Granite Construction - Q4 2018

Transcript

Operator (participant)

Good day, and welcome to the Granite Construction fourth quarter 2018 earnings conference call. Today's conference is being recorded. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then 1 on your telephone keypad. To withdraw your question, please press Star then 2. I would now like to turn the conference over to Mr. Ron Botoff. Please go ahead.

Ron Botoff (Head of Investor Relations)

Welcome to the Granite Construction Incorporated fourth quarter and fiscal year 2018 earnings conference call. I am very pleased to be here today with President and Chief Executive Officer, Jim Roberts, and Senior Vice President and Chief Financial Officer, Jigisha Desai. We begin today with an overview of the company's safe harbor language. Some of the discussion today may include forward-looking statements. These forward-looking statements are estimates reflecting the best judgment of senior management and current expectations regarding future events, occurrences, circumstances, activities, performance, outcomes, and results. Actual results could differ materially from the statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements, whether the result of new information, future events, or otherwise.

In October 2018, the company filed an 8-K, which provides a quarterly and annual look back and mapping of our reportable and market-focused segments. Our fourth quarter and fiscal year 2017 and 2018 results reflect this reporting. 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, adjusted earnings per share, and backlog. Please note that, as applicable, these metrics exclude nonrecurring acquisition-related expenses and one-time integration costs associated with the acquisitions and integrations of Layne Christensen Company and LiquiForce. Reconciliations of certain non-GAAP measures are included as part of our earnings press release, as well as in company presentations, all of which are available on our investor relations website, investor.graniteconstruction.com. Thank you.

Now, I would like to turn the call over to Granite Construction Incorporated, President and Chief Executive Officer, Jim Roberts.

James Roberts (CEO)

Thank you, Ron, and good morning, everyone. Thank you for joining us to discuss Granite's 2018 performance and our outlook. 2018 was a significant year of growth and evolution for Granite, and today we are extremely well positioned to execute the next phase of our strategic plan. About this time last year, we took a major step forward with the announcement of the Layne Christensen acquisition. This acquisition highlighted our end-market-focused path for growth and diversification. With the subsequent completion of the LiquiForce acquisition, our integrated growth strategy for the water rehabilitation market gained even more traction. By completing these strategic acquisitions, we expanded our sound platform for growth that drives Granite's diverse portfolio as America's infrastructure company. 2018 proved to be a year of significant evolution for a company that is nearly a century old.

Granite teams proved that they were up for the challenge and successfully integrated our new acquisitions and proudly shared our core values as we united these new businesses into our portfolio. We congratulate our legacy operations for record 2018 safety performance. Our strong safety culture was enthusiastically introduced to and welcomed by our newly acquired businesses. Today, we continue to align our new teams with Granite's nine core values, defining expectations and prioritizing safe work strategies to ensure all Granite employees return home safely every single day. We continually strive to reach zero incidents in any given year, and we are rapidly nearing our zero goal.

Certainly, we are cognizant of the macroeconomic data points that have created global economic growth concerns, but the green shoots across the end markets in which we operate continue to point to steady growth for Granite from healthy, public, and private market demands. As recently noted, current market conditions remain the best we have seen in more than a decade. Before I hand the call to Jigisha, I want to spend a few minutes providing a high-level view of our 2018 results and our strategic outlook. As we saw throughout much of 2018, operational and financial trends held up until wet weather began impacting our business in late November. Notably, after mild weather allowed for a particularly strong fourth quarter in 2017, winter rains came much earlier this year.

The erratic wet weather for the last six weeks of the year slowed much of our business in the West. Similar to early 2017, Mother Nature's influences carried forward into the first couple of months of 2019, slowing the start of work on our historically high backlog and rapidly accelerating committed materials volumes. We will continue to emphasize bidding discipline and the critical earnings leverage it creates. Even with the late-season weather slowdown across much of the West, revenue, profitability, and earnings improved significantly in 2018, and we expect 2019 to be another year of significant top and bottom-line expansion. Despite the late-year negative weather impact, revenue increased 11% in 2018, reflecting the balance of new acquisitions, strong demand environments, and a critical focus on improved profitability. The profit performance of our acquired businesses beat our expectations, generating solid incremental margin contribution.

Overall, in 2018, Granite achieved a nearly 24% company gross profit increase, 144 basis points of adjusted EBITDA margin improvement, and 49% adjusted net income growth from the previous year. Granite's strategic plan to concentrate on end markets for growth and diversification is alive and well. Diversification is also a critical driver of recent success and opportunity. Our results illustrate the benefits of four areas of focus, strategic themes that we have discussed for quite some time. First, diversifying the sources and drivers of our revenue funding. Second, emphasizing new but related end market growth opportunities. Third, diversifying our customer base with private market focus. And fourth, de-risking our project portfolio with increased pricing, higher revenue velocity work, and lower-risk projects with generally shorter durations.

As we march into 2019, we will continue to focus on these areas to drive improved results and growth across Granite's broad footprint. We are actively engaged in enacting our strategic plan. We are reviewing potential bolt-on targets, as well as more transformative opportunities for geographic expansion of Granite's vertically integrated model, and we also are continuing to explore diverse targets to grow our end market focus segments. Granite's strategic plan is built upon our belief that a diversified end market focus is the most appropriate way to balance growth and risk opportunities for our business, and we are particularly pleased that this intentional portfolio shift already is producing results and uncovering future opportunities. Importantly, recent project procurements are decidedly positive, with our procurement strategy and backlog composition becoming more aligned with our strategic plan.

Recent construction manager, general contractor, or CMGC wins in California and Utah add to a growing roster of best value projects on which we have focused our procurement efforts, emphasizing balanced risk and consistent returns in our transportation segment and across the company. This new CMGC negotiated work aligns perfectly with Granite's footprint and with our capabilities. This procurement method allows Granite to win a project based purely on its qualifications and the value we add to the project delivery process. We expect to pursue more than $4 billion in CMGC-type negotiated work in 2019 across the nation, including nearly $1 billion in California alone. This work provides critical new balance to our transportation segment portfolio as we work to complete and mitigate the impact of three legacy unconsolidated joint venture projects. Two of these three mega projects are nearly complete.

We only have one challenged legacy project below 90% complete today, and we remain steadfast in proactively limiting risk and improving performance wherever possible. The bidding environments in Granite's water and specialty segments also are healthy, supported by steady public and private market demand. The environment is expected to allow teams to continue to build backlog, pointing to meaningful segment growth in 2019. We are focused on winning work that we are well-positioned to efficiently execute, targeting local, regional, national, and international opportunities, including work and operations in Guam, Canada, and Mexico. With those moving parts in mind, our core legacy operations, especially our vertically integrated construction and construction materials operations, continue to plan for growth and to raise the bar on execution and profitability in what we view as a healthy growth environment for the foreseeable future.

