Good morning. My name is William, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Reportable Segment Change conference call. This call is being recorded. Our lines have been placed on mute to prevent any background noise, and after the speakers' remarks, there will be a question-and-answer period. To ask a question, you may press star, then one, and please note that we will only take one question from each participant today. It is now my pleasure to turn the floor over to your host, Granite Construction Vice President of Investor Relations and Government Affairs Ron Botoff. Sir, the floor is yours.
Good morning. Welcome to the Granite Construction Incorporated conference call to discuss changes to our reportable business segments. 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 this call is being webcast live with slides, with management referencing slides or slide numbers during this call. The webcast and slides are available on our 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 best judgment of senior management and reflect our current expectations regarding future events, occurrences, circumstances, activities, performance, outcomes, and results. Actual results could differ materially from the statements made today.
Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligation to update forward-looking statements, whether as a result of new information, future events, or otherwise. Certain illustrative data and non-GAAP measures may be discussed during the call and from time to time by the company's executives. Non-GAAP reconciliations are included in releases and in presentations on our investor relations website. In advance of our third quarter 2018 earnings call on October 26th, today's call will focus entirely on the discussion of reporting segment changes. Yesterday, the company filed an 8-K, which provides a quarterly and annual look back and mapping of the segment changes.
Thank you. Now, I would like to turn the call over to Granite Construction Incorporated, Chief Executive Officer, Jim Roberts.
Good morning, and thank you for joining us today. Jigisha will cover most of the ground on the mechanics of the changes we are making and how we report our business segments and the financial view. But before she does, I want to spend a few minutes talking about how these changes reflect the execution of our rolling five-year strategic plan, how we balance opportunities, and how we consider the ongoing evolution of Granite into America's Infrastructure Company. During the Great Recession, it became clear that Granite's concentrated market reliance on public transportation and public infrastructure funding was subject to accelerated negative cyclical trends and increasingly by political risk that is simply not manageable. These were limiting factors for consistent, reliable growth.
We recognized that we needed to expand opportunities by diversifying the sources and drivers of infrastructure funding, both with private market focus and with emphasis on new but related end markets. We also recognized that internal change and M&A activity would be critical to delivering on our geographic and end market diversification strategy. Beginning in 2010, as our traditional markets still were entering a trough, we began reshaping and shifting our approach to growth. In late 2012, we took our first external step toward end market and geographic diversification via acquisition-led growth with our purchase of Kenny Construction. This acquisition introduced us firsthand to significant growth and profit in interesting new markets, including the tunnel, power, water, and wastewater markets. At the same time, we highlighted diversification as a strategic driver across our traditional businesses and its third action and results.
By the end of 2013, our traditional transportation-focused businesses were in early stages of relationship and business plan development. Teams began to focus and to execute. New but complementary and adjacent end markets began to create results. Teams began to leverage existing core competencies and resources, added their local and regional capabilities, and deliver growth in a low-demand transportation market with profitability above traditional transportation profit margins. By 2015, with a couple of years of diversification growth in tow, we began to pursue and discuss areas of interest for Granite to grow and diversify further, highlighting targets in water, power, and rail markets. We since routinely have confirmed the positive impact of end-market customer and project funding diversification across our business. End-market diversification today helps us to identify, focus, and grow Granite's platforms for growth.
This year's acquisitions of Layne Christensen and LiquiForce were an important step on the path of our organic and acquisition-led growth and diversification strategy. This was not a last step. We are not done. We continue to target geographic and end market expansion, taking our vertically integrated model to the east, and we are exploring opportunities for incremental and bolt-on adjacent businesses with a consistent end market focus on transportation, water, power, and rail. Our new segment reporting reflects these efforts and highlights significant end market opportunities for our growth. We believe this new view is much improved, providing deeper visibility and insight than ever before. We also believe an end market focus is the most appropriate way to balance growth and risk opportunities for our business. Granite is a national leader in transportation, and these markets are stable and improving....
This is fueled by strengthening long-term public funding trends and by private, commercial, and industrial demand that remains healthy. 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, mature markets. So we won't beat our strength, even as 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 are developing this area of the business into an efficient, disciplined, consolidating, and growing presence in the attractive water and wastewater markets. In water infrastructure, as in transportation, chronic underinvestment in wastewater, dams, inland waterways, levees, and drinking water systems has resulted in considerable pent-up demand.
