Q4 2021 Granite Construction Inc Earnings Call
Good morning, My name is Betsy and I will be your conference facilitator today.
At this time I would like to welcome everyone to the granite construction Investor Relations fourth quarter 2021 conference call.
This call is being recorded.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer period to ask a question. Please press Star then one please.
Please note we will take one question and one follow up question from each participant today.
It is now my pleasure to turn the floor over to your host granite construction incorporated Vice President of Investor Relations, Mike Barker. Please go ahead.
Good morning, and thank you for joining us I'm pleased to be here today, with President and Chief Executive Officer, Carlos <unk>, and Executive Vice President and Chief Financial Officer, Lisa Curtis.
Please note that today's earnings presentation will be available on the events and presentations page of our Investor Relations website.
We begin today with an overview of the company's Safe Harbor language. Some of the discussion today may include forward looking statements within the meaning of the private Securities Litigation Reform Act of $19 95.
These forward looking statements are estimates, reflecting the current expectations and best judgment of senior management regarding future events occurrences opportunities targets growth demand strategic plans circumstances activities performance shareholder value outcomes outlook.
Guidance objectives committed and awarded projects where cap and results.
Actual results could differ materially from statements made today.
Please refer to granites, most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward looking statements. The company assumes no obligation to update forward looking statements, whether they are results of new information future events or otherwise except as required by law.
Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives. These include but are not limited to adjusted EBITDA adjusted EBITDA margin adjusted net income or loss and adjusted earnings or loss per share.
The required disclosures regarding our 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 Carlos.
Thank you, Mike and good morning, and welcome to our fourth quarter earnings call.
Three weeks ago, we announced several important steps as we continue to implement and drive forward, our new strategic plan.
I'll briefly touch on our strategic plan in a few minutes.
But let me begin with review of the steps that were announced.
First we signed a definitive agreement to sell a grant and liner you may expect that transaction to close as previously reported.
Secondly, we also announced our intent to sell water resources and mineral services businesses.
And liner water resources and mineral services comprised of our former water in mineral services for WNS operating group.
With these announcements WNS is now being reported as held for sale and discontinued operations in our financial statements.
Our company has been through a lot. The past few years, we are acutely aware of the need to learn from our recent struggles. So we can improve our performance and create value for all our stakeholders.
This was our focus as we revisited our strategic plan over the past year.
As our new management team came together and discuss the direction of our organization. It was clear that our company's core competencies lie in our civil construction and materials businesses.
All the information that we studied confirmed my belief the granite future should be built around return to our core skill set.
This is what we have done for 100 years, and we were one of the best contractors in the country.
As a result, we concluded that our success depends on our <unk> been focused on building, our core businesses and focusing all of our efforts on supporting and aligning the company with our civil construction and materials business.
This is why we decided to divest of the WNS businesses with full support from our board of directors and focus our energy and resources on our core competencies.
We believe this is a simple decision that is in the best interest of our shareholders divesting of these businesses bolsters, our cash position and allows us to strategically invest in new opportunities to grow both organically and through acquisitions.
We will be in position to invest additional capital and developing our people and upgrading our equipment and technology. These investments will create economies of scale, both in operations and support functions.
We will then be in a position to grow a familiar predictable business model one that we have run successfully for 100 years.
Our future is now truly going to be built by leveraging upon our past.
With the planned divestitures of the WNS businesses, we also announced a change in our reportable segments from transportation water specialty and materials to our new segments of construction and materials.
We identified a reportable segments based on how we manage the company through the allocation of capital and how we measure and assess performance with our new strategic plan.
Shifting away from end markets to focus on our core civil construction and materials business. We will continue to operate in a variety of end markets, including transportation projects private site development projects mining projects and water related construction projects, such as dams and Spillways all of these projects importantly, our bid and built by our team.
Utilizing the same core competencies underpin all of our work.
Granite strength has always been the ability of our teams working in their home market to leveraged materials resources and local market knowledge to gain a competitive advantage in the markets, where we operate.
Strengthening and growing these home markets across our geographies and leveraging our expertise to secure high value projects with both public and private customers as the core of our strategy that will be granted to achieve consistent profitability and growth.
We also announced the reorganization of our operating groups from five to three operating groups, the California and mountain, formerly northwest operating groups remains largely unchanged with the exception of the shift of our renewable energy business and to the mountain operating group the Central operating group is a combination of the previous heavy civil.
Midwest and federal operating groups with the addition of the Arizona region. It was previously and the former northwest drew.
As the Central operating group, our former heavy civil group businesses will adopt a more focused home market strategy built upon the strengths of our Texas and Florida market areas.
We believe this change will allow these regions to capitalize on the benefits of our proven home market model.
This is the next phase in the transformation of the former heavy civil operating group.
Project selection criteria of the opportunities we are pursuing in the central group have been transformed and now we are shifting the focus to strengthening our home market presence in these key and growing states. This transformation will take time it will not occur overnight, but we believe we have the right team and strategy to develop these markets and the image of our California and mountain groups.
