Granite Construction Incorporated
Q4 2020 Earnings Call Transcript

Published: 30 Mar 2021

[Operator:]

Good morning. My name is Kate, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Incorporated Investor Relations Fourth Quarter 2020 Conference Call. This call is being recorded. It is now my pleasure to turn the floor over to your host, Granite Construction Incorporated Vice President of Finance, Mike Barker. Sir, the floor is yours.

[Michael Barker:]

Good morning and thank you for joining us. I am pleased to be here today Granite Construction Incorporated President, Kyle Larkin; Executive Vice President and Chief Financial Officer, Lisa Curtis.

[Kyle Larkin:]

Thank you, Mike. Good morning everybody and thank you for joining us on our call today. Lisa and I are glad to be talking with you as you reached the final chapter related to our delayed financials. We expected our 2020 Form 10-K will be filed in short order. And we will now be able to resume a normal filing and reporting cadence. I'd like to start off by providing more color around the refresh core values I introduced during our last call at the end of February. As reminder Granite five core values are safety or the safety and wellbeing of our people, our partners, and the public is our greatest responsibility. Every level of our organization is engaged in our safety culture. Integrity, where we operate with integrity and the highest ethical standards we know and do what is right and we are expected to speak up when something is not right.

[Lisa Curtis:]

Thank you, Kyle. I'll start by discussing our performance for the fiscal year 2020 before diving into the strength of our balance sheet and our 2021 outlook. 2020 consolidated revenue grew over 3% year-over-year to $3.6 billion, with gross profits increasing 56% to $345 million and margin just over 10%. Within our Transportation segment, we saw very strong performance in the vertically integrated construction businesses, particularly in the California operating group, which drove revenue growth of almost 7% year-over-year to $2 billion. Transportation segment gross profit for 2020 increased 143% year-over-year to $134 million, resulting in gross profit margin of almost 7%. Although, losses in the Heavy Civil Operating Group Old Risk Portfolio decreased in 2020, these projects impacted gross profit margins significantly and dampened the strong performance by the California and Northwest operating groups. In our Water segment, 2020 revenue was impacted by the pandemic and decreased $28 million year-over-year, though we did see improvements in the fourth quarter. However, despite the revenue decline, segment gross profit for 2020 increased 82% year-over-year to $54 million, resulting in gross profit margin of just over 12%. This increase was a result of both improved project performance in 2020 and not repeated project write-downs in 2019, all partially offset by the impact of the pandemic during the first three quarters of 2020. Moving onto the Specialty segment, 2020 revenue was mostly flat compared to the prior year at $723 million. Segment gross profit for 2020 increased over 6% year-over-year to $92 million, resulting in a gross profit margin of almost 13%. This increase was due to the exceptional performance and execution of site development work in public and private markets and our California Northwest Federal and Heavy Civil Operating Groups. This performance was partially offset by a write-down related to a disputed cost overrun on a tunneling project. Finally, the Materials segment completed an outstanding year, with a revenue increase of almost 7% year-over-year to $381 million for 2020. This increase was largely due to favorable weather in California and strong sales volumes. Segment gross profit for 2020 increased 29% year-over-year to almost $65 million, resulting in a gross profit margin of 17%. This increase is due to liquid asphalt cost savings with lower oil prices in 2020, operational efficiencies and higher volumes. Turning now to our non-GAAP financial metrics. Adjusted EBITDA for fiscal year 2020 increased to $118 million year-over-year, resulting in an adjusted EBITDA margin of over 5% for the year. 2020 adjusted net income increased over $87 million to $60 million from an adjusted net loss of $27 million in the prior year, primarily due to the increases in gross profit that I discussed earlier. As a reminder, these metrics are adjusted for transaction costs, amortization of debt discount, non-recurring legal and accounting investigation costs and non-cash impairment charges. Despite the unprecedented challenges we experienced during the year and the write-downs within the Heavy Civil Group Old Risk Portfolio, Granite finished 2020 strong. Now to touch on cash and liquidity. Throughout 2020 Granite remain focused on cash and working capital management. For 2020, we ended the year with operating cash flow of $268 million, a record for Granite compared to $111 million in the prior year. Granite teams across the company did an excellent job at expediting cash collections and making progress in our efforts to settle outstanding clients. Despite the unprecedented events during the year, as of the end of 2020, we reduced Granite's total debt and significantly strengthened our liquidity position. Granite's strong balance sheet positions us well for 2021. Before handing it back to Kyle, I would like to discuss our guidance for 2021. Granite moves into 2021 with a strong CAP position and optimism across all segments and operating groups. We anticipate low to mid single digit consolidated revenue growth as we capitalize on the opportunities ahead of us, while continuing to work through the Heavy Civil Operating Group portfolio. This revenue growth coupled with continued strong performance in our vertically integrated businesses should offset the margin pressure from the Heavy Civil Operating Group Old Risk Portfolio. To give you a sense of the cadence around project completion in this portfolio, as at the end of 2020, the Heavy Civil Operating Group's backlog was just over $1.1 billion of which a little less than $700 million consists of projects in the Old Risk Portfolio. We anticipate working through approximately $425 million to $475 million of this backlog during 2021, which will leave approximately $225 million to $275 million in backlog to be completed primarily in 2022. As we complete the remaining backlog of the Old Risk Portfolio, we are assuming zero margin on these projects, which will, of course, continue to depress both Transportation segment margin and adjusted EBITDA margin in 2021. Based on these assumptions, we expect an adjusted EBITDA margin range between 5.5% to 7.5% for the year. Additionally, we expect 2021 SG&A expense, excluding non-recurring legal and accounting fees to be approximately 8.5% to 9% of revenue and an effective tax rate in the mid 20% range. In 2021, we will continue to invest in our businesses through capital expenditures between $80 million to $100 million. Following a difficult 2020, I am looking forward to seeing Granite take advantage of the many opportunities ahead of us. With that, I will turn it back over to Kyle for closing comments.

