuries certainly aligns us well with our stakeholders. With a heightened consistent focus across the company, including our most recent acquisitions in 2018, Granite teams have started 2019 on the safest path in our 97-year history.

An important and common metric used to measure safety performance is the OSHA Recordable Incident Rate. Today, our teams are operating at a best-in-class level well below 1.0. With record CAP and a healthy demand outlook, we remain focused on working to ensure that all Granite employees make it home safely every single day. Thank you to all of our employees for your hard work in this area, and please stay safe. Beyond changes in the Heavy Civil Operating Group, our overarching views on market conditions and strategy remain intact. The strong booking trends we have experienced remain supported by robust public and private market demand across Granite's end markets.

Public demand is driven by continuing investment at the state and local level, further evidenced by multi-year programs in key Granite geographies, including California, Washington, Utah, and in the recently approved $45 billion transportation infrastructure program in the state of Illinois. In addition, private market demand continues to bolster our strong outlook for growth in most markets. As we have said for some time, we continue to anticipate that 2021 to 2023 ultimately will mark a mid-cycle point for today's early stages of infrastructure investment expansion. Taken together, we believe these are the key factors that support the view that our business is poised to grow steadily for quite some time. Next, let's move to an overview of the second quarter and of overall operational performance in our reportable segments.

So second quarter project delays driven by weather have stacked additional work on top of strong market conditions across geographies and end markets. From May to June 2019, hours worked in the field jumped 62%, up from 48% in the same period last year. Importantly, June 2019 hours worked increased more than 11% year-over-year. June's strong performance trajectory, combined with six and seven day work weeks and multiple shifts to meet demand, are fast becoming the order of the day. Our teams are well into the full swing of what is now expected to be Granite's busiest summer and fall construction season ever. With that in mind, I will shift now to a quick segment overview before I hand the call over to Desai. Okay, let's start off with the transportation segment.

As we noted, persistent wet weather had a negative impact across most of our operations in the West through May. Even with accelerated activity in June, pent-up demand and strong bookings have driven record CAP in the transportation segment and in our California group operations. These trends largely have been matched across most of our operations in the West and Midwest. Most of our transportation portfolio is being driven by stable, improving long-term state and local funding and by growing opportunities for negotiated work. We continue to target significant margin improvement to mid-teens gross profit margins in this part of our business.

As I hope we now have made clear, we are accelerating action to balance portfolio dynamics away from large non-sponsored projects, tailoring our efforts to create geographic and project diversity that best leverages our large equipment fleet and consistent, reliable access to materials, local labor, subcontractors, vendors, and strategic relationships. Moving now to the water segment. This quarter marks the one-year anniversary of the Layne Christensen acquisition. With the vast majority of the integration activities and expenses now behind us, new Granite teams continue to sharpen their focus on growth and optimization opportunities in these businesses. This segment delivered second quarter revenue growth driven primarily by last year's acquisitions. One of the key highlights of note in the integration efforts we have made is in safety and safety performance. We made significant changes and investments in safety, and our teams enthusiastically have adopted and incorporated proven safety programs.

As a result, the year-to-date OSHA incident rate for the water business improved dramatically to a 1.0 figure from above 3.0 last year. I congratulate our teams with this concerted effort. Keep it up. Certainly, weather across the Midwest was challenging in the second quarter, with record rainfall and historic flooding impeding progress and delaying projects in our growing portfolio of water work. As in the transportation segment, inclement weather created delays and pent-up demand, only adding to the solid market conditions across geographies and to expectations for a strong second half of the year. Next, let's move to the specialty segment. The specialty segment is fueled by strong growing teams in tunnel, mining, and mining services, power, renewable energy, federal, and site development, leveraging the combination of our highly specialized equipment and capabilities. This quarter's results reflect a diverse mix of projects and businesses that comprise the segment.

Improved revenue was driven by acquisitions and by project mix, which concluded the anniversary of the Layne acquisition. In addition, we are seeing strong demand for solar work in the Southwestern United States, continued private sector investment in commercial and industrial expansion, as well as project wins in our federal division, coupled with overall solid demand in the West. By focusing on customer needs and challenges, we continue to be successful in aligning outcomes, creating significant value for all parties. This solutions focus is a key Granite differentiator. Now let's finish with a discussion on the materials segment. Here again, poor weather had a significant impact in Granite markets through most of the quarter, with activity, production, and volume inflecting positively in June.

The key driver to this portion of our business is the production, sale, and use of asphalt concrete products, with a smaller contribution from our lighter products water business. Strong second half 2019 results are expected to be fueled by record committed volumes, another way of saying materials backlog. This positions us extremely well for the rest of 2019 and supports our improved visibility into our 2020 demand. So as it is across much of our business, our materials teams are producing in earnest now, also employing six- and seven-day work weeks and multiple shifts to meet demand. Our performance in this part of our business will be driven by the combination of increased committed volumes and steady economic growth. Today, we believe that our businesses really are limited only by the number of operating days on the foreseeable horizon.

With that, I will now turn the call over to Jigisha to discuss our financial results and our 2019 guidance. Jigisha?

Jigisha Desai (Senior VP and CFO)

Thank you, Jim, and good morning, everyone. Let me begin with a deeper dive into charge specifics on the four legacy unconsolidated heavy civil joint venture projects and how they impacted our financials. Second quarter 2019 results included non-cash pre-tax charges of $143.7 million or $106.7 million after tax. These costs are reflected in the transportation segment, with both a reduction of revenue of $114.2 million and increased costs of $29.5 million. The charges include increased project completion costs exacerbated by schedule delays and execution of a significant amount of disputed work, and by a recent unfavorable court ruling on a project dispute. The revenue reduction represents a decrease in percentage of completion on these projects, and it represents the majority of our revenue guidance revision.

Percentage of completion accounting can be confusing, so let me spend just a moment going through the mechanics. The percentage of completion method calculates project revenue as a percentage of actual costs incurred divided by total estimated costs forecast on the job. This percentage is then applied to total estimated revenue for the job to determine revenue for the period. For these non-cash charges, we had significant unanticipated project costs, which increased the denominator, thus lowering the project completion percentage and thereby reducing revenue. Granite's disciplined cash management and operational strength positions the company to navigate the current situation while maintaining a strong balance sheet. Our disciplined capital allocation strategy has not changed. We remain focused on actions that provide the most appropriate value for our stakeholders. Granite's consolidated second quarter 2019 revenues were $789.5 million, which includes the reduction of revenue of $114.2 million.

On a year-to-date basis, revenue increased to $1.4 billion. Net loss per share was $2.09 in the current quarter, including discussed project charges of $2.28, compared to a net loss of $0.20 per share in the prior year. Quarterly and first half 2019 results include acquisition-related expense of $12 million and $26.5 million, respectively. Second quarter gross loss was $52.4 million, including charges, compared to gross profit of $80.4 million in the prior year. Year-to-date gross loss was $11.9 million, compared to gross profit of $136.7 million in the prior year. Selling general and administrative expenses were $70 million, or 8.9% of revenues in the second quarter of 2019, up from 7.6% of revenue last year, with the increase driven primarily by our acquired businesses.

We continue to focus on overhead reduction and are making strides in this area, but it will still be some time before we reach our longer-term target of 7.5%. As Jim noted, Granite CAP is now at a record level of $4.9 billion, up 33.4% year-over-year and 8.9% sequentially, and this figure now includes approximately $1.6 billion of negotiated work, all related to project procurements in the past 12months-18 months. Today, the trend in composition and quality of our CAP has never been stronger, with a greater mix of smaller, higher-margin, best-value Granite-led negotiated work combined with geographical diversity.

The Granite-led component of the strategic shift we made more than two years ago is a result of the lessons we learned coming out of the economic crisis a decade ago, where owners made a significant shift in how they approached risk-sharing and dispute resolution across the industry. Now, let's dive into segment results this quarter. Aside from the charges and their impact on the transportation segment, wet weather this quarter again slowed our core construction, materials, and water businesses through May. Mother Nature gave us a reprieve in June, and our businesses finally are in a position to fire on all cylinders. In the second quarter, transportation segment revenue was $404 million, which includes the reduction in revenue of $114.2 million. On a year-to-date basis, revenue was $742.2 million, including the revenue reduction, down from $861.9 million last year.

Quarterly gross loss of $99.9 million includes charges compared to gross profit of $36 million in the prior year. On a year-to-date basis, gross loss was $78.6 million compared to gross profit of $67.4 million in the prior year. Transportation CAP ended the June 2019 quarter at a record $4 billion, which notably includes approximately $1.6 billion of negotiated work added in just the past year. In the water segment, second quarter revenue increased to $112.8 million, compared to $51.6 million in the prior year quarter. First half 2019 water segment revenues were $212.1 million compared to $91.7 million last year. The quarterly and year-to-date results primarily reflect the impact of acquired businesses. Gross profit for the quarter was $11.3 million, up from $5.5 million in the prior year. Year-to-date gross profit was $19.4 million, up from $17 million in the prior year.

