Q4 2024 Granite Construction Inc Earnings Call
Speaker Change: Be Bold To be Bold Thanks for watching Be Bolder Be Braver prep.fi
Jamie: Good morning everyone. My name is Jamie and I will be your conference facilitator today. At this time I would like to welcome everyone to the Granite Construction Incorporated 2024 fourth quarter conference call.
Today's event is being recorded.
Jamie: All lines have been placed on mute to prevent any background noise, and after the speaker's remarks, there will be a question and answer period. To ask a question, please press star and 1.
Jamie: Please note that we will take one question and one follow-up question from each participant today.
Speaker Change: It is now my pleasure to turn the floor over to Vice President of Investor Relations, Mike Barker. Sir, you may begin.
Good morning, and thank you for joining us.
Speaker Change: I'm pleased to be here today with President and Chief Executive Officer Kyle Larkin, and Executive Vice President and Chief Financial Officer Staci Woolsey.
Speaker Change: Please note that today's earnings presentation will be available on the events and presentations page of our Investor Relations website.
Speaker Change: We begin today with a brief discussion regarding forward-looking statements and non-GAAP measures.
Speaker Change: 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.
the currencies
Opportunities. Targets.
growth
Speaker Change: 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
Speaker Change: Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these board-looking statements.
Speaker Change: The company assumes no obligation to update board-looking statements, except as required by law.
Speaker Change: Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives.
Speaker Change: These include, but are not limited to, Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, and Adjusted Earnings Per Share.
Speaker Change: 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 graniteconstruction.com under investor relations.
Kyle Larkin: Now, I would like to turn the call over to Kyle Larkin.
Kyle Larkin: Good morning. First, I want to thank our teams across the company for enabling us to achieve another record year for Granite.
Their dedication and hard work drives our success.
Kyle Larkin: From safety to revenue, profitability and cash flow, it was truly an outstanding year for the company.
Kyle Larkin: Before we dive into the results, I want to take a moment to acknowledge all the people impacted by the terrible fires in Southern California. Thankfully, our employees are safe and we are fortunate that there were no significant impacts to our projects.
Kyle Larkin: As we look ahead to 2025, I believe it is fair to say that Granite is a transformed company.
Kyle Larkin: Our teams are focused on growing our businesses while also generating strong cash flow and delivering consistent profitability.
Kyle Larkin: We also continue to explore potential acquisitions as we evaluate opportunities to build upon and expand our vertically integrated strategy into new markets.
as we work towards our 2027 finance targets.
Kyle Larkin: We believe both the construction and material segments have many opportunities to grow revenue and increase margin in 2025 and over the coming years. Now, let's turn to the results from the fourth quarter, starting with the construction segment.
Kyle Larkin: As discussed in previous quarters, we believe that we continue to experience the strongest market that I have seen throughout my career, excluding only the short-lived housing bubble.
State transportation budgets are near record levels across our footprint.
Kyle Larkin: These state budgets are supported by the Federal Infrastructure Bill, or IIJA. In California, our largest revenue state, the proposed 2025-2026 fiscal year transportation budget increased meaningfully in the key areas of local assistance and capital outlay projects.
on the 2024-2025 fiscal year forecast.
Kyle Larkin: California transportation funding is supported by the SB1 gas tax and the infrastructure bill and these funding sources will generate further opportunities for growth in 2025 and beyond as allocations move to active projects and as ultimately payments are made to contractors.
Kyle Larkin: Regarding the IIJA, due to the difference between the timing of allocations of funds to states and when the money is spent on projects, we believe the infrastructure bill will continue to support our industry for many years to come, but the majority of funds remain to be spent when the bill terminates in 2026.
Kyle Larkin: These strong markets support our outlook, as approximately 75% of our construction segment is publicly funded.
Kyle Larkin: The remainder comes from our private work, which primarily consists of water infrastructure services, drilling and infrastructure for mines, commercial site development, such as data centers, and rail infrastructure, including constructing intermodal facilities.
Kyle Larkin: These markets have been strong over the last several years, and we see a number of opportunities to continue to grow our presence in them in 2025 and beyond.