Okay.
Finally, we announced an increased authorization in our share repurchase program, resulting in an authorization for up to $300 million in purchases.
We have maintained a strong cash and liquidity position through 2021 and with the proceeds from the expected divestitures of the former WNS group, we should have additional flexibility to invest in our business and return value to shareholders through share repurchases.
Now.
Let me briefly talk about our new strategic plan and as key themes.
In the near future, we would go into much more detail on our new strategic plan were granted is going in the next few years.
There are four themes to our new strategic plan.
Develop our people.
Raised the bar grow market share and maximize granted value add or GBA.
Our people and refreshed core values are the foundation of Grand strategy.
To develop our people theme is centered on that foundation, there's incredible demand and competition for people at all levels of our organization.
And a strong macroeconomic market with low levels of unemployment, we need to not only retain our people, but also to focus on their development to achieve the growth is possible as a result of the increasing infrastructure funding.
We believe our renewed focus on our core competencies as a civil contractor will assist us to be more effective and sharing resources developing leaders using standardized processes and best practices.
Our next theme of raising the bar is centered on our unrelenting focus on execution and process efficiency to drive profitability.
We've talked a lot over the last year about the significant changes we made in our project selection process and the types of projects, we are pursuing compared to previous years.
We have made tremendous progress in this area as we transform the mix and quality of our cap.
We expect to see benefits in 2022, but even more in 2023 and 2020 for some of our lower risk projects such as construction manager general contractor or Sandra see projects have an extended initial construction manager timeline typically lasts over one year before the construction contract is awarded and construction where commence.
<unk>.
We have also.
Experienced certain project execution issues that have prevented us from achieving the levels of consistent profitability that we should be delivering in each period.
Within this theme of raising the bar, we are focused on driving improved and consistent execution with renewed focus on standardized requirements and best practices across all of our businesses.
We believe this focus will translate into improved profitability. Finally this team also includes our efforts to drive efficiency within SG&A.
While we have made good progress SG&A remains an area of continued focus.
The third theme is grow market share.
Key conclusion of our strategic plan is that we perform best when we utilize our home market competitive advantages.
This has been demonstrated over granite history by the performance of our vertically integrated businesses. Unfortunately, the typically strong performance of our vertically integrated businesses have recently been overshadowed by losses on higher risk large project work in our old risk portfolio.
RFP.
We intend to invest in our vertically integrated business model organically and through M&A to strengthen and expand existing home markets and to establish new home markets. We see many opportunities to invest in our home markets such as to acquiring additional material reserves and equipment as well as opportunities for bolt on acquisitions.
Our liquidity and balance sheet provide us the ability to invest in our business and we intend to do so in 2022 and beyond.
The final theme of our strategic plan is maximized GBA.
This theme pulls together the impacts of the strategic plan by and through growth in terms of earnings consistent profitability and capital management or in other words, bringing value to our stakeholders as I mentioned, you'll hear much more about these themes and our new strategic plan in the near future. So stay tuned.
Now, let's talk about our construction segment as a reminder, this segment includes all construction projects across the company, excluding the farmer WNS group, which is now presented in discontinued operations.
For fiscal 2021, approximately 41% of construction revenue was earned by the Central group, 32% came from the California Group and 28% came from the Mountain group.
Within the Central group revenue declined $87 million in 2021 compared to the prior year as work progressed through the ORP.
As I have discussed this past year, our focus has been to transform the group by completing the ORP as we pursue projects that meet our new project selection criteria.
We have made substantial progress in this transformation and we continue to work to build new backlog that should deliver the returns that we expect the decreases in revenue in the group which were intentional.
Partially offset by increases in revenue and the vertically integrated Arizona region based in Tucson, Arizona region expanded to open a second office in Phoenix in 2021.
These region offices serve customers throughout Arizona, and new Mexico.
And opportunities are significant and the Arizona region, and our organic expansion in Phoenix reflects the implementation of our new strategic plan.
The California group comprised 32% of our construction revenue for fiscal 2021.
Revenue decreased to $106 million in this group from the prior year. There were several factors that contributed to the decrease of revenue. The first factor was the record results recognized in the second half of fiscal 2020.
This was led by the acceleration of projects as we work with owners to gain accommodations arising from the pandemic question traffic conditions.
But these accommodations our crews were able to complete a significant amount of work in our caf in the third and fourth quarters of 2020 the.
The second factor, reducing revenue and the California group was an increase in weather related disruption in the fourth quarter of 2021.
This contrast, with the drive fourth quarter of 2020.
Lastly in the third quarter of 2021, I mentioned the impact on revenue we were experiencing as a result extended competitive bid environment. During the first half of 2021.
The result was a reduction of revenue in the third quarter that carried over into the fourth quarter. While these combined factors reduced revenue for the California group in the fourth quarter and the fiscal year 2021, our outlook for the state is still very bright.
