Q2 2025 Granite Construction Inc Earnings Call

Good morning. My name is Steve and I'll be your conference facilitator today.

At this time, I would like to welcome everyone to the Granite Construction Incorporated 2025 second quarter conference call.

This call is being recorded.

All lines have been placed on mute to prevent any background noise.

And after the speaker's remark, there will be a question-and-answer period.

To ask a question. Please press star then 1.

Please note, we will take 1 question and 1. Follow-up question from each participants today

It is now my pleasure to turn the floor, over to the 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, Kyle Walken, and Executive Vice, President, and Chief Financial Officer. Stacy Woolsey.

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 four booking 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 the future events occurrences opportunities, targets growth demand, strategic plans, circumstances activities, performance, shareholder value outcomes, Outlook guidance, objectives committed, and awarded projects or cap and results.

Axle results could differ materially from statements made today?

Please refer to granite's, most recent 10K and 10 Q filings for a more complete description of risk factors that could affect these 4 booking statements.

The company assumes. No obligation to update for a booking 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 heed up adjusted even the margin adjusted, net income, adjusted earnings per share and cash growth profit.

As part of our earnings press releases, and in company presentations, which are available on our website, Granite construction.com under investor relations.

Now, I would like to turn the call over to Kyle Arin.

Good morning and thank you for joining us.

Before we discuss our second quarter results, I'd like to talk about the recently announced Acquisitions of warm Paving and pavish construction.

These transactions are an exciting step forward for granted as we continue to execute on our strategic plan.

The Strategic plan started with a focus on raising construction margins and driving organic growth by selecting the right projects in the right markets, with the right owners while standardizing execution practices across the business.

We also Revisited our Capital appointment to ship the Strategic Investments to support our materials business. As we work to maximize the benefits of our vertically integrated business model. Our strategy is working

both our construction and materials. Businesses are seen significantly, higher margins which in turn are driving strong cash generation.

As we progress with our construction and material strategy, We are continuing to grow and strengthen the company with m&a.

We are using m&a to support strengthen and expand our home markets in the new geographies.

Over the last year, we have built out our corporate development team with the expectation that we will be building our company. Through m&a, we have also been putting a lot of work into our integration framework. We are prepared to efficiently integrate these companies into our organization.

We will continue to maintain a discipline and Target approach to m&a. Only pursuing those targets to support our strategic plan.

we remain committed to our vertical integration strategy with Target companies being primarily material focused, but within our current footprint and a new attractive geography,

The deals announced this week will have significant resources to our Southeast platform with a large supply of high-quality Aggregates on Mr. River and will also strengthen our Centric California operations by adding a leading vertically, integrated contractor to our business portfolio.

For the combined transaction price of 710 million, the Acquisitions are expected to handle the contribute approximately 425 million Revenue with an approximate adjusted. Eva margin of 18%.

The acquisition should provide a significant uplift to the material statement, by increasing annual accurate volumes, by approximately 5 million tons or 27%, and increasing aggregate reserves and Resources by more than 449 tons or approximately 30%.

The Acquisitions are expected to be immediately accretive to adjust at even a margin with an annual uplift of approximately 60 basis points. Driven by the increase aggregate exposure. Now, I will discuss each acquisition. Starting with the new addition to the southeast platform warm Paving which owns the slat. Lucas Quarry is a premier producer of construction materials, and provider of construction services, and Mississippi, and the Gulf Coast regions of Louisiana and Alabama. And it's a great addition to our Southeast platform.

This last week is quarantine strategically located on the Cumberland River. A tributary of the Mississippi and has an estimated 400 million tons of very high, quality aggregate reserves and resources.

Utilizing a distribution network of approximately 170 owned and least barges and 11 aggregate yards. 1 payment sales Aggregates. Both internally supplying its own asphalt plants.

And externally.

I'm excited. Not only because we are adding such a high performing business to our Southeast platform, but also because of the future growth opportunities provided by the addition of warm Paving.

The combination of these high-quality Aggregates and warm payments Logistics expertise should allow us to supply materials to certain Landing robbers and diggers and bone mass salt plants and positions us to expand the distribution Network as we continue to grow our Southeast platform.

Investment in and for the growth of the distribution Network, in addition to building out additional outlets for the Aggregates along, the Mississippi River system should have a compounding impact on the profitability of the southeast platform by any revenue and Associated gross profit, while driving increases and volumes and margin.

We are actively evaluating opportunities to continue to build upon the platform. I look forward to sharing progress that we make on our strategic plan, in the coming quarters.

