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Edited Transcript of GVA earnings conference call or presentation 26-Apr-19 3:00pm GMT

Q1 2019 Granite Construction Inc Earnings Call

WATSONVILLE Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Granite Construction Inc earnings conference call or presentation Friday, April 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Hildebrand Roberts

Granite Construction Incorporated - President, CEO & Director

* Jigisha Desai

Granite Construction Incorporated - Senior VP & CFO

* Ronald E. Botoff

Granite Construction Incorporated - VP of IR & Government Affairs

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Conference Call Participants

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* Benjamin J. Burud

Goldman Sachs Group Inc., Research Division - Research Analyst

* Brent Edward Thielman

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Michael Stephan Dudas

Vertical Research Partners, LLC - Partner

* Nelson Jay Obus

Wynnefield Capital, Inc. - President, CIO & Portfolio Manager

* Robert G. Jamieson

Cowen and Company, LLC, Research Division - Research Associate

* Steven Ramsey

Thompson Research Group, LLC - Senior Equity research Analyst

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Presentation

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Operator [1]

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Good morning. My name is Shannon Ginza, and I will be your facilitator for today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations First Quarter 2019 Conference Call. This conference is being recorded. (Operator Instructions) .

It is now my pleasure to turn the floor over to your host, Granite Construction Vice President and Investor Relations and Government Affairs, Ron Botoff. Sir, the floor is yours.

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Ronald E. Botoff, Granite Construction Incorporated - VP of IR & Government Affairs [2]

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Good morning. Welcome to the Granite Construction Incorporated First Quarter 2019 Earnings Conference Call. I'm 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 available on the Events and Presentations page of 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, demands, 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 a more complete descriptions of risk factors that could affect projections and assumptions. The company assumes no obligation to update forward-looking statements whether as a result of new information, future events or otherwise. In October 2018, the company filed an 8-K with a quarterly and annual look back and mapping of our reportable end-market-focused segments. Our 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 they 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 nonrecurring acquisition-related expenses and onetime 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.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [3]

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Thank you, Ron, and good morning, everyone. Thank you for joining us today for our first quarter update on Granite's strategy and performance and how it shapes our outlook for 2019 and beyond.

We are quite proud to begin by acknowledging Granite employees for exhibiting our core values every single day. As a result, Granite was named one of Ethisphere Institute's World's Most Ethical Companies for the tenth consecutive year. And just over a week ago, Granite was named by Forbes as one of America's best-midsized employers for the fourth year in a row. 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 0 injuries also aligns us well with our stakeholders. During the first full week of May, Granite teams and companies across the country are participating in the now well-established annual construction industry safety week. By emphasizing best practice training methods, sharing near-miss stories and raising awareness, construction industry employees nationwide will collaborate to develop solutions to work more safely. Granite teams have started 2019 well and understanding the extremely busy construction season ahead of us, we are committed to a healthy construction season as we work to ensure that all Granite employees make it home safely every single day.

Now let's jump into the trends that are driving our business. Oh, yes, weather. Let's just get it out of the way, to begin with. Consistently extreme weather across the U.S, which began last November, continued to create headwinds for our businesses and our markets into the early part of this quarter, with a particularly negative impact on Granite's first quarter operations. If you're looking for a number, we conservatively estimate that poor weather was at least a $0.25 a share earnings headwind in the quarter.

In response, we planned for and we kicked off an accelerated launch to operating schedules for an extremely busy construction year ahead, knowing that demand not only is strong but it also now includes work stacked up by poor weather across public and private markets. Now that we are launching from the gate, we reaffirm our outlook for the significant top and bottom line growth in 2019 that we share with you in February. Ultimately, we strive to become a company that can operate on a more weather-agnostic basis, able to drive and create value no matter the weather.

We will touch on weather a bit more as we discuss our results, but let's move now to an overview of some of the high-level drivers of the near- and midterm outlook. We've executed to refine our strategic plan, investing in our people, our capabilities and our reach. Today, markets are both competitive and buoyant, and we are confident in our growth prospects. Granite is America's infrastructure company. We are extremely well positioned for what we believe to be the early innings of a significant secular step up in North American infrastructure investment. Public and municipal infrastructure funding trends continue to improve, fueling margins that should provide stable and steady growth for an extended period in the transportation and water markets.

Private market infrastructure investment remains broad-based, driving demand in the diverse markets that comprise our Specialty segment. Together, this activity represents the steady economic growth necessary to fuel consistent improving demand in our Materials segment.

With lots of talk and a little progress in Washington, D.C., our near-term expectations for definitive action at the Federal level have been tempered modestly, even as we anticipate that action in the form of meaningful long-term incremental investment is still viable in 2019. We continue to anticipate that 2021 to 2023, ultimately, will mark something of a midcycle point for today's early stages of infrastructure investment expansion. Taken together, we believe these are the key factors that support to view that our business is not on a peak trajectory this year or next. We are poised to grow steadily for quite some time.