[Kyle Larkin:]

Thanks, Lisa. Let me close with the following points. We respect to filing a reform 10-K for 2020 forward to be in full compliance with all SEC and NYSE or requirements to returning to a normal reporting cadence in 2021. Themes across all our operating groups have moved into 2021 with significant momentum and robust CAP. And I expect a strong performance from all groups. Finally, our new leadership team is working to refresh our strategic plan. I look forward to sharing our vision for the company once this process is complete. Operator, I will now turn it back to you for questions.

[Operator:]

We will now begin the question-and-answer session. The first question is from Michael Dudas of Vertical Research Partners. Please go ahead.

[Michael Dudas:]

Good morning, gentlemen and Lisa.

[Lisa Curtis:]

Hey, Mike. Good morning.

[Kyle Larkin:]

Good morning.

[Michael Dudas:]

Good morning. First question for Kyle. As you look through 2021, as you break it down by segment with -- how do we think about margin performance, bidding competitiveness on the business you need to book in 2021, given that you already got one quarter likely in the books as of this week? So, looking at 2020 as a base for gross profit margins in each segment, how -- what are some of the dynamics that'll drive that moving forward? And you did discuss on the transportation side, the zero profit margins, but is there any more normalization or any trends that we should look at as we run through our model?

[Kyle Larkin:]

Yeah. Thanks Mike. So, I think at first referred you back to the guidance, I think just in general, in terms of where we see the company going -- excuse me -- in 2021 overall, but from a funding perspective, maybe I'll start there. Obviously, last year with the FAST Act extension, that's going to keep funding relatively flat on the transportation side. Then we had the relief bills that came out, one in December, one in March. And so the one in December really earmarked about $1.5 billion to states where Granite has BI businesses. So, we think that's going to have a nice uplift for us in 2021, perhaps a little bit later, mid to late year. And then we're optimistic still that we're going to get a federal package passed sometime later this year that will allow us to see opportunities late 2021 into 2022. You mentioned that we're already into two, three months into 2021, I think from a bidding perspective, we're actually seeing today across all of our businesses improve bidding in terms of the amount of work that's out there to bid. So, we're kind of back to pre-pandemic levels for sure. And then if we look at bookings, we're well ahead of where we thought we'd be actually in terms of bookings for the first two months in 2021.

[Michael Dudas:]

Terrific. Thank you for that. And for my follow-up for Lisa, obviously, terrific performance on cat -- operating cash, cash generation this year. How does that translate into 2021 relative to working capital use and requirements as the business grows relative to collections and maybe what's remaining that's outstanding that you might expect could come through into 2021. So, when you look at the 268 of 2020, how's that reflect towards looking at more normalized basis in the 2021.

[Lisa Curtis:]

Okay. Yeah. Thank you. Thank you, