Granite Construction Incorporated Price & Performance (GVA)

Actual results could differ materially from statements made today Please refer to Granite's most recent 10 ks 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. The required disclosures regarding our non GAAP measures are included as part of our earnings press releases which are available on our website, graniteconstruction.com under Investor Relations. Now, I'd like to turn the call over Good morning. First, I want to thank our teams across the company for enabling us to achieve another record year for Granite Granite. Their dedication and hard work drives our success. From safety to revenue, profitability and cash flow, it was truly an outstanding year for the company.

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. As we look ahead to 2025, I believe it is fair to say that Granite is a transformed company. Our teams are focused on growing our businesses while also generating strong cash flow and delivering consistent profitability. We also continue to explore potential acquisitions as we evaluate opportunities to build upon and expand our Vertica integrated strategy, into new markets. As we work towards our 2027 financial targets, we believe both the Construction and Materials segments have many opportunities to grow revenue, increased margin in 2025 and over the coming years. Now let's turn to the results from the fourth quarter starting with the Construction segment. As discussed in previous quarters, we believe that we continue to experience the strongest market I've seen throughout my career excluding only the short lived housing bubble. State transportation budgets are near record levels across our footprint. These state budgets are supported by the Federal Infrastructure Bill or IIJA. California, our largest revenue state, the proposed twenty twenty five-twenty twenty six fiscal year transportation budget increased meaningfully the key areas of local assistance and capital outlay projects from the twenty twenty four-twenty twenty five fiscal year forecast.

California transportation funding is supported by the SB-one 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. Regarding the IIJA, 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 with the majority of funds remaining to be spent the bill terminates in 2026. These strong markets support our outlook as approximately 75% of our construction segment is publicly funded.

The remainder accounts from our private work, which primarily consists of water infrastructure services, drilling infrastructure for mines, commercial site development such as data centers and rail infrastructure, including constructing intermodal facilities. 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. 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. I'm very pleased by the performance of our estimating teams in the quarter. 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.

With the work that we have in CAP, and the opportunities in front of us on the bid schedule, are in a good position to achieve our organic growth expectations and realize improvement in segment gross margin in excess of 1% in 2025.

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 the business. 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.

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 even higher level of performance going forward. Starting with price increases in 2025, a high single digits for aggregates, and low single digits for asphalt.

Investment in our materials business has been a priority within our capital allocation strategy as seen through materials led M and A, reserve expansion and plant and facilities upgrades and enhancements. 2024, we increased our aggregate reserves by 20% year over year to 1,600,000,000 tons.

In the construction we believe that the market environment will drive organic revenue growth and we are encouraged that we enter 2025 with an increase in materials backlog compared to 2024. In addition to strategic materials investments within CapEx, I expect we will grow the business through further M and A in 2025. We have a target of completing two or three deals a year as we focus on strengthening our Western and Southeastern footprints. There are numerous M and A opportunities in the market. We have added experienced leadership to our corporate development team as we position ourselves to be more active in M and A. With the efforts of our centralized materials leadership, strategic CapEx investment and M and A, I believe our margins will continue to expand over the next three years as we work towards our consolidated 2027 and adjusted EBITDA margin target of 12% to 14%.

Turn it over to Stacy to review our financial performance for the quarter. Thanks, Kyle. 2024 was a banner year for Granite with year over year in Revenue increased 14% to $4,000,000,000 Gross profit increased 44% to $573,000,000 Adjusted net income increased 45% to $214,000,000 Adjusted EBITDA increased 44% to $4.00 2,000,000 and operating cash flow increased 148% to $456,000,000 I'm proud of the hard work our teams have put in to implement our strategy. These strong financial results validate the strategic decisions we introduced at the beginning of twenty twenty two and our organizational realignment in 2024. 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. In the Construction segment, revenue increased $28,000,000 or 3% year over year to $821,000,000 increase in revenue was primarily driven by our acquired companies. This was a strong result despite some project delays that we discussed last quarter. Construction segment gross profit improved $56,000,000 to $128,000,000 dollars with segment gross profit margin of 16%. 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, we are prioritizing best value projects where we can leverage our established relationships to deliver larger projects while minimizing risk.

This strategy has resulted in an improved project portfolio which has produced margin expansion that we believe will continue into 2025. In the Materials segment, revenue increased $16,000,000 year over year to $156,000,000 with gross profit up slightly to $23,000,000 The increase in materials revenue was primarily due to acquired businesses. Cash gross profit increased $7,000,000 year over year to $37,000,000 or 21% for the quarter. The investments we are making in our materials business including M and A, have resulted in additional depreciation, depletion and amortization in the segment. 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, For the full year, cash gross profit margin improved by two forty 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. Adjusted EBITDA for the full year in [indiscernible] dollars which is an adjusted EBITDA margin of 10%.