Kyle Larkin: During the fourth quarter, we once again bid on, and won, more work than the prior year. There are a number of projects where we are awaiting formal award, and those projects have not been included in our 2024 cap.
Kyle Larkin: I'm very pleased by the performance of our estimating teams in the quarter.
Kyle Larkin: Although we saw a decrease in cap since the third quarter, we expect cap to increase in 2025, and the quality of our backlog should continue to improve and strengthen to what we believe to be the best project portfolio in our history.
Kyle Larkin: With the work that we have in CAP and the opportunities in front of us on the bid schedule, we are in a good position to achieve our organic growth expectations and realize improvement and segment gross margin in excess of 1% in 2025.
Kyle Larkin: Moving to the materials segment, 2024 was a pivotal year. In the beginning of the year, we reorganized our operational structure to better align the materials leadership with the business.
Kyle Larkin: The Materials Organization made significant progress during 2024 as we implemented price increases in both aggregates and asphalt, improved efficiency by adding several new modernized plants, and completed multiple automation projects.
Kyle Larkin: All these efforts helped drive a year-over-year increase of cash gross profit margin. It was a great year for the materials segment, and we expect an even higher level of performance going forward, starting with price increases in 2025 of high single digits for aggregates and low single digits for asphalt.
Kyle Larkin: Investment in our materials business has been a priority within our capital allocation strategy, as seen through materials-led M&A, reserve expansion, and plant and facilities upgrades and enhancements.
Kyle Larkin: In 2024, we increase our aggregate reserves by 20% year-over-year to 1.6 billion tons.
Kyle Larkin: As in the construction segment, we believe that the market environment will drive organic revenue growth, and we are encouraged that we end 2025 with an increase in materials backlog compared to 2024.
Kyle Larkin: In addition to strategic materials investments within CapEx, I expect we will grow the business through further M&A in 2025.
Kyle Larkin: We have a target of completing two or three deals a year as we focus on strengthening our western and southeastern footprints.
Kyle Larkin: There are numerous M&A opportunities in the market, and we have added experienced leadership to our corporate development team as we position ourselves to be more active in M&A. With the efforts of our centralized materials leadership, strategic CapEx investment, and M&A, I believe our margins will continue to expand over the next three years.
Kyle Larkin: as we work towards our consolidated 2027 adjusted even a margin target of 12 to 14 percent. Now I'll turn it over to Staci to review our financial performance for the quarter.
Staci: Thanks, Kyle. 2024 was a banner year for Granite with year-over-year increases in a number of areas.
Staci: Revenue increased 14% to $4 billion. Gross profit increased 44% to $573 million.
Staci: Adjusted net income increased 45% to $214 million. Adjusted EBITDA increased 44% to $402 million. And operating cash flow increased 148% to $456 million.
Staci: I'm proud of the hard work our teams have put in to implement our strategy.
Staci: These strong financial results validate the strategic decisions we introduced at the beginning of 2022 and our organizational realignment in 2024.
Staci: With the steps we've taken, we are well-positioned to achieve our 2025 guidance as we continue to march toward our 2027 financial targets.
Now let's discuss the results for the quarter.
Staci: In the construction segment, revenue increased $28 million, or 3% year-over-year, to $821 million. This increase in revenue was primarily driven by our acquired companies.
Staci: This was a strong result despite some project delays that we discussed last quarter.
Staci: Construction segment gross profit improved $56 million to $128 million with segment gross profit margin of 16%.
Staci: The significant increase in gross profit margin was driven by our higher quality project portfolio. We have maintained our discipline on project pursuits, we are focused on our home markets, and we are prioritizing best value projects where we can leverage our established relationships to deliver larger projects while minimizing risk.
Staci: This strategy has resulted in an improved project portfolio which has produced margin expansion that we believe will continue into 2025.
Staci: In the materials segment, revenue increased $16 million year-over-year to $156 million, with growth profit up slightly to $23 million.
Staci: The increase in materials revenue was primarily due to acquired businesses.
Staci: Cash Grows Profit increased $7 million year-over-year to $37 million, or 21% for the quarter.
