Q3 2023 Granite Construction Inc Earnings Call
My name is Kate and I will be your conference facilitator today at this time I would like to welcome everyone to the granite construction Investor Relations third quarter 2023 Conference call. This call is being recorded all lines have been placed on mute to prevent any background noise and after the speakers.
Remarks, there will be a question and answer period.
Ask a question. Please press Star then one 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.
Good morning, and thank you for joining us I'm pleased to be here today, with President and Chief Executive Officer, Carl Lukach, 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 1995.
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 out.
Comes outlook guidance objectives committed and awarded projects with tap and results.
Actual results could differ materially from statements made today.
Please refer to granites. Most recent 10-K 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, 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 and adjusted earnings 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 website granite construction dot com under Investor Relations.
Now I'd like to turn the call over to Carlos.
Good morning, and welcome to our third quarter Conference call.
We had a strong third quarter Q.
Q3 marked our second consecutive quarter of topline growth, we continue to grow our record cap projects that should produce margins in line with our expectations.
Just over two years ago, we stated that our goal was to transform grant what had become a volatile business and their business that earns predictable strong financial results, while also producing consistent sustainable growth.
We also shared our plans to earn adjusted EBITDA margins. The grant had not seen since the housing boom.
To support this effort it.
We took significant actions in both the construction and materials side of the business for construction. The first step we took was to Derisk, our committed and awarded project portfolio for Cat.
We moved away from complex design build projects and shifted our focus to best value bid build projects and best value projects, such as CNBC or construction manager General contractor, we are better positioned to succeed as we worked collaboratively with the client to mitigate risks for the project.
Although some best value projects have high total contract values there.
They are often separated in smaller work packages, which are then reviewed through multiple project workshops, we have.
Constructing more than 60 best value projects and they're generally we had a quicker with fewer claims.
Our record high quality cap macroeconomic construction market fueled by the federal infrastructure, Bill or I I J H puts granite in the strongest position for growth and profitability in over a decade.
On the materials side of the business. We said, we intended to invest in our materials business and in all markets that have been our strength since our founding.
For the past three years, we have invested in Greenfield reserves liquid asphalt terminal new automated aggregate plants and bolt on materials investments. These actions are strengthening our positions in our profitable vertically integrated markets.
We see further opportunities to strengthen our current home markets and expand into new geographies.
How much of the focus of the past couple of years has been on internal transformation. We are now growing and plan to pursue opportunities to drive growth and expand our footprint in both our materials and construction segments.
I view the performance in our segments for the quarter, starting with the construction segment.
What we've got in Q3, continuing the trend over the last year cap increase $147 million from the second quarter and is up $1 5 billion or 37% year over year to $5 6 billion.
This represents a second consecutive record cat for granted.
What is typically our largest revenue quarter of the year growing cap is a significant accomplishment for our teams robust market has produced a number of public and private opportunities that should allow us to continue to build high quality cap in the fourth quarter and as we move into 2024.
Further I believe the I O J, a funding will continue to expand bid opportunities in 2024 across all of our key markets and we are well positioned to capitalize on those opportunities.
Diving into our operating groups and starting with the California group.
Cap was flat from the second quarter and increased $792 million or 51% from Q3 2022.
This is a really impressive result, as the group continued to win significant amount of work, while achieving record third quarter revenue.
Public spending in the state has been strong and is expected to continue.
Earlier in the year there were concerns about the state budget deficit that these concerns are resolved without impact transportation spending.
And in Q3, Caltrans to state Department of Transportation again awarded their highest dollar value of contracts at least five years historically high bid opportunities are expected to continue in 2024.
Moving to the Mountain group, our most seasonal group have decreased $65 million from the second quarter as a group posted year over year revenue growth of 12% in the third quarter.
Despite the decrease in cat or in the quarter. The group ended with a cap of $1 4 billion remained significantly higher by $431 million or 43% year over year.
Utah, Alaska, and Nevada regions continued to lead the group with strong cat.
But budgeted budgeted spending in each state and degree are expected to increase in 2020 for the mountain group is poised for continued growth in the fourth quarter and 2024.