As a reminder, our adjusted EBITDA margin guidance had a assumed gains on sales of assets, which were not fully realized in the quarter. Turning to cash, we had another outstanding quarter of cash generation and ended the year with operating cash flow of $456,000,000 11% of revenue. This is up from $184,000,000 or 5% of revenue in '20 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 days sales outstanding. Our transformed business is generating the predictable profitability and cash flow that we expected positions us to strategically invest in the company. 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%. We ended the year with $586,000,000 in cash and marketable securities, and we have $334,000,000 in availability under our revolving credit facility. We are in a great position to execute on our which include growth and maintenance capital investments, M and A, maintaining our dividend, and share repurchases to offset dilution from stock based compensation. 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 5 and 25,000 shares.

Now let's turn to our 2025 guidance. We expect revenue to grow to a range of $4,200,000,000 to 4,400,000,000.0 This guidance captures organic growth in line with our target and includes the results of Dickerson and Bowen for a full year. We have entered 2025 with a strong cap portfolio and robust bidding opportunities ahead of us. As we continue to grow, the efficiency of our SG and A expense is a priority across the company. In 2025, we expect our SG and A to be inclusive of an estimated $45,000,000 in stock based compensation expense. We anticipate increased stock based compensation in 2025 and share price appreciation. We expect our adjusted EBITDA margin With improved execution across our transformed construction project portfolio, strong macro market environment and high performing materials business we expect to realize an increase in gross profit margin to a achieve our adjusted EBITDA margin range.

Finally, we expect to invest in our business through CapEx in the range of $140,000,000 to $160,000,000 This range contemplates strategic materials investments of dollars 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, Stacy.

I'll close with the following points. Our teams did a tremendous job in 2024 and as reflected in our record year.

We're excited about the strong construction market and the opportunities ahead of us to build cap in 2025, while also organically growing revenue alignment with our new guidance.

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. Our adjusted EBITDA margin guidance for twenty twenty five to '11 represents a 10% to 20% increase where we ended 2024. 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 Vertivy integrated model. 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. Finally, while I am confident in our ability to grow organically, I'm equally excited about the prospects of growing our business through M and 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. Operator, I will now turn it back to you for questions. And our first question today comes from Steven Ramsey from Thompson Research Group.

Go ahead with your question. Hi, good morning. Maybe to start with the low end of the sales guidance implies a modest decline and even at that low end of sales the low end of EBITDA margin still implies meaningful expansions. 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? Hey, Stephen. So I think when we look at our guidance that we put out for 2025, it's midpoint of 4.3% is in line with that 6% to 8% longer term organic growth rate that we put out through 2027. So I think we feel pretty good about that 4.3 midpoint today. $4,300,000,000 midpoint today And I would just remind everybody that is somewhat of the low end because doesn't include any inorganic M and A acquisitions for the company. So I think that is what we believe somewhat of a base case [indiscernible] I think when we look at EBITDA margin expansion, Norcap is really strong. As I 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 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 driving pricing, 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 getting up into that midpoint of 11.5 is a nice step up. And again, it's still in line with where we're headed directionally through 2027.

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 2027 targets where that low end is 12%. 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?

Maybe.

I mean, I think really what we're looking at our business is we still have opportunities in our marketplace to raise margins. We still have opportunities to perform at a higher level.

That's going to help get us up towards that 12% into the range of 12% to 13%. I think to be balanced for us to really get up [indiscernible] 14% or even higher. We're going to have to make the right capital investments in our 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 as we do the right deals in our existing markets. We're still looking to build out that Southeast platform that has really strong EBITDA margins in that part of our business. We're looking for other opportunities. That would be EBITDA margin accretive. 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%.

Okay. That's great. And then last one for me. 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 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?

Yes, I would say that it's pretty consistent the overall business. Matt, the RVI revenue is certainly growing at a fast pace. The market environment continues to be really strong. A good example is if you just look at the California market and we provided some information today regarding what we anticipate for the 2025, twenty six 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 BI market to continue to grow for us and our businesses should All righty. Thank you.

Yes. Thank you.

And our next question And our next question comes from Michael Dudas from Vertical Research Partners. Please go ahead with your question.

Good morning, everybody. Kyle, maybe you could share with us as you look at regionally in home markets and some of the growing markets you have, some of the puts and takes on how 2025 should roll out Generally, obviously, from your overall guidance, it's quite supportive. It seems like across the board, but maybe little bit of sense of where things could be better, where things could catch up and what opportunities it might be for you to maybe give gross get some gross some of your businesses at a faster rate than you would have thought because of the stronger demand in the market.

Well, again, I think it's really strong across all of our geographies. [indiscernible] public market that we've seen now for a while and the strong public market that we expect to see for quite some time. As we mentioned, private market for us continues to be robust as well.

I think one of the things that I want to highlight is Q4 was a really strong mid quarter for us. And we actually picked up around $450 $50,000,000 more dollars in low bids relative to where we were in Q4 twenty twenty three.

We expect those projects to get awarded and that would they would flow into our cap in Q1 and even Q2. So 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 just across the board, we feel really good about the markets.