Next, let's move to an overview of the first quarter. As we said, despite the negative weather impact, especially in the West, we continue to maintain our strong growth expectations for 2019. Project delays now stack additional work on top of strong market conditions across geographies and end markets. In fact, our teams across the country, finally, are kicking off a very busy construction season with 6-day work weeks, and in some cases, multiple shifts to meet the demand. We continue to balance on our opportunities and our portfolio by prioritizing strategies that give Granite the opportunity to create value, both with high-velocity revenue projects and medium-term anchor projects. The strategic execution of our diversification strategy continues to produce results. We are seeing this across the spectrum of Transportation segment projects that we are bidding, with less revenue reliance on large nonsponsored work.

CMGC and alternative procurement wins are a direct result of this intentional effort to reshape the segment portfolio.

In the Water segment, we are observing an expansive opportunity set, with particular strength in demand for our growing Granite Inliner business and diverse opportunities for our legacy operations. For Granite's Specialty segment, broad demand is a strong driver of end-market diversification across operating groups and geographies. Today, our tunnel, power, mining, renewable energy development and site development capabilities are expanding, and we are investing to meet the needs of these diverse customer bases.

And finally, our Materials segment. Strong committed volumes entering 2019 combined with weather delays and steady economic growth should drive steady increases in volume. This should, in turn, create operational and financial leverage throughout 2019 and over coming years.

So with those thoughts in mind, let's dive a bit deeper into each of the segments, starting with the Transportation segment. Unfortunately, during the first quarter, poor weather conditions had the most impact on our very healthy California business. Here, we are extremely well positioned for growth as billions of dollars of incremental investment now is flowing from California's SB 1. Across geographies, our teams are accelerating from day 1 with 6-day work weeks and multiple shifts to meet demand. This is the first time we have seen this level of acceleration this early in the season in at least a decade or more. Our portfolio of transportation work has been driven by stable, improving long-term state and local funding and growing opportunities for alternative procurement projects and more negotiated work. We continue to target significant margin improvement to midteen gross profit margins in this part of our business over the next couple of years.

We also are continuing our focus on strategic bidding opportunities to balance portfolio of dynamics away from large nonsponsored projects, creating geographic and project diversity, that best leverages our large equipment fleet and consistent reliable access to construction materials. Fueled by strengthening long-term public funding trends and balanced private commercial and industrial demand, Granite is a national leader in transportation infrastructure, and we will continue to grow and to lead in this important area of our business. Pair these demand trends with a backdrop of decades-long deferred maintenance and investment, and today, this allows us to confidently take a disciplined approach to early-cycle growth and investment opportunities even in such established and mature markets.

So while we invest further in diversification, our Transportation segment, the largest both by revenue and profit today, will continue to be a source of growth and opportunity for Granite teams across the country.

In the Water segment, we saw a strong revenue growth in the first quarter, driven by the Layne Christensen and LiquiForce and acquisitions. However, profit declined year-over-year as the first quarter of 2018 included some emergency work that was not repeated in 2019. Across the Midwest, in the first quarter, severe cold and regional flooding delayed work, but again, it has not lessened demand. Driven by a consent decrees formally and by chronic underinvestment, generally, there are billions of dollars in -- of demand in wastewater, dams, in the waterways, levees and drinking water system. Granite's Water portfolio is focused on developing this area of the business into an efficient disciplined, consolidating and growing presence in attractive water and wastewater markets.

Now on the third quarter of our integration of last year's acquisition, we remain on track to create recurring cost synergies and new and growing revenue synergies. Today, the municipal and private markets that drive much of the work in this area of our business remained steady, and we believe we are increasingly well positioned to benefit from secular and market share growth across geographies and project types. We anticipate significantly improved results from the first quarter across the balance of 2019 in the Water segment.

Next, let's move to the Specialty segment. The Specialty segment is driven by the widest variety of projects, both in terms of project type and project scope. Here, diversity fuels strong, growing teams in tunnel, mining and mining services, power, renewable energy and site development, leveraging the combination of our highly specialized equipment and capabilities. We are an industry leader in tunneling, pursuing opportunities across all civil infrastructure-related markets, with a focus on transportation, water, wastewater and rail work. Today, our teams are delivering in Ohio, Connecticut, Illinois and Alaska, with this end market providing a steady stream of project opportunities across the country.

Over the past few years, we have become a trusted partner to a growing list of corporate and industrial clients, especially in California and in the West. Here, we collaborate with our clients on site development of their manufacturing facilities, data centers, corporate campuses, refineries and commercial developments. By focusing on customer needs and challenges, we continue to be successful in aligning outcomes and reducing conflicts, creating significant value for all parties. This solutions focus is a key Granite differentiator.

This also adds private market balance to steady to improving public market dynamics for our vertically integrated businesses. In renewables, our teams are delivering and building on opportunities in new geographies and contributing to private market penetration. This includes a growing resume of solar work in California, Nevada, Arizona, New Mexico and in Texas. In our mining and mining services operations that operate primarily in the West, include those acquired last year, are seeing the benefits of consistent commodity pricing, which is driving steady mining industry CapEx investment in key Granite markets. This project diversity balances segment returns, producing springboards for growth tied to project wins across industries, geographies and importantly, across Granite's operating groups.