We took strategic actions last year that drove results in 2018, but more importantly, positioned Granite for success in 2019 and well beyond. Increased bidding discipline and an emphasis on alternative procurement negotiated work within our healthy and growing segments of transportation, water, and specialty have provided a backlog of improved margins, coupled with lower associated risk. The activity level across end markets and geographies remains buoyant and supportive of our top and bottom line growth expectations. Today, our bookings and project pursuits reflect an intentional strategic shift in end market diversification, portfolio de-risking, and portfolio mix, with improved returns tied to a better balance of project duration, pricing, location, project burn, and procurement-type considerations. With our emphasis on disciplined pricing and profitability, our win rates have declined modestly, as anticipated, but we are bidding considerably more work, and our project, revenue, and profit outlook continues to improve.

Granite is extremely well positioned to continue to flourish and to grow, delivering on our vision as America's infrastructure company. With that, I hand it over to Jigisha with details on our results and our 2018 outlook. Jigisha?

Jigisha Desai (CFO)

Thank you, Jim, and good morning, everyone. Today, let's start with 2018's fourth quarter, where revenue totaled $892 million, up 11.4% from last year, with gross profit up 7.3% to $108 million. Excluding the impact of acquisition-related expenses, fourth quarter 2018 adjusted net income totaled $23.6 million, or $0.50 per diluted share. For 2018, revenue was $3.32 billion, up 11% year-over-year, with gross profit up 23.6% to $389 million, and with consolidated gross profit margin improved by nearly 120 basis points.

Excluding the impact of acquisition-related expenses, 2018 adjusted EBITDA increased 39% year-over-year to $236.5 million, with adjusted EBITDA margin of 7.1%, a more than 140 basis point improvement from last year. 2018 adjusted net income increased nearly 49% year-over-year to $102.8 million, or an adjusted $2.34 per diluted share. Our scalable cost structure continues to produce results. While second half in fiscal 2018, SG&A increased year-over-year, the increase was driven almost solely by the impact of higher overhead costs from our recently acquired businesses. Excluding the impact of acquisition-related expenses, legacy SG&A expenses were in line with 2017.

SG&A expenses were $79.4 million or 8.9% of revenue. Fiscal year SG&A expenses totaled $272.8 million, or 8.2% of revenue, compared to 7.4% of revenue a year ago. As noted, this increase is attributable to the acquired businesses. Granite's balance sheet remains strong, with more than $300 million in cash and marketable securities at the end of 2018. We continue to target improved working capital and cash flow trends, which allows us to maintain our strong capital structure and execute our strategic plans.

In addition to our regular quarterly dividends, Granite also returned value to shareholders through the repurchase of more than a quarter million of our shares in the fourth quarter, investing $10 million as part of $200 million stock repurchase authorization. Integration of both the LiquiForce and Layne businesses is progressing very well as we anticipate material completion by the end of second quarter. I'm pleased to report that our deal date announced annual run rate synergy estimates are tracking better than our original $20 million estimate. Our teams have come together very well and implemented best practices across integrated operations and enhanced efficiency in our functional support areas. A key component of our plan involves rationalization and an investment in both core and non-core assets.

As part of our portfolio management and capital allocation planning, Granite divested the former Layne Water Midstream business in the fourth quarter. Our M&A activity in 2018 has enabled Granite to align our strategic outlook with our end market focus on growth, profitability, and risk-weighted returns. Wrapping up the consolidated results discussion, total contract backlog was $3.69 billion at the end of 2018, down slightly year-over-year. But this figure does not include approximately $700 million of previously disclosed CMGC projects, which will enter transportation segment backlog as task orders are approved. Next, let's move to our segment performance. We began today in the transportation segment, where markets are stable and improving, fueled by strengthening long-term public funding trends and by consistent private, commercial, and industrial demand. Wet winter weather had a significant impact on our year-end operations.

In the fourth quarter, transportation segment revenue decreased 3.8% year-over-year to $504 million. In spite of the late year drag, full-year segment revenue increased to $1.98 billion, up 1.5% from last year. Quarterly gross profit increased 2.8% year-over-year, with a gross profit margin of 10.2%, up 66 basis points from last year. We created solid leverage in this segment, with a gross profit increasing 11.7% in 2018, and a gross profit margin up 88 basis points year-over-year to 9.6%. Both fourth quarter and 2018 results include negative forecast adjustments on certain legacy unconsolidated large projects attributable to increased visibility into costs as these projects near completion.

As we begin 2019, only one of our three challenged legacy projects is less than 90% complete. Transportation segment backlog decreased 1.9% year-over-year to $2.82 billion, not including the $700 million of CMGC projects we have discussed. Market opportunities remain robust as we patiently reshape our transportation project portfolio while pursuing disciplined strategies that balance project risk dynamics reflected in our improved fourth quarter and annual segment results. Let's move now to the water segment. Here, we're expanding Granite's leading edge for growth, further developing our presence in attractive water and wastewater markets, and our newly acquired businesses are delivering promising incremental revenue and profit performance. Water segment revenue increased significantly year-over-year, with the inclusion of acquisitions both on a quarterly and on an annual basis.

In the fourth quarter, revenue increased more than 270% to $122.3 million. Water segment revenue increased 153% to $338.3 million in 2018. Quarterly gross profit increased to $18.5 million from only $2.5 million last year, with gross profit margin of 15.1%, up nearly 750 basis points from last year. Full-year gross profit increased to $59.6 million from $12.3 million last year, with gross profit margin of 17.6%, up nearly 850 basis points from 2017.... year-over-year profit improvement is tied to solid execution on projects in the healthy market we target in the water segment.

Recent acquisitions contributed to a significant backlog increase year-over-year to $239 million. The segment's bidding environment remains robust against a backdrop of steadily increasing water infrastructure funding at the state and local level. Let's move now to the specialty segment. As you are aware, specialty is Granite's incubator of sorts, including tunnel, renewable energy, and site development, in addition to logistics, transmission and distribution of power, materials management, and a broadening portfolio of mining activities. In the fourth quarter, specialty segment revenue increased 1.2% year-over-year to $165.5 million. On a full year basis, segment revenue increased 1.8% to $626.6 million.

Quarterly gross profit decreased 16.7% year-over-year to $25.6 million, resulting in gross profit margin of 15.5%, as fourth quarter wet weather negatively impacted both site development and mining work. Full year gross profit increased 3.9% year-over-year to $90.9 million, with gross profit margin of 14.5%, up about 30 basis points. Both revenue and profit growth were driven by solid execution on a diverse portfolio of work. In 2018, tunnel, site work, and mining drove improved results, while power and renewable energy delivered less contribution on a year-over-year basis. Specialty segment backlog ended 2018 at a healthy $545.6 million. Moving now to our materials segment.