Staci: The investments we are making in our materials business, including M&A, have resulted in additional depreciation, depletion, and amortization in the segment.
Staci: As a result, we report cash gross profit margin in order to show the impacts of our aggregate and asphalt pricing, as well as our plant production efficiencies without the impact of depreciation, depletion, and amortization.
Staci: For the full year, cash gross profit margin improved by 240 basis points year-over-year to 21.4%. This is a significant improvement in our first year following our reorganization, and we are looking forward to further advancement as we execute on our operating strategy.
Staci: Adjusted EBITDA for the full year increased $123 million to $402 million, which is an adjusted EBITDA margin of 10%. As a reminder, our adjusted EBITDA margin guidance had assumed gains on sales of assets, which were not fully realized in the quarter.
Staci: Turning to cash, we had another outstanding quarter of cash generation and ended the year with operating cash flow of $456 million, or 11% of revenue. This is up from $184 million, or 5% of revenue, in 2023.
Staci: Our strong cash flow in 2024 was driven by the implementation of our new business model and process improvements, resulting in a substantial reduction in day sales outstanding.
Staci: Our transformed business is generating the predictable profitability and cash flow that we expected and positions us to strategically invest in the company.
Staci: For 2025, our target operating cash flow margin is 9% of revenue, already at the low end of our 2027 target range of 9 to 11%.
Staci: We ended the year with $586 million in cash and marketable securities, and we have $334 million in availability under our revolving credit facility.
Staci: We are in a great position to execute on our capital allocation priorities, which include growth and maintenance capital investments, M&A, maintaining our dividend, and share repurchases to offset dilution from stock-based compensation.
Staci: As we said on our last quarterly earnings call, we expected to return value to shareholders through share repurchases, and we repurchased 300,000 shares under our board-approved share repurchase plan during the fourth quarter.
This brought our total repurchases during 2024 to 525,000 shares.
Now let's turn to our 2025 guidance.
Staci: We expect revenue to grow to a range of $4.2 to $4.4 billion.
Staci: This guidance captures organic growth in line with our target of 6-8% and includes the results of Dickerson and Bowen for a full year.
Staci: We have entered 2025 with a strong CAB portfolio and robust bidding opportunities ahead of us.
Staci: As we continue to grow, the efficiency of our SG&A expense is a priority across the company.
Staci: In 2025, we expect our SG&A to be approximately 9% of revenue, inclusive of an estimated $45 million in stock-based compensation expense.
Staci: We anticipate increased stock-based compensation in 2025 driven by improved performance and share price appreciation.
Staci: We expect our adjusted EBITDA margin range to be 11% to 12% of revenue.
with improved execution across our transformed construction project portfolio.
Staci: Strong macro market environment and high-performing materials business We expect to realize an increase in gross profit margin to achieve our adjusted EBITDA margin range
Staci: Finally, we expect to invest in our business through CapEx in the range of $140 to $160 million.
Staci: This range contemplates strategic materials investments of approximately $50 million to expand reserves and complete further automation projects as we work to grow the materials business.
Now I'll turn it back over to Kyle.
Thanks, Staci. I'll close with the following points.
Staci: Our teams did a tremendous job in 2024, and that is reflected in our record year.
Staci: We're excited about the strong construction market and the opportunities ahead of us to build CAP in 2025, while also organically growing revenue in alignment with our new guidance.
Staci: We are following the changes coming out of Washington and believe that there is tremendous support to maintain and improve our nation's highways, roads, bridges, ports, and airports. We expect the current level of funding for this critical infrastructure to continue well beyond the IIJA.
Staci: Our adjusted EBITDA margin guidance for 2025 of 11 to 12% represents a 10 to 20% increase from where we ended 2024. While we have made tremendous strides over the last three years, particularly in this past year, I believe that we are just starting to show the earnings power of our VertiBee integrated model.
Staci: Our cash generation in 2024 has been exceptional, and we have the cap, market, and strategic plan to continue to be an industry leader in 2025 and over the coming years.
Staci: Finally, while I am confident in our ability to grow organically, I'm equally excited about the prospects of growing our business through M&A. We're evaluating bolt-ons in our existing markets and also platform opportunities in new markets as we continue to strengthen our position as America's infrastructure company.