With the acquisition of Warranty, the Southeast platform has grown to be a more significant component of Granite. We are excited about the opportunities to continue that growth.

The market from Memphis, through Mississippi and into Louisiana is growing in terms of Public Funding and private investment.

We view the region as a historically underfunded area but recently the Mississippi and Louisiana state legislators have recognized the need for infrastructure investment.

In addition to the expected continued increase in public funds, We Believe private investment will ramp up in the region.

With a few data centers for other. Large commercial developments, the region is attracted to due to Affordable land, plentiful water and electricity, and labor availability.

A number of large developments have begun in Mississippi and we expect this trend to continue.

throughout Bran's history, we have found success by investing in markets that are historically underfunded but growing and expanding

We believe this reach in aligns well with that formula and we are excited to be part of that growth. Now let's move on to our acquisition in California.

Package construction is a leading producer of Aggregates and Asphalt in California's Central Coast and Central Valley and has expertise in infrastructure projects across the public and private sectors.

The addition of more than 40 million tons of aggregate reserves and resources, spread across the market is complimentary to Grants current operations in the area.

With the combined footprint, we will be better positioned to serve the market in Aggregate and asphalt sales as well as construction projects.

The addition of package construction is a great example of executing on a strategy of a strengthening existing home markets with Bolton civil enhance our vertical integration and our home Market that we know. Well,

Looking forward, I believe that m&a will be a significant component of our growth.

We are focused on generating cash while being proven with capex resulting in strong, free, cash flow.

Whether it is through proactive Outreach by our teams or Bank Le auction processes, there is a robust lifting of active m&a opportunities ahead of us.

But we will continue to be selective in the coming quarters. I believe we will continue to execute on transactions. That will further strengthen our national footprint.

Now, let's discuss our strong secondary results, starting with the material segment.

Our materials business completed. Another exceptional order. The strong Public Market environment is continuing to drive growth as has been the case in previous quarters and the project market levels relatively hunt changed.

We continue to execute on our strategic plan.

And we remain focused on continuing, to raise the bar, across all of our businesses.

Part of our strategy, involve restructuring your operational leadership to place our materials to experts and charge them, chills business, and decentralized management functions such as sales and quality control.

This realignment is helping us grow our materials margins. We're also investing in capital Improvement, projects such as our native, plant automation, to drive efficiency and reduce production costs, and we are promoting best practices across all of our operations, through the implementation of our materials, Playbook.

These efforts are driving increases in volumes.

And prices per ton on agus and asphalt as we work to increase our margin.

I'm proud of the accomplishments of the materials team and of our performance this quarter. We have a long Runway of opportunities, to capture additional potential, gains, and profitability in the business for the coming, quarters and years.

Now, let's move to the construction segment.

During the quarter, our estimate teams, did a great job capitalizing on the robust hitting environment by when in the number of high-quality projects that drove our cap to a new record high of 6.1 billion.

The new project spanned across our footprint, including Nevada Utah, California and Alaska.

in California, our largest market, the budget for the 2025 2026 fiscal year was finalized during Q2

transportation funding for the upcoming fiscal year remains strong with the key components of the transportation budget, capital, outlay, projects, and local assistance, increasing budgets, and allocations 9% for with a fiscal year and a June 2025.

In California and across our footprint, we continue to see a healthy list of project bidding opportunities in both the public and private markets.

Based on these encouraging signs, we believe we will continue to see cap increase over the next several quarters.

I'm pleased that the segment performance during the quarter was strong, and we expect revenue growth to accelerate in the second half of the year. This project progressed. In addition, I believe we are on track to achieve our gross margin expansion expectations of greater than 1% during 2025.

To the first half of 2025, we are seeing the benefits of the steps. We have implemented to improve project performance.

I expect further gains in the construction segment in the future.

Now, I'll turn it over to Stacey to review our financial performance for the quarter.

Thanks Kyle. We had an outstanding second quarter and first half of 2025.

In the second quarter Revenue, increased 43 million, or 4%, growth profit, increase 34 million or 21%.

Adjusted net income improved by $9 million, or 12%; adjusted EBITDA improved by $22 million, or 17%.

In the construction segment Revenue increase, 19 million or 2% year-over-year to 937 million driven by the recently, acquired Dickerson, and Bowen. And a strong cap we are working through AC the company.

Heading into the third quarter with a record cap balance. I believe, we are on track to meet our Revenue guidance for the year.

Construction segment, gross profit improved, 18 million to 154 million with the gross profit margin of 16%.

