Q1 2022 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 incorporated 2022 first quarter conference call.
This call is being recorded.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will 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 Vice President of Investor Relations, Mike Barker.
Good morning, and thank you for joining us I'm pleased to be here today, with President and Chief Executive Officer, Carl Walking 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 a brief discussion regarding forward looking statements and non-GAAP measures.
Some of the discussion today may include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095.
These forward looking statements are estimates, reflecting the current expectations and best judgment of senior management regarding the future events occurrences opportunities targets.
Demand strategic plans circumstances activities performance shareholder value outcomes outlook guidance objectives committed and awarded projects or 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.
The company assumes no obligation to update forward looking statements, 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 color.
Thank you Mike good morning.
In our fourth quarter conference call, we briefly discussed our new strategic plan today.
Today, we will share more detail about our plans and how we believe it will position granted for success.
I wanted to start with an overview of the foundational strides we have made to deliver consistent profitability and measured growth.
We have made substantial progress in Derisking, our project portfolio by narrowing the footprint of our former heavy civil group and introducing rigorous project selection criteria.
This represents a transition away from Mega design build and <unk> projects to project delivery methods that more appropriately share of project risk.
Reducing <unk> exposure to the types of complex design build projects that we and others have struggled with recently.
We believe that this transition is increase the quality of our committed and awarded projects or cap that are existing cap portfolio positions us for increased profitability in 2022 and beyond.
Our strategic plan contemplates a return to strong profitability by focusing on our core construction skills.
The skills that we have developed and honed over the past 100 years. This part.
Part of this focus on core competencies and as previously announced we are in the process of divesting, our former water and mineral services group businesses.
Proceeds from these sales will add to our already strong cash position and support strategic investments and new opportunities to grow both organically and through M&A.
Our new executive leadership team is in place and working to return granted to the profitable company that our shareholders expect and we insist upon.
Recent key decisions include Bahrain, SG&A and driving efficiencies across the company by restructuring our operating groups from five to three.
These revised groups, California Mountain and central are focused on our home market strategy to build on the strengths that made us one of the most respected contractors in the country.
Before we get into the details of our strategy, let me revisit the four key themes of our strategic plan.
First develop our people.
Developing our people is the foundation of Grand strategy and success.
The financial performance of granite depend our engaged employees executing on our strategy.
And a strong macroeconomic environment with lower unemployment there is unprecedented demand and competition for talent at all levels.
Want to be the employer of choice for our industry and we are committed to identifying hiring and retaining the best talent.
We believe we can do this by modeling inclusive diversity, providing career advancement through training and development.
And accelerating opportunities for all employees throughout our talent pipelines.
We look to capitalize on increased funding from the federal infrastructure Bill. It is critical to have skilled train teams ready to execute work across the organization.
To further this goal we are investing in our college entrance ship co op and graduate recruitment programs. We're also focused on enhancing our craft recruiting.
These efforts allow us to identify talent early introduce them to the granite family and convert them to full time employees.
We're implementing more rigorous and standardized continuous training at all levels of the organization, which will enhance the flexibility of our workforce and promote the growth of our people.
Additionally for high potential employees, we have developed and implemented a suite of leadership training programs focused on business acumen, managing people and strategic planning with the goal to graduated 250 employees annually with 40% being people colored for women.
We are proud of our inclusive diversity program.
The right thing to do for our people and is a differentiator in the construction industry. We believe that we are industry leader and inclusive diversity and we plan to continue our focus in this area.
We set company wide goals to increase total women's representation that granted 13%, 2021% to 18% in 2025.
Our goal is to increase women in leadership from 15% in 2021% to 20% in 2025, and we're working to increase people color and leadership from 17% in 2021% to 20% in 2025, we.
We are well on our way to meet these targets we continued to build on the real estate the granted our people.
Second raise the bar in the construction segment. We are focused on three key factors appropriate project selection and accurate estimate on bid day and execution during construction.
To enhance our work on these factors we establish the construction leadership Council our CLC.
Two identify and promulgate best practices in the bidding estimating and project execution processes.
Good CLC, we are focused on further strengthening these processes with increased training enhanced standardization improved database projections and universal adoption of best practices.
The construction industry overall has been slow to adopt technology based solutions to augment the project teams and we look to make this another differentiator for granted we.
We believe these actions will translate to improvements in gross profit and gross profit margin.
We think construction materials, we are raising the bar by automating our plans to increase production capacity, although in our per unit costs.
Investment in technology to support our materials facilities is ongoing and a major component of the strategic plan.
At the beginning of 2021, we opened two new aggregate and asphalt locations in California.
Utilizing the latest technology. These facilities not only replace aging plants, but significantly increased production capacity and efficiency, thereby lowering our overall costs.