Staci: Operator, I will now turn it back to you for questions.
Speaker Change: Ladies and gentlemen, at this time we will begin that question and answer session. To ask a question, you may press star and then one on a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys to ensure the best sound quality.
Speaker Change: Withdraw your questions you may press star and 2. Once again that is star and then 1 to join the question queue.
will pause momentarily to assemble the roster.
Speaker Change: And our first question today comes from Stephen Ramsey from Thompson Research Group. Please go ahead with your question.
Stephen Ramsey: Good morning. Maybe to start with, Bill, low end of the sales guidance implies a modest...
decline, and even at that low end of sales.
Stephen Ramsey: the low end of EBITDA margin still implies meaningful expansion. So maybe you can talk to what would occur to drive that, the low end of sales, and then in that scenario, what would drive the margin expansion.
Stephen Ramsey: Yeah, hey Stephen. So, I think if we look at our guidance that we put out for 2025, it's
Stephen Ramsey: The midpoint of 4.3 is in line with that 6 to 8% longer-term organic growth rate that we put out through 2027. So, you know, I think we feel pretty good about that 4.3 midpoint today, that $4.3 billion midpoint today. And I would just remind everybody that's...
Stephen Ramsey: That is somewhat of a low-end because it doesn't include any inorganic M&A acquisitions for the company. So I think that is what we believe somewhat of a base case for the company I think when we look at EBITDA margin expansion
Stephen Ramsey: You know, our cap is really strong. As we mentioned, it's the highest quality cap that we believe we've had in our company history. We talked in our last call about how our construction margins are really going to increase.
Stephen Ramsey: percent, a little bit higher as we came into 2025, so I think our guidance certainly reflects that improvement. We've also been looking at our materials business and driving margin expansion through pricing.
Stephen Ramsey: automation investments, standardizing how we do our materials business from an operational excellence perspective, we're seeing those investments and efforts pay off as well. So we think you know getting up into that midpoint of 11 and a half is a nice step up and again it's still in line with where we're headed directionally through 2027.
Stephen Ramsey: Okay, that's great. And then on the scenario that you hit the high end of the targets closer to 12%, that's two years ahead of the 2027 targets where that low end is 12%.
Speaker Change: Maybe it depends on how you get there, but if you hit the high end of the guide, does that give you the confidence to potentially raise the 2027 targets?
Speaker Change: maybe I mean I think I think really what we're looking at in our business is we still have opportunities in our marketplace to raise margins we still have opportunities to perform at a higher level
Speaker Change: That's going to help get us up towards that 12% into the range of
you know, 12, 13 percent.
Speaker Change: I think to be balanced, for us to really get up into that 14% or even higher, we're going to have to make the right capital investments in our business.
Speaker Change: I'm going to take that cash that we generated this year, which is really strong operating cash flows that we expect to continue. We can reinvest in the markets that we're in, strengthen really those home market positions, which should allow us to get some margin expansion if we do the right deals in our existing markets.
Speaker Change: We're still looking to build out that southeast platform that has really strong even margins in that part of our business, and we're looking for other opportunities that would be even a margin of creative. So as we make the right investments in our existing business and the future businesses, I think that's what's going to push us above that 14%.
Speaker Change: Okay, that's great. And the last one for me, I wanted to think more about vertically integrated revenue and the growth you're achieving from that category of the business, maybe just kind of order of magnitude.
Speaker Change: How vertically integrated revenue trended in 2024 on a year-over-year basis, and do you think vertically integrated revenue grows at a faster pace than the total sales guidance of the company in 2025?
Speaker Change: Yeah, I would say that it's pretty consistent with the overall business. I mean, the RBI revenue is certainly growing at a fast pace. You know, the market environment continues to be really strong. You know, a good example is if you just look at the California market, and we provided some information.
Speaker Change: today regarding what we anticipate for the 2025-2026 budget for Caltrain is up 10%. So we do think that we see really strong markets across really our entire network of businesses and so I would expect that DEI market to continue to grow for us and our businesses should should follow.