This 170 basis point increase is largely due to improved execution and performance. Across our higher quality project portfolio as well as increased claim, settlement recognition year-over-year,

In the first half of 2025, our cap has increased approximately 800 million from a 2024 year-end balance of 5.3 billion.

We continue to see cap expand in our public markets, across the company as we capitalize on opportunities at the federal state and local levels.

In the material segment, we continue to realize year-over-year, cash growth profit. Margin Improvement led by our Aggregates business.

Year-over-year aggregate volumes increased 11% for the quarter and 13% year-to-date driven by strong demand in our regions.

These volume increases coupled with higher aggregate prices led to improved cash growth. Profit margin for both the quarter and year to date periods compared to the prior year.

In Asphalt, we are also seeing volume increases in cash growth profit Improvement year-over-year.

Revenue while implementing initiatives, such as Automation and best practices to offset cost inflation.

Now, turning to cash flow and the balance sheet.

We generated 5 million of operating cash flow through the first half of the Year. Typically the first half of the year is a slow period for cash flow as projects and operations ramp up. Then as we get further into the construction season cash flow, typically increases,

I believe we will see this seasonal pattern this year and expect that we will achieve our operating cash flow, Target of 9% of revenue for the year.

As of the end of Q2 cash and Market will Securities for 483 million.

With the closing of the two transactions this week, we amended our credit facility by adding a new term loan of $600 million and expanding our revolver from $350 million to $600 million.

Of which $10 million was drawn in conjunction with the transactions.

In addition to the new term loan, we have the ability to draw another term loan of 75 million within 6 months.

We also utilized 100 million of cash on hand.

After accounting for the transactions are total debt outstanding as approximately 1.35 billion.

With our expanded revolver additional available Term Loan and cash flow generation. We are in a great position to act on future m&a opportunities that bolt on to a home Market or further expand our Geographic reach.

Now, let's discuss our guidance for the rest of this year and our 2027 targets.

As a result of this week's acquisitions, we are increasing our annual revenue and adjusted EVA margin guidance for 2025.

Our revised Revenue range is now 4.35 to 4.55 billion and our adjusted. Eva margin range is now 11.25 to 12.25%.

This reflects an expected 150 million in revenue from the Acquisitions for the remainder of the year, as well as an uplift of 25 basis points to our adjusted ibido margin range.

our annual guidance for sgna is the percent of Revenue of 9% capex, in the range of 140 to 160 million and adjusted effective tax rate in the mid 20s are unchanged,

Through the second quarter, we have achieved the margin expansion. Expected in both of our segments, and with our busiest months ahead of us, I believe we are on track to meet our guidance for the year.

looking forward, we are also revisiting our 2027 Financial targets with the addition of the acquisitions

Our organic Revenue growth. Expectations are unchanged at a kegger of 6 to 8% through 2027, as we see a robust Market ahead of us that should provide for continued growth across the company.

With an active deal pipeline. We believe we will be able to complete at least 2 to 3 deals, each year to strengthen and expand our home markets

While the timing of any transactions is difficult to predict, we believe we have the team, market cash generation, and balance sheet to achieve this growth.

Following the completion of 2 Acquisitions this week. We are raising our 2027 targets for adjusted Eva margin. Operating cash flow, margins and free cash flow margin ranges by 50 basis points.

Now we'll turn it back over to Kyle.

The following points.

I am excited by a performance in the second quarter and the first half of the year. We continue to execute on our strategic plan and we are showing the earnings power of our company and our vertically integrated model.

We continue to grow cap fueled by public market opportunities at the federal state and local levels. Our private markets also have a number of strong opportunities which I believe will contribute to cap growth in the future.

Overall in 2025, we have bid and won more work than in the previous year just as we have done for the past several years.

And both our construction material segments, our teams are meeting our margin expectations. And as we head into the third quarter, I believe we are on track to meet our 2025 guidance.

The additions of warm savings and package construction are significant strategic transactions for granted.

Not only do they add great High performing businesses to our portfolio, but they also provide opportunities to continue to expand our home markets in a way that should compound returns by driving volumes.

And what has historically been a seasonally slow quarter, we generated positive operating cash flow and I believe we should reach our Target for operating cash flow of 9% of revenue for 2025

Finally, with our cap, generation of Size credit facility backed by our strong balance sheet, and a number of organic and inorganic investment opportunities ahead of us. We believe that granular will continue to drive significant shareholder value.

Operator. I will now turn it back to you for questions.

Thank you. We will now begin the question and answer session to ask a question. You may press star then 1 on your touchtone phone,

If you are using a speaker-phone, please pick up your handset before pressing the keys.

If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2.

At this time, we will pause momentarily to assemble a roster.

The first question comes from Brent Hillman with D.A. Davidson. Please go ahead.

Good morning, uh, congrats to the great quarter, um, and and on the transactions as well. I guess the, the first question would be, um, Kyle. I mean on the construction segment the, um, the, the growth, through the first half.

Maybe less robust relative to what. I think you're you're seeing in the markets and obviously your cap is picking up pretty nicely here. So maybe if you could just comment on

the transactions layering into the second half, but you know, obviously you'll have the.

Just the the the pace that you're now seeing on some of this work, as you're starting to work through some of the stuff in cap, has there been things that have held it back and now you're starting to see it moving, just wanted to get some some color there.

Yeah. Good morning, Brand. We agree; it was a great quarter. We're excited about the performance of our teams regarding the revenue on the top line for the company. It really just projects starts and finishes.

So we feel really strongly about the back half of the years. You mentioned we have record cap at 6.1 billion and so we've had a lot of projects that just been ramping up and so we do. So we do expect these to accelerate.

In the back half of the year. So, if you look at our overall guidance and our updated guidance, for 2025, we left our Legacy guidance alone, and we just added the, uh, contributions of the Acquisitions to the guidance for the year.

Okay.

Um, and then I guess that the follow-up question would just be. I mean, the materials.

Profit margin expansion, particularly notable, um, this this quarter and just wanted to get a sense of what might be transitory factors impacting that and what's kind of sustainable as we think about profitability of that business going forward.

Yeah, well, we were pleased with certainly the volumes, uh, of the quarter and for the year to date. We're seeing, uh, nice volume improvements, uh, and the 10% or better.

And both asphalt and aggregate. So I think that's a sign of a healthy market there as well. I say it's more supported by the public markets, and the private has been pretty much consistent year over year.

As we mentioned on the last call and previously, did we expect around 3% gross profit margin improvement in our materials segment for the full year and a minimum? We're certainly tracking well ahead of that today. So we'll see how the back half shakes out. But I think there's good science that we're seeing volume increases, and we're seeing the margin expansion we expected in the year. I would say that holds true for construction as well.

Okay, thank you.

Thank you.

the next question comes from Stephen Ramsey with Thompson research group, please go ahead

Hey, good morning. This is actually Brian bars on for Stephen, thank you for taking my questions today on on popaj. Can you just maybe touch on what that business I guess, excels at I think you mentioned expertise and infrastructure projects in the prepared remarks. Um, but just curious on what popaj can add to you, what you can add to them, and why they're marching profile is as strong as it is.

Yeah, yeah, yeah, good morning. And thank you for the question, you know, package package is very similar to grant our our businesses look similar in terms of mix of work. So they're primarily a public works contractor. Uh, that turn around 80% of their business, spend on a given year. 20 20% private, they can be very strong in in the private market and they feel, they fill an area within the state of California that we don't have the strongest presence. So it's the Central Coast kind of the central area of California. So, it's really complimentary to our current footprint

and it's in a state that we believe in and and obviously has really nice budget and funding behind it about even coming into the 2526 cycle. So I think the timing of it is really good for us as well. Uh our businesses in the central part of the state

Rely a lot on third-party material suppliers. So having popaj is materials, business is getting really additive to our overall business as a company. So, we're excited about that and I think together, we seem to just opportunity

You see opportunity drives volume increases in both through, to their plants to internal sales. I think we can leverage our pricing, uh, strategies how we look at automation. Uh at our plants business today, and learn from some of the previous projects. We've done Implement our materials, Playbook our construction Playbook. I think our Legacy business can also learn a little bit from package around, uh, private work, uh, and some of the customer relationships that they have and bring that into other areas as well. So, again, we're really excited about the acquisition. Uh, it's in a great market for us. And I can tell, I think, I know papish is excited about being part of the grant team.

That sounds like a great.

Great pick up for you again.

Uh,

Secondly, can you just compare and contrast maybe cap Trends year to date and the Outlook I guess between the home regions of the West and then the Southeast. Thank you.

Yeah, yeah. We don't necessarily, uh, break break it apart. Um, I would say just in general, it's across the board so that, that record Gap at 6.1 billion. Again, uh, it's, it's across the entire footprint. Uh, you can see some recent announcements that we put out.

It could be some of our federal work in Guam, but we've been successful there. I'll be a successful in Utah. Nevada city office in California, even up in Alaska. So it's really across our entire footprint is a company which which, uh, isn't surprising because the overall market with the ija funding

Uh continues to be strong. Uh I think that's pretty Universal and all the markets that we're in and just as a reminder that the spending to date on the iija is still less than 50%. And so we haven't seen in our in our opinion of that Peak yet we think it's probably going to beat sometime in 2627. So we still have a long Runway ahead of us and we do believe we can continue to build up our cap across our program.

The next question comes from Michael dudus, with vertical research Partners, please go ahead.

Michael, your line has been unmuted. Please go ahead with your question.

Thank you. Sorry about that. A good good. Good morning, Stacy, Mike and Kyle.

Morning.

So um the shifting to the warrant acquisition, um maybe you could share more perspective on the quality of the assets and and some of these locations that you're you're picking up and how well capitalized are, they have? They been are the operations could be additive or is there things you could learn from the other parts of the of your business so that you could take from this and and how you know, how much helpful can it be to the, your the Dixon bone, and the Acquisitions you've made in that Mississippi Market. Because again, I think you're correct in assessing that uh not just on the public side but there's certain be a lot of energy and data center investment in that region here over the next several years.

Play all 3 of these businesses together. This p, as part of the southeast platform, I want weren't paying me as a little bit different.

Uh, we mentioned we've been looking at these material-focused acquisitions. Well, Warm Painting is actually material-centric, with around 75% of its revenue coming from materials.

In 25% and his construction. Now the 75 percentage is materials. 70% is a and about 30% is asphalt so it's really an eccentric business. Uh and that's going to provide a lot of opportunities for us down in, in the southeast part of our, our company now. So we're focused on uh pull through. I think there's opportunities to drive volumes.

With internal sales. We think we can expand its distribution yard Network, which is really impressive. Uh, we think there's obviously opportunities for pricing, even in the automation that we can. We can install a business like popaj, uh, introducing look at how the materials Playbook. We also think there's opportunities now that we have scale,

And even even Explore our liquid asphalt options as well. I think in other piece of this that's interesting is we can connect warm Paving to our federal division.

And there's a lot of Shoreline protection opportunities with the Army Corps in that part of the country that we can pursue both in the Contracting side. And also try to pull through through the Corey. So it, it is a great business alone.

We see tremendous opportunities as being part of the program at Southeast platform.

Sounds sounds terrific and a great fit for for the company. My follow-up would be as you indicated or see, you talked about it in a remarks on the 2027 time, I just want to clarify. So um, those targets include the Acquisitions you closed. On this this month is that also including potential or a percentage of potential opportunities of these 2 to 3 deals a year or or is there is there be lighter? Um, upside, you know, from the low to high levels on on revenue and margin? Just kind of you could do conceptualized so I can understand it clearly. But the visibility is on 2027. He says you look at it today

Yeah. So what we what we provide in the updated guidance through 2027 is a consistent consistent organic growth that that 6 to 8%. Uh so we still feel confident in that we still feel as though the underlying Market the Public Funding, the private Market of supports that range. Um so we feel good there

Uh, and then we do believe that we're going to be able to continue to layer in acquisitions. So we're set up, uh, to do that. We have the balance sheet. I think that our business is operating very strong, uh, and so that's going to give us what we need to continue to do deals. Um, we didn't want to come out and put a dollar amount to those deals because it's really, it's really tough to predict.

The size and the timing of these things, as you know. And, uh, so historically now over the last couple years, uh, we've been able to get them across the Finish Line. I think it's starting to show that the consistency in our, in our business, in that regard but I think 2 to 3 deals a year is, is this a good number for us to to put out there?

And then obviously, we have that even in margin Improvement. Uh that's all uh you put the benefit of these these new acquisitions. So that's the 50 basis points.

Great. Just a quick just to quickly follow up on um just well how is it? Was it just Jason period or the time of negotiating with these 2 companies? Are these not companies? I've I have in the past but you know was it something that happened recently or happened over several months to years as your business development team has been much more active

Oh, how these games are fruitions. Are you breaking up a little bit on our? Yeah. Yeah, I think that's it. Yes, yeah, yeah. Popaj was a self-service deal. Um, and Warren Paving was a banquet uh process.

Thank you, Tom.

Yeah, thank you.

Thank you.

This concludes our question and answer session.

I would like to turn the conference back to KY Lakin for any closing remarks.

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.

We would also like to take this opportunity to welcome our newest team members from warm Paving and package construction. We're excited to have you on the team now forward to building Better Together.

Thank you for joining the call and your interesting granted. We look forward to speaking with you all soon.

Thank you. The conference has now concluded.

Thank you for attending today's presentation. You may now disconnect