Finally in the Central group cap increase in the quarter by 212 million sequentially up $284 million year over year to $1 8 billion.
The increase in cap is led by the tunnel division, which landed at $205 million tunnel project in Ohio.
<unk> growth in the Texas region home markets in Houston and Dallas.
Group revenue was flat year over year in the quarter I expect the group to return to revenue growth in 2024.
And transformation of the central groups Cat has been tremendous and a key component to our expected margin expansion in 2024 overall the construction segment had an outstanding quarter. We continued to build high quality cap real revenue and increased profitability in line with expectations. I believe we will continue to grow cat and revenue in.
The fourth quarter, and our 2024, very well positioned to achieve our financial targets.
Moving to the materials segment, we built on the momentum of the second quarter with another strong performance in the third quarter as I mentioned last call cost inflation significantly impacted profitability last year normalized in 2023.
These stabilized cost environment aggregate and asphalt price increases resulted in margin gains in the second and third quarters of 2023.
Materials volumes and orders remained strong throughout the third quarter and going into the fourth quarter in this market environment I would expect to realize further price increases in 2024.
As we have previously reported we've been investing in our materials business in numerous ways over the last two years.
In the fourth quarter.
<unk> the completion of major investments into automation projects, including a new fully automated hired to plant. These investments in our materials segment should drive cost efficiencies and further margin expand margin expansion in 2024 in line with our gross margin extra connotations of 15% to 17% now I'll turn it over to Lisa to review.
Our financial performance for the quarter.
Thank you Kyle.
In the third quarter revenue increased 108 million or 11% year over year to 1.1 billion, while gross profit increased $52 million $267 million or gross profit margin of 15%. These.
These results reflect the strong performance in both the construction and materials segments during the quarter.
In our construction segment revenue increased 98 million or 12% year over year to 946 million an outstanding result for the segment.
The revenue increase was led by the California, and mountain grades, which were up an impressive 21% and 12% respectively year over year.
Entering the quarter with record Cat, the California Grant significant year over year revenue increase was in line with our expectations as the group overcame a historically wet and slow start to the year.
Heading into Q4, I expect continued top line growth in the fourth quarter year over year and in 2024.
The mountain grade, 12% year over year growth was led by construction revenue increases.
And the Alaska, and Nevada region.
With our larger regions, such as Utah, and Washington also contributing meaningfully to revenue.
Finally in our Central group revenue in the quarter was flat year over year with revenue in the growing, Texas, Arizona, and Illinois region offsetting declines in the Florida region.
As legacy projects wrap up.
Construction segment gross profit increased 44 million year over year to 137 million with a gross margin impact at 14, 5% up from 11% in the third quarter of the prior year.
The gross profit margin includes a write down on the I 64 High rise Bridge project at 8 million during the quarter with an impact of granted after noncontrolling interest of 4 million.
The project continues to move towards completion, which is expected by the end of 2020 three.
Despite the impact of I 64, and a quarter construction segment gross profit margin improved year over year as expected led by our higher quality cap compared to the prior year.
Over the past year, we have won work at higher margins and we are seeing the benefit in our gross profit margin.
And the materials segment revenue increased 10 million year over year to 171 million with gross profit, increasing 7 million to 29 million or a gross profit margin at 17%.
The improvement in gross profit margin was primarily due to sales price increases in both asphalt and aggregate and stable oil and energy costs.
The year over year increases in revenue and gross profit resulted in third quarter adjusted diluted earnings per share of $1 69.
And adjusted EBITDA margin of 11%.
Our non-GAAP adjustments during the quarter included a litigation charge of $8 million and other costs related to the settlement of the Salesforce tower matter.
At the end of the third quarter, our cash and marketable securities totaled $329 million up from 251 million in the second quarter during.
During the quarter, we also paid off our outstanding revolver draw and the amount of $55 million, resulting in a net debt reduction of 133 million.
Third quarter profit and favorable news met in key working capital accounts produced strong operating cash flow in the quarter about 153 million.
We reduced net contract assets by $55 million from the second quarter as billings cash collection in overall activity from projects ramping up in the second quarter progressed in the heart of the construction season.