In the fourth quarter, materials segment revenue increased 24.2% year-over-year to $100.5 million, and full year revenue increased 28.7% to $376.8 million. Revenue growth was driven by healthy external demand related to stepped up external sales efforts, and from the mid-2018 addition of the acquired Lane Christensen subsidiary, Liner Products, which represents about 10% of overall segment revenue. Quarterly gross profit totaled $12.4 million, with gross profit margin of 12.3%. Fiscal year gross profit increased 8% to $48.7 million, as segment gross profit margin finished at 12.9%, down about 250 basis points from last year. Performance was driven by improved external market demand throughout 2018.

Late 2018 weather impacts slowed segment performance, as internal and external sales were delayed due to ongoing wet weather in the West. With committed materials volume well above last year's level, sales and business performance will accelerate and begin correcting as weather improves. Increased demand and volume will contribute to consistent, improving margin performance that will help us achieve our target returns in this segment. With that, let's discuss our outlook and some additional assumptions that guide our view. We continue to focus on opportunities for efficiencies and reductions in higher overhead levels of our recent acquisitions. We will continue to rationalize targeting current portfolio SG&A as a percentage of revenue back to our stated target of 7.5% over the next couple of years.

We anticipate capital expenditure of between $110 million and $125 million, or approximately 2% of revenue in 2019, and depreciation and amortization is expected to total between $130 million and $150 million, including the amortization of intangibles related to our recent acquisitions. Our effective tax rate in 2018 was 16.2%, driven by a decrease in the tax rate due to the impact of tax reform enacted in December 2017. The rate also includes impact from adjustments to the tax reform provisional amounts recorded in 2017, which was partially offset by one-time, non-deductible acquisition and integration expenses incurred in 2018. In 2019, the tax rate is expected to normalize to a low to mid-20s percentage range.

Our annual expectations for 2019, including the full year contribution of 2018 acquisitions, are low teens consolidated revenue growth and adjusted EBITDA margin of 8.5%-9.5%. Now, before we take your questions, let me turn the call back to Jim.

James Roberts (CEO)

Thank you very much, Jigisha. As a note, the guidance that Jigisha just provided anticipates a second consecutive year of better than 30% improved operating performance, as we see strong growth opportunities both in top and bottom line performance for 2019. Growth opportunities that for years were on the horizon are now at our doorsteps across the end markets and geographies that we serve. Defeat of the Proposition 6 ballot measure in last November's California election marked an important point in infrastructure investment. This is something of an inflection point for public spending, beginning to spur significant growth opportunities in our transportation segment....

Preservation of the 10-year, $52.4 billion Senate Bill 1, the Road Repair and Accountability Act of 2017, better known as SB 1, funds critical repairs, maintenance, and improvement of California's transportation system, providing improved safety and quality of life across the state. Notably, SB 1 is just one of more than two dozen state and local transportation and infrastructure measures passed since 2015 across the country, including Utah, Washington State, California, Illinois, and Indiana. With these public spending commitments serving as significant resources for Granite's growth and profitability for years to come. It's worth noting that SB 1's more than $5 billion of incremental annual funding does not sunset. We anticipate significant stepped-up funding in 2019.

Measure M in Los Angeles, along with other local measures passed in California in 2016, now are providing at least $3.5 billion in incremental annual infrastructure investment at the local level. The Sound Transit measure in Washington state is another $50 billion long-term infrastructure program for the Puget Sound area, and Sound Transit's program is incremental to the state's 16-year, $16 billion Connecting Washington Transportation plan, passed in 2015 and funded primarily by a gas tax increase. Our procurement strategy is taking hold as we continue to emphasize pricing discipline in a market that we believe is full of pent-up demand as we continue to build backlog across the company. Strong demand trends also are evidence of growth opportunities for our growing water segment.

Water segment backlog increased significantly in 2018, and the bidding environment remains healthy against a backdrop of steadily improving state and local water infrastructure funding. We do not see the dynamics of this robust market slowing down for Granite in the foreseeable future. At the federal level, programs such as America's Water Infrastructure Act and State Revolving Funds for clean water and drinking water are in place, but today they only provide a framework. Now, funding must expand significantly to meet the seemingly endless demand that aged, crumbling infrastructure provides. It may surprise some, but our optimism is growing, that our country is poised to invest significantly in domestic infrastructure. At the state and local levels, funding trends are improving, and now we are increasingly optimistic that infrastructure investment is an opportunity for the elusive political agreement that will produce significant incremental and long-term funding solutions.

Discussions and conjecture point to infrastructure as the most logical area of agreement in Washington in 2019. We anticipate that a deal will be struck. Our growth outlook for 2019 does not include a federal infrastructure bill, which, if passed, immediately, would enhance long-term stability in the overall market, while adding to additional growth prospects beginning as early as late 2020. Our teams are prepared for a strong recovery, and we expect this solid demand will accelerate activity in 2019. This year's outlook includes the impact of current winter weather, which, along with strong backlog, has created a springboard for strong growth when inclement weather finally subsides. As America's infrastructure company, Granite is extremely well positioned to be opportunistic, even while emphasizing discipline in what we view as early to mid-cycle growth end markets.

This balance will produce top and bottom-line growth in 2019 and well beyond, delivering exceptional value for our key stakeholders. With that, everyone, we will be happy to take your questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. That's again, star and then one to ask a question. We will take our first question from Alex Rygiel, B. Riley FBR. Please go ahead.

Alex Rygiel (Analyst)

Thank you, and good morning, everyone.

James Roberts (CEO)

Good morning, Alex.

Alex Rygiel (Analyst)

Jigisha or Jim, when do you expect the last project that's below 90% complete to be finished?

James Roberts (CEO)

Oh, that project will probably take 2-3 more years.

Alex Rygiel (Analyst)

Okay. And then could you possibly quantify the fourth quarter adjustments from all of the legacy projects?

James Roberts (CEO)

Well, I don't have it just as the legacy projects. I will tell you this, that the large projects themselves, the bottom line performance of large projects have improved from Q3 to Q4. As we have stated, the impact is starting to be reduced on a quarter-to-quarter basis. And so therefore, as the transportation segment produces results going forward, we're looking at it getting better and better over the next several years as these projects start reducing in size.

Alex Rygiel (Analyst)

Is there any way you could attempt to quantify the impact from weather across your business, either from business lost on a revenue basis or impact to EBITDA?

James Roberts (CEO)

Yeah, you know, that's an interesting one, Alex. You know, that certainly depends on what it could have been, and during the best situation, if we had no weather impact for the last 6 weeks versus, you know, by being impacted. It's substantial. You know, we've talked about somewhere on the bottom line, you know, it could have been even, you know, $0.15-$0.20 a share at the end of the day, on the bottom line adjustment, and it could have been, you know, more or less, kind of, depending on the weather in general. If it's dry all the way through Christmas, we tend to just keep moving along, and it could be substantially different than what it was.

Alex Rygiel (Analyst)

And lastly, in your third initiative, could you expand upon the opportunities and what you're looking at in the private sector?

James Roberts (CEO)

Well, okay, so the private sector, we've, we've built up a lot of activity in the commercial and the industrial sectors. We really never found a lot of rebound in the, in the residential sector. So from a private market demand, we've highlighted a lot of high-tech companies that we are working directly with all over the Western U.S. today. On the industrial side, we're working on the rail side with the major rail companies. We're working into the refining businesses. So both of those sectors are quite healthy, and we have quite a nice backlog going into 2019 in both those areas.

Alex Rygiel (Analyst)

Very helpful. Thank you very much.

James Roberts (CEO)

Thanks, Alex.

Operator (participant)

We will take our next question from Michael Dudas, from Vertical Research. Please go ahead.

Michael Dudas (Analyst)

Good morning, gentlemen. Jigisha.

Jigisha Desai (CFO)

Hey, good morning.

James Roberts (CEO)

Good morning, Mike.

Alex Rygiel (Analyst)

Good morning, Mike.

Michael Dudas (Analyst)

Jim, let me share some thoughts on backlog. Year-end 2018, in your backlog segments, how did the current in backlog margins look relative to what you had ending 2017 and 2016? And maybe how you look at Layne and LiquiForce relative to your due diligence back in 2016, 2017, to where they are with the potentials going forward. And on that, how much are we gonna see? It sounds like a shorter duration, more book-and-burn type business. Will we see that as we move into the, you know, the needy part of, of the revenues and the business activities move to this, middle part of the year? And is that across the board in the segments or just primarily in the transport side?

James Roberts (CEO)

Okay, Mike, I'm gonna slow down there on three different areas, and if I miss something, please just remind me, okay?

Michael Dudas (Analyst)

Thank you.

James Roberts (CEO)

Relative to backlog. The backlog, there's no doubt, Mike, that the backlog is healthier than it was in 2017 and 2016. It's getting better and better. Certainly, by burning off some of the large project issues that we've had, with having a smaller portion of the backlog in those projects, automatically makes it better. But adding to that, as we've increased our margin expectations, certainly on the work that we've procured over the last 12 months, that margin has increased. And adding the water segment in, as you can tell from the results stated in the release, you know, the water segment continues to operate at a higher gross margin than any other segment. So our backlog that we have today is with a much healthier margin than in previous recent years.

So I hope that answers that question. Layne and LiquiForce are absolutely progressing as planned, very well. I'm gonna let Jigisha talk a little bit about the integration, but I will tell you, out in the field, Mike, you know, from an earnings perspective, I can't tell you how excited I am. I look at the lining business, and you'll see we had a press release yesterday. We're getting not only mainline work, we're getting lateral work, we're bidding work all over the country. On the mineral services side, you know, the mining, precious metal pricing has stayed stable, and we're seeing quite a nice backlog of work in the mining area.

And then in the, you know, the drilling business, that goes up and down, and the industrial municipality environments are strong on the drilling side. So I think you're gonna see Layne and we call it now, Water and Mineral Services in Granite. That's gonna be a very healthy environment on margins. And then maybe, Jigisha, you can add a little bit about the integration.

Jigisha Desai (CFO)

Yeah. I think the integration of both companies is going extremely well. You know, a lot of some of the short-term issues related to personnel and all had been addressed in 2018. And then we're really focused now on integrating the kind of back office system integrations, and we expect that a majority of that will be done by the second quarter of 2019. We are reinvesting in the business. It was somewhat capital-starved, and we're definitely reinvesting in the business. And as Jim pointed out, the gross margin, you know, the profit profile with... They do a lot of small jobs, so it's a quick burn type of work. So from a portfolio diversification, it's really been a positive contribution to the overall.

James Roberts (CEO)

Yeah, and the margins are actually helping the overall margins of the company.

Jigisha Desai (CFO)

Exactly. Yeah.

James Roberts (CEO)

If there's anything there that we're working on, Mike, that we noted a little bit in the script was that we are starting to work hard on our SG&A.

Jigisha Desai (CFO)

Yeah.

James Roberts (CEO)

Which is probably the one area that will move past the middle of the year, as we continue to migrate the way that we manage our businesses from an SG&A perspective into the water segment and the specialty segment of WMS. But overall, I'm just, we're really happy we beat expectations going into the year, and we're excited about where it's going. Now, the last thing you mentioned was a project burn. So smaller work, quicker burn, that is one of the things I've mentioned over the last three or four quarters, Mike, that has basically lowered the overall backlog.

Although I will say that obviously, we had a nice fourth quarter, and we have a very healthy backlog, despite the fact that the smaller work doesn't necessarily show up in backlog because it gets burned so fast. So what you'll see coming out of the gate here in the spring, and hopefully soon, will be that we will be hitting it hard on a lot of our local water, smaller burn work, and the intent there would be to ramp up faster than we have historically on the revenue side, because of the fact that this stuff is shorter duration. We literally calculate revenue per day, margin per day on these jobs to try to optimize a quicker burn and higher margins on a per day basis. So we should come out of the gate pretty strong.

Michael Dudas (Analyst)

That's very helpful. My follow-up, Jim, is twofold. One, with all the expected SB 1 revenues, funding, projects, you know, local, state, and, you know, counties wanting to spend the money, how's Caltrans and other local officials able to, like, kind of get through these projects, get the bids out and lets out? Is there gonna be any issues with that over the next coming years? Is... Are the states prepared to get the work that's required? And then, and on top of that, any implications or thoughts relative to high-speed rail cancellation that was just announced, and any direct impact or indirect impact because of that, towards the California civil construction market? Thank you.

James Roberts (CEO)

Sure, sure. Let me go high-speed rail first, and let me get into it, then let me talk about the broader, procurement strategy, I would say, of the states, the state and the local entities. High-speed rail is something that, you know, as, as you may know, we have not been a participant, directly in high-speed rail. We bid the very first project out about 4 or 5 years ago, where we were not close on it. It went far, far, below our number, and so, so we've stayed away, from high-speed rail. Now, with that said, you know, most of the major general contractors that are building high-speed rail are not people that we compete with on a day-to-day basis in the transportation segment, in the state of California.

So I don't see whether or not high-speed rail gets canceled or slowed down, delayed. First of all, I anticipate the contracts that are underway will be completed. And therefore, those contractors, and most of them are from ... I think there's one that's an in-state contractor, but doesn't really follow in the transportation segment, and all the rest of them are somewhat international or out-of-state contractors. I think what you're gonna see is they're gonna, they're gonna pack their bags and go somewhere else, where they can go do some large design build work, if the high-speed rail slows down. So I don't see it having an impact on Granite at all. I don't see the competitors in the transportation segment, changing their strategy. They really have not been a strong part of high-speed rail, to date.