According to the American Society of Civil Engineers, in their 2017 infrastructure report card, in the wastewater market alone, more than 56 million new users will be connected to centralized treatment systems over the next two decades, with a price tag estimated at $271 billion. We believe improving funding trends and the significant pent-up demand in water markets bodes well for our business expansion for the foreseeable future. In the materials segment, we emphasize efficiency and relationship building to optimize asset utilization in steady and growing demand environments. This holds true both in our traditional construction materials business, as well as in the vertically integrated liner products business that we acquired with Layne. Increased demand and volume in the materials segment will translate into consistently strong margin performance and steady cash generation.
The specialty segment is comprised of diverse and highly variable projects and businesses, including tunnel, power, renewable energy, and site development, in addition to logistics and materials management. This project diversity will balance segment returns, and we believe it will produce exciting springboards for growth, kind of project wins across industries, geographies, and importantly, across Granite's operating groups. So today, as we get nearer to the dawn of Granite's second century, our basis for growth and value creation emphasizes an increasingly broader approach to markets and opportunities. Even as we expand our opportunity set, emphasis on consistent discipline will allow us to better optimize resources, investments, and results. And with that, I hand it over to Jigisha, with detail on our segment changes. Jigisha?
Thank you, Jim, and good morning, everyone. For those of you following along on the webcast, I begin on slide 4. In June, following the close of the Layne transaction, we announced the creation of the Water and Mineral Services operating group, and we announced the reportable segment changes we have made. Please remember that our functional businesses are managed in operating groups. The M&A activity we executed this year has allowed Granite to better focus and align our strategic outlook with our end market focus on growth, profitability, and risk. Beginning in the third quarter of 2018, the Kenny Operating Group's underground business and LiquiForce joined the Layne Inliner business to become Granite Inliner. This newly combined team is the largest part of the newly formed Water and Mineral Services Group. With this shift, the former Kenny Group is now Granite's Midwest Operating Group.
With that in mind, let's flip over to slide 5 to get into the detail. This change to end market-based segments is consistent with the execution of our rolling five-year strategic plan. Here, we provided a comparative illustrative view of our new segments with presentation of our 2017 annual results, a trailing 12-month illustrated presentation of Granite's results through June 30, 2018, and a trailing 12-month illustrated presentation of Granite's results, including Layne, also through June 30. Both from a revenue and profit perspective, this split highlights the benefits of diversification across the business. On slide 6, we have defined what types of work are reflected in our old and new segment presentation. I will not spend much time here, other than to highlight a couple of the bigger changes. The new transportation segment now includes all related work, regardless of project size.
To that end, reporting of large project activity now will be split, with the majority in the transportation segment. Granite is no stranger to water infrastructure, but breaking out the work we do in the large segment this quarter is new. The specialty segment will include the larger projects in our tunnel and power businesses. It also will include work in the specialized areas of site development, renewable energy, and a broadening portfolio of mining activities and capabilities. Finally, the new materials segment reflects our long-term strategy for vertical integration, and it now includes the cured-in-place pipe focus manufacturing capabilities we acquired with Layne, though today, this represents only about 10% of total materials revenue. Let's dive into the segments just a little more now. On slide 7, we see that even with the addition of Layne and LiquiForce, the transportation segment remains Granite's largest.
Gross profit performance this year lacks the other segments, as it includes the large legacy projects that have been a drag on performance for some time. Work in this segment also includes the pavement preservation work that we pursue across much of the Western US, and of course, it includes the bridges, rail work, airports, and marine ports, a broad range of work and projects that are our everyday bread and butter, and which vary in geography, scope, scale, and risk. The composition of the water segment, as seen on slide 8, includes all water and wastewater solutions, with the maturity of our work and revenue and projects in cured-in-place pipe rehabilitation.
This segment will be an exciting source of growth for our team for many years to come, both from building on a more than century-old history in well drilling and in delivering Granite's traditional work in water storage and conveyance projects. Moving on now to the specialty segment on slide 9. This area of our business is an incubator of sorts for Granite, and it will be driven by the widest variety of projects, both in terms of project type and project scope. Whether leveraging our tunnel, power, mining, or core civil construction capabilities, project diversity will fuel this segment. And finally, on slide 10, the segment with more modest changes is our new material segment, which should track broadly in line with the growth and market development in the transportation and water segments. Now, before we take your questions, let me turn the call back to Jim.
Thank you, Jigisha, for the details of our segment changes and for highlighting the strategic end market focus with which we view our business. Some on the street have modeled Granite for peak performance over the next couple of years. We have not and do not view our opportunities through this prism. We are extremely enthusiastic about our growth prospects, highlighted by our view that we are still in the early innings of what we believe is a significant secular step up in North American infrastructure investment. Our expected trajectory certainly is up and to the right, with stable and steady growth for an extended period. We still believe that based on current market conditions across our business, 2021 to 2023 ultimately will mark something of a mid-cycle point.
These are key factors that contribute to our view that our business is not peaking, rather, we are poised to grow steadily for quite some time. Granite continues to target disciplined, profitable growth, driven by the best long-term trends we have seen in more than a decade. Our opportunities for top and bottom line growth via diversification remain abundant in our water and specialty segments, both in the near term and looking out in the years ahead. We are particularly excited to be able to pursue and grow across these end markets. Our materials segment will continue to press margins higher as demand improves steadily from current levels that still remain well below the past peak of demand about a dozen years ago. Public and private markets remain competitive, but the balance of opportunities is significant.
Hit rates, especially on public transportation work, have been impacted in some markets in alignment with increased bidding, pricing, and market discipline. We are confident that this discipline is creating and will continue to create long-term pricing and margin improvement, especially in the transportation segment. As has been previously discussed, mature large projects have had a significant negative impact on our results for some time, pushing financial performance well below our long-term mid-teens gross profit margin expectations. Newer projects continue to perform well, and we expect our focused efforts on mature projects to help us get to substantial completion of two of those projects by the end of this year. Even with these permanent segment changes, we will provide you with an update on what previously was the large project construction segment performance during our third quarter earnings call.
We are focused on patience and discipline, and we continue to target steady margin improvement in the transportation segment and across our business through 2019, 2020, and well beyond. Delivering financial performance will further enhance our balance sheet strength and fuel the delivery of our growth plan through diversification and geographic expansion. Our pace down the path as America's infrastructure company is accelerating as we build significant economic value for Granite's key stakeholders. Driven by the consistent execution of our strategic plan, we are quite enthusiastic to expand Granite's platforms for growth, investing in our businesses and in our people to help take our success to new heights in the coming years. With that, we will be happy to take your questions.
To ask a question, please press star, then one. Please limit yourself to one question and jump back into the queue if you have additional questions. Our first questioner today will be Joseph Giordano with Cowen. Please go ahead.
Hey, guys. Good morning. This is Tristan in for Joe. Are you going to provide any sort of backlog orders information aside from the new segments?
How will our backlog be, represented in the queue? Is that what you're asking?
Yes, correct.
Yeah, I'm sure we will. It'll, it'll come in the segments just like it did before-
That's correct
... Tristan.
Will you provide any sort of like, sorry, historical like, measures?
No, I think what we'll do is we'll... I think like you see in the, in the 8-K, you've got the historicals on the financials, but I believe that our intentions today are just to provide the current backlog in the new segments in the quarter.
Okay, thanks.
Thank you, Tristan.
Our next questioner today will be Brent Thielman with D.A. Davidson. Go ahead.
Hey, thanks. Good morning.
Good morning, Brent.
Jigisha, any thoughts on terms of kind of target margins between these segments? Maybe, maybe you're not willing to offer today, but I think it would be useful going forward as we, as we think about where these businesses ultimately should get to.
... Yeah, Brent, I think that one of the things we've been really consistent with is that we're a mid-teens margin company. And I think that the best way to model Granite as we go forward and as we burn off a couple of these projects this year, and work our way through the burn off of large projects next year, is to model Granite as a mid-teens margin company over a longer period of time. And we try not to dive into the individual segments, as we have previously discussed.
Okay. Thank you.
Okay, Brent, thank you.
As a reminder to everyone, it is star, then one, if you would like to ask a question. The next question will be Satya Jain with Vertical Research Partners. Please go ahead.
Hi, good morning. This is Satya with Mike Brooks with Vertical Research.
Good morning!
Good morning. Just on the three underperforming projects in large construction, are all the three projects in transportation, or is there a project in specialty segment also?
All of them are in transportation today, yes.
Okay. And one more question. In the $504 million of transportation revenues in second quarter, how much of it was there from Layne and how much was in Nevada?
Well, I'll have to go back and look at some of the Q2 information to be able to determine that. Yeah, yeah, so if the question is, is, was some of that in transportation? The answer is no.
Okay. All right, thank you.
We'd be happy to dive into details offline if that, if we can help you on getting a little more into the details of the Q2 results, okay?
Okay, perfect. Thank you very much.
Yeah, please just get a hold of Ron or Jigisha and I, we'd be happy to, to further develop that thought.
Okay, thanks.
This is the end of the Q&A. I would now like to turn the call back over to our host.
All right, well, very good. Thank you for, for your questions, and Jigisha, and Ron, and I will look forward to speaking with you again on just a couple of weeks from now, October twenty-sixth, when we discuss our third quarter twenty eighteen results. And so as always, we're available for follow-up at your convenience. Thank you, everyone.