Quarterly gross profit margin was in line with last year's second quarter, though down on a year-to-date basis due to emergency work performed in 2018 that was not repeated. As the NOAA weather map indicated, wet weather across the country, and especially in the Midwest, had a negative impact across much of our water business operations. Bookings remained consistent, as water CAP totaled $318 million at the end of June. Specialty segment revenue grew to $175.1 million in the second quarter, with year-to-date 2019 revenue of $315.8 million. For the second quarter, gross profit was $22.2 million, up modestly year-over-year, and the gross profit was flat at $37.1 million on a year-to-date basis. Specialty CAP totaled $559.3 million at the end of June. In the second quarter, materials segment revenue was $97.6 million, down modestly from the prior year period, with year-to-date revenues of $139.3 million.

Quarterly gross profit was $14 million, with a year-to-date gross profit of $10.2 million. Here again, wet weather impacts to this business across the first half of 2019 was a headwind to results, and with this business, volume is the key component to creating significant improvement in operating and financial leverage, which is now expected to accelerate for the remainder of the year. As a result of the impact of mega project charges we incurred and discussed, we have adjusted our full-year guidance. We now anticipate high single-digit consolidated revenue growth and Adjusted EBITDA margin of 4%-5%. The core operational strength of the business, combined with a record $4.9 billion of CAP at mid-year, gives us confidence that we can target and achieve a low double-digit Adjusted EBITDA margin in the second half of the year. With that, I will turn the call back over to Jim.

Jim Roberts (President and CEO)

Well, thank you, Jigisha. Our construction, materials, and water businesses continue to operate well overall, an important indication of the overall health of our company. We are very encouraged by the underlying performance of the majority of our business and by the robust and buoyant market environments in which we operate. After 2018's 39% increase in Adjusted EBITDA, we began this year targeting another year of better than 30% Adjusted EBITDA improvement. Even in light of this quarter's charges, our longer-term outlook has not dimmed. As we look ahead to the rest of 2019, we believe importantly that both our short and long-term earnings trajectory continues to point to meaningful top and bottom line growth in the second half of this year and in 2020. We expect our second half Adjusted EBITDA growth to more than double last year's 17% growth performance.

We continue to develop and deliver exciting expansion opportunities across our end-market-focused businesses. Our focus and investments in our geographical and end-market diversification continue to position Granite incredibly well for long-term profitable growth. We are prioritizing projects and infrastructure solutions that leverage our broad growing footprint, our diverse capabilities, and an outstanding dedicated workforce that delivers on Granite's core values every single day. And with that, we will be happy to answer your questions.

Operator (participant)

Thank you, sir. To ask a question, please press star one. Please limit yourself to one question and one follow-up question, and feel free to jump back in the queue if you have any additional questions. Our first question will come from Michael Dudas with Vertical Research Partners.

Michael Dudas (Equity Research Analyst)

Good morning, everyone. And it's an early one for you guys, I know. I know it's a very early one. I don't know if anybody got sleep last night.

Jim Roberts (President and CEO)

Yeah, we were just, we're lucky making sure that everybody on the East Coast got the proper time. So that's, we're happy to do it.

Michael Dudas (Equity Research Analyst)

And we do appreciate that. Thank you very much. So my first question is, and you addressed this towards the end of your prepared remarks, Jim, just a few seconds ago. Yes, if not for the large project issues and for wet weather, which everybody was aware of for April and May, if you were to have this, as you look out to the second half into 2020 and beyond, has the cadence and the visibility improved from what you would have thought? About the same, you know, even just going through the numbers.

And how much of this problem that you're trying to deal with internally relative to the large projects and monetizing or right-sizing that is going to show an impact to the results out the next couple of years? And are there any cost reductions to offset that given what you're going to be restructuring?

Jim Roberts (President and CEO)

Okay, so first of all, Mike, relative to have we seen a change in the markets or the cadence of where we're going? And the answer is no. I would say that it is in alignment with what we thought was we were going to see happening. The markets are strong. We mentioned California, that the SB 1 program is healthy. We've seen markets like Illinois now pass a transportation program. The state programs are healthy. Private sector investment is healthy. The mining services business is healthy.

So those are things we saw starting to develop at the beginning of the year. We started seeing them develop last year, and that hasn't changed at all. In fact, I would say that we're very, very happy with where the basic overall market is heading. It's in alignment with our thoughts. When you look at the heavy civil group, we certainly believe that the work we have on our books today is work, the work especially we've booked in the last two years is in alignment with our expectations. We also believe that we have covered our current challenges and future risks in the heavy civil group adjustments that we made in those four legacy projects that we announced on Monday.

So we will have some costs relative to, and I'm not going to call it necessarily restructuring, but remember, we're doing a strategic review on that business so that we are just focused on optimizing results going forward by reducing the risks and increasing the margins. And I don't see significant costs, but of course there will be some as we move forward, but we have embedded that, and when we give guidance, those costs are embedded in the guidance that we provided, Mike.