Now let's touch on some early-season details on the Materials segment. Here, once again, due to poor weather in Granite key markets, very little significant work was completed by contractors during much of the winter months. As a result, our Materials segment started the year slowly. However, there is a notable silver lining of sorts as our idle plants, including those with significant planned maintenance, missed out on little to no incremental business opportunities. So as it is across much of our business, with committed volumes that were strong entering and ending the first quarter, our Materials teams are producing in earnest now, accelerating from day 1 with 6-day work weeks on multiple shifts to meet demand. Here, increased volume is expected to be driven by the combination of increased committed volumes, combined with demand driven by steady economic growth as well as anticipation for a year-over-year inflection towards much stronger internal demand.

Emphasizing efficiency and relationship building to optimize asset utilization in steady and growing demand environments, we are focused on improved leverage from both our traditional Construction Materials business as well as in the vertically integrated Liner Products business. We believe our vertical integration provides significant strategic and operational leverage, which positions Granite extremely well to respond to rapidly increasing demand and which supports expectations for improving margin performance and more consistent cash generation.

On the next slide, we are introducing you to a new way to consider Granite's measurable opportunities set. Over the past few years, we invested considerable time and thought refocusing our strategic bidding for what we think of as an anchored Granite projects. Those that capitalize on our unique combination of asset base and infrastructure solutions capabilities. Bidding discipline and end-market diversification combined with a more balanced portfolio of Committed and Awarded Projects, now termed CAP, which now totals $4.5 billion, supports our near-term expectation for strong revenue and profit growth in 2019 and beyond. This includes a very intentional shift to more negotiated work, largely in the form of alternative procurement processes, including Construction Manager/General Contractor or CMGC, progressive design-build as well as qualifying direct negotiations. These projects comprise an increasingly strategic portfolio of stored energy for the company. Project demand points to significant opportunities for both near- and midterm growth for all segments of our business.

We continue our focus on bidding strategies, balancing pricing and project win rates and positioning our teams to expand Granite's platforms for growth in the Transportation, Water, Specialty and Materials segments.

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

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Jigisha Desai, Granite Construction Incorporated - Senior VP & CFO [4]

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Thank you, Jim, and good morning, everyone. I'm happy to join you for a brief overview of our first quarter 2019 results.

Granite's consolidated revenue increased 10% year-over-year to nearly $620 million. Gross profit totaled $40.5 million, which translated into consolidated gross margin of 6.5%. As we have highlighted this morning, poor weather was a significant revenue and profit headwind during the quarter. We are now launching quickly into a very busy construction season.

First quarter 2019 SG&A was $81.2 million with most of the increase from our acquired businesses, including some acquisition-related cost. The balance of the increase was a result of larger administrative and estimating staff, who were kept from working on projects by poor weather. We continue to work through rationalize and scale acquired overhead, but as we anticipated, it will take some time to allow us to reach our previous target of 7.5% of revenue. Certainly, the solid rebound to growth will help significantly in this effort.

First quarter net loss grew from last year to $34.6 million or $0.74 per diluted share. On an adjusted basis, net loss was $26.4 million, excluding acquisition-related expenses, or $0.57 per diluted share.

And with that, let's move now to the segment details. We do not provide individual segment guidance. But we remind you that we believe Granite must be a consistent midteens consolidated gross margins performer over time, driven by the performance of our end-market-focused segments. Transportation segment revenues declined about 6%, with weather headwinds, especially in California, the largest driver of the revenue and of the year-over-year margin decrease to 6.3%.

In Water, revenues reflect our acquisitions increasingly significantly year-over-year to more than $99 million. But as Jim mentioned, segment profitability declined to 8.2%, largely as a result of early-season work last year that was not repeated in 2019.

Our Specialty segment produced nearly 19% revenue growth in the first quarter, again, driven largely by contribution from our acquired businesses. Weather delays impacted both acquired businesses and site development projects. The resulting project mix shift and delays resulted in a segment margin decline to 10.6% this year.

And in the Materials segment, winter weather kept plants idle. As a result, revenue declined about 9% from 2018, with gross loss expanding to about $3.8 million from the $2.5 million loss last year.

Certainly, it was a challenging quarter, but we anticipate a strong, steep recovery through the second half of 2019, which leads us to our guidance.

Overall, 2019 started out slowly, but we are very pleased that booking trends reflected in growing CAP combined with overall strong market demand positions us to reaffirm the 2019 guidance expectations that we shared with you in February. We continue to expect low-teens consolidated revenue growth year-over-year, driven by the combined effect of last year's midyear acquisition and steady organic growth across the enterprise. We also expect adjusted EBITDA margin of 8.5% to 9.5% in 2019. And we anticipate SG&A should end the year slightly lower year-over-year as a percentage of revenue, while we have maintained our February expectations for capital expenditures and tax rate.

Granite is well positioned and our businesses is primed for significant top and bottom line growth in 2019. And with that, I will turn the call back to -- over to Jim.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [5]

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Thank you, Jigisha. And before we turn the call over for some questions, I want to spend just a couple of moments highlighting key themes for Granite's growth in 2019 and beyond as well as the primary tenets of our strategic plan.