And then on the margin front, is the shifting, I guess, moving bid the best value versus the deal Is that something that's going to need the margin improvement? I'm sure to date and we'll continue to improve it. And is there been a trend of executing through the P and 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 at least quicker than you had anticipated just several months ago? [indiscernible] What was the second half of your question there, Mike? I'm not sure. I was I'm not sure I got.

Well, I was asking. [indiscernible] executing from whatever the margin you could book, relative to executing through the P and L and you'll be achieving at levels, above levels, below levels? Is that a trend that could be helpful to expanding the margins that you choose from backlog on the conversion of your backlog?

Yes. Okay, Augur. Thanks for clarifying that. Yes. So from a value versus bid build, I think it's an overall cap balance. It's pretty consistent with the last couple of years.

One of the things that we did in 2020 if you look back and kind of step up between 2022 and 2023, we added a lot of best value type projects into our cap As we spoken previously, it takes a couple of years as an average for those projects to go from the construction manager portion of the contract into the general contractor proportion 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. I think from a margin perspective, yes, we can do larger, more complex projects with 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 in the backlog has improved and that's a combination of going back in time and really de risking our business and really set our teams up for success as an organization. So we still have execution risk as any given year, but the 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. And our final question today comes from Jerry Revich from Goldman Sachs. Please go ahead with your question. Yes, Sunny. Good morning, everyone.

Hey, good morning, Joey. Good morning.

Wondering if you could just talk about the range of free cash flow expectations for $25,000,000 really good free cash conversion '24. How do you expect 2025 to look the range of outcomes, if you wouldn't mind bracketing it?

Yes. We're really happy with our overall total cash flow and our free cash flow conversion [indiscernible] performance for the year. If you look at our balance sheet at the end of last year, we had a good amount of receivables that we were able to collect and have really strong performance in the first half of twenty twenty four. And now we're at a more normalized level. And for operating cash flow targeting our 9% of revenue for 2025. And free cash flow targeting around the range of about 50 EBITDA going forward. Super. And then in terms of in the fourth quarter, really strong free cash generation, you worked on receivables. Can you just talk about were there any project closeouts or anything along those lines because I think margins were at the low end of the expectation Granite. I'm wondering how much of that was project closeouts to drive cash flow or if there's any linkage to that?

In the fourth quarter, there wasn't any big significant closeout or one off items. That were unusual. Sometimes there are some milestone payments and we did collect one large milestone payment on an ongoing project. In December and that was really related to being able to work a little bit further into the quarter. Related to weather, but as far as other larger claims or closeout things, there wasn't anything related to that.

Okay, super. And lastly, Kyle, can you just talk about your expectations for inflation in 2025 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?

Yes. I think just in general, we see inflation dropping down a little bit. I mean, obviously, it's it's moving around. But I think inflation right now, we anticipate closer to that 3% 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 would already be considering inflation. But all in all, our contracting today again, it's very different. So we all of our contracts that we get into on the construction side for sure are 100% designed We have coverage on the supplier sides, the contractor sides, which really protects us in some regards from price fluctuations, so that when it relates to employee So we feel really good 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.

Thanks. And we do have an additional question from Jean Valiz from D. A. Davidson. Please go ahead with your question. Hi, thank you. You perhaps you mentioned an expected gain on sales of assets of $17,000,000 in the fourth quarter. It doesn't look as though that was realized So does something large there get pushed out in 2025? And if so, can you clarify how much and when?

Yes, that's right. We did expect a gain on sale of certain asset in Q4. That's 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 got complete in 2025, that would be one of the items that move us up in terms of our guidance. Thank you. And going back to adjusted EBITDA margins, at the midpoint of the bridge, is 150 basis points. Can you talk about why you expect to come from Construction segment versus Materials segment in delivering that Yes. As I mentioned last quarter, just over percent or so would come out of construction, the balance would come out of materials. So in 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 1.5% improvement year over year.

Got it. And just last one for me. 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 taking into account it's a slower revenue burn rate [indiscernible] Thank you.

Well, I think we expect the long term outlook to capture really positive.

As the market has been healthy, we continue to win work. So again, as I mentioned, additional $450,000,000 in low bids in Q4 versus the prior year in Q4 is pretty significant. So we expect that to get into cap in Q1 and Q2. Obviously, cap can come up and down a little bit based on some of these best value projects. When it can be lumpy, but over the long haul, we believe going to continue to build cap. And our cap has gotten stronger and stronger over the last two, three years and we expect our cap to continue to get stronger this healthy market environment From a revenue burn perspective, it's always one of the variabilities for us is Q1 and Q4 in terms of weather. We're getting some weather certainly out in the West today 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 still got a ways to go and see how that turns out for us. But yes, so far we're on track for 2025.

Thank you. Appreciate the time. 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.

Okay. Well, thank you for joining the call today. 2024 was another record year for safety and financial performance.

As always, we want to thank our teams for everything they did to make 2024 such a success. I know we are all excited to continue to raise the bar in 2025.

You for joining the call and for choosing Granite, We look forward to speaking with you all soon. Ladies and gentlemen, that does conclude today's presentation and conference call. We do thank you for joining.