Investment in materials facilities continues in 2022 with a variety of upgrades and enhancements to our aggregate plants, which will provide competitive advantages as we worked to strengthen our home market positions.
The third strategic theme is grow market share.
We will continue evolving towards a more client centric culture and investing in our vertically integrated business model to strengthen and expand existing home markets and strategically established nuance when the time is right.
I will discuss shortly this growth will be in two phases, the near term support and strengthen phase and a longer term expand and transform base.
The final strategic theme is maximized granted value add or GTA.
This summarizes what we believe our mission as granite employees work every day to bring value to our stakeholders and reward our employees.
We intend to maximize value add by improving capital management growing earnings delivering consistent financial results and leading the industry in environmental social and governance performance we.
We will deliver value back to shareholders, while simultaneously investing in growth organically and through M&A.
Okay.
You've heard US mentioned, our home market strategy on multiple occasions, now I will walk you through the advantages of this strategy and how it differentiates granite from our competitors.
Your experience in markets, where we have an established presence rebuild market intelligence and insights, which allows us to read the competitive landscape identify the best project opportunities implement the most effective strategy to win and execute work.
In our home market, we are an active member of the community with long standing trusted relationships with vendors and subcontractors. These hard one relationships with key stakeholders. They grant that contracted choice within our home markets.
Our home markets have readily available resources, both in terms of quality construction materials and workforce in these markets. We have many long tenured employees and we are the employer of choice among contractors for both salaried and craft workforce, we can leverage our solid relationships with our union partners to obtain the workforce.
That we need for our projects even in the current challenging labor conditions.
These relationships will be ever more important as funding for projects and demand for Labour expands in the next several years.
Finally, having strong relationships with project owners and regulators is crucial to driving a client centric culture and a key aspect of our home market strategy.
Our goal of being the contractor of choice.
Owing to be selected for emergency work or best value procurement projects, but to maximize collaboration with our stakeholders throughout the full lifecycle of a construction project.
And home markets, we know the clients and representatives from working together for many years enjoyed the strong relationships to support long term success. In fact, we still work with clients that we have worked for a century ago.
This reduces disputes and legal claims improves profitability that helps us bring the most value to our clients.
These critical components of our home market result, and a balanced project portfolio, combining larger projects and increased retention and workforce stability with smaller quick turn projects.
Markets are also areas, where we have built relationships with public and private owners.
From 2018 to 2021, we increased the percentage of construction revenue from private owners from 17% to 24%.
This was result of building.
Over several years and we see this investment further diversifying and potentially expanding our portfolio of private work in the future.
Better portfolio balance will allow us to maximize our capabilities and resources driving better returns for all stakeholders.
<unk> 2022, and beyond we will continue to strengthen existing markets and develop new ones.
Vertical integration is key to granite success.
<unk> fully developed vertically integrated model aligns the strength of our construction materials segment with our construction project tackling.
In some markets it is difficult to secure work at acceptable margins without access to quality materials.
Vertical integration maximizes, our project productivity and scheduling while being able to rely on high quality materials, although independents on the capacity of other material suppliers with competing priorities.
Vertical integration allows us to reduce costs in several ways.
First we can reduce cost with internal purchasing compared to relying on external pricing.
Selling materials to our projects as well as to external customers increases volumes for our materials plants lowers our fixed cost per ton and maximize profit.
We collect <unk> from our projects uses recycled asphalt pavement, our rack and future asphalt mixes.
By reducing the amount of Virgin material utilized we lower potential cost of projects, thereby increasing the profitability of our materials business.
In addition, our aggregate core locations backhaul materials for construction projects utilizes still or for use in future projects.
Benefits to construction project that may otherwise need to pay to place materials, while also adding value to our aggregate plants.
Finally, we achieved tax savings through the transfer of materials internally, two construction projects, rather than purchasing and materials externally and paying applicable sales taxes.
Advanced materials businesses has been integral to our strategy for 100 years and through vertical integration and we will continue to drive our sustainable profitable growth in the future.
Turning to our investment framework for growth over the next few years, our liquidity balance sheet and cash generation allow us to invest in our business, which we will continue to do this year and moving forward.
We intend to invest in our vertically integrated business model organically and through M&A to strengthen and expand existing home markets and eventually establish new home markets. Our strategy is separated into two phases support and strengthen and expand and transform.
Within our support and strengthen phase we plan to invest over the next three years and solidifying and bolstering our core competencies and expanding within our existing markets within.
Within the materials business, we are making investments to upgrade production capacity to aggregate facilities.
Increasing automation and energy and water conservation.
These investments are underway in 2022, and we will continue in 2023 and 2024 and.
In addition, we continue to invest in materials reserves to ensure that our facilities and markets have access to aggregates for today and into the future.
In the near term, we intend to strengthen and expand our current markets with bolt on acquisitions.