As we plan for the rest of this year, we believe there are 3 key areas of focus that will drive success for Granite this year and for years to come: first, recent project procurements reflect the execution of our strategy to better align backlog composition with our strategic plan. This has resulted in a growing, diverse book of business and CAP of $4.5 billion, in a historically high figure, which is supported by strong demand across our platforms for growth. Significant CAP now is in place to allow for ramped up production and for continued portfolio evolution, emphasizing risk-weighted returns and shorter duration of higher-margin work.

Secondly, robust bidding environments across end markets and geographies point to steady growth opportunities across the enterprise. Additionally, we believe core markets are tight and tightening. And poor weather that kept a large swath of our industry idle into April has stacked up demand even further in the near term. Taken together, we believe these factors support our visibility at least through 2021.

And finally, the third piece of the puzzle for this year and for the coming years is that our strategy is and will continue to drive results. Granite's platform for growth will continue developing the launching pads poised to generate incremental top and bottom line growth and improving cost and revenue synergies.

Which is a terrific lead-in for a brief review of our strategic plan that now focuses and highlights our vision out to 2023. Our strategic themes remain based on opportunities to develop our people, to execute our work and our strategy and to grow via organic- and acquisition-led expansion. We are evolving our portfolio and expanding new platforms for growth.

Everything that Granite starts with, are people. They are foundational. So our themes start at the bottom of the page with develop and focus on Granite's employees. We continue to invest in our people, starting with recruiting, where we are targeting bright, diverse, young minds as well as experienced industry leaders. Emphasizing engagement, our investment in training and development and leadership growth are helping our employees create careers and careers paths, not just jobs. As we grow, our focus on excellence and execution is sharpening. We are investing in new markets, growing capabilities in line with deeper customer relationships, and we are emphasizing discipline across the span of project pursuits. By optimizing asset use and expanding the productivity of our talented teams, we anticipate more consistent successful outcomes and development of an increasingly diverse customer base.

The growth portion of our plan is really the culmination of our people and our work, combining to create significant expanding value for all of Granite stakeholders. Our end-market focus on diversification of portfolio balance is broadening opportunities for Granite teams across the enterprise. Strategic focus is allowing us to bid considerably more work, and our project, revenue and profit outlook continues to improve. Granite is America's infrastructure company, and we are extremely well positioned to flourish and to grow.

And with that, everyone, we will be very happy to take your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Michael Dudas of Vertical Research.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [2]

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Jim, I'd like to elaborate a little bit more in your prepared remarks talking about the environment moving to 6 days a week, haven't seen it in over a decade, this type of opportunity. Maybe compare how the customer mix or the platforms different than what it was, say, 10, 12 years ago when these types of environments occurred? And what is this moving to? With all the stacked business, what kind of execution risk does this place upon Granite and your employees as you try to catch up and achieve your targets out until the next year, at least, through '19?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [3]

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Okay. Mike, thank you. That's very important that -- because if you think about where we were, and I'm going to say probably 12 years ago, that's when we were in an environment when the residential market was really hot and a lot of our demand was being focused on beefing up, I'll call it, the infrastructure for our big residential projects. This -- at this point in time, we have none. That is not even in play today. What we've done since the downturn is diversify our business to be able to focus on all different markets and different funding mechanisms. So the pent-up demand today is not just in, I'll call it, the Transportation segment, it's basically in all parts of our business. Example, site development. We're really tracking and negotiating a strong portion of our work with private companies today. The high-tech companies. We're building business parks. We're working in refineries. And what happened was they have a very strong CapEx, capital improvement program and expansion program, and that work wasn't able to be performed over the winter months for obvious reasons due to weather. So a big host of our large equipment and people are now focusing on making up lost time over the winter to work for a lot of private customers. It's not as much on the public customer side, on the DOTs, although we have a significantly very healthy backlog in that environment. You don't typically get a lot of painting type of work done because you have ambient temperature requirements. So what you try to do in the winter months is do a lot of earthwork and underground and things that don't -- that you can do in the winter months, and we did none of that because of the rain this last year. The issue for execution, Mike, is really to stay safe, working with your employees. When you start working 6 days a week early in the season, there's good things and bad things that can happen. And the bad thing is that you start working long hours, fatigue sets in and accidents occur, which we spent a considerable amount of time upfront planning our work and making sure that our employees are put into a safe environment at all times. But the good part about it is that once our teams get rolling, when you start working and you've got -- and our teams know they have projects to go through, and they've got the rest of the year and next year out in front of them, they tend to build momentum and they tend to actually work at higher productivity rates. Because they know that if they don't get through the summer and into the fall and into the winter, we'll never meet the deadlines that have been established by our customers. So historically, I've been involved in this a lot where I really enjoy when we work the longer days, the longer hours. You've just got to really focus on creating a safe work environment. And the people that work for us enjoy working long hours, staying busy in the summer and fall because that's how they make their living. So they are the ones -- they're the last people that want us to slow down and only work 5-day work weeks. We just got to focus on safety, and I do think that productivity actually gets better with longer work weeks.

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Michael Stephan Dudas, Vertical Research Partners, LLC - Partner [4]

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That's encouraging, Jim. And my follow-up is, you didn't mention the tempered view on what's coming out of Washington. What's the -- what's most important that we could -- what we -- you'd want to see what the industry is trying to extract from the committees to -- we don't get a big grand bargain, something that can like give some visibility for the '21 to '23 outlook?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [5]

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Yes. So Mike, when I look at D.C., I say to myself 2 things, first of all, do we have an environment where anything can productively get done. And I think we all question that every day in all facets. So when I look at infrastructure, what I'm really hoping for is -- that there is a, I'll call it, a very intelligent discussion about long-term stability and infrastructure investment across the nation. But 2 things. First of all, shoring up the highly trust fund. That is the first thing they should always talk about. Not having to go into any individual year and have to borrow from the general fund in order to shore up (inaudible) line. Second of all, what they need to focus on is, I call it, diversified infrastructure investment. And not just looking at the Surface Transportation Act, but look at infrastructure as a whole and work into the Power, Water, Transportation segments and other segments as we define infrastructure today. And then lastly, what I'd really like to see in D.C. this year, is the house to come out with a bill. And to come -- and what's going to happen. I believe, that our new leader of the house C&I committee, Mr. DeFazio, has a -- has truly wants to put out an infrastructure bill. Let's get something through the house that is of reasonable nature, large, I'll call it, federal investment, let's not push it on the private sector. Keep it as a federal investment in the future of this country. And then let's use that as a foundation to build on. Whether we can take that into the Senate and the administration and get it passed or not is probably questionable and then how you fund it is probably even more questionable. But let's get a foundation started so that we can work on that as we progress and maybe hopefully get something done this year, but if not, use it as a foundation into 2020 and '21. The key ingredient here, and I firmly believe this, is that even if we don't get anything passes, we'll get an extension of the FAST Act and that will occur sometime next year. So we won't have any interim interruptions in funding. But I am not a fan of stimulus. I hope they do not use that word at all in D.C.. To me, that's a lack of true belief in investing in infrastructure. It's a financial play, not an investment in the future of the country. But I do think there is an opportunity here to get a foundational bill in play, and if we get fortunate, we get it all the way through the Senate and the administration, If not, we've got a foundation to work off of 2020.

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Operator [6]

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And our next question will come from Joe Giordano of Cowen and Company.

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Robert G. Jamieson, Cowen and Company, LLC, Research Division - Research Associate [7]

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This is actually Rob, in for Joe this morning. Just a quick question on the $884 million in alternative procurement work that's not included in backlog, Just wondered, how long do you expect that work to take to work through? And then, is it like shorter or longer duration than your typical backlog?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [8]

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Okay. Yes, that's really -- and we tried to help out a little bit of that last quarter when we started talking about these alternative procurement jobs because of the way they literally show up in backlog. That's why we now have Committed and Awarded Projects as a terminology called CAP. Because of that $880 million, Rob, so to speak, actually -- it actually burns at a rate very similar to what I'll call a large project. It just doesn't show up in a lump sum backlog upfront. What they'll do is take -- let's say, if you take a $200 million project, they -- what we do is go through a negotiation and we actually come up with an agreed upon number, which we've always gotten to with the owner and then we'll do it in task order. So we could do a $40 million segment, a $50 million segment, and we'll still bill the project out over, let's say, a 2-year, 3-year period, but we'll do it in lots, in $40 million, $50 million lots, so to speak, probably at a very similar pace than we would have burnt the work that we would normally put in the backlog. It's just that we don't put into backlog until we have an improved task order.

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Robert G. Jamieson, Cowen and Company, LLC, Research Division - Research Associate [9]

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Okay. That's helps. And then, just another quick one. I know you talked about this last quarter, but the 2 big projects that you're close to completion on, and I know, you said you'd started the dispute settlement process, just wondered if you could provide an update there and how that's progressing.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [10]

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Well, I mean, I don't want to get too far into much detail relative to the dispute resolution process. No doubt that, in general, these jobs that we talked about and large projects, in general, since they're so complex, Rob, they tend to always have some type of dispute. And we hope, in every single case, that the opportunity arises so we can settle up before we go to the judicial system. So far, we have a couple of them that are heading down the path for a potential -- getting into the court system and they're very slow moving. And so I don't want to suggest that we're going to settle these outstanding disputes any time soon. But what I've seen historically is that once the 2 sides of the equation start really spending time and energy on it, you typically almost always come to an agreement prior to getting into the court system. So on these larger projects with larger numbers at play, it might take a little bit longer. You could see some settlement of these disputes in 2019 and they could roll into 2020. But I don't want to really dive too deep into them because of the sensitive nature of the actual disputes.