Michael Dudas (Equity Research Analyst)

Thank you for that, Jim. And my follow-up is for Dudas. As you look at, you know, given the charges and everything that you've discussed this morning, as you look at the balance sheet, how do you feel relative to cash generation second half of the year, given the outlook that you have and the fact that you're wrapping things up so quickly?

And your cash level on the balance sheet and cash flow, how comfortable do you have? Is there opportunities to allocate that capital in other ways, maybe to reactivate share repurchase? The board seems to see that fit.

Jigisha Desai (Senior VP and CFO)

Yeah, so let me address the cash flow question first. Our cash flow generation is dependent on the timing of the distributions of cash from these unconsolidated JVs. That's where some of our, I mean, lion's share of our cash is tied up. As Jim pointed out, you know, we do not expect any additional meaningful cash contributions for these legacy projects. So we are expecting our operating cash flows to be positive, barring any unforeseeable issues around these non-sponsored JVs. That said, you know, we also go through seasonality aspects of our cash cycle, and we tend to see the cash kind of dip at this level.

Between May and June, we probably hit the bottom, and then we start building our cash levels into third and fourth quarter. So that's pretty consistent with what's happening in 2019. And again, I think from a capital allocation perspective, as I mentioned during my remarks, you know, our strategy around capital allocation has not changed. That said, we're certainly going to be monitoring what's happening in the marketplace, and we'll be opportunistic. We do have $190 million of $200 million of share authorization in place, and we'll be opportunistic.

Operator (participant)

Thank you. Our next question comes from Brent Thielman with D.A. Davidson.

Brent Thielman (Equity Research Analyst)

Great. Thanks. Good morning.

Jim Roberts (President and CEO)

Good morning, Brent.

Brent Thielman (Equity Research Analyst)

Jim or Jigisha, could you clarify? I think you said $350 million is remaining from the JVs and CAP, and I guess I just wanted to bridge it.

I think in the last queue, you said somewhere around $900 million related to all of your unconsolidated JVs. I guess can you just update us on performance of the other jobs in there?

Jim Roberts (President and CEO)

Okay, so let me just focus a little bit here on the jobs that we've been talking about for the week here. The four unconsolidated jobs that were bid, we call them the mega jobs, that were bid between 2012 and 2014. You know, we can call them the problem jobs, the mega jobs that caused the large charge in this quarter. Those jobs have about $350 million or less million in our backlog and in our CAP going forward. We do have some other unconsolidated jobs, but they're smaller, and certainly they would be in addition to that amount, Brent.

I don't know, I don't have the number in front of me of the exact amount of backlog in those numbers, but overall, all the work in that portion of our portfolio is about $1.8 billion for the entire heavy civil group.

Brent Thielman (Equity Research Analyst)

Okay. And then I guess my follow-up, Jim, be curious, you know, the contracting dollars associated with SB 1, are they moving at the pace you expect now? I guess is the agency beyond some of the bottlenecks maybe previously seen to get this work out?

Jim Roberts (President and CEO)

Well, it kind of goes, you know, Brent, what happens with California, it kind of goes in lumps. And interestingly, the first half of the year was substantially higher than last year, which is good, which is what we expected. You know, even when I say that, even in 2019 this year, we saw our awards up about over 50%.

So that's really healthy. We also saw that we're getting a larger share of the California work, which that we had in previous years. So that's good. And it comes in, I'm going to say again, buckets. And right now, we see a large amount of work bidding in the second half of 2019 that they have released. The California Transportation Commission puts a list out. And so it's coming, I would say, as planned on an annual basis, but it's very lumpy during the year.

Operator (participant)

Our next question comes from Jerry Revich with Goldman Sachs.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Yes, hi. Good morning, everyone.

Jim Roberts (President and CEO)

Good morning, Jerry.

Jigisha Desai (Senior VP and CFO)

Hi, Jerry.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Can you give us a rough understanding out of the project write-downs this quarter, what proportion of that was to the single project that's only 60% complete versus the three others that are over 90% complete?

Can you say more about your review process this quarter? What triggered the review? You could certainly understand the comments on rainfall and litigation, but you know, this is a really big adjustment, and presumably you were contemplating making an adjustment last quarter to some extent, because I don't think I saw any big catalysts this quarter outside of the litigation. So maybe can you talk about your process there as well?

Jim Roberts (President and CEO)

Okay, so Jerry, first of all, what we don't do is talk about individual projects, because every one of these four projects is in some form of a dispute resolution process. And therefore, I really don't want to focus on how much of the charge was on the job that is only, I'll call it two-thirds complete, because I think we have work to do with that owner and relative to resolving disputes.

