Q4 2023 Granite Construction Inc Earnings Call
Good morning, My name is Andrea and I will be your conference facilitator today.
At this time I would like to welcome everyone to the granite Investor Relations fourth quarter 2023 conference call.
This call is being recorded.
All lines have been placed on mute to prevent any background noise and all the speakers' remarks.
Yes.
And 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 your host granite construction incorporated Vice President of Investor Relations, Mike Barker. Please go ahead.
And thank you for joining us I'm pleased to be here today, with President and Chief Executive Officer, Carlos <unk> Executive Vice President and Chief Financial Officer, Lisa Curtis. Please.
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 outcomes outlook guidance.
Objectives committed and awarded projects, where cat 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, 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.
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.
Collagen: Now I'd like to turn the call over to collagen.
Collagen: Good morning, and welcome to our fourth quarter Conference call.
Collagen: I'm excited to talk about how we close the year across the company our teams had an outstanding fourth quarter.
Collagen: But before I discuss the details and highlights of the quarter.
Collagen: Like three visits some significant accomplishments during 2023.
Collagen: Okay.
Collagen: We laid out our investment framework for growth as part of our 2024 strategic plan.
Collagen: Our growth strategy is built upon two pillars support and strengthen and expand interest for them.
Collagen: Well, we support and strengthen we focus on developing and strengthening our core competencies and growing our own markets.
Collagen: We worked to expand and transform and grow our business with more transformative investments both in our home markets and new geographies.
Collagen: Over the course of 2022 2023 we worked to support and strengthen our businesses and our construction segment, we strengthened our home markets by selecting the right owners projects subcontractors and vendors, while leveraging our local market intelligence to win more projects at higher margins.
Collagen: You select it works you did to our core competencies and the construction of these projects with high levels of customer satisfaction without the types of claims to play legacy work.
Collagen: In our materials segment investments in our own markets through bolt on acquisitions equipment and plant automation projects and by investing in additional aggregate reserves.
Collagen: We have had a lot of success strengthening our home markets.
Collagen: Texas is a good example.
Collagen: Going to the American Road in Transportation Builders Association, Texas led the country in state and local government transportation construction contract Awards, if 16 billion.
Collagen: Closest state, California is at 9 billion.
Collagen: As discussed on previous calls.
Collagen: Texas region, historically chase work across the southeast and Midwest. Since we began implementing our 2024 strategic plan several years ago. The Texas region has focused on Dallas Fort worth and Houston.
Collagen: Although granted has been in both of these markets more than 15 years and has strong relationships with the Texas D O T labor pool subcontractors and vendors.
Collagen: He missed opportunities to strengthen those relationships as we pursued work across the country.
Collagen: Both metros are growth markets with good funding and resilient pipeline for a range of projects different end markets, including transportation water airports and private site development and.
Collagen: 2023, we applied a targeted and selective bidding strategy to leverage our strengths and competitive advantages to build a derisk portfolio projects. These.
Collagen: These projects have an average cap size of approximately $30 million per project as at the end of the year.
Collagen: Well the size and quality of the cap is a significant improvement from the historical cap or the Texas region.
Collagen: On the materials side across the company, we supported and strengthened the business with significant investments in reserves targeted automation projects in aggregate quarries and the consummation of bolt on acquisitions.
Collagen: First acquisitions in 2023, we completed two bolt on aggregate acquisitions that added strategic capabilities to our home markets.
Collagen: The first was the purchase of the Brunswick category, an asphalt plant in Carson City, Nevada.
Collagen: The Brunswick Union Korry up to 17 million tons of reserves.
Collagen: We ended our home markets vertically integrated reach in northern Nevada.
Collagen: We also purchased coast Mountain resources, which operates the beverage inquiry on Vancouver Island in British Columbia, Canada.
Collagen: Banbridge inquiry added 40 million tons of reserves.
Collagen: And it had previously been a customer of the Corey due to its high quality aggregates and strategic proximity to our home markets in the Pacific Northwest.
Collagen: Keenly evaluating bolt on acquisition opportunities and believe we continue to grow our home market footprint by and through similar future acquisitions.
Collagen: I forget facility automation projects had been another focus like our recently completed Swan aggregate facility in Tucson, Arizona.