So we'll see what happens politically, you know, whether or not California refunds money or they build the next phase or not. I think that's, that's all you have left to conjecture at this point. Now, back to the overall state, lettings, you know, Mike, it's a really good point. You know, there was a lot of concern originally when SB 1 hit the street, that the state of California could not design the work fast enough to put on the street. And as we know, most of the design work done in the state of California is done by the professional engineers group of the state of California. They do their own in-house designs. So with that said, what they did was they targeted maintenance work first, so, so which is really good for Granite.

So they, they took a big chunk of the monies that they would be employing in 2018, 2019, and maybe even 2020, to start upgrading the maintenance, which is the large asphalt overlays, the concrete work, the rehabilitation jobs, while their design folks could get design on large capital projects underway and completed. So with that in mind, at the state level, I think you're gonna see more maintenance work outbidding in 2019, which we already are seeing, by the way, and slight widenings and overlays and things of that nature while they do the big design work. At the local level, interestingly enough, they've had a pent-up demand for a lot of these improvement projects for many years, and what they do is they go to the external market to do their design work.

So they will be able to move a little faster to get their capital improvement projects out on the street. We've never seen a problem at the local level of when they pass a local measure of them getting the money out on the street within the next 6-9 months. They've always figured out a way to do that, and they're already doing that as well. So I don't see the local monies being an issue at all. Then I see the... There'll be maybe a little delay in capital projects, which will be offset by maintenance projects at the state level.

Michael Dudas (Analyst)

Jim, thank you. So very helpful. Thank you very much.

James Roberts (CEO)

Okay.

Operator (participant)

You're welcome. We will take our next question from Steven Ramsey, from Thompson Research Group. Please go ahead.

Brian Biros (Analyst)

Hey, good morning. This is actually Brian Biros on for Steven. Thank you for taking my question.

James Roberts (CEO)

Hey, Brian.

Brian Biros (Analyst)

I wanted to ask about SB 1 funding in fiscal year 2019. I believe it's kind of the first full year for the funding. And if you can provide some color on how soon you think those dollars will actually flow into lettings, and any color on the type of projects that might come from those, would be helpful?

James Roberts (CEO)

Okay. First of all, you know, this fiscal year, it's ramped up to well over $4 billion, where last year was about $2.5 billion. So first of all, there's a significant ramp up in the SB 1 monies in 2018, 2019 fiscal year compared to the 2017, 2018 year. And interestingly enough, Brian, you know, as I mentioned to Mike a few minutes ago, the work is hitting the street. It hit the street pretty nicely in January and now in February. We saw somewhat of a delay up until the Prop 6 vote, you know, on November 6 last year. And then after that, a little slowdown during the holidays, with everybody knowing that the work was gonna hit the street.

What is happening is, as I explained, it's maintenance projects. And these are projects that use Granite materials. So it's the asphalts, the concretes, it's the widenings. And it's the work that the state of California can show that they are spending the monies, the gas tax monies, you know, in a proficient manner, and they're getting the work on the street now. January and February were both very nice bidding months for the state of California. I don't see it slowing down at all as we move into the spring months and into the summer. I will say this: I think as we end 2019, you're going to see more of the capital improvement projects starting to hit the street, the big intersections, the interchanges, some of the larger work.

Now, the other thing that's happening is that they are obligating monies into some of their CMGC projects, which is certainly a nice alternative, as I mentioned, and Jigisha mentioned earlier, and we've been quite successful on those, as we've stated. And so they are allocating money to the CMGC jobs. And, and the way the CMGC jobs work, is that we were in the process today of negotiating some of that work with the state of California, that we've been selected to build, and, it will come out in task orders. So if it's a $100 million job, they might come out in $30 million task orders. It'll probably be built in the same kind of burn as you might expect a $100 million job, but it will be awarded in $30-$40 million task orders. That's happening already as well.

So, so those CMGC jobs will start burning here by mid-year, let's say, and then the maintenance work is bidding today, and you'll see the capital improvement projects probably starting in a strong sense, and I'm gonna just throw out the end of the year, knowing that the engineering and design work has to be completed.

Brian Biros (Analyst)

Thank you, Tyler.

James Roberts (CEO)

Thank you.

Brian Biros (Analyst)

Quick follow-up, I guess, regionally, in the past, I believe, you talked about strength coming out of the Southeast. If you could share any specific states you're seeing increased work there, and specifically, the type of projects in those states that are kind of driving the strength.

James Roberts (CEO)

Yeah. I mean, the Southeast is, as we've mentioned, has always been a strong corridor. We've seen Florida, North Carolina, Georgia, really have healthy transportation programs as they go forward. You know, we're in that market in a little different program than we are in the West. Obviously, we are in it in bidding larger projects, in the $100 million-plus projects in those states. But all three of those states, you know, and then as we've said, you know, for quite some time now, we believe the Southeast, including South Carolina and some of the other adjacent states, will produce long-term benefits and higher transportation programs. But today, Florida, North Carolina, and Georgia are three of the strongest states in the Southeast.

Brian Biros (Analyst)

Gotcha. Thank you.

James Roberts (CEO)

Thank you.

Operator (participant)

We will take our next question from Bill Newby from D.A. Davidson. Please go ahead.

Bill Newby (Analyst)

Good morning, guys, and thanks for taking my questions.

James Roberts (CEO)

Sure, Bill.

Sure.

Brian Biros (Analyst)

Good morning, Bill.

Bill Newby (Analyst)

Just a couple of loose ends on the, on the problem projects. I guess on the two that are, that are over 90% complete, when do you- when are you expecting to completely hand those off? And, I guess what exactly is left to do, and how are you thinking about the risk associated with what you have left?

James Roberts (CEO)

Yeah, good question, Bill. You know, so when they get to this point, really what you're doing is you're kind of closing out the jobs and selling them to the owners. We have a little bit of work to do on both jobs, not much, and most of that work should be completed in the first six months of 2019. And then we're in a process that we call it a punch list process, where we literally go through items that the owner asked us to complete before we hand them the keys, so to speak. Now, in most of these larger projects, we've already handed them the keys in a lot of respects, where they are now operating and required to maintain sections of the roads and the environments that are already open.

So work will probably go on, let's say, for the middle of the year, but the key after that will be to really focus on dispute settlement. In both of these two jobs, we have some significant disputes with the owners. And even as we hand the keys and physically move away from the job, it will take some time to settle the outstanding disputes. And that will be the lingering event that will hang on with those two projects for a while. We are very comfortable that we will end up in an environment that is in line with our anticipated recovery. But the physical work is short-lived. I'd say six months.

