Granite Construction Incorporated (NYSE:GVA) Q1 2024 Earnings Call Transcript May 2, 2024
Granite Construction Incorporated beats earnings expectations. Reported EPS is $-0.21, expectations were $-0.49. Granite Construction Incorporated isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Megan and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Incorporated 2024 First 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 remarks, there will be a question and answer period. [Operator Instructions]. 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 Vice President of Investor Relations, Mike Barker.
Mike Barker: Good morning, and thank you for joining us. I’m pleased to be here today with President and Chief Executive Officer, Kyle Larkin, and Executive Vice President and Chief Financial Officer, Lisa Curtis. Please note that today’s earnings presentation will be available on the Events and Presentations page of our Investor Relations website. We begin today with a brief discussion regarding forward-looking statements and non-GAAP measures. Some of the discussion today may include forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, opportunities, targets, growth, demand, strategic plans, circumstances, activities, performance, shareholder value, outcomes, outlook, guidance, objectives, committed and awarded projects, or CAP, and results.
Actual results could differ materially from statements made today. 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 forward-looking statements. The company assumes no obligation to update forward-looking statements, except as required by law. Certain non-GAAP measures may be discussed during today’s call and from time to time by the company’s executives. These include but are not limited to adjusted EBITDA, adjusted EBITDA margin, adjusted net income, and adjusted earnings per share. The required disclosures regarding our non-GAAP measures are included as part of our earnings press releases and the company presentations which are available on our website graniteconstruction.com under investor relations.
Now I would like to turn the call over to Kyle Larkin.
Kyle Larkin: Good morning and welcome to our first quarter conference call. I am pleased to report that we are off to a strong start in 2024. Before diving into our first quarter results, I would like to share an update on our organizational structure. During the quarter, we reorganize our operations to more closely align with our reportable segments, construction, and materials. We believe that this new structure better positions our leadership team to manage the performance of these segments. As a reminder, we previously organized into three operating groups, California, Mountain, and Central. In the prior structure, our leaders manage both construction and materials operations within their respective groups. Our new structure results and our construction experts overseeing construction operations and our materials experts overseeing materials operations.
Of course, our teams will continue to work together, but we believe the new structure will allow us to better leverage our expertise to drive top and bottom line growth. Construction leadership is focused on supporting regions with growth strategies and project execution while leveraging resources across the company to better serve our national clients. For our material segment, we always centralized management functions such as sales and quality control should drive consistency and improved financial performance. Granite has invested significantly in the material segment over the last several years with both acquisitions and strategic investments. And our material segment leadership will be tasked with identifying opportunities to build shareholder value from further organic investments and M&A.
Importantly, this new structure does not change our vertical integration strategy in our home markets. Regional leadership in both construction and material segments will maintain the partnership that has differentiated Granite for decades. I believe this organizational change sets the foundation for Granite’s next chapter and will accelerate our ability to provide shareholders with higher levels of return. Moving to the construction segment, I’m very pleased with the strong start to the year. Minor weather means the first quarter is typically our slowest, but our teams are off to an outstanding start in part because of more favorable weather conditions in 2024. So far in 2024, we have bid and won more work than in 2023, but CAP remains flat from the fourth quarter, but increases significantly year-over-year.
While CAP is unchanged during the quarter, the market has been consistent with our expectations. Our markets in the public and private sectors continue to be strong in California and across our geographies. We expect CAP to grow in 2024. Best value projects continue to be a focus and represent $2.5 billion or 46% of our total CAP. The collaborative delivery methods captured in this number, like construction to manage your general contractor or progressive design build, better position us for success by allowing us to collaborate with our clients to mitigate risk. Larger best value projects are often separated into smaller work packages that are reviewed through multiple project workshops. This provides more opportunities to assess and address risk for large bid-build projects.
In the last 15 years, we have completed or have under contract 87 best value projects. Generally, these projects are constructed more quickly and with fewer claims. In the first quarter, construction revenue increased 18% year-over-year led by our teams in California, Utah, and the Midwest. This was primarily a result of the higher CAP entering the year and the more favorable weather conditions compared to the first quarter of 2023. With our strong start to the year, our current CAP and the bidding opportunities ahead of us, we are on track to win the work needed to meet our revenue guidance in 2024 and continue our organic growth in 2025.