Acquisitions of construction materials, our vertical vertically integrated construction businesses, but most likely be less than $100 million complement our existing operations and provide uplift from utilization of adjacent facilities and assets. We are continually evaluating bolt on acquisition opportunities and are excited to strengthen our home market footprints.
Future transactions.
Looking to 2024 and beyond we plan to expand and evolve to a more transformative investments in the new geographies through vertical integration expansions and platforms.
As we move into this period of our plan, we will build our M&A and integration capabilities to small to mid sized bolt on acquisitions, and we will expand in more transformative acquisitions by entering new markets, we're adding materials assets, where we currently do not have a vertically integrated presence.
Now I'll turn it over to Lisa to go over some of our financial expectations within our strategic plan.
Thank you Carl.
Over the next few slides I will cover our financial targets and expectations through 2024, starting with revenue.
Since the timing of M&A is highly dependent on the market and opportunities. These slides are focused on our continuing operations business and our expected organic growth.
As we stated last quarter our guidance for revenue in 2022 is for low single digit growth from 2021.
At the end of the first quarter of 2022, we are maintaining that guidance with growth from the California and mountain groups expected to offset an intentional decline in revenue from the Central group as we continue to transform that portfolio.
As we move into 2023 and 2024, we expect to benefit from a strengthening funding environment, but the federal infrastructure Bill, resulting in an increase in opportunities that will a 2023 and continue to grow in 2024 and following years as.
As we saw in California, when SB, one was implemented the full benefit at the infrastructure Bill will take time to be realized with maintenance projects funded first and expansion projects funded as designed right of ways and other requirements are completed.
Our focus is on driving sustainable growth in each of our groups by leveraging our home market strategy. We believe we are well positioned to capitalize on the positive environment in our key vertically integrated market and.
Including California, Washington, Nevada, Utah and Arizona.
Given the public funding dynamics and strong private economic environment. We believe we will reach our target of $3 4 billion to $3 6 billion of revenue by 2024.
This slide details the historical gross profit and gross profit margin, both including and excluding all risk portfolio losses for 2019 through 2021.
In the construction segment in 2022, we will work through most of the all risk portfolio or ORP with planned completion in 2023.
As we move through 2022 and 2023, we anticipate improvement in gross profit margin as margin pressure from the MRP declined.
In addition to the uplift from the completion of the ORP. We are focused on raising profit margins on our projects and multiple avenues, starting with the previously identified key factors are procuring the right project maximizing profit on bid day, and executing everyday to meet and exceed that.
De margin.
Our operations have previously achieved this level of profitability and we are confident we can consistently reached this level again by 2024.
Our strategic plan and related initiatives will drive best practices across our markets to increase consistency of execution to reach the targeted 14% to 16% gross profit margins in 2024.
Within our materials segment, we are focused on increasing profitability through investment in technology disciplined performance and pricing.
In 2020, the materials business benefited from the low oil prices with a gross profit margin of 17%.
While lower commodity prices cannot be expected to repeat in future periods through our investments and initiatives. We believe we will reach our target gross profit margin at 15% to 17% by 2024.
Turning to SG&A as noted on the slide our SG&A as a percentage of revenue has been largely consistent over the last three years.
Our new strategic plan centers on capitalizing on our return to our core businesses by maximizing standardized processes to accommodate future growth, while minimizing increases in SG&A.
We will achieve this efficiency by utilizing technology, reducing non value add activities and leveraging our centralized structure.
We have the people and resources in place to allow us to drive topline growth while remaining at the low end of our SG&A range.
We expect significant improvement in adjusted EBITDA margin from the five 4% reported in 2021 to our target of 9% to 11% by 2024, driven primarily by the increase in construction gross margin and more moderate impact coming.
From improvement in materials gross margin and SG&A efficiency.
We expect our core vertically integrated businesses to achieve this level of profitability on a consistent basis across the company by 2024.
Next I want to review our capital allocation priorities.
Underpinning our disciplined capital allocation strategy is our desire to deliver growth and return value to our stakeholders through our strategic plan.
Our first priority continues to be steadily returning value to our shareholders in.
In this regard since 2007, we have distributed a consistent dividend every quarter.
Our next objective is supporting business operations through reinvestment.
Maintenance Capex extortion Lee has been to one 5% to 2% of annual revenue and we expect that to continue in future years.
Granite ability to win and deliver a profitable project relies on timely replacement and upgrade of equipment and facilities. So that our people can focus on sustainable project delivery.
We expect to optimally keep our debt to capital ratio at 20% to 30% through debt repayment.
We paid down just over $60 million of our term loan in the first quarter and expect to continue optimizing our capital structure to the upcoming planned facility refinancing.
Next we expect to drive growth and efficiencies through growth Capex and M&A.