Collagen: The new plant ever just automated technology to produce aggregates at lower costs.
Collagen: Minimizing night and weekend shifts, thereby reducing workforce challenges.
Collagen: Second automation project is expected to be completed at our slurry facility in Bakersfield, California during the first quarter of 2024.
Collagen: Well not suitable for all plans, we expect to continue to roll out automation technology to additional aggregate facilities in our network in 2024 and 2025.
Collagen: Moving forward, we intend to continue making investments to support and strengthen our home markets.
Collagen: We will also look for growth opportunities through investments that will expand and transform our business.
Collagen: The acquisition of even Robert's company in Memphis Stone and gravel company is a good example of such an investment.
Collagen: Even operates seven strategically located asphalt plants, serving the greater Memphis area in Northern Mississippi, Memphis Stone and gravel operates three sand and gravel mines with an additional line expected to be operational during the first quarter 'twenty 'twenty four adding in total 82 million tons of reserves.
Collagen: I previously discussed the fact that we are interested in acquiring well run businesses that can be a platform for growth.
Collagen: The types of businesses that we would consider operating the market is healthy and growing they have strong leadership will continue post acquisition, just like Lehman and Memphis.
Collagen: Our long standing well regarded companies that are positioned for growth.
Collagen: The acquisition expands grants footprint into the southeast and the attractive growing Memphis metropolitan market.
Collagen: Readership team is staying well continue to lead and grow the businesses, we expect Lehman and Memphis don't to add approximately 200 million in revenue 2024, with consistent high profitability between 15, and 20% EBITDA margin.
Collagen: Cited to build on the platform. This acquisition provides and growing the south east in 2024 and beyond.
Collagen: Now before I dive into the segments.
Collagen: Like to touch on what we are seeing related to public funding for transportation and specifically in the state of California.
Collagen: As we said throughout 2023, we believe the level of federal and state funding throughout our geographies. That's created a market and we have not seen since the short lived housing bubble the mid two thousands.
Collagen: This strong public market is complemented by a private market, which various industries are increasing investment in their infrastructure together this benefits the civil construction industry granted.
Collagen: We believe that the robust level of funding will continue and present opportunities for revenue growth for years into the future.
Collagen: California, our largest market transportation funding has translated to high levels of project awards and record cap.
Collagen: Within the California State transportation budget, there are two areas that most correlate to future bidding opportunities for granite.
Collagen: Capital outlay projects and local assistance expenditure allocations.
Collagen: Outlet projects are primarily caltrans projects, whereas local assistance expenditure allocations are funding provided to local municipalities for transportation projects.
Collagen: Actual and estimated allocations for the previous and current fiscal years, which ended June 2023, and will end in June 2024, respectively.
Collagen: So it's consistent allocation level, but these accounts and $8 3 billion and $8 5 billion respectively.
Collagen: This level of funding resulted in a 38% increase in Caltrans project awards during calendar year 2023, compared to 2020 to.
Collagen: The proposed budget for the fiscal year ending June 2025, she was an increase in the level of transportation funding to $8 9 billion. Despite the overall budget deficit in California.
Collagen: This funding is supported by the transportation specific S. P. One revenue in the federal infrastructure Bill.
Collagen: We believe that these funding sources will continue to support transportation budget in California at these levels for several more years at a minimum.
Collagen: As a reminder, these amounts represent allocations for construction projects, which will then need to be prepared for letting awarded and then released for construction for example, and allocation made to a project in the current year budget.
Collagen: Not turn into revenue for a contractor for several more years based on the time period between allocation letting award in construction.
Collagen: Moving to the construction segment. It was frustrating that are really strong fourth quarter was tempered by negative impacts in the legacy Tappan Zee and ICC for high rise bridge projects, although a noncash event, we adjusted our probable claim recovery estimate on the Tappan Zee project reflect developments in dispute review process.
Collagen: This resulted in a negative impact to gross profit of $19 million during the fourth quarter. In addition, even though construction activities are now substantially complete on the I 64 project.
Collagen: Weather related delays negatively impacted.
Collagen: Fourth quarter gross profit of $14 million or $7 million after noncontrolling interest.
Collagen: <unk>.
Collagen: It was a tremendous growth quarter for the construction segment revenue grew by 19% year over year, driven by the record cat carried into the fourth quarter.