Funding and budgets are strong so we carry strong cap in the 2022, which I will talk further about in a few minutes.
Finally, the mountain group finished 2021 strong with 28% of our total construction revenue an increase of $31 million from the prior fiscal year.
Driving the year over year increase in revenue for the Nevada, Washington, and Utah regions, coupled with the renewable energy Division all turning in strong performances.
We have long standing established vertically integrated businesses in these regions.
All represent growing markets and opportunities for us to build upon.
Our renewable energy division operates across the U S and primarily focuses on installation of solar power generation and battery storage facilities granite has a strong presence in this growing market, which has been fueled by the U S government's pushed to expand the nation's shift to renewable energy sources.
Now onto our construction cap, which ended the year at $4 billion and as a reminder, this is only cap is continuing operations in the California, Central and mountain groups and excludes cap from discontinued operations our WNS.
Cap of 4 billion represent slight decreases from the third quarter and the prior year of 55 million to $15 million respectively.
On the slide you can see two different views of our cap.
By procurement type and by operating group.
These are two key ways that we measure and assess our project portfolio mix and quality.
Capped by procurement type provides a view of the percentage of cap in the bid build design build and best value procurement types.
Bid build as the procurement type is most commonly used by departments of transportation and other municipalities. When letting projects did build is when the project owner is responsible for the design of a project typically the lowest bid wins the job. This procurement type is widely used throughout our markets, particularly on smaller quicker trained projects that we typically construct by a vertically.
Integrated businesses.
The last two years the percentage of bid build projects in our cap has remained consistent and we expect they built work will remain the majority of our project portfolio mix.
Design build procurements as frequently used for larger projects and allows project owners to more quickly with these projects to contractors.
Contractors are responsible for design risk and construction risks and bids are often submitted with approximately 30% of the design of the project completed.
This procurement type introduces more risk to the contractor who takes responsibility for the majority of the design of the project.
Historically granted was a joint venture partner on very large design build projects. These projects now represent the majority of our remaining ORP and where the impetus for development of our new project selection criteria over the last two years Katherine such design build projects has been reduced by over half as we continue to complete the ORP.
We expect the design Bill will remain a component of our cap in the future. However, we intend to target such projects in our home markets, where we can leverage our team's local knowledge and where we can we are fairly compensated for the additional design risks inherent in this procurement type.
And best value procurement projects contracts are primarily selected based on qualifications and experience.
And awards are not solely based on low price.
Similar to design build this procurement type also allows project owners to these projects to contractors much quicker and bid build as the design and construction of the project is a collaboration between the owner and the contractor.
First of all your projects have longer lead times, including Preconstruction phase work to come out several years before the actual construction begins granite has been very successful in procuring best value projects due to our project teams strong qualifications and experience. We have increased the percentage of this type of work in our project portfolio of over the last two years.
We believe this procurement type due to the collaborative nature of the relationship with the owner allows us to provide a high level of value and simultaneously to mitigate risks before they rise to the level of a legal dispute or claim.
Very pleased with the increase a best value procurement in our portfolio and expect it will continue to be a significant component of our cap in the future.
The next few of our cap is by operating group when we review our cap, we'd look at diversification by risk and contract type, but also geography.
Over the last two years, you can see the reduction to cap in our central group, including the ORP within the Central group keep in mind that this group now includes our vertically integrated Arizona region.
Our formal federal Division, our Civil Division, and the Chicago region, and our Texas and Florida regions.
But the reduction of ORP cap and the more selected new project selection criteria the central groups cap as a percentage of our total has decreased by 17% in the last two years as we remain diligent in transforming the project mix in the Central group, we expect their cap to stabilize or grow modestly in 2020 to offer.
Setting the decrease in Central group cap is the increase in both California and mountain groups. The increase in cap in the east groups reflects a strong economic and funding environments in those markets as well as the success, we have demonstrated to owners and adding value and <unk> selected as partners and the best value procurement projects.
We're excited when we look at the transformation of our cap and how we're positioned going into 2022 is a stronger portfolio with less risk and grant has had in recent years you.
We are not only pleased with our cap in our largest markets in California, but also across the country I believe we're very well positioned with our new home market strategy to grow our cap as funds are distributed from the federal infrastructure, Bill and allocated the dot's municipalities and state agencies.
Now turning to the materials segment, where although the materials business was impacted by wet weather in the fourth quarter. We finished the year with an annual revenue increase of 12% over the prior year led by higher volumes across the operating groups.
For 2021 aggregate volumes increased by 11% and asphalt increased by 6% over the prior year.
During 2021, we derived approximately 65% of our materials revenues from asphalt sales. These percentages are calculated on a gross basis and include not only external sales, but also internal sales at higher get to our asphalt plants as well as sales of asphalt into our construction projects.
A significant component in variable in asphalt production as liquid asphalt, which is had volatile pricing along with other oil related products over the last two years and 2020, we saw a benefit in our results from lower cost for liquid asphalt in 2021 oil prices increased throughout the year and into 2022.
While we apply measures such as bulk purchases forward contracts and.
And other hedging to mitigate our exposure to oil prices, we did experience some negative impact in our results from rapidly rising oil prices during 2021 and.
In 2022.
We continue to see a rising oil prices due to the concerns over the economy and the conflict in eastern Europe , We will continue to closely monitor oil prices and apply measures to mitigate risks.
Now I'll touch on the market and what we are seeing in terms of funding and the economy.
At the federal level in November of 2021, the infrastructure investment and jobs Act was finally signed into law attributed discussion for many months.
This slide represents a generational investment in critical infrastructure needs of the country to.
The Bill provides 550 billion in incremental funding over five years, including 284 billion for transportation and 261 billion for utilities.
This funding is for a wide variety of infrastructure needs many of which granted participates in directly or indirectly from rosenberg as airports and water ports to power and water construction as.
As a diversified civil contractor, we believe we will benefit from the additional funding for many different types of projects.
The Bill is also expected to drive economic expansion that should benefit the private market.
Clinton has steadily built upon relationships with private market clients over the last several years in various industries from mining in renewables the tech companies and should benefit as these clients expand their footprint and a strong economic environment.
At the state and local level our markets vary based on geography, but there is general continued support from voter approved transportation measures.
We believe the environment is healthy and we expect that once Congress funds infrastructure build through appropriations more activity and opportunities will be generated as 2022 progresses. However, the more meaningful impact should occur in 2023 and 2024.
Now I'll turn it over to Lisa to go over our financial results.
Thank you Scott.
For fiscal year 2021 revenue from continuing operations decreased 4% from the prior year, while gross profit increased slightly resulting in a gross margin of 10%.
And the construction segment full year revenue from continuing operations declined $162 million year over year to $2 6 billion.
This decrease reflects lower revenue in our central and California and.
In the Central group, we experienced an expected revenue decline this year as we transform the central groups project portfolio.
California Group revenue also saw a decrease resulting from several factors, including an extended competitive bidding environment in the first half of 2021 and inclement weather in the fourth quarter of 2021, particularly as compared to 2020.
The California group results for 2021 are also contrast, it against a very strong second half of 2020, where the group had record revenues while.
While revenues are down year over year, we believe there is underlying strength in California as demonstrated by the group's caf.
Construction segment gross profit for the year increased 3%, resulting in a gross profit margin of 10%. This increase in gross profit was primarily driven by a decrease in ORP losses year over year, which was partially offset by the impact of several factors, including reduced margins on certain projects from <unk>.
Execution and margin pressure from the extended competitive bidding environment during the first half of 2021.
DRP ended the year with remaining cap at $319 million, which is higher than our previous projections of $275 million.
This is due to progression of projects lagging original expectations and write downs incurred in the fourth quarter.
Fourth quarter and full year 2021, net ORP losses to granite, which excludes non controlling interests were $16 million for both periods on revenue of $66 million and $385 million respectively.
This compares to a loss of 81 million on revenue of $410 million for full year 2020.
The fourth quarter illustrates the complexity and risk of these challenging projects and continues to support and validate our new strategy.
During 2021, we reduced ORP cap by $358 million, leaving $319 million going into 2022.
Only one project in the ORP has cap in excess of $50 million at this point and the majority of the projects should be completed in 2022.
We expect that we will have approximately $50 million of ORP cap that will remain at the end of 2022 and carried into 2023.
This figure remains consistent with our previously communicated expectations.
And the materials segment, our teams completed a strong year, despite the inclement weather in California in the fourth quarter for.
For the year, the materials segment revenue increased $43 million or 12% led by strong aggregate and asphalt volumes throughout the year.
Materials gross profit for the year declined by $6 million with a gross profit margin in 2021, 14% compared to 17% in the prior year.
This decrease in margin is largely due to the benefit received in 2020 from lower liquid asphalt costs.
Turning now to our non-GAAP financial metric adjusted EBITDA margin from total operation, which includes both continuing and discontinued operations was 6% for fiscal 2021 compared to five 1% for 2020.
We ended the year at the low end of our guidance as two risks we discussed during the year materialized during the fourth quarter those being the ORP performance and fourth quarter wet weather adjusted.
Adjusted EBITDA and EBITDA margin from continuing operations for fiscal 2021 was $163 million and five 4% compared to $153 million and four 9% in the prior year.
For fiscal 2021, combined SG&A, including discontinued operations ended at eight 7% of revenue, which was in the middle of our guidance of eight 5% to 9%.
SG&A from continuing operations ended the year at eight 1% of revenue.
Adjusted net income from continuing operations for 2021 increased $10 million year over year to $61 million or adjusted diluted earnings per share of $1 33, compared to $1 12 and 2020.