Earlier call walk you through our home market strategy and our intention to invest in our vertically integrated business model organically and through M&A.
Our markets are healthy and expecting strong growth, making it important to build upon our existing market positions through the right bolt on acquisitions in the near term and more transformative opportunities down the road.
Finally, we announced an increased authorization and our share repurchase program last quarter, resulting in an authorization for up to $300 million in purchases.
We repurchased approximately $19 million this quarter and intend to repurchase shares when our cash position is in excess of operational requirements and when a repurchase is highly accretive.
Before I turn it back to Kyle to go over our first quarter results. This slide summarizes the key financial metrics, we expect by 2024 from our strategic plan.
We expect sustainable organic revenue growth with increased profitability, while maintaining efficiency in our administrative support functions.
Our strategic plan implementation is well underway and will lead to our next period of transformation and expansion by 2024 and beyond Kyle.
Thanks Lisa.
No you are as excited as I am for granted is headed over the next few years.
We have laid the foundation and our set are making incremental enhancements that will allow us to reach our 2024 targets now.
Now, let's shift the discussion to the first quarter, starting with the construction segment.
While we saw an overall decrease in revenue in the first quarter from the same period last year I am encouraged by the mix of our results for the quarter.
Primary reason for the year over year decline in revenue was expected decrease in the Central group is ORP projects continue to move towards completion.
And the Central group. This decrease was partially offset by a good performance in the Arizona region, which entered the year with a strong backlog.
Taking advantage of temporary climates allowed the region to work throughout the first quarter and I expect that vertically integrated Arizona region to have a strong year in 2022 as the team continues to benefit from a positive and growing market in California, while there was a revenue decrease year over year. This was primarily due to weather in northern California and delays in project starts.
We have seen an extension of the period between the award of a project and project start that impacted revenue during the quarter as we stated in our guidance. Although there was a year over year decrease in revenue in the California group, we expect that the turnaround in following quarters, resulting in the increase in revenue for the 2022 fiscal year compared to 2021.
Increment weather early in the year had the most significant impact on our mountain group as compared to the others for the mountain group because of where their operations are located the construction season generally does not begin until after winter, but even without limitation. The group turned in a strong quarter with revenue increasing in multiple regions.
And in particular by our Utah region.
Last two years, a key component of the Utah regions success has been its work on our <unk> joint venture of $350 million Progressive design build project with the Utah Department of transportation.
The project has been another example, I granted success in partnering with owners and delivering value to best value procurement projects.
In February of this year, we announced another progressive design build granite led joint venture for the Utah Department of transportation. The construction for that project is expected to start in 2023 with a value of $155 million.
We believe that this project reflects our recipe for success on large projects. It is the best value procurement project in our home market, but we know the owner vendors and subcontractors, where the project will be built by experience granted crews.
Turning to cap I am pleased with what I see while there was an overall decrease in cap since the prior quarter and from the prior year driven by the Central group, but the California and mountain groups ended the quarter with increases in cap sequentially and over 2021.
This cap growth and our vertically integrated regions demonstrates continued resilience and strength in our markets from both public funding and private markets.
While the first quarter of the year is always competitive we have seen a better environment compared to the beginning of last year, we were bidding more work and see margin improvements as pricing pressures lessen.
Inflation concerns persist in general as soon as our markets continue to be healthy.
We are optimistic there will be further improvement later in the year with more opportunities funded by the infrastructure Bill that will allow us to continue to build cap going into 2023.
In the materials segment aggregates and asphalt volumes increased year over year in all three groups first quarter provided a strong start to the year and an encouraging sign for the health of our markets, even with the impact of inflation and higher oil prices.
Although oil prices increased and remained high during the quarter cost mitigation strategies, such as bulk purchases and forward contracts, partially offset the increase in oil related prices and pressure on margins.
In addition to cost containment measures, we have implemented price increases some of which were not effective until April which will help to offset the rising prices of liquid asphalt and diesel.
While it is expected that inflation, including oil prices will continue to be elevated and volatile we believe resilient market demand for construction materials will continue driving revenue throughout 2022 now.
Now I'll turn it back to Lisa to discuss our financial results for the quarter.
Thank you Carl.
In the first quarter revenue decreased 3% from the prior year by gross profit decreased 7%, resulting in a gross profit margin of 9%.
In our construction segment revenue declined $32 million year over year to $475 million.
This decline was primarily due to $29 million decrease in the central group year over year. The decrease in our central group in the quarter was consistent with the continuing transformation of the group as the projects within the ORP move closer to completion.
The decrease in quarterly revenue and the California group was largely offset by an increase in the mountain group.
The California group was impacted by work start delays, while the mountain group completed a strong first quarter.
The construction segment gross profit for the quarter decreased 9%, resulting in a gross profit margin of 10%.