But what we do every quarter is we go through a detailed cost estimate to complete every job. And so this quarter was no different than any other quarter. We actually, by, I'll say, beginning of June, beginning of the third month, we go through an exhaustive detailed cost to complete. And the issues that occurred that were cumulative in these 4 projects were new issues that became apparent to us, I would say, by the time we had concluded our forecast by the end of June. And then obviously we had some resolutions and a dispute that we had a rendering of a decision in early July. So they're just standard protocol issues that we are doing every quarter on these large projects. And it just happened to be one of those quarters where we had a host of items that occurred at the same time.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Well, and you know, I appreciate the ongoing discussion with customers, but you know, the reason for the question is the implications for the stock are really different if a big chunk of the charges comes from a project that's only two-thirds complete versus the ones that are scheduled to reach completion this year.

Jim Roberts (President and CEO)

Yeah, I understand that, Jerry. And I will say this, that the project that is two-thirds complete, I will say we have a good relationship with the owner. We are working on continually working on dispute resolutions, and I believe that the work we're doing with that owner has progressed nicely in the last three months, in the last quarter. And we've got more work to do with them, but that is about the extent of what I think is appropriate to talk about on that job itself.

Operator (participant)

Next question comes from Alex Rygiel with B. Riley.

Alex Rygiel (Senior Managing Director)

Thank you. Good morning, everyone.

Jim Roberts (President and CEO)

Morning, Alex.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Jim, can you comment on July hours worked and weather related to June?

Jim Roberts (President and CEO)

Okay, so I don't have the hours sitting in front of me right now, but I will say this, Alex, it was healthy. It was a very busy month. Weather is in excellent shape as we've seen it for June and July, and especially July would be say weather was even less impactful to our business than June. And as I mentioned, you know, we really are working six- to seven-day weeks in almost all locations now. So July will have been a healthy month as well, but I don't have the man hours in front of me.

Alex Rygiel (Senior Managing Director)

And Jim or Jigisha, it looks like in the specialty business, margins were down in 2Q of 2019 versus 2Q of 2018.

I didn't hear you call out weather as an issue in specialty, so I was curious why margins might have been a little soft.

Jim Roberts (President and CEO)

Yeah, I don't know if I have an answer for that. The margins are actually pretty good in specialty. In fact, I think they're actually quite healthy, and there is no reason to suggest that there's any issues there at all. I think you're still in the mid-teens in specialty. So with that in mind, we had one location that we had a strike with a large customer that occurred for most of the quarter. That strike was resolved at the end of the quarter. That might have had some impact. I would suggest specialty businesses operating at a very nice level.

Jigisha Desai (Senior VP and CFO)

Yeah, I would agree that the mining activities were impacted as a result of some of the strike that Jim referenced.

Otherwise, I'm looking at the quickly here. I don't think anything that kind of jumps at it, but we can certainly dive deeper into that. And again, this is a, you know, specialty segment has been kind of like the potpourri, and it's mixed driven by diverse work of portfolio. So this one probably will fluctuate from a year to year or to quarter to quarter, depending on the completion of work.

Jim Roberts (President and CEO)

There might have been a little bit of weather on the specialty side, just as in everything else as well, Alex. But I do think it's a very healthy market.

Operator (participant)

Thank you. Our next question comes from Steven Ramsey with Thompson Research Group.

Steven Ramsey (Senior Equity Analyst)

Good morning. I want to delve into - good morning. Yeah, I wanted to delve into the alternative procurement space.

You know, maybe talk to how these projects are focused in certain geographies and if it's an expanding field to play in. Do you expect alternative procurement to hit in sectors outside of the transportation sector over time?

Jim Roberts (President and CEO)

Okay, so I think that that's a pretty broad question, Steven. I think it's a really good environment to talk about because the procurement delivery methods are changing across what I see in the U.S. It is not strictly a transportation issue. This is in general. What we're seeing is that as we saw this migration of projects to a larger size, we saw this huge risk shift over to the contractor. As Dudas mentioned about 10 years ago, contractors were willing to assume that risk, or at least the contracts mandated they assume that risk.

So in today's environment, what we're trying to—what we're seeing is that the owners and the contractors agree that we've got to get to the goal line in these jobs in a satisfactory manner that provides a product at the end of the day that is a win-win. And to do that, these alternative procurement methods allow you to expedite the process of the bidding and to reduce the risk. And I'll give you an example. The CM/GC, which is not just a transportation issue. This can happen in water. This can happen in specialty mining. It can happen with private sector. It can happen with public sector. But these alternative procurement methods are where you literally create an environment where the owner chooses the contractor in advance based on qualifications.