For fiscal 2021, $1 3 million potential shares were added back to diluted weighted average shares outstanding.
Representing the diluted effect of our convertible note, which is offset by a purchased equity derivative instrument.
Now turning to our cash and financial position.
Operating cash flow for fiscal 2021 decreased to $22 million compared to $268 million in 2020.
There were several factors that drove the decrease in cash flows.
For fiscal 2020 operating cash flow benefited from approximately $70 million of claims settlements and favorable impacts and working capital while fiscal 2021 was impacted by the Securities litigation settlement and nonrecurring legal fees of 88 million.
As of the end of the year, our cash and marketable securities remained strong at $411 million and our revolver availability stands at 232 million with no debt currently drawn on the revolver.
Our liquidity position will be further strengthened with the closing of the inline our divestiture and later in the year. We also expect cash inflow with the planned divestitures of water resources and mineral services.
With our liquidity position and increased share repurchase program authorization up to $300 million, we expect to pay down debt and deliver value back to our shareholders in 2022.
Now I'd like to discuss our 2022 outlook and guidance before turning the call back over to Kyle.
In 2022, we expect low single digit revenue growth compared to 2021.
Our assumptions are driven by expected increases in revenue and the California and mountain grades, which will be partially offset by a decrease in the central group as projects in the ORP are completed and the Central group focuses on pursuing work in home markets, which fit with our project selection criteria.
Yes.
While we expect to build backlog during the year as more projects are released with the increased funding from the federal infrastructure Bill the benefits of this on our cap one more meaningfully translate into higher revenue in 2023 and beyond and is not expected to be as impactful in 2022.
We are excited about our markets and industry outlook over the next several years as the nation makes this generational investment in infrastructure.
We are well positioned in growing markets across the U S and are ready to build on our cat portfolio in 2022 and beyond.
We expect adjusted EBITDA margin from continuing operations to improve in 2022.
We ended 2021 with an adjusted EBITDA margin from continuing operations of five 4%.
Our guidance for 2022 is a range of 6% to 8%.
In 2022, we anticipate the completion of a majority of the ORP projects and have assumed zero margin and our guidance.
We expect SG&A expense from continuing operations to remain largely consistent with the level in 2021, and we are providing a guidance range of 8% to eight 5% for fiscal 2022, as we work to eliminate stranded costs related to the <unk>.
Planned divestitures and also work to position ourselves to capitalize on the new infrastructure funding.
We remain focused on gaining efficiency in SG&A and believe we will be able to achieve greater economies of scale.
With a renewed focus on our civil construction and materials business as we standardize and grow the business in 2023 and beyond.
Finally, we expect our effective tax rate from continuing operations to be in the low to mid 20% range and capital expenditures in the range of 100 million to $115 million.
This increase in capital expenditures compared to 2021, primarily reflects expected investments in technology, and our materials business to reduce our production costs and to expand our aggregate reserves.
Our materials business remains a critical component of our vertically integrated how market strategy, and we intend to be strategic and investing organically.
And through M&A to enhance and grow our footprint.
With that I will turn it back over to Kyle.
Thanks, Lisa I'll close with the following points.
I'm disappointed with the results of our fourth quarter, particularly the losses occurred in the ORP. The good news is that we expect to burn through all but $50 million of the ERP in 2022.
We fully appreciate the importance of mitigating the risks associated with these projects and our team remains laser focused on their completion.
We all understand the importance of getting these projects behind us and executed so that we don't have a repeat of the performance to be experienced in the fourth quarter.
We are well on our way in the implementation of our new strategic plan that will allow us to focus on what we do best civil construction and materials work in our home markets.
We believe that this return to our core strengths will result in a profitable business to provide consistent returns for our shareholders.
We move into 2022 with the transform cap portfolio that has been built to our initiative to pursue best value procurement projects and reduce exposure to risky design build projects I believe we will see the financial benefits of this transformation in 2022 through higher levels of profitability.
Our cash and liquidity position remains strong and will grow stronger as we complete our announced divestitures.
We will be strategic and investing in our business. We are positioned to return value to shareholders through our expanded share repurchase program upon closure of the divestitures.
Finally, with the passing of the infrastructure Bill in the fourth quarter. We believe our bid list will continue to grow as funding makes its way to states and project Lettings in the second half of the year.
Operator, I will now turn it back to you for questions.
To ask a question. Please press Star then one please.
Please limit yourself to one question and one follow up question and then feel free to back into the queue. If you have additional question.
Our first question today comes from Brent Thielman with D. A Davidson. Please go ahead.
Okay, great. Thank you.
Hey, Tom I guess my first question just beyond the water portfolio recognize some.
Some of these assets were generating the returns I think you sort of expected them to get to.
Just wanted to kind of come back to why now in terms of the rationale to sell some of these businesses and if possible. If you can offer any range of what you might expect for the two remaining businesses in terms of.
What that could bring it to a degree.
In terms of new capital that that'd be great.