This decrease in gross profit was primarily driven by lower revenue in the quarter with a slight decrease in gross profit margin.
The ORP ended the quarter with remaining cap of $246 million, a decrease of $73 million from.
$319 million in the prior quarter.
The burn during the quarter was consistent with expectations and is on pace for the expected progression in 2022, leaving approximately $50 million going into 2023.
First quarter net ORP losses to granite, which excludes noncontrolling interests were $3 million on revenue of $80 million compared to breakeven on revenue of $105 million in the prior year.
The materials segments revenue increased $13 million or 22% led by strong demand and volumes as well as price increases in both asphalt and aggregate over the prior year.
Materials gross profit increased $1 million with a slight year over year increase in gross profit margin to 2%.
Although cost pressure due to increased liquid asphalt and diesel prices impacted the first quarter bulk purchases for contracts and financial hedges, partially mitigated the effects of the cost increases.
We continually monitor the market and will remain proactive to mitigate exposure from oil inflation.
Turning now to our non-GAAP financial metrics.
Adjusted EBITDA and EBITDA margin from continuing operations for the first quarter was $4 million and 1% compared to $9 million and 2% in the prior year.
Adjusted net loss from continuing operations for the quarter increased $6 million year over year to $13 million.
Or an adjusted diluted loss per share of <unk> 28.
Compared to an adjusted net loss of $7 million and adjusted diluted loss per share of <unk> 15.
In the prior year.
For the year, our adjusted EBITDA margin guidance of 6% to 8% is unchanged.
Our business is seasonal and ramps up as we enter the spring and we expect continued improvement in profitability and 2022.
Now onto our cash and financial position.
Cash used by operations during the first quarter was $50 million compared to cash provided by operations of $38 million in the prior year.
Typically cash is used by operations in the first half of the year due to seasonality as projects begin and ramp up.
In the first quarter of 2021 cash flows benefited primarily from the timing of cash collections from receivables.
At the end of the first quarter, our liquidity remains strong with cash and marketable securities of $398 million and revolver availability standing at 242 million with no debt currently drawn on our revolver.
Our fixed interest rate debt at the ended the quarter is $299 million down from $340 million at the end of the first quarter of 2021, reflecting the early pay down of half of our term loan.
This change is inclusive of the adoption of ASU 2020, Dash <unk>, which.
Which will be discussed in our Form 10-Q that will be filed later today.
During the first quarter, we closed the sale of the <unk> liner business and made progress and the divestiture process of the water resources and mineral services businesses.
There is significant interest in these businesses and we believe that we will reach agreements to sell both and 2022.
While it is still early to definitively say the amount that will be received from the transactions. We believe that the combined value of these businesses is greater than that of the <unk> liner business.
And March we executed share repurchases of 611000 shares for approximately $19 million, leaving $281 million remaining of the $300 million share repurchase authorization.
We continually evaluate share repurchases, while balancing our capital allocation priorities.
With our strong cash position and expected cash inflows from the sale of the remaining water resources and mineral services businesses.
We will evaluate the continued repurchases of shares that will provide immediate value back to shareholders in 2022.
As long as the share repurchases are highly accretive.
With that I will turn it back over to Kyle.
Thanks, Lisa I'll close with the following points.
We are excited about our strategic plan and were granted is headed we.
We expect our plan to unlock tremendous value through consistent profitability and cash flows.
Plan to sustainably grow our businesses strengthen and expand our current footprint and then pursue more transformative platform acquisitions in the longer term.
While investing in our business. We are also focused on utilizing our strong cash position to return immediate value to our shareholders.
The markets in which we operate continue to be robust as we have seen during the first quarter.
While we are keeping a close eye on the overall economic climate.
Not seeing a slowdown in activity in 2022 and demand is strong.
This increased funding is expected to flow into the market. Later this year, we expect our cap to expand with the opportunities leading to organic growth in 2023 and 2024.
Operator, I will now turn it back to you for questions.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
You are using a speaker phone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Please note we will take one question and one follow up question from each participant today.
At this time, we will pause momentarily to assemble our roster.
Our first question today comes from Steven Ramsey with Thompson Research Group. Please go ahead.
Yeah.
Hey, good morning.
That's R. Maybe.
Jump in kind of big picture it looks like great Thats, a great setup to end the year with a lot of excess capital from the divestitures and then the ORP burning off to a very low level, you talked about two phases to growth.
And deploying capital over the long term so given you'll be in this excess capital position should the divestitures play out.
How do you expect to deploy capital in 2023, so it's early but just how youre thinking about it from a high level.
Hey, Steven.
You said 2023.
Just thinking about the excess capital position you would begin to in this year and how you think about philosophically deploying capital.
Yes. So thanks for the question from an investment framework perspective over the next two to three years, we're really focused on.