Collagen: Well cap decrease sequentially from the third quarter it remained higher than the prior year by 1.1 billion or 24%.
Collagen: Even though this record cap led to significant revenue growth.
Collagen: We were able to win work during the quarter to replace much of this revenue burn, which is a testament to the market environment and our holiday shortened bidding quarter.
Collagen: Diving into our operating groups, starting with the California Group cap increased 91 million to $2 4 billion from the third quarter and the group enters 2024 with cat three 9% higher than the prior year with a record cabin, California group experienced tremendous revenue growth in the fourth quarter of 61% year over year.
Collagen: Another record cash balance going into the first quarter 'twenty 'twenty four.
Collagen: Also and importantly, California continues to lead the company and best value projects, which represent $1 5 billion or 61% and this total cap.
Collagen: This best value cap at the end of the year, because $345 million added during the fourth quarter, where private rail facility project in the state.
Collagen: These collaborative delivery methods like construction manager general contractor, a progressive design build better position us for success and allow us to work together to mitigate risk with the client.
Collagen: Larger best value projects, Robyn separated and small work packages, which should then be viewed through multiple project workshops, providing more opportunities to address risk and large bid build projects.
Collagen: Last 15 years.
Collagen: Pleaded or have under construction 87 best value projects.
Collagen: Found that these projects are generally completed more quickly and with fewer claims as mentioned public funding remains elevated in the state and we see continued investment and opportunities in the private sector.
Collagen: We believe this trend will continue for the foreseeable future.
Collagen: The mountain group capped decreased slightly by 26 million from the third quarter, but ended 2023, 3% higher year over year. The group ended the year with an impressive revenue increase of 12% year over year for the fourth quarter led by increases in the Alaska and Utah regions.
Collagen: The budgeted spending in each state in the group expected to increase in 2024 with a higher level of Caf.
Collagen: I expect the mountain group to continue to grow revenue cap between 24.
Collagen: Finally, the central group.
Collagen: Low cap decrease during the quarter by 104 million. The group finished with an increase of 46 million year over year to $1 7 billion.
Collagen: While the quantity of the central groups cap has remained consistent I believe the quality has increased significantly.
Collagen: I expect the group to return to revenue growth and be a key contributor to our expected margin expansion in 2024.
Collagen: I believe that our high quality cap coupled with the macroeconomic construction market. It is fueled by the I J a.
Collagen: Granite in the strongest position for growth and profitability in over a decade.
Collagen: Moving to the materials segment, we completed another strong performance in the fourth quarter.
Collagen: Over the last two years, we've taken actions across this segment in support of our 'twenty 'twenty four gross profit margin targets of 15% to 17%.
Collagen: Our focus on raising prices investing in automation purchasing reserves bolt on acquisitions and geographic expansion not only gives us confidence that we will meet our financial targets that we will continue to sustainably grow revenue.
Collagen: In 2023, we added 140 million tons of reserves through bolt ons and geographic expansion transactions, including the materials focused Lehman and Memphis Stone acquisition with <unk>.
Collagen: Babelized costs more efficient operations and consistently strong order volumes when combined with further expected price increases, we anticipate growing segment revenue and profitability in 2024.
Collagen: Now I'll turn it over to Lisa to review, our financial performance for the quarter.
Lisa: Thank you Paul.
Lisa: In 'twenty two 'twenty three we made significant strides in our financial performance on our path to achieving our 2024 financial targets. We finished the year strong with fourth quarter. Adjusted net income of 36 million and adjusted diluting earnings per share and ADT.
Lisa: For fiscal year 2023, adjusted net income improved to $140 million and adjusted diluted earnings per share improved to $3 and 14 hatch.
Lisa: Adjusted EBITDA margin for 2023 increased to seven 7%.
Lisa: From six 4% in 2022.
Lisa: Excluding the impact from Tappan, Zee and I 64, and 2023, our adjusted EBITDA margin would have been eight 9%.
Lisa: For the year revenue increased 208 million or 6%, but the fourth quarter completing a strong second half of the year.
Lisa: In the fourth quarter and last six months of 2023 revenue increased 18% and 14% respectively over the comparable periods in 2022.
Lisa: In 2023, we began with a weather related slow start to the year.