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Operator [11]

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I now move on to Brent Thielman of D.A. Davidson.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [12]

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Maybe back -- just on the backlog methodology. How -- is there a way we can think about the timing of conversion of this alternative procurement work, I guess, into backlog? Or, ultimately, revenue? In other words, would you expect to burn 25%, 50%, 75% of that this year? Any help there?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [13]

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Okay. So what I would do, Brent, because, again, we've got this new terminology now called, CAP. And really what's happening is that what we were hoping would happen is that we would provide more effort upfront in developing relationships with our customers, we would negotiate work. And part of a CMGC job -- and you can almost think about it as designed build in probably 15 years ago. So it's a new form. But the burn rate shouldn't change. So even though we don't call it backlog, what I was trying to say, earlier, it was that if you've got a $200 million job, we'll still burn that over the next 3 years or 2 years, whatever the original expectation for the time frame was. But what we'll do is we move it from Committed and Awarded into backlog in segments, in task orders. So there could be a $40 million move from the overall CAP just directly into backlog, let's say, in May. And we build a $40 million section of a project from May to September. While we're negotiating the next section, we could move another $40 million in December into backlog. So I would not suggest you that the burn rate on that $884 million is any different than any other backlog that we already have in place. It's very similar. Now with that in mind, what we have been focusing on is trying to build a backlog that has a higher velocity of burn rate. So that if we have a, we'll call it, $500 million of backlog on the books and we historically would have burned it over 4 years, we're trying to burn -- find projects that we can burn by over, let's say, 2.5 years, and we think that's more valuable for the company. But I would not look at these alternative procurement burn rates any differently than our core business.

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Brent Edward Thielman, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [14]

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Got it. Okay. Appreciate that, Jim. And then maybe just thoughts on California transportation work. Your thoughts in terms of how SB 1 work is proceeding. Are you starting to see your win rates improve? And I guess getting more comfortable with the bid margins now in the market?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [15]

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Well, most certainly, California is a good place to be today and it's going to be a good place to be for quite a few years. We have seen that the state of California do exactly what they said they're going to do. The budget proposal provides about $4.8 billion in new SB 1 funding for the '19-'20 budget, which is right on target to what they said they were going to do. Remember, they were going to ramp it up and, on average, to about $5.2 billion a year over 10 years. Here we are in the third year of the program at $4.8 billion. Now pull it back up over $5 billion next year, I'm fairly certain. What we have seen is a little bit of a change in the bidding environment. Our hit rate has gone up from 2018 to 2019. I don't want to say exactly. But our hit rate is going up and quite nicely. And we have a very healthy backlog in California, and we do not see the rate of bidding slowing down in California. So I would say that SB 1 is really hitting the street as planned. Now if you're a taxpayer, they want to know where all the road and repairs are. I mean, they keep looking for them and what people don't realize is that it takes time to procure the project physically get notice to proceed and get out there and get the work done. And as we said that part of the reason for the 6-day work weeks as well going into this summer and fall months. It is hitting us, we have the backlog. And California is going to be a very busy place to be for quite some time.

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Operator [16]

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(Operator Instructions) Our next question will come from Steven Ramsey of Thompson Research group.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity research Analyst [17]

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A couple of different segments I'm curious about. So in Specialty, is there pent-up demand there? Is there any verticals you would call out where there is pent-up demand or lack of it? And are you -- with the projects you've secured or that you're looking at, can you discuss, kind of, the burn rate time frame in that segment?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [18]

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Sure. Sure. So one of the things, Steven, about the Specialty is that the host. It's kind of the -- we call it the incubator of all of our -- lot of segments that don't fall under Water or Transportation. And let's go through them a little bit because the site development is really, I would say, the hottest market. And this is where we have developed relationships with private clients. A lot of them in the high-tech industry. We have a lot of industrial parks with the high-tech industry that we are heavily invested in. And in fact, some of those are using a big portion of our heavy equipment, our large earthmoving fleets that were basically stuck in the mud over the winter times. So not much happened there. But I don't see that slowing down. That is a sector where these projects grow in size and they burn very quickly. And I'll give you an example. If you're going to build, I'll call it, a new data center for a high-tech company, and let's say it's a $50 million job, you're going to burn that all in one season. And because they are on rapid paces to get their processes in place to create value for their company. So we see the private sector actually moving at a faster pace than the public sector, which, I guess, in general, you would expect. They need to get their operating businesses up and running to create value for the business. So the site development businesses are quick burn, nice margins, repeat work, negotiated work, and we do a lot of that same work for the refineries. We're in doing their CapEx projects for them today, and we see that really working nicely. The other part of that also site development is, we do a bundle of work in mining industry for site development. And what I would call fairly steady commodity pricing, we're seeing that the CapEx in the mines has started to steady out. And we are consistently being called back to a lot of our primary partners in the mining business to really continue on expansion projects that they weren't sure they were going to continue into 2019 and into 2020. And in almost in every case, we're seeing these investments being made and the expansions continuing into at least the remainder of this year. Now sometimes, they will not give us a longer-term program in the mining industry. Typically, they turn the spigot on and off fairly quickly. Right now, they turned it on. And we are heavily invested in doing site development and, I will call it, geologic exploration in the mining business. So the combination of the Layne acquisition and the Granite existing capabilities have really been -- we have seen nice in the mining business and it's doing quite well. Now the other part of our Specialty business, the tunnel business, is a very specialized business. And I consider the quality of the team that we have in the mining business to be the best in the industry. And so we are very, I'll call it, picky and very focused on specific projects. As you can imagine, building a tunnel hundreds of feet under the ground, 10, 20, 30, foot diameter under variable conditions is a very complex environment. But that is a very healthy market. So what we are doing in the tunneling business is we are being very choosy. We are being very focused on jobs that meet, what we consider fast burn, and I would say, although complex and high-risk relative to a site development job, would be something that we can get our arms around quickly and that we have historically done before. And so our tunnel business is very steady and has a nice long list of work out in front of it. So Specialty segment, although diverse, there is not a portion of the Specialty segment that doesn't have a nice healthy outlook out in front of it.