And then in a lot of these cases, we are literally either negotiating a price that the owner and the contractor agree to, or we actually do an open book estimate. And that open book estimate literally allows the owner to understand what the contractor has included in their bid. Therefore, as the job progresses, the owner knows whether or not a dispute is reasonable because they know whether or not that was anticipated at the time of the bid. And that's the biggest single issue I see today is that as things change on these jobs and they're fixed price jobs, that the owner assumes that the contractor had those inside their bid and the contractor didn't. And so the dispute arises and we have what we call construction claims.

So the idea here is to create a stronger relationship between the owner and the contractor at the very beginning and have a very open relationship. The key ingredient to the win-win in this industry is going to be when we do not have disputes at the end of the job. That is the bottom line, and that has to change in this industry. Progressive Design-Build, CM/GC, CM at Risk, and negotiated work are all better options than fixed price and then battle out the disputes at the end of the job. That process is not working.

Steven Ramsey (Senior Equity Analyst)

Thank you for the color. Then maybe to understand a little bit more the unfavorable court ruling impact, you said it happened in early July. Did that actually hit Q2 results?And maybe talk about the charges, you know, how much of that was due specifically to the court ruling?

Jim Roberts (President and CEO)

Okay, so Steven, we got the decision in the second week of July, and it was a bench decision. So in other words, the judge provided the ruling, and we did book it into the Q2 results. So as soon as we knew it, we were closing our books for the second quarter, and it was still, the books were still available to have the adjustment made, and it was significantly material to the company's financials, so we did book it in the quarter. Now, here's the reason I can't quantify it, or I can quantify it, but I'm not unwilling to share it right now, is that we have not seen the details of the ruling. And we are in the process.

Once we get that information, we will determine whether or not we believe it should be appealed or not. But until then, until we have all that information, we believe that it is probably in the best interest of the company in case we need to appeal it to kind of hold those financials close to our vest for the moment. But it is a material event, and when we have our books open, we still need to book those items if we have knowledge of it prior to actually the earnings, which is, you know, obviously now today.

Jigisha Desai (Senior VP and CFO)

So regardless of whether we decide to appeal it or not, we're required by the accounting rules to make the adjustments on our financials.

Jim Roberts (President and CEO)

As soon as we know about it.

Jigisha Desai (Senior VP and CFO)

As soon as we know about it. Thank you again as a reminder.

Operator (participant)

Please press star one to ask a question. Our next question comes from Joe Giordano with Cowen and Company.

Robert Jamieson (Analyst)

Hi, good morning. This is Robert in for Joe. Just looking at the legacy projects.

Good morning.The legacy projects that you took write-downs on, there were four different projects. I was wondering, one, how many other legacy projects are in your portfolio, and do you think they face similar risk? And also, have these projects been evaluated already as well? I have one follow-up.

Jim Roberts (President and CEO)

Okay. Okay, Robert. Well, we call these the four legacy projects because they were bid between 2012 and 2014. And we have, these are the only jobs that we have in our portfolio that were bid in that timeframe.

We also have isolated these four jobs because of the fact that they are all for over $1 billion, and they are all for unconsolidated joint ventures where we are a minority partner in each and every one of them. So there are no more in this category. Now, with that said, of course, we have a host more of large projects that we have in our portfolio that we bid after 2014. And certainly, starting in 2017, we have a whole new portfolio of the type of work that we've been bidding since then. And we evaluate these projects every single quarter in detail as to how they're performing. So every project, every other project in our portfolio has been evaluated in detail as of June 30th.

And just as a reminder, every forecast that we have in place is intended to cover all of the current challenges and future risks in them. So every one of those items has been covered. And just to reiterate, we really have no other projects that were bid from 2012-2014 in our portfolio.

Robert Jamieson (Analyst)

Okay, thank you. And then what gives you comfort that the current projects don't need to be adjusted further, or do you feel like the write-downs and everything that's been taken is enough to cover anything that might pop up in the future? Thank you.

Jim Roberts (President and CEO)

Yeah, we're confident that we have covered the current challenges and the future risks in the forecasts that we have provided for not just the four legacy projects, but for all of our work.

Operator (participant)

Thank you. Our next question comes from Michael Dudas with Vertical Research.

Michael Dudas (Equity Research Analyst)

Hi, Jim.Just two quick follow-ups. Thanks for taking them. First, I wanted to maybe elaborate on this new alternative project delivery and CM/GC work that you're doing. What gives Granite the competitive advantage to be successful in winning those types of work? Because it sounds like it's a type of a delivery project that, boy, everybody would like to do because it's not fixed price and it's open book and you can negotiate with the client. And how does that play out? And does that lead to the selectivity where you have to go to get those projects that meet what you can generate to the customer that you have the confidence to get the projects done on time and under budget?