Sure Yes.
Thanks for the question when we looked at WNS, we spent the last good.
Part of last year working on our strategic plan as a company we were very closely with the risk Committee and our board in terms of the process moves a lot of data.
We looked at all kinds of information.
Internal and external.
And what it all came back to was really focusing on where we know we do well where were successful and how we are successful and that really came back to our core civil construction business and our materials business and really kind of our home market strategy and those those are the attributes.
Where we do best.
In WNS just didn't fit and.
And so we decided to to really divest of that portion of our portfolio. So we can reinvest back in our core business and line ourselves up for success moving forward. So that was really the impetus for the sale.
In terms of the.
The amount that we anticipate for the remaining two businesses to.
To be determined we just started the process. So we're hopefully going to have something that we could announce later this year, but it's too early to tell at this point in time.
Okay.
And then the 6% to 8% EBITDA guidance margin guidance.
Obviously still reflects the impact of the ORP portfolio.
Maybe just a refresh of what you still expect from the kind of the ongoing business.
Beyond that sort of more of on a normalized basis, one sort of ORP rolls off.
Okay.
Yes.
For us, we see ourselves longer term towards that 9% to 10% EBITDA margin type business, obviously, we have to get through this ORP in.
And we will certainly get that behind us I mean, the good news is we are seeing that portfolio wind down it really the pace, we thought it would for the most part obviously, we werent. We're pleased with how we performed in Q4.
But we are looking at that portfolio, we're getting behind us at the end of the year.
Backlog around $50 million and we have really two active projects at that point in time and one is actually in a profitable position. So so we are pacing to get the ORP behind us.
And then we can really move the business forward in the direction that we're working towards an end.
As we look at that.
Longer term guidance I can tell you the market seems to be improving we like what we're seeing.
And we think by allowing ourselves to really focus on our core business driving improved execution and get even better at what we're good at so we think that's going to be how we get to that 9%, 10% EBIT margin.
Okay. Thanks, Scott I'll get back in queue.
Thank you.
The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Hi, good morning.
To kind of stay on this margin topic.
SG&A at 8% eight 5% includes ORP is there a way to think about what this looks like excluding ORP would rise as a percentage of sales somewhat or even decline.
Well, what we've been doing is actually offsetting the decline in ORP with our vertically integrated businesses out in the west and we see that will continue but we are also transforming.
What was the heavy civil group and now is the Central group.
And focusing them on their home markets and we.
We're starting to see results. So we're starting to see certainly in Texas, our ability to pick up work.
On a lot smaller type contracts that fit us very well. So I think the teams have done a really nice job of transforming beyond just not pursuing big Mega project design build jobs, so it really transforming into our home market strategy. So.
Because we as we look forward.
Certainly we are well positioned for the infrastructure Bill and what will come out later this year in terms of Lettings.
We expect that we're actually to build a growth we would anticipate that our SG&A will actually improve so that's how we're looking at it.
Okay. Okay helpful. Helpful and then on that Central group transformation.
A revenue headwind in 2022 at that purely ORP.
And then.
I guess should the transformation of the central groups proved successful is there a way to quantify kind of the gross margin or SG&A benefit to the construction segment from that happening and is there a timeline associated with that.
I'm not sure I'm totally following the question.
So you are asking.
So so far so Steven this is Lisa So you were asking about so for the central group kind of a change in the revenue going into 2022 that is going to be impacted by a lower ORP burn.
We burned through about $358 million of ORP capped in the current year and we're going into 2022 with about $319 million. So our expected burn is about $270 million and 2022. So that is a component, but we are transforming that port.
Folio and shifting it to more of our home market focus so as that transformation happens and we stick to our new project pursuit criteria.
There is some decline that we are anticipating in our guidance related to central So those are kind of the key components. So that maybe in the first part of your question and there may have been a part two that we missed.
No that is helpful. Yes, I guess, yes, that's helpful. What im getting at is the margin benefit or headwind in 2022.
And.
As a launch pad to next year is the central group ready to grow with this new discipline.
And track it takes for its strategy, yes, okay.
Youre headed there so yes, the ORP that we have burning through 2022 is really to breakeven and so we look forward. We expect the margins within the ongoing central group to be just in line with where we are in the other parts of our business. So we anticipate growing it.
There will be some.
<unk> coming off of projects and going onto the bench, so thats a little bit of why you see a slight uptick in the SG&A off of last year's results. We anticipate there's going to be opportunities to put those employees to work on projects as infrastructure Bill comes out but in general we expect our margins in the central group to be really.
Looking very similar to what we see out in the west.
Okay. That's helpful. Thank you.
Thank you.
Question comes from Michael Dudas with vertical research partners. Please go ahead.
Good morning, gentlemen, Lisa.
Good morning, good morning.
Could you share your thoughts on you seem pretty upbeat about the cap that you had going into 2022, how does the margin that booked into that cap heading into 'twenty two compare to what you were going into 2021 and on top of that could you share you mentioned about the competitive.