Supporting and strengthening our existing home markets.
Priority today in this kind of a couple of pieces to that.
First is around automation and reserve expansion in our materials business. So we need to continue to ensure we have access to aggregates raw materials business same. Tom you also think we can drive down our cost to produce.
Automation, so that's a primary focus for us let's.
Let's say over the next two or three years.
And then from there we're looking at some bolt on acquisitions that we're looking at getting into an acquisitions around civil construction materials within the existing footprint that we're in today.
And there's a few reasons for that.
One that complements our current operations, we think it's easier to capitalize on synergies and drive utilization, but it's also easier for us to integrate so we think that that's going to give us an opportunity to go out.
Do some deals demonstrated our ability to do the deals and integrate the deals and set ourselves up down the road, where we want to do something more transformative.
I'd expect it our goal will be doing somewhere around maybe one to two deals a year and all of those deals to be under around $100 million.
Okay helpful.
About capex this year.
Above levels, we've seen in the past three years.
Talking about raising Capex in the next couple of years does that imply that capex in 2023 and 2024.
Will be higher.
Given that the.
Plans for the materials segment.
Just the way to bogey the level of Capex that you guys have embedded in the plan.
No I think the Capex the guidance that we provided you can be pretty consistent.
You have our maintenance Capex Lisa spoke to.
The balance of that really is more in our materials business Thats, where were making the larger of the investment from a capex perspective, as we move forward, but I think I think the guidance. We provided this year is pretty consistent with what we will see in subsequent years.
Okay helpful. And then one more thing about the near term good to hear the bidding environment year to date is better than last year. A couple of questions. How does this compare to pre COVID-19 levels.
And are the benefits of this better environment.
Into the margin guidance does this.
Implied margins could go to the high side of the EBIT margin.
Well so as we shared we're really looking to get I would say outside of the <unk>.
About a 2% margin improvement by 2024, and and that's going to come really into two components. One is going to be on good day getting more money on the projects that we're bidding in the market.
Second is improved execution across the board even outside of the ORP.
The good news is in terms of the market as the market is healthy.
You talked on the last call that we had started to see more bid opportunities.
On higher margins on bid day, even though our hit rate has gone up.
I can tell you at this point through the year in 2022, we are seeing our hit rate improve with higher margins on the work that we're that we are procuring. So you add that to our materials business that had higher volumes.
In the quarter and higher margins everything is really pointing towards a much better market in terms of health that we saw last year at this time and so that's that's really encouraging and thats in advance of an infrastructure Bill that will really hit later this year. So everything is kind of set for us from a market perspective today I mean, we're still cautiously optimistic as can remain unlimited, but today it's.
Is looking very strong.
Understood. Thank you.
Thank you.
The next question comes from Michael Dudas with vertical research. Please go ahead.
Good morning, gentlemen.
Yes, good morning, Mike.
Paul on your on your goal for revenues and margins in 2024 versus where we are today.
And you put forth some very helpful. Paul.
Guidepost, but.
What are the.
Again economy, aside because youll, there's GDP came out negative.
Morning, So so what are two or three things that are.
Uncertainties or risk mitigation to.
You need to overcome or set up for to achieve those goals.
How much of the capacity of your employees and your asset base do you have.
Now to achieve those goals can you do it without significant I know you're going to be making some investments with <unk>.
Will be fruitful and pulling way. So do you have that and is it could be much to get to that market share growth that you are discussing.
Prepared remarks.
Yes, I would say that we do have the capacity I think we've been demonstrating that with our California and mountain teams over the last couple of years they've been growing their cap.
And we believe those teams are well positioned they have been in those markets for a long time. They are the employer of choice. We think we can recruit the people we need in those businesses to deliver on the growth.
I think it will be wind down the ORP.
Actually in a position this year, where we can take those employees and resources and put them onto these projects that we're going to see that would allow us to grow our company. So that we can be quality projects. So the timing the timing is working out quite well for us.
Assuming that the infrastructure bill will start to flow into bid opportunities late this year and we can actually turn those into construction projects in 2023, so that winding down the ORP really allows us to take that central group team and put them put them to work on projects that will create value for the company. So I think thats.
That's probably.
The opportunity for US I think just in general I mean, we are focused on our people I mean, thats a big big piece of not the foundational piece of our strategic plan is to make sure that we're recruiting and developing and retaining our employees and create opportunities for them.
It will create more opportunities for the company.
Second I guess follow ups, So certainly Youre, California mountain businesses, but given your historic levels and the level of integration.
On your.
The execution of those divisions have been quite good.
How does the central division kind of fit into this plan over the next three years you talk about tech.
Texas, Florida, how much is that going to be helpful additive to those goals and beyond what are your strategies there to once the ORP projects from officer to get to that business through that division to achieve.
The quality and result levels that youre, hoping to have historically provided.