Jim Roberts (President and CEO)

Sure, sure, Mike. And I think that really is the key question.

So it sounds like the process is great, which we do like the process because it creates the opportunity to have a better beginning pricing and relationship with the owner. And the key ingredient to these is to provide something different to the owner that not every contractor can provide. I'll give you an example. We mentioned this starting on Monday in our release that we focus on relationships. We focus on local labor pools. We focus on knowing the subcontractors and the vendors. We focus on knowing the owner's requirements and their specifications. And what we do is we literally have a, I'll call it a qualification process with them, and then we typically go through an oral interview. And the key ingredient is they're looking for a partner. This is a partnering approach.

And they want a partner that they feel comfortable with that has the resources to physically build their work, to create an environment to get the projects done on time at a high quality, and that can openly provide, I'll call it a path towards completion with a cost basis that is acceptable. These owners have a different approach toward business from the perspective of just throwing everything on the contractor. They want to get the job done, and they want to get it done in an entirely manner. What's happened in the last decade is that projects are coming in behind budget, behind timing, and over budget. And a big portion of that is because of the ongoing disputes that are happening between the owner and the contractor.

So this relationship not only talks about creating a stronger relationship, it provides open discussions to partner and making sure that the job success is the priority for both partners. And it's not about just being cheap. It's about finishing the job on time so that the owner can provide the product to the customer.

Jigisha Desai (Senior VP and CFO)

I was going to add, Mike, that there's a lot better collaborations on the risk-sharing discussion, which also happens on the front-end side because we've seen the shift from the owners to the contractor on a lot of these risks. So whether it's easements or permitting or environmental, all of those things have been much more discussed in advance and priced accordingly. And I think that's been the positive around the CM/GC procurement methodology.

Jim Roberts (President and CEO)

I think maybe, Mike, to address what makes Granite different is that we provide in the markets that we have strength. We obviously have very strong resources to bring to the table. They look at our labor, our history in the market. They look at the equipment we provide. They look at the resources, the physical resources of our materials businesses. And they also look at the bigger Granite to say that if they need to bring in additional resources beyond what they have in the local market, they can bring that in from other resources as well. So this is why we said in our discussion earlier this week is that where we have local strategic advantages is where we want to do our work. And it is very difficult to parachute in from an external environment and have advantages.

So we are going to be focusing on areas where this type of work the owner would like to have us because we're different and we have stronger resources.

Michael Dudas (Equity Research Analyst)

Jim, I just want one more question. I couldn't let the call end without you providing your recent thoughts with your political antenna out there on what's going to happen out of Washington, and is there any encouragement on what the EPW is doing, and is there a chance we get something maybe even for maybe 2020? You want to go call 2019? I appreciate to hear that.

Jim Roberts (President and CEO)

Okay, Mike. Well, you know, so my view on Washington, we'll talk strictly about transportation. Otherwise, we could talk forever, right, Mike?

Relative to the transportation, it's encouraging to see the Senate coming up with some, I'll call it a skeleton bill, which is a nice substantial increase from the current FAST Act. I personally don't see them coming to a conclusion, but I do think this skeleton approach towards getting the discussion started is imperative. I'll say this also. Having it coming out of the Senate is unusual. Usually, these things percolate up through the House, the Transportation and Infrastructure Subcommittee. Having the Senate take the lead on this thing really bypasses a step. But the key now to success is to get the House T&I Subcommittee to come up with something similar. And I think they will. But I think the key differentiator here that's going to cause this thing to lag is going to be obviously the funding mechanism.

I say this that when you look at what Illinois just did and they doubled their gas tax to provide and of the $45 billion overall bill, $33 billion is associated just with surface transportation. So they doubled their gas tax. I think what we're going to have to come to a conclusion with in D.C. is a very strong funding mechanism to get anything done. I believe we're going to get a full bill done before the expiration of the current bill. I think that's a win-win for both parties. It's a win for Congress. It's a win for the administration. It's a win-win for everybody to get something done. It's nice to see the work start already, Mike.

Operator (participant)

Thank you. Our final question for today comes from Jerry Revich with Goldman Sachs.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Yes, hi. Thank you for taking the follow-up. Jim, I'm wondering if we just go back to the other large projects that are in the book as we just build our comfort level around where they stand today. Can you just talk about what proportion of the remaining large construction work that we're seeing revenue burn now are for multi-year projects? Can you just give us a little bit more color in terms of the composition of the remaining book of business? I think last year, your large construction run rate was $1 billion. These four projects, I believe, were in the $350-$400 million range. So can you just talk about the remaining pieces and what kind of projects they are and what the duration?