All righty, thank you.
Speaker Change: And our next question comes from Michael Dudas from Vertical Research Partners. Please go ahead with your question.
Good morning, everybody.
Where am I?
Thank you.
Kyle Larkin: Kyle, maybe you could share with us as you look at regionally.
Speaker Change: in the home markets and some of the growing markets you have.
Uh...
Speaker Change: Some of the puts and takes on how 2025 should roll out generally obviously from your
Speaker Change: Overall guys, it's quite quite supportive seems like across the board But maybe a little bit sense of where things could be better where things could catch up and what opportunities there might be for you to maybe get gross in some grow some of your Businesses at a faster rate than you would have thought because of the stronger demand in the market
Speaker Change: Well, again, I think it's really strong across all of our geographies, which I think really is just reflective of the strong market, the strong public market that we've seen now for a while and strong public market that we expect to see for quite some time. As we mentioned, the private market for us continues to be robust as well.
Speaker Change: I think one of the things that I want to highlight is you know Q4 was a really strong big quarter for us and we actually picked up around four hundred fifty dollars four hundred fifty million more
Speaker Change: dollars in low bids relative to where we were in Q4 2023. So we expect those projects
Speaker Change: to get awarded, and they would flow into our cap in Q1 and even Q2. So we expect to really start building our cap back up. Again, we expect the market to continue to be strong over the long haul. We do expect our cap to continue to trend upwards. So I think just across the board, we feel really good about the markets.
Speaker Change: And then on the margin front, is the shifting, I know it's moving, the best value versus the build, is that something that's gonna aid the margin improvement? I'm sure it's aided it.
Speaker Change: to date and will continue to improve it and is there been a
Speaker Change: The trend of executing through the P&L at a better rate than what the actual margin would be into the projects, is there a helpful trend that could certainly help you achieve the margin targets that you put out, you know, at least quicker than...
as you had anticipated just several months ago.
Speaker Change: Yeah, what was the second half of your question there, Mike? I'm not sure I was, I want to make sure I got what you're asking.
Mike Barker: Are you achieving at levels, above levels, below levels? Is that a trend that could be helpful to expanding the the marches that you use from the backlog on the conversion of your backlog?
Mike Barker: Yeah, okay, okay, thanks for clarifying that. Yeah, so from a best value versus bid-bill, I think it's an overall cap.
Mike Barker: balance. It's pretty consistent with the last couple years and one of the things that we did in 2020...
Mike Barker: of the contract into the general contractor portion where we actually do the construction work. So we're seeing a lot of those converting over today. So that's going to allow us to perform more of those best value contracts as we move forward.
Mike Barker: I think from a margin perspective, yeah, we can do larger, more complex projects without taking on the risk profile that certainly we saw with some of the larger design-build contracts in the past. So, all in all, we do feel as though the execution on projects and the backlog has improved, and that's a combination of...
going back in time and really de-risking our business.
Mike Barker: and really setting our teams up for success as an organization. So we still have execution risk as any given year, but the execution risk that we have in our business today is not even comparable to where we were two, three years ago.
Excellent, Kyle. Thank you very much.
Yeah, thank you.
Speaker Change: And our final question today comes from Jerry Revitch from Goldman Sachs. Please go ahead with your question.
Yes, hi. Good morning, everyone.
Speaker Change: Good morning, Jerry. I'm wondering if you could just talk about the range of free cash flow expectations for 25, really good free cash conversion, 24, how do you expect 25 to look and the range of outcomes if you wouldn't mind bracketing it.
Jerry Revitch: Yeah we have we're really happy with our our overall total cash flow and our free cash flow conversion. It's pretty high.
performance for the year.
Jerry Revitch: If you look at our balance sheet at the end of last year, we had a good amount of
Jerry Revitch: receiveables that we were able to collect and have really strong performance in the first half of 2024, and now we're at a more normalized level, and we're operating cash flow targeting
Jerry Revitch: are 9% of revenue for 2025 and free cash flow targeting around the range of about 50% of EBITDA going forward.
Super.
Speaker Change: And then in terms of in the fourth quarter, really strong pre-cash generation, you worked on receivables. Can you just talk about, were there any...