Bill Newby (Analyst)

Okay. And I guess that dispute settlement process. I guess I expect that to get started in the second half of this year, and then timeline, who knows?

James Roberts (CEO)

Well, you know, it's interesting, Bill. It, it's already started.

Bill Newby (Analyst)

Okay.

James Roberts (CEO)

So in a lot of these larger, we'll call—I call these mega jobs, you know, they're somewhat ongoing disputes, but how you build the job, how you end up on the job, a lot of times we fold it all into a major discussion at the end to come up with what we call a global settlement, or we'll pick and choose certain issues and try to settle them outside of a global issue. So in both of these cases, the disputes have already been really worked on from both sides, and we're really just dialing in to what will not be settled by the time we physically leave the job, and then that's the amount that may take, you know, could take years. I hope it doesn't. You know, and so we'll see.

But in a lot of cases, a lot of the disputes are being resolved as we move along.

Joseph Giordano (Analyst)

... Okay, that's helpful. And then I guess on the last one that's gonna drag on for a bit here, is there any way you could give us, I guess, a little bit of guidance on what's expected from that project in 2019? If you look at the guide for 2019, is that project gonna be less than 5% of revs, less than 10%? Is there any guidance you can give us there?

James Roberts (CEO)

Well, certainly it's less than 10% and less than 5% of our revenue. I mean, it's not a big overall part of the company, but it's all baked into the guidance. I mean, our anticipated revenue and earnings from that one job is incorporated into the guidance that Jigisha provided to you in both the script, and we provided in the press release. So, whether we progress a little faster or a little slower, do a little better or a little worse, it's inside of that of the revenue and the EBITDA guidance already provided.

Joseph Giordano (Analyst)

Okay. Very helpful. Thanks, guys. Appreciate it.

James Roberts (CEO)

Thank you very much.

Operator (participant)

Thank you. We will take our next question from Jerry Revich from Goldman Sachs. Please go ahead.

Ben Burud (Analyst)

Hi, good morning, everyone. This is Ben Burud on for Jerry.

James Roberts (CEO)

Oh, good morning.

Operator (participant)

Good morning, Ben.

Ben Burud (Analyst)

Morning. So your sales guidance implies an acceleration to mid-single digit organic growth from a mid-single digit year-over-year decline in the back half of last year. Can you talk about what the drivers are of the acceleration in 2019, and what do you expect the growth cadence to look like?

James Roberts (CEO)

Okay. So I think you're in the ballpark relative to where we expect organic and acquisition growth to come from. And I think that the key ingredient. And I'm gonna focus on organic growth for a minute, really comes from the type of work that we're bidding. Remember, where we're looking at quicker burn work, and so we anticipate the type of work that we're bidding will accelerate as soon as Mother Nature allows, as we said, and it'll burn faster, generating revenue in a shorter period of time. So that's why we see the organic growth ramping up nicely into the mid-single digits, and we'll call it mid-single for the moment.

Now, on the acquisition side, you know, that again, that's a really nice story, there, because now we'll get a full year of that business, and we've already done some integration work, significant integration work in the first half of, or the second half of 2018, and we anticipate that to really ramp up nicely as we gain traction with, with Granite being able to help, as Jigisha said, add to the CapEx, which means we can build more crews, and we can provide more equipment to expand that business. That will be a little slower. We are in the hiring mode right now, both in the organic and in the acquisition side of the business.

In the operations portions of our business, we are hiring people across the country to be able to facilitate the growth that we expect. So both environments, the acquisition and organic, are in a nice, healthy growth environment today.

Ben Burud (Analyst)

Got it. And to get to the 8.5%-9.5% Adjusted EBITDA margin guidance, in 2019 from, you know, 7%-ish in 2018, it looks like that's essentially the large construction losses rolling off. Is it as simple as that, or do you have other moving pieces we should keep in mind?

James Roberts (CEO)

Well, certainly that's part of it. But there's a bunch of moving parts here, and let me, let me elaborate a little bit. So first of all, you know, certainly we would expect growth in, in all of, of the markets, transportation in general. You roll off the, the some of the large project issues, but you also expand your market on your smaller burn work because of the health of the, economic environment that we work in, in, in the West, let's say, or construction. So we see that part ramping up nicely. On the water segment, you know, we, we do see that, contributing to EBITDA margin by having a full year of higher margin work on our books. And the material segment, you know, we're, we're still ramping up the margins on the material segment.

We ended up at a spot this year that is not where we wanna be. It is gaining traction. We lost, you know, a quarter or part of a quarter due to weather, but the materials business is gonna get stronger, too. As we do burn work and burn work more efficiently, we will be incorporating our materials into the type of work that we're bidding, and that will not only help our construction segment and our overall revenue, it will help our materials segment as well. So I don't think it's just large projects, you know, slowing down with those couple projects. I think it's the health of the rest of the business that's really driving the growth and the bottom line growth for 2019.

Ben Burud (Analyst)

Got it. Thank you.

James Roberts (CEO)

Okay, thank you.

Operator (participant)

Thank you. Again, if you have a question, please press star, then one. We will take our next question from Joe Giordano from Cowen. Please go ahead.

Joseph Giordano (Analyst)

Hi, everyone. Good morning.

Operator (participant)

Good morning.

James Roberts (CEO)

Good morning, Joe.

Joseph Giordano (Analyst)

So can you maybe talk a little bit about FAST Act and what we should expect about what you guys are thinking about that coming next year? I know not a huge dollar amount for you guys relative to what you're seeing in SB-1, but I know from a visibility standpoint, and we saw what kind of consternation it caused when there was confusion about what it might look like last time around. So I guess that expires next year, and any color there would be helpful.

James Roberts (CEO)

Sure, Joe. In fact, that's kind of an interesting thought. I was thinking that might be the first question come out of the box today, when we start thinking about the federal investment program. So, you know, there's a lot of things going on here. Reminder that the FAST Act, you know, a $305 billion five-year bill that runs through October of 2020. And, you know, the one thing that we always said with the FAST Act that we weren't happy with, was that it really didn't shore up the Highway Trust Fund. And we've seen the inadequacy of the solvency of the Highway Trust Fund continue. I personally, I'm not worried about the expiration date of the FAST Act, because I do believe that if worst case scenario, there will be an extension.

I do believe that today, as I mentioned in the discussion earlier, there's a real opportunity to get a longer term, substantially larger infrastructure bill that would incorporate the surface transportation component and have the ability to shore up the Highway Trust Fund. And that's our job. In the next six months, through the end of August, our job is to work with Congress and the administration to get a longer term, substantially higher, larger program funded by the feds, not just private sector, in place by the end of August. I think we can do it, and I said that in the discussion earlier. But with that said, we haven't put any of that into our forward-looking guidance at all.