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Steven Ramsey, Thompson Research Group, LLC - Senior Equity research Analyst [19]

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Excellent. Helpful color. And then last question. Does faster burn rates in the Transportation segment, as that continues to be a focus, does that provide any benefit or challenge to the Materials segment when that comes into play for your own projects?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [20]

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Absolutely. I mean, that's a really good point and a nice way to think about our Materials business. Historically, the Construction Materials business is tied directly to Transportation projects. And as the -- and we've been focusing on Transportation projects that actually have a large portion of the project with a materials portion attached to it. So ideally, one of the things I mentioned in the discussion earlier, was that we see our internal demand going up substantially, this year compared to last year, which means the project that we're targeting in the Transportation segment and in the Specialty segment because these are Materials and site development as well, have a strong Materials component in it. And so as we start running 6-day work weeks on Construction, we will be matching that with our Materials business.

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Operator [21]

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And our next question will come from Jerry Revich of Goldman Sachs.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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This is Ben Burud on for Jerry. Just wanted to touch on the bidding environment. You alluded to win rates earlier, but just wanted to get an update on how they're trending your dates, sound like they're pretty positive, but mainly for the company as a whole and specifically in California. In the past, you've noted how competitors, ideally, will fill up on lower margin work, and you even specifically called out instance of that playing out in the California. I guess, is this dynamic actually playing out in real time and supporting -- improving win rate trajectory?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [23]

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Okay, Ben, so thank you for asking that question. Because I'm actually doing a company webinar in about an hour or 2 and as we were developing the -- sharing what's currently going on inside Granite with our employees. We were putting together a package showing what, kind of -- where the market is going in the short term, and I'm going to call it, during the summer months of 2019, where do we see it going. And it was very enlightening to see that, although, we have a very large Committed and Awarded Projects total today, as does the industry, and this is the important part. The entire industry wasn't able to build work over the wintertime. So they didn't burn their backlog, so to speak. So they know that. And so what people end up doing is changing their price structure going into the summer if they don't need as much work. And so you see in general, and not targeting any individual markets, but in general, you see a reduction in competition or a reduction in, I'll call it, overly aggressive pricing because people already have a lot of work. Now here's a really important thing that I noticed in just in the last couple of months. The amount of work being put out to bid that Granite is bidding on is increasing dramatically per month going forward. Let me give you an example. The month of May, we kind of break our target list of projects up over $150 million to below $150 million. And below $150 million in the month of May, we are bidding $1 billion worth of work. We have never, and I've been with this company 37 years, we've never bid $1 billion dollars in work that didn't fall into that larger category in a single month. Now when I look back at 5 years ago and I look when we were just, kind of, what we called in the heart of just still in a financial downturn in our market, we were bidding between $150 million to $250 million a month and now we're up to $1 billion in month. So the market dynamics have changed. And this is not just the public sector but it's the private sector combined together to create a really different market than what it was last year, the year before or the year before. And so this is really good news. Now with that said, in the first quarter, our hit rates were up from last year, and I expect them to stay up. And as I've always said before and a lot of people have said, well, if the market expands, Jim, Jigisha, Ron, do you expect Granite's share of the market to stay the same or get greater? And I think, that one of our comments originally was that, well, it might go down to begin with because people may get overaggressive to go build their backlog in the new market, but I don't see that. I actually see our share today is larger than what it was last year. So let's see what kind of elasticity or competition has as the market grows. And so far, really good. And as we look out to see what's available over the summer months, we see it getting even better.

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Benjamin J. Burud, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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Got it. And then in 1Q, weather was, obviously, a meaningful headwind across your footprint. As we have 1 month of 2Q here in the books, can you just give us an idea, are you seeing any weather headwinds quarter-to-date? It looks like there's been some wet weather may be in Texas, in areas of the Midwest. That's fine as long it's tracking to plan. Just wanted to make sure that was still the case and there's no meaningful headwind quarter-to-date.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [25]

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Yes. So one of the things that I think is important, and as we reiterated in our guidance or reaffirmed our guidance for the year, is that's certainly, it's going to be weighted in the last 3 quarters, obviously. But I do think that we did have some headwinds in the first couple of weeks of April in the West. It is nice today. It is projected to be really nice from this point out. What we did lose probably 10 to a days, to 2 weeks in April in the West. And so that would be the only thing I can see as a headwind going into the next 3 quarters. With that said, we're running on all cylinders right now. But we did lose probably 10 to 15 days -- 10 to 14 days in the month of April.