Jerry Revitch: Project closeouts or anything along those lines because I think margins were at the low end of the expectation range I'm wondering how much of that was project closeouts to drive cash flow or If there's any linkage to that
Speaker Change: And lastly, Kyle and Jay, can you just talk about your expectations for inflation in the
Jerry Revitch: In 25 and what you folks are bidding into contracts, labor, materials, can you just flesh out for us?
What you folks are seeing and bidding based on.
Jerry Revitch: Yeah I think just in general we see we see inflation dropping down a little bit I mean obviously it's it's it's moving around but I think inflation right now we anticipate being closer to that 3%.
Jerry Revitch: So a lot of that already is factored into our pricing, certainly on the asphalt side of things, and the price increases that we put out would already be considering inflation. But all in all, you know, our contracting today...
Jerry Revitch: Again, it's very different. So all of our contracts that we get into on the construction side, for sure, 100% designed. We have coverage on the supplier side, the contractor side, which always protects us in some regards from price fluctuations, certainly when it relates to inflation. So we feel really good.
Jerry Revitch: about our ability to mitigate that risk, but we do expect inflation to go up a little bit this year.
I appreciate the discussion. Thank you.
Thank you.
Speaker Change: And we do have an additional question from Jean Valise from D.A. Davidson. Please go ahead with your question.
Speaker Change: Hi, thank you. You previously mentioned an expected gain on sales of assets of $17 million in the fourth quarter.
Speaker Change: It doesn't look as though that was realized. So that's something large there. Get pushed out in 2025, and if so, can you clarify how much and when?
Speaker Change: Yeah, yeah, that's right. We did expect a gain on sale of a certain asset.
Speaker Change: In Q4, that isn't going to get completed, and we expect that to be completed in 2025, and that's not considered in our guidance today. So if that sale completes in 2025, that would be one of the items that would move us up in terms of our guidance.
Speaker Change: Thank you. And going back to adjusting even that margins, at the midpoint the bridge is 150 basis points. Can you talk about what you expect to come from construction segment versus material segment in delivering that?
Speaker Change: Yeah, as I mentioned last quarter, just over a percent or so would come out of construction, the balance would come out of materials. So, again, our cap is really high-quality cap. We feel good about it. We feel good about the market environment that we're in. We think we can still continue to raise prices on the construction side. So, we feel pretty good about that one and a half percent improvement year over year.
Got it. And just last one from me.
Speaker Change: Just a little more context on the outlook you're seeing in 2025. Can you provide a little more color on the improvements in cap that you have seen so far in the first quarter? And given it's also taken into account, it's a slower revenue burn rate quarter. Thank you.
Speaker Change: Well, I think we expect the long-term outlook at CAPTU to be really positive. The market has been healthy. We continue to win work. So, again, as I mentioned, additional $450 million in low bids.
Speaker Change: In Q4 versus the prior year in Q4 is pretty significant. So we expect that to get into cap in Q1 and Q2
Speaker Change: Obviously, you know, cap can come up and down a little bit based on some of these best value projects and when it can be lumpy, but over the long haul, we believe we're going to continue to build cap and our cap has gotten stronger and stronger over the last two or three years and we expect our cap to continue to get stronger in this healthy market environment.
from a revenue burn perspective.
Speaker Change: You know, it's always one of the variabilities for us is Q1 and Q4 in terms of weather.
Speaker Change: We're getting some weather certainly out in the West today and this week, but I think it's been pretty average so far this year. We'll have to see how things shake out for the rest of the quarter, and of course, weather-wise in Q4, we've still got a ways to go to see how that turns out for us. But yeah, so far we're on track for 2025.
Thank you. Appreciate the time.
Thank you.
Speaker Change: And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Kyle for any closing remarks.
Kyle Larkin: Okay, well thank you for joining the call today. 2024 was another record year for safety and financial performance.
Speaker Change: As always, we want to thank our teams for everything they did to make 2024 such a success.
Speaker Change: Ladies and gentlemen, that does conclude today's presentation and conference call. We do thank you for joining. You may now disconnect your lines.