I am pleased with our progress in the quarter and expect the trend of strong cash generation to continue in the fourth quarter as seasonally high receivable balances are collected.
I believe as we settle older outstanding claims in conjunction with our D. Risked business model, our cash flow will continue to significantly improve.
Our third quarter performance was directly in line with our 2023 guidance expectations and we are not changing our guidance.
I believe we can achieve the higher end of our revenue and adjusted EBITDA margin ranges. If we continue to have favorable weather conditions in the fourth quarter and we continue to execute across our portfolio.
We are also maintaining our 'twenty 'twenty four financial targets of 3.6 to $3 9 billion in revenue and adjusted EBITDA margin of 9% to 11%.
We believe we have the market opportunities and the cat to reach our 'twenty 'twenty four targets that will then lead to even further gains beyond 2024.
Now I'll turn it back over to Kam.
Thanks, Lisa I'll close with the following points.
We grew our top and bottom lines in the quarter in alignment with our guidance for 2023 'twenty 'twenty four financial targets are.
Our results were impacted again by 64.
While less impactful than prior quarters, we can't finish this job sooner that Fortunately, we expect to complete the project this year.
Revenue growth during the quarter was consistent with a strong cash position our teams had when heading into the quarter I'm impressed that even though the third quarter was our busiest quarter. We were still able to continue to build cat as we've done in each quarter over the last year.
We ended third quarter with another record cap.
Rate position for the fourth quarter and 2024.
I believe we will continue to build cat over the next year as we were still in the early stages of projects going out forbid funded by the I J a.
We're being selective in the projects that we bid that are winning work and better margins year over year.
That is really a good sign for granite and the industry.
Lastly, the materials segment is performing very well, we continue to invest in the materials segment and I believe we will see top line growth and bottom line expansion as those investments come online.
Operator, I will now turn it back to you for questions.
Can I ask a question. Please press Star then one please limit yourself to one question and one follow up question and feel free to jump back in the queue. If you have additional questions.
Our first question is from Steven Ramsey with Thomas.
Thompson Research group. Please go ahead.
Hey, Good morning. This is actually Brian Biros on for Steven Thank you for taking my questions.
First of all good morning in the Central region was very strong can you just talk more to the projects that you filled the cap with their I think he mentioned a few projects.
Paired remarks are there any other specific types of projects, you're targeting and just how does the margin profile on those compare to the other mountain in California regions.
Yeah. So so good good question, our business down in Texas or in Texas region that was one of our initiatives a couple of years ago to really ship back to that whole market strategy, specifically within our Texas region.
And they've been focused on two primary markets today, Dallas Fort worth, which you've been in that market for a long time and also in the Houston market. So we're seeing that that that whole market strategy pay off for that team.
<unk> been pursuing large projects mega projects out of that office across the country.
So this whole market strategy for them is really focusing on smaller D O T jobs.
Projects that are bullied is designed the bid build type projects that they can execute on and perform at a high level and that's really what what they're a portion of the cap is it's the average job size now for them is.
Probably pretty close to $50 million, maybe 75.
Which is a lot different than historically the type of work that they would have on the book. So that's just a great example of how we've shifted away from really risky projects and asked our teams to focus on our home market strategy and they've done a really nice job of executing on that from a margin profile perspective, it's right in line with the rest of the company and where we expect to be Directionally as an organization moving in.
'twenty 'twenty four.
Got it. Thank you and then follow up maybe just the construction gross margins overall it looks like it might've been above 15%. If you exclude the I 64 is that the.
The right way to think about the gross margins there and if you can just put kind of a year to date gross margins of that segment ex the oldest projects into perspective, and it seems like you're maybe already within the targeted zone for for next year. So just.
Thinking about how to reach the high end of that in 'twenty four.
Yeah, we're pretty close I think if you adjust out I 64 of them were just just below the kind of the range, we put out there of 14% to 16%.
For 2024.
We have two other things going for us.
Certainly we've been we've been focusing on execution as a company for a while we.
Put in place are construction playbook across the company and that's been moving forward and the team has been adopting adapting the playbook in implementing it across the organization. So we expect to see further margin expansion and construction through our efforts on that front and then the other thing to think about is our R gap.