The one thing I have reiterated, and I made it clear back in 2015, when the FAST Act got passed, Joe, was that I consider the federal government programs to be the stability. They aren't the drivers of the high earnings and the high revenue growth. What they are typically is the stability of creating a longer term, stable foundation, for infrastructure funding. That's what we want out of the feds. We don't need them to grow the overall size of the pie, so to speak, because we've already got the healthy states, we've got the local, we've got the big propositions. Those are all that are gonna be the growth environments. All we want out of the feds is long-term stability. And yes, we want some growth, but it doesn't have to be large growth as well.

And as a note, this is an infrastructure bill that we're looking at, not just a transportation bill. So we want water, power, and transportation, which is what was discussed that was gonna be included in the infrastructure bill. So certainly, it falls right in line with our plan. But I'm gonna go back, and the last thing I'll say is that, you know, FAST Act does sunset in October. I am not concerned about that at all. They will certainly extend it if they don't get something done by then, and then the new administration and the new Congress would obviously pass something. If it didn't get passed, they'd pass something in the very quickly in twenty twenty, twenty twenty-one. But I believe there's a good shot we'll get something done by the end of August.

Joseph Giordano (Analyst)

All right. That's helpful. Thanks. I wanted to just touch on margins, too. So, for 2018, you for the first half of the year, you were talking 7%-8%. You bumped it a little bit in 3Q. Obviously, weather was a tremendous impact at the, to end your year. But, you know, also, you guys weren't guiding to zero weather, I assume. So maybe if you could talk about non-weather puts and takes that in your EBITDA performance relative to when you guys raised, because I think you came in like just above the original, the low end of the original target.

James Roberts (CEO)

Yeah. So what happened was, you're exactly right, Joe. We had a nice third quarter. We were cranking along and anticipated that that would continue. What happened was that, you know, right around Thanksgiving, we started getting rain in the West. And rain is one of those deals where if it dries out quickly and it doesn't rain again, you're fine. What happened to us was that it would rain one day, then it would dry out for three days, and it would rain five days later. So really, we got put to a skidding halt around the first of December. Now, it doesn't change the margin performance on a project, so to speak, but it's the amortizing of some of the fixed costs that doesn't occur when the business slows down.

So, it's the people who are managing the field operations that now don't get amortized over the entire revenue stream. It's a slowing down of the materials business because the materials really can't play a part of our construction because we've shut that part down. It's our equipment coming to a halt. So, we were certainly on a good roll, which means that we will be continue to be on a good roll as soon as mother nature allows us to be as we come out of the first quarter. Really, it's a combination of all those events. It doesn't really change the long-term margin performance of the work. It just didn't have a place to amortize some fixed costs in the month of December.

Joseph Giordano (Analyst)

Related that, that would have been impacting that number?

James Roberts (CEO)

I'm sorry, I didn't quite hear the question.

Joseph Giordano (Analyst)

There was nothing that you'd call out specifically that was like non-weather related and that kind of changed your, the progression?

James Roberts (CEO)

No, the only thing that we mentioned separately were a couple of the large legacy projects that had negative adjustments.

Joseph Giordano (Analyst)

Right.

James Roberts (CEO)

The rest of the work, no. No, it was just the fact we didn't get to it.

Joseph Giordano (Analyst)

Fair enough. Thanks, guys.

James Roberts (CEO)

Okay. Thanks, Joe.

Operator (participant)

We will take our next question from Ryan Hamilton, from Morgan Dempsey Capital Management. Please go ahead.

Brian Rafn (Analyst)

Morning, everybody. This is Brian Rafn. How are you doing?

James Roberts (CEO)

Hey, Brian.

Joseph Giordano (Analyst)

Hey, Brian.

James Roberts (CEO)

Good to hear from you.

Brian Rafn (Analyst)

Yeah. Yeah, let me ask, on, on the, the transit side, guys, what if you looked at your sweet spot for job size, you know, you've kind of walked away a little from heavy civil and the design build. What, what type of revenue size and maybe project duration would be in your sweet spot for the transit side?

James Roberts (CEO)

... You bet, Brian. Well, first of all, there would be few and far between jobs greater than $1 billion. Although, although I will say this, I don't want to say that we won't build a job over $1 billion, but it has to be something right in our wheelhouse that we have an advantageous position on. So, so look at jobs less than $1 billion in general, and, and have quicker burn. And I say, you know, we want jobs that probably last no more than 3 years, maybe 3.5 years. Because we, we really, as you get into these mega jobs, trying to predict the future 5 years out doesn't work. It just doesn't work. You don't know what the markets are gonna be like for labor, materials, other resources, the macro environment.

So I'll say $3.5 billion or less. Design-build is okay. Design-build is okay, but literally speaking, only under the premise that we take the lead role in the job. So we wanna be in control of our own destiny, Brian. So either we do the jobs by ourself, or we end up being the lead sponsor on the projects.

Brian Rafn (Analyst)

Yeah.

James Roberts (CEO)

We've made a strong commitment to ourselves that we're not gonna take a non-sponsored joint venture position going forward, unless it's a special job of some nature. But I don't see any on the horizon in our bidding environment, maybe one out of 20 or 30 that might be a non-sponsored, and maybe one out of 20 or 30 that would be over $1 billion. But they gotta burn fast, so we get through them, and design build is okay. Probably less towards the P3. Design build would be all right, and ideally, negotiated type work would be even better. CMGC, CM at risk. Progressive design build, where we literally go in and procure the work based on our qualifications with the owner, not by being the low-cost provider upfront.

We believe that there is a way to go approach these more sophisticated jobs with owners, where we can both come out in a better position by negotiating the work upfront, being very open, transparent as to the type of, what's in the bid, what's not in the bid. And what we really wanna do is build work and not have disputes with the owners. Now, we don't want any disputes going forward. That, that is a goal inside Granite, so that we build a $500 million, a $700 million dollar job, and we come out of where the owner, we're shaking hands, and there's no disputes, and we're going on to the next job. And we believe that different types of procurement methods will allow that to happen.

Brian Rafn (Analyst)

Gotcha. What, what are you seeing on bid day? How competitive between you guys and other contractors? And then what, what has, you know, kind of evolved relative to, you know, your win rates, you know, per your bid and quotes, you know, today versus where they might have been four, five years ago?

James Roberts (CEO)

Okay. That's really the genesis of our strategy there, Brian. We have no doubt, and as we've told our investor base, we've raised our prices, and we started doing that 12, 18 months ago. And with that, we saw 2018 had a lower hit rate than we had had previously. But as we progressed through the year, we started seeing our hit rate starting to get better and better and better. And that happens from market to market, which all the markets are different. And it's really interesting to watch when these markets get healthy, when they get healthy, there is somewhat of a saturation point, where the competition realizes that they have the ability to go change their margin structure and potentially get the work as well. So we started that a year ago.