In 2021.
How does it look today.
As less competitive more competitive is that going to be a hindrance because of your new selectivity.
Until some of this federal funding starts to flow through more aggressively to hopefully some of those competitive battles.
Sure and you look at the cap I mean, I can tell you as we wind down the ORP and maybe replacing the caf with with quality.
And our <unk> businesses and even in Central group with new work the quality of our cap is a lot better than what we had seen.
Year over year. So we're excited about the cap.
For sure as you look at kind of back end the prepared remarks in the presentation.
This shift is that moved from design build it two years ago around 25% of our portfolio and now we're sitting right around 10, so that the risk profile of our cap has changed dramatically.
And we are also are best value component has gone from 24% two years ago to <unk> 46, and we know we do very well on these best value projects. So so we're.
We're excited about our cap and where we're moving the company forward in that regard given your question around the market last year at this time.
And we were kind of walking into.
For Q2, Q3, where we saw that the market and the competitive landscape remained more competitive than it usually does into Q2 and Q3 and we shared that part of it was whether you started to slow private lettings public levies as there were some really trying to figure out where things are going with the infrastructure Bill.
The pandemic inflationary pressures supply chain issues things things were a little bit different a year ago than they are today, what we've seen in Alaska, a three or four months, we've seen the bid volumes go up.
Which is very encouraging we're seeing that in really every one of our markets. So that's encouraging we're picking up about the same amount of work, but the really good news is our margins are a little bit higher. So we see all the indicators are pointing the right direction right now and we'll see how things progress, but we are excited about our market. So overall I would say they're all.
Looking strong.
Obviously, some are stronger than others.
So I can now be positioned today.
And when you talk about the positive risk profile shifted in your backlog unless design builds more best value, which I understand is that an overall net positive neutral and they get to absolute margin expectations of generating that margin.
Yes, our expectations margins with increase certainly.
We need these design build projects that we've been building for years some of them go back to 2000.
Maybe <unk> and <unk>.
These projects.
That design build criteria.
The margins didn't deliver.
Based on our cap today, we're feeling very confident around the quality of our cash.
That's encouraging and my follow up question would be.
So I think in response to a question in your remarks, you talked about your share repurchase program. That's expanded in your capital spending for the year.
You mentioned about your.
Comfortable maybe executing on that program do you feel you can do that now given where the cash and balance sheet you have to wait for the proceeds to come in on this transaction you have to wait to both transactions get closed.
Are you guys thinking about that on the pace, given where the valuation stock is today.
And then.
With the pace of M&A and opportunities, especially maybe in that Central group, where you may want to think about adding more.
<unk> backward integration to kind of make it.
More structurally verticals business.
Is that going to be a part of it because it seems like you had a lot of moving parts of the cash and also what the drain on cash.
Would you expect from your teams.
So just can you give a sense on how thats been planned I appreciate it.
Hey, Mike This is Lisa so I'll touch on your question about liquidity on our share repurchase. So we ended we ended the year strong with us.
With our liquidity position, we had year end cash a little over $410 million and then we did announce that we that we received the increased authorization from the board in early February related to our share repurchase program to increase that up to $300 million. So we're really positioned nice.
Fleet to be able to take advantage of that so.
We are keeping an eye on the markets. We don't have specific timing at this point, but we expect it in the near term. So we are keeping an eye on the markets and we are monitoring for appropriate opportunities. We also talked about that.
In our prepared remarks.
Anticipation of paying down debt so with granite we are.
Our liquidity position has remained strong even through the past couple of years and some of the challenges that we anticipated. We also do not have any borrowings drawn on our revolver. So we have full capacity related to that so that's from a just overall balance sheet and liquidity position, we're sitting strong.
To then ultimately when we close on the inline our transaction in the near term, we will have an infusion from cash related to that and then we'll be able to act accordingly.
The balance between debt Paydown, and actually returning value back to shareholders through share repurchases.
So maybe and then I'll piggyback and talk a little bit about what we're doing in terms of reinvestment back into our business and when.
Maybe we can talk about central it's really any part of our business today, we're looking at strengthening our existing home markets.
So that's going to be kind of our first step over the next year or two but we see opportunities to invest in aggregate reserves and we talked about technology earlier in automation, we see an opportunity to lower our cost produced in our materials business.
And many of our facilities, we also see opportunities to do smaller bolt on M&A deals within our existing footprint. So we're really looking today is strengthening and supporting even growing our existing home markets and that could be.
Even within say, Texas or Florida.
And again, a home market for us because what we have really the labor the equipment the.
The materials resources, we have the relationships we have the market intelligence.
We're in those markets and we're part of the communities and so we want to ensure that we're strengthening those the best we can and then really I would say in 2024 and beyond that's when we'll start to be prepared to do something more transformational as a company in terms of M&A, but today, it's really about strengthening and supporting our existing home markets and growing them.
Thank you Colin.
Thank you. Thank you.
The next question comes from Brian Russo with Sidoti. Please go ahead.
Hi, good morning.
Hey, Brian .
So.
No.
We've heard from some of your segment tears regarding general optimism.
On.
Yes.
State Lettings throughout 2022, just based on tax revenues are leftover.
<unk>.
Yes.
Subsidies et cetera.
Maybe you could talk about your largest market, California, and how that kind of translates.
What you see as the year over year.
In 2022.
Yes so.
As I mentioned before we're seeing really increased bidding opportunities across all of our markets today, which is encouraging.
If you look at some of our bigger states in terms of say, California.
We're seeing things come back certainly on the public side Caltrans Lettings were actually up year over year, and we anticipate based on SB. One their budget is actually improving over the next five to seven years. So we see that as being an encouraging sign and on top of that within our California market, We do see the private market coming back to some level in <unk>.
<unk> as well so.
Other markets are strong.
I wanted to say go into the details of each one but I think we are encouraged by what we're seeing it seems like there was definitely a little bit of a slowdown last year again with inflationary pressures supply chain issues I think everybody.
As well as wondering what was going to happen with the infrastructure Bill. So now that thats behind us it hasnt been appropriated, but I think I think the Dod and the agencies are starting to see where things are headed so I guess to answer your question in general we feel we feel pretty good about our markets today.
Okay, and then just to follow up on the SG&A.
$2, 5% target of revenues in 2022, do you think that.
Gives you enough scale to then leverage off of what would be the <unk>.
Implied absolute level of SG&A as we move into 2023.
To support the organic growth.
Yes, I do and one thing that we did late last year as a restructure as part of our strategic plan to line things up around this.
Our civil construction and materials business, and we kind of reorganized the organization. We found ways, we could streamline things and so that did result in a cost savings as we move into 2022, but we believe that that's going to be scalable.
And so as you look at the business long term as we grow the top line, we expect that SG&A to come down.
Okay, great. Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press Star then one.
The next question comes from Jerry Revich from Goldman Sachs. Please go ahead.
Yes, hi, good morning.
Morning, Jerry.
Lisa I'm wondering if you could just.
<unk>.
160 basis point margin expansion target that you have it at the midpoint of the range.
Oh.
<unk> of losses, there it looks like it adds about 100 basis points.
Maybe you could put a finer point on that and talk about the improvement that you're expecting in the base business profitability and the visibility that you have on that thanks.
Yes definitely.
So as Tom said some of the points are factors and assumptions that we use related to the midpoint I mean, as you mentioned and I said and that I mentioned in the talking points for.
For the ORP revenue, which is actually anticipated to be a lower component overall, we have no margin or break breakeven related to that portfolio.
We are working towards our strategic plan overall for all of our businesses is to be like in the mid teens range and we're working our way up towards that but really where we are we're anticipating more in the 14% range and the guidance SG&A is at eight and eight 5%.
Which is pretty consistent with what we had for the prior year and then from a weather perspective.
We're not expecting necessarily a dry year, but we're also not expecting.
A lot of inclement weather, we did experienced that more so in the Q4 and.
That impacted our results, whether it's kind of more within normal lines.
With some impact in Q1 and Q4, so those are some of the base assumptions.
For our for our guidance of 6% to 8% range.
Okay.
And in terms of the first quarter, we've heard all micron has really impacted absences in.
Parts of the U S can you talk about whether you expect.
Organic growth to be up year over year in the first quarter based on.
What you've seen so far and if you can just put some parameters around first quarter margins because.
Seasonality can be pretty volatile year to year.
Well I think it's probably premature for us to really anticipate what Q1 is going to look like I can I can tell you December was very wet in the west in December we really lost most of the month in California.
So far in January we saw a drive.
And dry months.
Certainly it's been it's been wet and.
And we see some winter definitely some winter weather across sounded stays with freezing temperatures. So I think that you've already seen some weather impacts in February we will see what March holds but of course in Q1 and Q4, we always have some risk with weather. So it's probably a little early for us.
To give any sort of indication there.
Yes.
Okay, and maybe lastly, just a clarification in terms of ORP backlog entering the year.
Where was that at least we're entering 'twenty two.
Yes, so entering the year, we're at $319 million entering into 2022, and then we anticipate.
To burn through most of that through 2022 and have approximately $50 million entering into 2023.
Okay terrific. Thanks.
Youre welcome.
This is the end of our Q&A session and now I would like to turn the call back over to Mr. Michael.
Okay well. Thank you for your questions to all of our employees. We appreciate everything you do for granted every day. This year, we celebrate our 100 year anniversary, while we chart grants course for our next 100 years.
We are well positioned to capitalize on the numerous opportunities that are in front of us across all of our businesses in 2022 and beyond and to the investors and analysts. Thank you for your continued interest in granite we look forward to speaking with you soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.