Lisa: But that changed significantly in the second half of the year.
Lisa: We are poised for that growth to continue in 2024.
Lisa: And the construction segment annual revenue increased 188 million or 7% year over year to 3 billion aided by a strong finish to the year in the fourth quarter with an increase of 19% year over year.
Lisa: The increase in revenue for the year and the fourth quarter was driven by a significantly higher levels of cat and the California and mountain grades over the prior year, resulting in fourth quarter revenue increases of 61% and 12% respectively.
Lisa: Annual construction segment gross profit improved to 325 million and gross profit margin of 11%.
Lisa: It was impacted by the Tappan Zee and I think people on projects.
Lisa: Excluding the impact of these projects annual construction gross profit margin was 13%.
Lisa: In the materials segment annual revenue increased 20 million year over year to 517 million with gross profit, increasing 6 million to 71 million and a gross profit margin at 14%.
Lisa: In the fourth quarter, we continued the strong performance in this segment from the second and third quarters with a gross profit margin of 16%, including the impact of newly acquired operations, which produced a gross loss of 2 million due to winter seasonality any impact at all.
Lisa: Purchase accounting.
Lisa: The materials segment overcame a very slow start to the year and we are realizing the benefits from investments in the business.
Lisa: Another highlight was our strong cash generation in the fourth quarter, which continued from the third quarter and led to cash and marketable securities at 454 million at year end.
Lisa: After the second quarter I mentioned that the weather delayed start to the year has impacted the timing of our cash generation.
Lisa: That would change in the second half of the year.
Lisa: That is what we saw occur in the third and fourth quarters.
Lisa: I am pleased by the performance in the second half of the year that led to operating cash flow of five 2% of revenue or $184 million for the year.
Lisa: I expect our Derisked the business model to drive further increases in our operating cash flow as we target 7% of revenue in 2024.
Lisa: Now, let's turn to our guidance in 2024, we are excited as we begin the new year and believe we are positioned to realize the benefits from all the actions taken since announcing our 2024, our strategic plans.
Lisa: And 'twenty 'twenty four we expect strong revenue growth to a range of three eight to 4 billion.
Lisa: And the second half of 2023, we demonstrated that we have the businesses in our home markets to capitalize on the positive market environment and drive organic growth.
Lisa: I expect that organic growth to continue in 2024 and be supplemented by our new home market and the south east from Lehman and Memphis down.
Lisa: SG&A continues to be a focus across the company with an emphasis on efficiency as we grow revenue.
Lisa: We are taking action to improve processes and procedures in order to leverage our resources more effectively.
Lisa: This will result in more efficient use of our SG&A expense in 2024 to a range of seven 5% to 8% of revenue with greater impact in following years.
Lisa: In 2024, we expect our adjusted EBITDA margin range to be 9% to 11% of revenue.
Lisa: This range is unchanged from the targets, we set two years ago.
Lisa: When we set this range. We said we were going to replace legacy projects dragging down profitability with lower risk higher margin projects. We also said we were going to obtain margin expansion.
Lisa: Higher margins on that day and through improved execution.
Lisa: We committed to invest and raise margins and our materials business and we said we would be more efficient with our SG&A.
Lisa: We did what we said we were going to do in all these areas and we believe that we will realize our margin targets as a result.
Lisa: In 2024, we expect to continue to invest in our business through capex in the range of $130 million to $150 million.
Lisa: This higher range is driven by strategic materials investment.
Lisa: Proximately 50 million for a new aggregate plant reserve expansion.
Lisa: And further automation project.
Lisa: Well I think project specific tunnel boring machine totaling approximately 20 million now.
Lisa: Now I'll turn it back over to Colin.
Colin: Thanks, Lisa I'll close with the following points.
Colin: We finished 2023 with a strong fourth quarter to continue to build upon momentum from the third quarter.
Colin: Demonstrated our ability to drive strong organic revenue growth with higher levels of profitability in the grant is seen in many years I'm also very happy to say the construction work and paving is substantially complete and I 64.
Speaker Change: And I want to thank our team working diligently to put this project behind us.
Speaker Change: I'm also impressed not only with the end of the year, a cat, but the quality of the cap with 47% of the cat the best value work in which we were selected by the owner based on our qualifications.