You can see our backlog is healthy, our margins are healthier than they were before. And in the local regional markets, those, those regional players don't have the large capacity, so they see quickly, fairly quickly, that they are saturated, and they change their bidding environment, which in 2019, that is happening and will happen. In the larger project environment, there's an insatiable appetite among those competitors, both national and international players. But I believe the market is changing there as well, Brian, not because they're saturated or filled up, but because they haven't done well historically. And they are starting to look at the jobs differently. And just as Granite started 12, 18 months ago, I see our competitors following with, being more realistic on productions, being understanding what the contractual requirements are, understanding the cash flow, understanding the, the labor components.

The opportunity to have higher margins on those projects, I believe the competition is starting to follow our lead, and as it does, I think our win rates will move up. So somebody had to come out of the barrel first, so to speak, and I'm happy to say that it's paying off in the backlog that we have today, and it's gonna... Our win rates in 2019, just in the first couple of months, it's healthy, very healthy. So I do think that the market is changing, and the competition would like to get back to the kind of earnings that they were making ten years ago, instead of over the last... They've gotten used to over the last five years.

Brian Rafn (Analyst)

Gotcha. And then, Jim, on the water side, you talked about adding crews and capital, a little undercapitalized. How quickly can you expand that, and is your expansion moving to plan, or are you surprised at how much, you know, kind of pent-up ability you can add?

James Roberts (CEO)

So, we're moving as planned, and it's probably as difficult as we thought it would be, or not as difficult, depending on how you look at it. Let me just kind of, first of all, replacing older equipment is the first thing. So older equipment that is not efficient, that causes productions to be reduced in the field, whether it's drill rigs, whether it's a liner crew truck, boilers, we call them wet out facilities. We're building a new wet out facility where we actually prepare the liners to go into the ground. So first of all, is upgrading the equipment that the teams have. And that will not necessarily expand revenue, but it will expand productivity, which will enhance their margins.

Jigisha Desai (CFO)

Yeah.

James Roberts (CEO)

And then the second thing we're doing is literally adding to the fleet. And whether it is old drill rigs that we're selling and upgrading, or whether it is, again, new boiler trucks and things of that nature, it costs, if you wanna even think about one lining crew, you're probably gonna spend $2 million-$3 million of capital investment just to build one crew. And the people who run our lining businesses, you know, certainly are asking for that CapEx and that equipment so that they can expand their business, which is a good thing, which is a really good thing. But we're gonna do it very methodically because we wanna get the older equipment fixed first and then work on the expansion side.

But they're both going today as planned, and I think the revenue and the bottom line projections so far, we're actually ahead of what we said we're gonna do. And I think both Jigisha and I are comfortable that we will get the integration in line as planned, and that the operational folks are, I'm gonna say, doing as well or better than planned.

Jigisha Desai (CFO)

I also think there's opportunity for consolidation. This is a very fragmented market, and, you know, to your point about the how quickly we can get crew up and ready, I mean, this is where the opportunity for bolt-ons come on. And so we're obviously are being very methodical, as Jim pointed out, on how we look at those opportunities. But our initial focus has been, is really, is getting their existing capital assets in line with where we expect our our equipment to be, and, you know, we're definitely investing in that business.

James Roberts (CEO)

It's going quite well.

Brian Rafn (Analyst)

Yeah, let me just-

Jigisha Desai (CFO)

It is going really well.

Brian Rafn (Analyst)

Yeah. Yeah, let me just ask you, you talked... We always—we've always talked about bid day discipline and that. How relative is that in, you know, some of the other—or how uniform is that kind of culture applied to, you know, the, the military base side or mining or some of the solar projects, some of the more niche businesses versus, say, your heavy, your, your transit side?

James Roberts (CEO)

Yeah, well, okay. So believe me, and you can imagine, Brian, knowing us as well as you do, that we have a similar level of discipline in every one of our operating groups or segments. There's a minimum set of expectations, and across the Granite portfolio, what they have all been given is a minimum set of expectations of a similar nature. And if the environment that they're in can't reach those minimum thresholds, then they need to keep moving into an environment that can. And we have a minimum set of margin expectations on bid day, and especially on the larger projects. And if they desire to change that, they have to make a call to their group manager or even Jigisha or myself.

Jigisha Desai (CFO)

Mm-hmm.

James Roberts (CEO)

And those expectations and patience is paying off, and it is interesting. The people who run our businesses in the field want the higher margins as well. So we don't see them being as aggressive as maybe three years ago, when the market was so tight that they didn't have any work, Brian. Today, sometimes I am more aggressive on these jobs than our operations folks. They have really created discipline and patience so that everything that we get today is value creation. It's not a revenue driver. It is revenue and bottom line.

Jigisha Desai (CFO)

Yeah, as part of my-

Brian Rafn (Analyst)

And margin.

Jigisha Desai (CFO)

As part of my quarterly review with the operations leadership team, I asked that question, and after the third quarter, and saying, "Given our hit ratio had been impacted, do we wanna revisit the, you know, bid day expectations?" And every one of them had said, "No, they need to be patient." So it was really nice to hear from our operational leadership to say, "We just need to be patient, and the work is on our way." So I think-

James Roberts (CEO)

Obviously, it's here.

Jigisha Desai (CFO)

Right.

James Roberts (CEO)

It's happening. So, it's the whole... I mean, everybody believes in our plan, Brian.

Brian Rafn (Analyst)

Got you. Got you. Just one more, Jim. Vertical integration on the quarry side or material side, east of the Mississippi River, still a challenge?

James Roberts (CEO)

Still a challenge, but still a desire. And a strong desire. And, and I will tell you, we've actively engaged in opportunities east of the Mississippi, where we're not successful in 2018, and we are not done. We are going to get east of the Mississippi, or I will say this: We're gonna continually work our way east until we get all the way to the Atlantic Ocean.

Jigisha Desai (CFO)

There you go. Yeah.

Brian Rafn (Analyst)

All right, guys. Thanks.

James Roberts (CEO)

Thanks, Brian.

Operator (participant)

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

James Roberts (CEO)

All right, everybody. Well, thank you for your questions. You know, a quick note for our shareholders and investors, Jigisha, Ron, and I will be on the road and at conferences, visiting our operations and investors around the country throughout 2019. So please reach out to Ron, and we will look forward to speaking with you and meeting with you. And 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, Ron, and I are available to follow up if anybody has any further questions. And everybody, have a great day. Thank you.

Jigisha Desai (CFO)

Thank you.

Operator (participant)

The conference has now concluded. Thank you for attending today's presentation.