Sure and good question and Central group today and includes our Arizona region and also includes the team up in Illinois, and our tunnel Division so.
It's got a whole different mix than what we probably used to when we talked about the heavy civil group.
And we did that to help.
Move in some of the by business type work and help them create that type of environment within Florida, and Texas and so we knew that it was going to take some time as we wound down wind down the ORP.
Transition of Central group into more of a <unk> type business and I don't know if thats, even the ultimate goal today, our feed in the near term, but we really are pushing them to look at different types of work. So we've talked about really resetting the type of work that we're pursuing are no longer pursuing these big large mega projects design build project.
That got us into trouble.
So now we're focused on small work and we even went further with us home market strategy. So they're no longer even call the southeast region as the Florida region or the Central region is now the Texas regions, we're really starting to narrow in their home market, because we know as a procure work in the home market to have the resources the hazard relationships all.
Components to go into a market that can be more successful so that transition isn't going to happen overnight given working really hard on over the last year year, and a half and I think they're doing a nice job.
Do you think.
And as we sit through today in 2022 that team is starting to procure work and the right kind of work that's going to help the company achieve the goals that it wants to achieve so again, it's going to take time, but I think we're making really good progress in the transformation.
And do those margins.
Our.
And relative to the other.
Play on the construction side or a <unk>.
And there will be a level of opportunity and Thats, a 200 basis point improvement in mix fuzes from that area or is it really just overall on the getting it right and make sure you can execute the esol margins.
Yes, the margin profile of the Central group really shouldnt be any different than the margin profile of the California group.
So we don't we don't see.
A difference there as.
As we get to the margin improvement. If you go back last couple of years, we've been there before so it's not a matter of can we get to the margins that we're talking about getting to its really around creating a more sustained performance level to where we're at that mid teen margin consistently.
Again, it's really about you can look at it as a percent on bid day, and a 1% better in terms of execution as a company outside of the <unk> there.
Thanks, Paul.
Thank you.
The next question comes from Brian Russo with Sidoti. Please go ahead.
Yes, hi, good morning.
Good morning.
Just to follow up on the last question on the top line and the margin.
Guidance through 2024.
The top line.
Yes.
Are you is there any assumption on the <unk>.
Hey.
Funding.
And or do you need M&A with bolt on acquisitions to reach the top line target or.
Which seems to be kind of a <unk>.
Mid single digit growth rate also about 2021 base would that is that viewed as.
But we are assumed to be more organic in nature.
Yes, so what we provided was a 6% to 8% CAGR as our revenue growth rate organically that that does not have any sort of M&A or inorganic growth within it I think maybe the way to.
To level set that is if you look at the infrastructure build on really the highway funding portion.
We look at that is around a 6% CAGR. So our 6% kind of marries up with the highway portion of the infrastructure Bill and then for us to get up to around 8% implies that we're going to get a little bit more market share than we have today.
Okay got it and in.
In the near and intermediate term are there specific regions where.
You see.
More opportunities to vertically integrate the businesses versus other.
Regions currently in the portfolio.
I think they are probably are I mean I think.
There are certainly markets that we see where we can strengthen our vertically integrated position, there's some markets where.
We don't have verdict, meaning we're not very good integrated today, and say, Texas or Florida, those would be opportunities for us.
But right now I think I don't want to tip, our hand too much in terms of where we're looking but we certainly are looking at our existing footprint. When it gets back to that integration piece for us and we really want to if we really wanted to do it in markets, where we have very strong teams in place the integration.
Lot easier for us as we do it so.
I think it's mostly going to be out in the west coast today.
Okay, and then lastly.
Yeah.
<unk>.
Relationships and customers.
The increase in inflation or.
Has there been any impact on on Lettings or.
Dot's, having to react to some reengineering on.
Projects in the pipeline.
Just given the sharp increase we're seeing in.
Raw material costs et cetera.
No. We saw the dip last year I think we saw a little bit of a pullback with supply chain, the inflationary pressures and even with the COVID-19 .
We're not seeing that today, we had a much better.
Late 'twenty one early 'twenty two.
Letting in terms of volume.
This year again, we're seeing through through today, we're seeing really nice improvement in our arent in terms of our ability to capture work. So our hit rates up in the margins of the work that we're picking up has gone up as well. So what we're seeing come out is showing a very strong market and I'll point back to the materials business. Our volumes are up and that's another good indicator. So so every.
He is indicating that we're moving in the right direction from a market standpoint.
Okay, great. Thank you very much.
Thank you.
The next question comes from Zane Karimi with D. A Davidson. Please go ahead.
Hey, good morning, Kyle Lisa.
Good morning.