Speaker Change: It is truly a testament to grant strength in all markets, our experienced teams and a strong public and private market environment.
Speaker Change: The impact of the <unk>.
Speaker Change: He will be felt by granted industry for many years as projects continue to be programmed funded designed let awarded and constructed.
Speaker Change: Our acquisition of Lehman and Memphis Stone is a transformational event for granted.
Speaker Change: Not only does it provide granite with a high performing materials focused business with significant aggregate positions in the area and also provides granted a platform from which to expand.
Speaker Change: With our de risk business model, we are seeing the positive effects on our ability to generate cash you saw the results of our efforts in the second half of 2023 and I expect further gains in 2024.
Speaker Change: Finally, along with the significant revenue growth expected in 2024, I believe we will achieve our adjusted EBITDA margin range of 9% to 11%.
Speaker Change: Operator, I'll now turn it back to you for questions.
Speaker Change: We will now begin the question and answer session.
Speaker Change: To ask a question. Please press Star then one please.
Speaker Change: 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.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question. Please press Star then two.
Speaker Change: And our first question will come from Steven Ramsey of Thompson Research Group. Please go ahead.
Speaker Change: Hi, everybody, it's John calling in for Steven can you can you maybe dig into the materials segment, a little bit more talk about.
John: Organic growth next year and kind of how you expect volume and price.
John: To contribute.
Speaker Change: Sure Yeah, good morning, and so I think we will start with the volume side of things and certainly as we look into 2024.
Speaker Change: From an aggregate side I think the volumes will be pretty consistent with what we saw in 2023, which was was it a healthy market for us how would you see pricing on the aggregates up around 10% go into 2024, and that's our expectations for the year Aaron on the asphalt side, that's where we see a volume increase in 2024 versus 2023, I would say no.
Speaker Change: Or that it's.
John: It's gonna be seen in California, and we expect pricing increases to be somewhere close to around 5% in 2024.
Speaker Change: Got you, Okay, and then just one more on the under construction cap side is.
Aaron: Is there an area or region that we can think about driving further than others or are we kind of think about it broad based.
John: Well I would think about a broad based I think all of our markets are healthy certainly the I R. J a fund are helping contribute to that and we spoke about that in the prepared remarks.
John: So we've got a healthy market both on the on the public side and the private side that we're excited about I mean, one of the highlights certainly with what we saw in California.
John: And we know there's been a lot of discussions around what's going on in California overall with with its budget yet.
John: Transportation Highway infrastructure spending in California is really strong and I think our cap really reflects that today and so we're really excited about what we see out in the west.
Speaker Change: That's great. Thanks, so much.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question comes from Brian Russo of Sidoti. Please go ahead.
Brian J. Russo: Yeah, Hi, good morning, just want to follow up on good morning, just to follow up on California, obviously, a lot of extreme weather and flooding.
Brian J. Russo: In late January and through the month of February and just wondering how that's impacting.
Brian J. Russo: Your your business et cetera, considering what occurred in the fourth first quarter 'twenty three.
Brian J. Russo: Yeah, So 24 actually that being this year January was very dry out in the west. So we're very fortunate to have good weather and our team has been busy. So we're already off to a really strong start in Q1 of this year last year, obviously, you've got really tough quarter weather wise, but we did get some emergency work last year, but it wasn't enough to really offset.
Brian J. Russo: Ed.
Brian J. Russo: The weather that we were impacted by.
Brian J. Russo: This year, we are off to a better and stronger start in 'twenty, three really kind of created a low bar I would say year over year. So we have that going for us from a comparison perspective, but I think our materials businesses, where we're going to see the impact.
Brian J. Russo: Probably the greatest.
Brian J. Russo: In Q1 of this year, where with emergency work there last year, there wasn't a lot of auto materials opportunities for us this year, having better weather our materials teams are getting out of gate faster than they did last year.
Speaker Change: Okay, Great and then just curious could you just talk more about.
Speaker Change: The water and wastewater business your outlook there what's the financial.
Speaker Change: Contribution now I think it's just embedded in the construction.
Speaker Change: And then the strategy as well.
Speaker Change: Yeah, I mean, I think nothing has really changed for us except that we've been able to take that business incorporated into our construction business.
Speaker Change: And create some efficiencies.
Brian J. Russo: Part of that business.
Brian J. Russo: Obviously, we do a lot of the parent installation work out we work for and municipality.
Brian J. Russo: Your clients and the market is strong.
Brian J. Russo: Little bit of a higher end of the range that we have for construction in 'twenty four or 14, 16%. So we feel really good about the opportunities there and an opportunity to continue to grow that that business for us.
Speaker Change: Okay, great. Thank you.
Speaker Change: The next question comes from Michael Dudas of vertical research. Please go ahead.
Michael S. Dudas: Good morning, Lisa Mike Pyle.
Michael S. Dudas: Good morning, good morning.
Michael S. Dudas: I want to follow up on your comments or your comments in the prepared remarks about execution and in the strong markets that you see across the board how does that translate you sold in 23 on bid day margins relative to what you've been booking in the past.
Michael S. Dudas: And on the execution front when you your 13% gross margin in construction for helpful. How but could combined to impact and help you achieve the 24 type targets.
Michael S. Dudas: Relative to the better more higher quality book of business and is there a burn rate because of the is the best value practice some.
Michael S. Dudas: Contracts may be a little bit more delayed or may not pull through as quickly if somebody in Europe reconfirm. This is somehow that translate on the cadence through the year.
Speaker Change: Yeah. Thanks, Mike So I think I think maybe I'll address the question is really how do we bridge between our 2023 results and margins performance in and how do we get to that 14% to 16% in 'twenty, four and and I think there's a few things that we're looking at every one of you if you adjust out.
Michael S. Dudas: Tappan Zee and 64 projects, where we're sitting right around 13, 3%. So we're not quite up to that 14% to 16% gross profit margin that we are expecting in 2024.
Speaker Change: I think your comment around the pipeline.
Speaker Change: <unk> is important because the pipeline of projects we have in <unk>.
Michael S. Dudas: Company today are much better higher quality margins type projects and we had come into 2023.
Michael S. Dudas: Kind of think about that pipeline of work coming through in 'twenty. Three we're still burning through some of that worked we picked up in 2021 and 'twenty two there was a little bit more.
Michael S. Dudas: Tougher market I should say than what we have historically seen and what we have in the last couple of years. So the pipeline has gotten stronger margins has gotten better and I think those projects are going to really start to hit our books in 2024. So I think that's going to help our execution hasn't changed around what our focus is and we've ever construction playbook, we're focused on operational excellence.
Michael S. Dudas: We continue to see opportunities to get better.
Michael S. Dudas: On a year over year, and we're focused on that and I can say the market's still healthy we talked about that so our margins are getting better if not pretty consistent with what we saw last year, which are really healthy margins in the market during the first month or so.
Michael S. Dudas: We're seeing the bid volumes very consistent with what we saw last year and margins are very consistent and as well and our hit rate has been strong. So we feel like we have the market. We have to work on the books today to hit that those those margin expectations of 40% to 60% in 'twenty four.
Speaker Change: I appreciate that call. My follow up is you are talking about your recent acquisition in the southeast.
Speaker Change: Maybe you can look at that this is characteristic to what grant it's like for like this would be on the materials front end and is that an area that when you went into your looking towards you know going vertically integrating and moving into the construction phase for dramatically is that kind of how you were thinking about is that where some of your attention might be placed on them.
Speaker Change: Some of the acquisition opportunities that may come up for you as you move through 2024.
Speaker Change: Relative to what Lisa talked about and some of the targets.
Speaker Change: Well I think when we looked at the acquisition with Lehman Robertson Memphis Stone and gravel I look at it like we were getting back to our roots as an organization you know we haven't done a vertically integrated deal since 2008, and it was really important for us to get back to doing the types of businesses and deals that we were comfortable with and how he grew organization historically.
Speaker Change: Overtime and so if you kind of go back to 2023, we're very intentional about supporting is strengthening our existing home markets and reinvesting in those they were underinvested from a reserve perspective.
Speaker Change: We saw some bolt on opportunities ways, we can preserve the market position we had so.
Speaker Change: So we did that Lehman Roberts with opportunity for us to get outside of our existing footprint and create that real platform for growth and as I mentioned on our last call. We were looking for really strong leadership and looking for a healthy growing market.
Speaker Change: We're looking for a really good business and we found that when Lehman Roberts and that's going to provide a platform for us to continue to grow in the south southeast and where we can grow that business and really leverage the team to find other opportunities in that marketplace to grow our company. So this is a big a big shift for us.
Speaker Change: We're excited about it we haven't done a vertically integrated deals and again, it's been 15 years and so so quite a while so that's that was really kind of our thoughts behind the Lehman acquisition.
Speaker Change: And as we look to 2020 before I think our investment thoughts are very very similar.
Speaker Change: You need to reinvest in our existing businesses support strengthen but we're looking for other opportunities like Mike Lehman Roberts do we can we can grow our business. It can be part of the platform will either Robert or find other other areas that we can expand and transform our company and I think you look at that positive cash flow.
Speaker Change: We generated in Q3, and Q4 and what we expect to 'twenty four we're going to have the ability to do it.
Speaker Change: Yeah, Kudos Alisa on that cash flow generation Mexico.
Speaker Change: Thank you thank you Mike.
Speaker Change: The next question comes from John Ramirez of D. A Davidson. Please go ahead.
John Ramirez: Hi, good morning.
John Ramirez: Good morning, good morning.
John Ramirez: And so I'll start with the question about the projects you guys bid so under the new disciplined so for those types of jobs you guys go after could you discuss the progress you are seeing on the logic projects on your portfolio.
John Ramirez: So the.
Speaker Change: Yes on the larger projects.
Speaker Change: Yeah Yeah.
Speaker Change: Okay.
Speaker Change: Yeah. So I would say we've been through this transformational journey as an organization for quite some time now we really.
John Ramirez: Don't bid these mega projects that we historically had been that it caused us a lot of challenges in organization and we do pursue projects that we would call larger projects that would be let's say $150 million to $250 million range, but the big shift for US has been the contract method in which we do that work.
John Ramirez: So most of our larger projects now there are more complex or even longer in duration tend to be the best value type projects because of C. M D C.
John Ramirez: Or or progressive design build and if you look at the Pie chart that has the breakdown of our cap around almost half of our cap now is that best value type projects and so we've been able to deliver larger more complex projects.
John Ramirez: Are you successfully under that contracting methods. So it's really a very big difference.
John Ramirez: Entirely different business models, and what we were doing several years ago and that's really why we're excited about our transformation and I think the other thing that's really important is this.
John Ramirez: Projects are also being built in markets that we know these are home markets for us were not chasing work into markets with clients that we don't understand or don't have a really strong relationship with <unk>.
John Ramirez: That allows us to be more successful, but it also does something really important it allows us to avoid claims and so that's certainly something we want to get away from as an organization is having these contract claims.
John Ramirez: There are a distraction there they are a challenge and frankly, they're a drag on our cash and so one of the things you're seeing with our new business model is we don't have these claims on our books, we can actually drive a lot higher operating cash flow. So.
John Ramirez: In short we're doing we're doing very well on the larger projects that were procuring today.
Speaker Change: Great I appreciate that.
Speaker Change: Yeah, let's call it either.
Speaker Change: Yes sure.
John Ramirez: <unk> focus on California.
Speaker Change: Could you address it.
Speaker Change: Do you have any concerns around the budget deficit in the state.
John Ramirez: And whether your.
John Ramirez: C C.
John Ramirez: Seeing or.
John Ramirez: Kind of forecasting the impact projects just schedules are planning.
John Ramirez: Or any future work you'll be pursuing.
Speaker Change: Not at all yeah, what we really wanted to make sure that everybody understood as the Caltrans through your expenditure allocations are only going up.
Speaker Change: We're excited about the opportunities we see.
Speaker Change: And the state of California, certainly on the public side. If you look at the SB one monies that are out there that continues to grow.
Speaker Change: So we think California's can be a healthy market for years to come so yeah, we don't have any concerns.
Speaker Change: Okay I appreciate it thank you so much.
Speaker Change: And thank you. Thank you.
Speaker Change: Our last question will come from Jerry Revich of Goldman Sachs. Please go ahead.
Jerry Revich: Yes, hi, good morning, everyone and nice cash flow this quarter.
Jerry Revich: Wanted to ask at the EBITDA outlook that you folks outlined 424 are what level of free cash flow conversion do you folks expect.