% : Over the past three years, we have significantly invested in our material segment. We expect this pattern to continue in 2024 with approximately $50 million of planned strategic investments in further automation projects, plants, new reserve expansion, and a new aggregate plant that is expected to come online later this year. We ended 2023 with 1.3 billion tons of reserves, an increase of 294 million tons or 30% since 2021. This includes 140 million tons reserves added through acquisitions in 2023. In 2024, we will continue to explore M&A options for both bolt-on pportunities and possible expansion into new geographies. We remain very selective in our pursuits, but I’m hopeful we will complete additional materials M&A transactions in 2024. Now, I’ll turn it over to Lisa to review our financial performance for the quarter.
% : Over the past three years, we have significantly invested in our material segment. We expect this pattern to continue in 2024 with approximately $50 million of planned strategic investments in further automation projects, plants, new reserve expansion, and a new aggregate plant that is expected to come online later this year. We ended 2023 with 1.3 billion tons of reserves, an increase of 294 million tons or 30% since 2021. This includes 140 million tons reserves added through acquisitions in 2023. In 2024, we will continue to explore M&A options for both bolt-on pportunities and possible expansion into new geographies. We remain very selective in our pursuits, but I’m hopeful we will complete additional materials M&A transactions in 2024. Now, I’ll turn it over to Lisa to review our financial performance for the quarter.
Lisa Curtis:
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% : The improvement in gross profit margin was largely due to a decrease in negative net revisions and estimates. The increase in gross profit was offset by $5 million of seasonal gross losses from acquired businesses, including purchase accounting related depreciation and intangible asset amortization of $3 million. In the material segment, revenue increased $20 million year-over-year to $77 million, with gross profit increasing $2 million to a gross loss of $3 million. The increase in materials revenue was primarily due to acquired businesses as well as increases in sales prices and volumes. The increase in gross profit was led by higher sales prices in both aggregates and asphalt, which was offset by losses from acquired businesses of $3 million, including $2 million due to purchase accounting related depreciation and intangible asset amortization.
Building on the momentum from the second half of 2023, cash flow significantly improved over the first quarter of 2023, with operating cash flow of $24 million or $101 million improvement. We have made significant strides in this area and our teams remain focused on cash generation.
%: The improvement in gross profit margin was largely due to a decrease in negative net revisions and estimates. The increase in gross profit was offset by $5 million of seasonal gross losses from acquired businesses, including purchase accounting related depreciation and intangible asset amortization of $3 million. In the material segment, revenue increased $20 million year-over-year to $77 million, with gross profit increasing $2 million to a gross loss of $3 million. The increase in materials revenue was primarily due to acquired businesses as well as increases in sales prices and volumes. The increase in gross profit was led by higher sales prices in both aggregates and asphalt, which was offset by losses from acquired businesses of $3 million, including $2 million due to purchase accounting related depreciation and intangible asset amortization.
Building on the momentum from the second half of 2023, cash flow significantly improved over the first quarter of 2023, with operating cash flow of $24 million or $101 million improvement. We have made significant strides in this area and our teams remain focused on cash generation.
% : With our cash and marketable securities of $337 million and availability under our credit agreement of $333 million, we have the liquidity to continue to invest in growing our operations, both organically and through M&A. We are continually reviewing opportunities for bolt-on acquisitions to infill our existing footprint, as well as expansion opportunities into new geographies such as the Lehman Roberts and Memphis Stone and Gravel Transactions that closed late last year. While we continue to be very selective, I expect that we will pursue further M&A in 2024 that will add to our cash flow generation and lead to increased shareholder value.
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% : Now, I’ll turn it back over to Kyle.
%: Now, I’ll turn it back over to Kyle.
Kyle Larkin: Thanks, Lisa. I’ll close with the following points. We started 2024 strong with significant growth in revenue, adjusted EBITDA and operating cash flow compared to 2023. This builds upon momentum carried into 2024 from the growth experienced in the second half of 2023. Our CAP supports this growth remains high at $5.5 billion. We see a continued strong public and private market environment supported by the IIJA and healthy state budgets across our geographies. Hitting opportunities ahead of us are robust and should provide excellent opportunities to continue to grow CAP, meet our growth objective in 2024 and continue organic growth in 2025.
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% : Operator, I will now turn it back to you for questions.
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