So our cap has gotten stronger as we've talked in the last few quarters now are picking up more work with higher margins and so we've seen that trend continue through Q3, and so as projects.
Get burned through construction to bring new cap and into construction, we expect margin expansion on that and so that gives us the confidence.
We're gonna be well within that range of 14% to 16% as we get into 2024.
Okay. Thank you.
Thank you. Thank you.
The next question is from Brent Thielman of D. A Davidson. Please go ahead.
Hey, great. Thanks, good morning.
Hey, Kyle you mentioned several times through the commentary just bettered bid margin.
Within the book of business that you have today and at least Couldnt have been more selective.
Well over the last couple of years in terms of what you're pursuing any more granularity on how the bid margins within the cap look today relative to a year ago or two years ago with me. If we think about you're executing in that book over the next 12 plus months.
Yeah, I mean, I think if you go back a couple of years certainly we saw the market tighten a little bit in early 'twenty, one we talked about that and as we've seen the market.
Adjusted and grow.
And certainly with your Iga funds coming in I think over that two year period, we've seen our margins improve how you're pretty close to 2% and a half maybe up to 2% on the day I think it might be a good proxy for what we see so we will start to see that really transitioning some of that already have so I don't want to over promise and suggest theres another 2% in margin expansion just.
And our cat, but we've seen some of that that kind of already get burned through some of the newer cap coming in certainly a better margins and we had a couple of years ago.
Okay.
And then obviously some of the concerns in the market right now they seem to be around that the private sector and you are obviously much more focused on the infrastructure.
Maybe can you talk about any slack in your markets that you may be seeing across your geographic regions things you might be concerned about.
Yeah, do you feel like Youre, capturing that in these growth expectations for the business for 2024.
Yeah, I think I think I look at the public side is really strong I think as we look at what's coming for our teams really across our entire footprint.
Uh huh.
As growth in 'twenty 'twenty, four certainly from a public spending perspective I.
I mentioned in the last call. The American Road Transportation Builders Association website, how a lot of good information around the opportunities are out in front of us specifically in our markets.
And they also really strong public funding for us in 'twenty 'twenty four I know our teams a see a lot of opportunities for growth in 'twenty four and beyond as a result of that on the private side.
Our focus has really been around mining rail industrials.
Solar has been a little bit soft this year I think is sort of all kind of work through some of the funding that came their way and we expect that to pick back up.
And I think the only softness we've seen.
Probably around residential.
I would I would look at that more on the material side, but.
And as we've talked before we don't really quarterly pilot with the presidential we correlate higher with transportation for.
A couple of reasons one is our asphalt is about two thirds of our materials business versus the aggregates.
But most of it's been kind of isolated up in the northern California, Northwest, Washington, but that's been in place for a few quarters. Now. So we think that that softening is kind of already into our numbers and what we've seen today.
Okay really helpful. Thank you.
Thank you.
The next question is from Brian Russo of Sidoti. Please go ahead.
Yeah, Hi, good morning.
Good morning, just curious.
When a when we look to 2024.
And the targets, you've given them, 9% to 11% EBITDA margins in the top line and gross margins by <unk>.
Construction materials segment or are those kind of considered normalized or can you improve upon that as well maybe as you referenced you know better bidding where maybe it's incremental.
Vertical integration or even.
A different public versus private mix, which I think is approximately 60 40, just wanted to get your kind of.
Strategic thoughts on that.
Yeah. Good question, Brian I mean first of all we feel good about where we're headed directionally in what we look like for 2024, we have put out 39% to 11% EBITDA margin.
You look at where we are today in terms of our midpoint of our guidance around 8%.
Theres, obviously, some nice improvement as we have I 64 wrapped up and behind us that gives us pretty pretty close to the bottom end of that range.
As I mentioned.
Good question, our cap is very different.
Believe there is a margin expansion associated with our cap as we get newer projects going through through the pipeline so to speak so that'll help drive up.
Margins as well.