Jerry Revich: Can be a wide range of outcomes, but would love to.
Speaker Change: We're thinking about it.
Jerry Revich: Similar question for longer term as you continue to work off.
Jerry Revich: The prior projects and then Lisa can I just ask virtually.
Jerry Revich: Where did claim recovery estimates and unbilled receivables in the quarter. Thank you.
Lisa: Yeah. Thank you Jerry So yeah, let me talk about free cash flow cash generation, Yeah, we're excited with our cash generation for 2023.
Lisa: Now last year 2023 we talked about cash generation and <unk>.
Lisa: And generating positive free cash flow was really the last major area that we needed to improve upon and so we made we made nice strides with that when 2023 and we see that continuing into 2020 for them. You know, we we've intentionally changed our business model over the past three years.
Lisa: Derisking the portfolio from anywhere from project procurement methods, which Carl was talking about so not entering into non sponsored joint ventures. So that our model is really broken historically.
Lisa: From a risk perspective, and so where we're getting to see the benefit of that because that would you say that not only impacted our bottom line, but really our ability to generate cash and so from an EBITDA to free cash flow conversion.
Lisa: You know when we look at 2024 and as I said in my opening remarks that we're targeting <unk> as a percentage of revenue of around 7% and start with our EBITDA projections that would be a ratio of conversion of about 35% to 40% for 2024.
Lisa: And if we look out further let's say to 2026, you know our operating cash flow as a percentage of revenue will be moving closer looking to move closer to our target of 9% to 10%, which would be closer to a 50% conversion ratio.
Lisa: So that that is what we're looking at from a free cash flow conversion perspective.
Lisa: As far as the Unbilled receivables.
Speaker Change: Go ahead I'm sorry.
Speaker Change: No no. Please yeah.
Lisa: Lisa.
Lisa: Yeah. So you know claim recoveries I mean, we do we do disclose that in our Qs in case related to what we what we have recorded in that will be coming out later today for Unbilled receivables. We Q4 was a very strong quarter for us.
Lisa: For reduction of Unbilled receivables.
Lisa: You know our DSO and we continue to main DSO, we do not have issues for our collections.
Lisa:
Lisa: R. R 2023, Q3, and Q4 were very high activity levels.
Lisa: Which generated a cat very nice cash generation, obviously in Q3, and Q4 and a big portion of that was our receivables.
Lisa: Isn't unusual which is actually what we expected.
Lisa: Due to due to the strong second half of the year since the first half of the year.
Lisa: What's delays due to the wet weather.
Speaker Change: Yeah, making good progress.
Lisa: Contract assets have gone down and our contract liabilities have increased so all of those points are moving and moving in the right direction.
Lisa: And that 7% target.
Lisa: Yeah that they're claiming that there isn't any claim recovery in that 7% target in 2024 correct.
Lisa: Super.
Speaker Change: Can we shift gears and talking about the pricing opportunity that you're seeing in the materials business I mean, we've seen pretty heavy M&A, particularly in California across the materials spectrum is there opportunity for pricing to be stronger than what you laid out in terms of you know 10.
Lisa: We're set for aggregates as a perpetual for a midyear price increase in <unk>.
Lisa: Similar question for for asphalt given all the industry consolidation in your markets is there an opportunity.
Lisa: For additional price increases over the course of the year.
Speaker Change: Perhaps I mean, I think it's probably early too early to tell for us in that regard, but I think we still feel good about the 10% and 5% or so so.
Speaker Change: I guess, what we'll see.
Speaker Change: Okay, and just sorry clarification of 10% to 5% that's the.
Speaker Change: January one price increase that Youre embedding, you're not embedding anything for mid years.
Speaker Change: Yeah, No I think that's kind of an average I mean every markets can be a little bit different but those are those are averages over the year.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you. Thank you.
Mr. Larson: This concludes our question and answer session I would like to turn the conference back over to Mr. Larson for closing remarks.
Larson: 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 most.
Larson: Most importantly in 2023, we had the best safety results and granted history for a second consecutive year.
Larson: You keep raising the bar you should be proud of this achievement. Thank you again for joining the call and your interest in granite we look forward to speaking with you all soon.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Speaker Change: [music].