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Operator [26]

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And our next question will come from Nelson Obus of Wynnefield Capital.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [27]

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Just a couple of questions about our troubled projects in the past. Is this a correct statement, let me make a quick introduction. These things have a -- they have a tendency to get worse. But am I -- so this is apart from contract resolution. Is it correct to surmise, without getting specific, that the era of taking additional reserves may be past us? And a second, sort of, looking-forward question. You've said that in the future, you might take large projects, but you would be in charge. And where are we on that? And how do you feel about that reflecting on what's going wrong in the past?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [28]

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Okay, Nelson. Those are strong discussion points that I think are very relevant. So first of all, with reserves and dispute resolution. We always do -- when we get into a dispute on a project, we always analyze what our probability of recovery is. And then we hold and we would include in our forecast a calculation of probability recovery based on the value of a claim. So we continue to do that. And we adjust that every single quarter. If we believe our probability of recovery goes up, then typically, we would take that to the bottom line. If we believe our probability of recovery goes down, we would probably adjust our bottom line down accordingly. And I don't have a crystal ball, Nelson, to tell you if they're going to get better or worse. I will tell you that we look at it every single quarter. In fact, in a lot of cases, we look at it every single month. And if there is an event that occurs, then we do a positive or negative adjustment. Now with that said, I do think as these disputes get into their final stages, the value of disputes get constantly adjusted, but I do think you get closer and closer to a more of a finite resolution of numbers. And so I don't have a specific answer for you whether we're done taking reserves or releasing reserves. You can go either way. But I do know that we are -- by the end of 2019, we will physically only have one of these legacy projects to build. And we...

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [29]

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Actually, real quick, that's my question. These legacy -- I mean, I understand contract resolution is a nebulous arena. But the actual job that you're doing in the field, are you -- have you basically, put your hands around what potential risk could be, just in engaging the difficulty of the job away from change orders?

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [30]

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Correct, Nelson. So of the 4 legacy job that we've been talking about, absolutely, there is only 1 that we'll have, I call it, potential productivity issues. Because there's only 1 project of those 4 legacy projects that has any longevity to it. So I the other ones, we're just cleaning up right now. And in fact...

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [31]

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Yes, I think that's the Florida one.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [32]

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[It was] 95%, 97%, 98% done. Yes, there's only one left that will carry into 2020 of those projects. So let me go back to the next one because that's important also, Nelson, is that where is it are we in the evolution of our bidding on large projects and we have absolutely moved away from being a nonsponsored JV partner. I would say on -- out of, I'm going to say in general, about 20 jobs that we're bidding, I can think of 2 jobs that we are not the sponsor. And that's it, going forward...

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [33]

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And why do you feel comfortable about them? Is there something about them that because, obviously, as you move away from the old model, you significantly reduce your risk profile I think you're entitled to a higher multiple.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [34]

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Well Nelson, I'll tell you what. Because I think, on the 2 that I can think of, is because we partnered our project or our partner has a very strong relationship with the owner and/or our partner is in that geographic market.

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Jigisha Desai, Granite Construction Incorporated - Senior VP & CFO [35]

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Right.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [36]

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And is a very strong player in that geographic market and they've asked us to help them build the project. In general, we say no. And the only time that we would team with anybody in a minority role now is that we talk about margin, contingency and expectations going in. So that they may raise there -- we typically are the contractor that requires the highest margins in the industry and if they're going to partner with us in any sense of the word and even if we are a minority partner we would agree in advance that the minimum expectations would be the expectation that Granite has on all of our work. So again, very small -- now previously, we would have 75% of our work, we probably would have been the nonsponsor. So let's call it, 90% of our work today we are the sponsor, very unique situations, Nelson, where we would be a nonsponsor, very unique.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [37]

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Just random comments. I mean, I think that's a major change in your business model and a very positive one. So enough said.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [38]

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Yes. Nelson, one thing that I will say about it is that it puts the owners on us. We are in charge. And if we have a bad project or a problem, we need to look in the mirror. And that's where we're going. We are going to take complete ownership, responsibility and accountability for our work and make sure that the good, the bad, and hopefully, there isn't the ugly, but the good, the bad is all ours. And we believe we wanted to end up having better result because we're in charge, and we actually create our own destiny.

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Nelson Jay Obus, Wynnefield Capital, Inc. - President, CIO & Portfolio Manager [39]

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That's fair enough. Buck stops with you know. But you must have learned something from having too many chefs in the kitchen, so to speak.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [40]

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We have learned a lot, Nelson. Yes, we have.

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Operator [41]

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And it does appear, we are no further questions at this time. I'll turn the conference back over to our presenter for any final or closing remarks.

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James Hildebrand Roberts, Granite Construction Incorporated - President, CEO & Director [42]

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Well, everybody, first of all, thank you for your questions. And a quick note for our shareholders and to our investors. Jigisha, Ron, and I will be on the road, in the conferences. We are also going to be busy in our operations and investors around the company throughout all of 2019. So please reach out to Ron and we will look forward to speaking with you and of course, be willing and look forward to meeting with all of 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, Ron and I are available if for follow up, if you have any further questions. Thank you, everyone.

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Operator [43]

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That does concludes today's teleconference. Thank you all for your participation. You may now disconnect.