Jim Roberts (President and CEO)

Sure. I think our run rate is at a similar rate overall, but I will say that the composition has changed. Outside of these four legacy jobs, really the jobs are smaller. They're faster burn, but they end up probably having a similar revenue cadence that we had historically. Also, Jerry, we're starting to see more of that, and I'm going to call it large project portfolio in our, what we would call typically our vertically integrated businesses. And some of that is CM/GC and CM at Risk work. And so we're seeing that being built by our local businesses in the committed and awarded projects. So smaller work, negotiated. The largest job that we have on our books that we put on our books in the last two years was a negotiated job. And so.

Jigisha Desai (Senior VP and CFO)

With a private owner.

Jim Roberts (President and CEO)

With a private owner. Good point, Jigisha. And they're all Granite-led.

I don't think we have put anything into our backlog in the last 2 years that is not a Granite-led or a Granite sole venture project. So on top of that, of all that work, we have $1.6 billion of the backlog or the CAP is now negotiated work. So it's different work than those 4 legacy projects. I mean, it's substantially different work.

Jerry Revich (Managing Director and Senior Equity Research Analyst)

Okay. Thank you for the color. And then in terms of getting back to the mid-teens growth and all the things that you talked about, what timeframe did you have in mind? And what's the top line base that we should be thinking about since we will no longer be competing for these types of projects that I believe on a trailing basis are somewhere in the $400 million revenue range?

So is it as simple as reducing the size of the opportunity set by $400 million and the mid-teens gross margins on the remaining business, or can you frame that for us at all?

Jim Roberts (President and CEO)

Well, if I understand correctly, Jerry, let me talk about two things. The cadence of the margins first. I think we've been, we believe that by the end of 2020, that we will be approaching the mid-teens margins in this part of the business. And that part, we can still, is still consistent. I don't think that the smaller jobs that we're bidding is going to change the overall top line. The top line is really a, I'll call it a product of the burn rate. And so although we're bidding smaller jobs, we put more smaller jobs into the portfolio. They burn faster.

They still create the top line that we have talked about historically and going forward. And so I don't see that changing. But I think that you're seeing that as our cap continues to increase, that there's a more diverse portfolio of smaller work. But remember, we've talked about this for several quarters now. We believe the most valuable work is the faster burn work for a host of reasons. First of all, it does generate very quick top line and bottom line, but it also is less risky because it's easier to bid and project out cost on a shorter-term basis. We certainly have found that out with these legacy projects. Trying to price out work that takes 5-7 years is obviously very, very difficult to do.

So this quicker burn work will create a very similar top line, and it'll probably take us through the end of 2020 to get back to the mid-teens market.

Jigisha Desai (Senior VP and CFO)

Yeah, Jerry, the other interesting part is that for the last 3 months in a row, we've seen our bidding schedule for jobs less than $150 million of anywhere around $1 billion a month. We're bidding about $1 billion worth of work, which is a huge change from the prior year because that small amount of work that we used to do, that used to be worried from somewhere around $450 million to $350 million to $500 million. So we've seen a complete flip into the dynamics of our portfolio of the smaller jobs, and we're pursuing those instead of going after these $800 million or $1 billion jobs. And I think that's been a shift in our portfolio bidding.

Jim Roberts (President and CEO)

Yeah, I think that to really emphasize that, Jerry, as I go around Granite, we go to our town halls. I've been doing this now for quite some time, and I remember putting up on the screen the monthly bid lettings for our normal work outside of our larger projects, and it was down to about $250 million a month. And now for the last three months, it's been right at $1 billion. So the market is flush. And I do think that was Jigisha's right on. That is going to be the core driver of our growth and our steady lower risk portion of our portfolio, which is by far the vast majority of our cap today.

Operator (participant)

Thank you. This is the end of our Q&A. I would now like to turn the conference back over to our host for closing remarks.

Jim Roberts (President and CEO)

Well, thank you, everybody, for your questions.

A quick note for our shareholders and investors. Jigisha, Lisa, and I will be on the road and at conferences visiting our operations and investors around the country throughout the second half of 2019. So please reach out to Lisa, and we will look forward to speaking with you and meeting with you. As always, thank you to all of our employees for keeping your fellow workers safe and for exhibiting Granite's core values every single day. As always, Jigisha, Lisa, and I are available for follow-up if you have any further questions. Have a great day, everybody. Thank you.

Operator (participant)

Thank you. The conference is now concluded. We appreciate your attention. Have a good day.