So first of all I'm going to talk about the quarter, a little bit here, but <unk> had stronger than anticipated material revenue and gross profit, but now looking forward what degree to what level is the company targeting for materials margins through the year and can you elaborate a little bit more on how the business is overcoming the higher diesel and liquid asphalt costs and how.
Leave those inflationary costs will impact you guys throughout the rest of the.
Yes, let me let me, let me start if I forget part of that and it would be second to jump in there, but we are pleased with our materials business in the first quarter volumes are up.
We're seeing our aggregate margins and improve our asphalt margins are down slightly so which kind of gets back to your question around supply chain.
Some of them some of the costs on the inflation side on commodities.
And we did pretty well as a company I think in getting out in front of a lot of what we've seen in terms of.
Oil diesel and natural gas at some level.
And the company and Thats, where we have the biggest impact.
Today, we've been navigating some of the supply chain issues across the company.
For quite a while and I think our teams on the field and a really nice job of that rescheduling projects. If they are ready mix issues and the like or for <unk>.
Different shipping issues that they had.
We have been navigating that nothing has really changed there I would say.
Late last year, we put in place our new diesel pricing into our equipment right. So we were able to get out in front of that quite.
Quite a bit and so a lot of our newer work did have higher cost in the estimates for diesel.
As well as our pricing on the liquid asphalt side.
We do do a lot of work and a lot of our clients.
Clients have escalators and de escalators or somewhat protected.
On that end of things our team puts in place a physical inventory to liquid asphalt we do some financial hedges. So we do a lot to try and mitigate this risk for us in the business I think has paid off for us.
And then we also do some supply contracts with diesel and large earthmoving contracts as well.
The one area, where I think we did struggle a little bit in the first quarter was just on the burner fueled us where we use NRG to dry out the aggregates before we introduce liquid asphalt. So we did have a little bit of a natural gas pump in the first quarter as we've talked about in the prepared remarks, you have an energy surcharge noticed it went out it goes into place on April one so we're going to try and recover some of those.
Moving forward, but I think in general.
<unk> done a nice job of.
Ensuring that we are.
Covering those costs and we can pass those on so what did I Miss in your question.
No.
That's pretty solid.
Just understand how the margins could look from a historical or seasonal perspective, this year versus what will be the only other point that could be elaborated on.
Yes, I mean, I think I think we feel good about the margin profile of the materials business I think it's going to be in line with our guidance.
In general around.
Kind of overall.
Overall mid teen margins as kind of the goal for our business.
Two years ago, we had the benefit of liquid asphalt.
And diesel dropping last year. It came back up and we Couldnt really past that margin expansion on I think this year in general we're able to pass those costs are on in Q1 is we're pleased with Q1's results and we're looking forward to seeing you can continue that into Q2.
Okay. Okay. Thank you and my second question, just a little bit more on the ORP, but I recognize the progress made so far.
But looking forward, how should we think about ORP backlog and expected revenue burn for 2022 and into 2023.
So so I think the way to look at it we're pretty much in alignment.
With with what we had guided towards.
Just around $70 million is what we've earned through Q1.
We have another $250 million still an ORP cap.
And we expect to burn through another 200, which will be a $50 million at year end.
Okay. Okay. Thank you for that.
The last question today will come from Jerry Revich with Goldman Sachs. Please go ahead.
Hi, This is Adam on for Jerry today, Thanks for taking my questions.
Outside of bolt on acquisitions can you talk about it if there are any specific areas of your business you would like to expand either in competency or geographic exposure, which areas are those.
Yeah.
Yes, no I think I think what we're really focusing on in our strategic plan is getting back to our core civil construction and materials business.
I think I think longer term, we're looking at more of a geographic diversification I don't think that's going to be something we're focused on over the next couple of years I think thats longer term to get into markets that we're not in today I think I think our first step is to stay focused on what we do.
Well get even better at it and strengthened the positions that we have.
Today and so that's that's our focus I would say in the next two three years and we'll be better prepared to go out and take on a new market and grow our markets outside of our current footprint.
Got it and can you provide any more color on the expected timeline for the completion of the water resources and minimal risk.
Our resources divestiture.
Yes. This is Lisa so we classified at the end of the year and announced earlier this year the divestiture of the businesses within the WNS group.
We completed the <unk> liner sale.
Closed that on March 16th and so we are continuing to progress on the other two divisions.
Within WNS.
Still early still still.
Looking at that.
Information Thats rolling in so we anticipate that it will be done with those.
<unk> four by the end of this year.
Great. Thanks, so much.
Thank you. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Larson for any closing remarks.
Okay, well, thank you for joining the call today.
We're well on our way in the implementation of our strategic plan that will build upon the strengths that make granted one of the best contractors in the country for 100 years to our employees. Thank you for everything you do and I know, we will be building better together and to the investors and analysts. Thank you for your continued interest and granted we look forward to speaking with you soon.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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