That range, we think our execution, we're still not there maybe theres still opportunities for us as a company to improve how we don't want us suggest that we're kind of at the end of the road in terms of operational excellence is a company that's going to stay out of really primary focus of ours next year and beyond so we think there's there's continued opportunities for us on that front.
Yup teaser for materials pricing.
So we do expect to it to raise pricing again in 2024, and then we'll kind of see what these go beyond that and then your automation efforts you talked about a couple of the facilities, we're bringing online next year and those are nice investments for us.
Those facilities I think that's going to help expand our margins as well.
Zinc from there.
We're always going to expect certainly from from from our team in 2020 by beyond.
Top and bottom line growth and so that's something that we can come back to you on in terms of kind of what's the next next step for the company longer term and how we can get those topline and bottom line growth.
Okay, Great and just curious on the 64 project, obviously, you write downs of declining each quarter this year.
So what is actually towards technically left to complete that project by year end.
Confidence level.
That that can actually happened since I think previously you were targeting mid October.
Yeah, that's right and really the impact in the quarter was just further delays mostly associated with design conflicts that we encountered as he started to kind of put the final final project together.
Today, we're down to down to final tablet paving so we're actually putting the final servicing on the roadway itself, putting your final striping in and putting putting vehicles in their final configuration and expecting to turn it over to the owner.
In December and so again, we're working day organized two or three paving crews getting network complete so.
So those things in our control and we feel good about so we're confident that we can perform the word for beating our productions that the project will be complete I think the only thing thats out there would.
It would be weather it into some major storm came through the area that could be a setback for the team and we expect to have a few rain days here and there.
That's fairly normal for that part of the country and this time of year, but we feel good about the opportunity to get that project behind us this year.
Alright excellent and then lastly, just you mentioned expanding your footprint into new geographies could you just elaborate on that what might be complementary to I guess your existing home markets.
Sure Yeah, I mean, I think I think you'd go back to Q1 'twenty two we laid out a plan that from 'twenty to 'twenty four and beyond we're going to focus on support and strengthen our existing home markets that was really around small bolt ons automation efforts and purchasing material reserves.
In our existing markets and we got a lot done as you mentioned in prepared remarks around centennial asphalt and oil terminal in Bakersfield Brunswick Canyon.
<unk> Hoffman at Northern Nevada grants bills, Corey expansion in Salt Lake City, and Iqos, not resources, which is a core up in Canada that ships material down into our business and the state of Washington, So a lot of.
Really nice.
Support and strengthen of our existing home markets over the last couple of years that we're excited about although we always.
Spoke to doing something larger on an expansion and getting outside of our existing footprint, specifically around our vertically integrated business in 2024 and beyond we felt like the timing you're right.
For us to do that that the large mega project.
Challenges, we have as a company with behind Us and so we do feel like it's time for us to take on a new opportunity outside of our existing footprint.
I think there's a lot in the pipeline that are out there in the marketplace. Today I can tell you what we're looking at is first off.
Good businesses that to be a platform or something we can for a market that is healthy and growing and of course, we're looking for strong leadership.
And those opportunities are out there we have a couple of things in the pipeline and I hope that we'll be able to share some success in the coming months.
Okay, great. Thank you very much.
Thank you.
The next question is from Michael Dudas of vertical Research partners. Please go ahead.
Hey, good morning, gentlemen.
Good morning.
I'll just quickly I'm, calling upon the material side.
How does how.
You should costs had been normalized any insight on maybe cost pressures fourth quarter into 2024, and what kind of range of type of pricing are you anticipating them as their volume growth associated with that business relative to the core business. Susan you mentioned about relative to me a little bit slower but.
But some of the new acquisitions some of the new opportunities you've got from your from your bolt ons.
Yeah.
Yes, I think the cost has stayed fairly fairly consistent this year I mean, there's been some some fluctuation certainly a way we've seen a little bit there I mean, the energy escalator. We put in place last April is still out there for us to protect ourselves and also we have public garners that provide some protection on the end of things. So we feel good about.
The cost components today, we did.
Yes, we were able to raise pricing on aggregates and asphalt in 2023, and we do expect that to be consistent with what we can do next year, probably in the range of say, 5% to 10%.
But all in all we do think that the cost components have normalized and I think that's good news for.
For the business from a volume perspective, we haven't seen a drop so despite the fact that there were a couple of markets.
Often with residential.
We're actually up both asphalt and aggregate for the year. So so I think that's a that's kind of indicative of the market today.
Excellent Thanks Kyle.
Thank you.
The next question is from Jerry Revich of Goldman Sachs. Please go ahead.
Hi, This is Adam on for Jerry today, Thanks for taking my question.
Nice to see the positive free cash flow inflection in the quarter can you can you just update us on how youre thinking about the free cash flow and receivable bowls trajectory in Q4 and into 2024.
And then as a follow up.
How our payment terms on new projects, you're you're winning how does how do they compare to what you were winning in 2022 and 2021.
Yeah, Hey, Adam This is Lisa good morning.
Yeah really good quarter from a cash flow perspective, you know coming in at $153 million for the quarter.
We've talked before about you know from an internal perspective, how we look at operating cash flow and ultimately free cash flow is first you know we were incentivized internally at a 5%.
Operating cash flow as a percent of revenue, yeah that being at 5% and so.
We manage our Capex I'm looking at we spend approximately 1% to 2% for maintenance Capex and so you take that from our operating cash flow. So that leaves about two and a half 3%. So that's our target of what we're what we're shooting for.
So.
As we work through some of our challenging projects from the past.
Which are hot which some of that is <unk>.
Included in our contract assets.
We anticipate cash to be freeing up as we're moving forward and we've seen that in Q3, and our operating cash flow. Our net contract assets went down around 55 million as I mentioned in the third quarter.
And overall, that's just key working capital.
Account movements, our receivables are up in the quarter, which we expect it that wasn't unusual you know we started the year off slow and then picked up.
Picked up activity levels in Q2. So we were full speed ahead, when we entered Q3 with a very busy quarter with.
It's coming in way that revenues at $1 1 billion. So higher accounts receivable that we expect to turn in Q4, along with just other working capital accounts with with higher activity and so going into 2024 at a minimum we would anticipate them.
Our operating cash flow targets being similar or even pushing a little bit higher as we build momentum and start to release some of that contract assets that are on our balance sheet.
Improvements in our.
Contract liabilities and then receivables just from a collections perspective, you know, we're always working with the teams.
Just focus on our cash collections, and just generation and just speeding up that process and so that that area is working and working well.
We continue to maintain this focus going into 2024.
Thank you very helpful and I appreciate the color.
Of cap by procurement type can you update us on the contract mix of your cap so.
How much is fixed price versus fixed unit price. So any color there would be helpful.
Yeah, I don't know if we have the breakdown between fixed price and fixed unit price on the bid build side of things.
Our cap if you look at the best value has been pretty consistent between last year and Q3 and this year in Q3 are right around 42% or so.
Our fully designed projects are at 53% of our cap today and so I think we feel we feel good we feel like we've derisked the company our design build again went from 5% down to three and.
And so that's you.
You know as you see the 64 jobs certainly wind down we expect we don't expect that to go to zero Theres still owners that will have a design build contracts that we have a compelling reason to pursue there.
Is there kind of the exception.
And our business today, so I don't I think we feel good about where we're at from a cap perspective, and a contracted message. We have I don't think anything shifted by the way.
In terms of the payment terms with the contract work that that hasn't really changed a whole lot whats changed is this whole market strategy.
One we're working for clients that we know me understand which allows us to move away from having contract claims which is certainly not helpful. In terms of generating cash for the business.
And also we're doing work that is best value as opposed to design builds there's a lot of those claims associated with these types of contracts too. So I think our entire business model.
That shifted which only help not only derisk the company, but also generating better cash flows in the future.
Great. Thanks, so much.
Thank you.
This is the end of the Q&A and now I would like to turn the call back over to Mr. Larkin.
Okay, well. Thank you for joining the call today as always we want to thank all of our employees for the work they do every day.
I believe that our company has never been stronger.
We're in a better position to grow and deliver shareholder returns.
Finished the year strong thank.
Thank you for joining the call and your interest in granite look forward to speaking with you all soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.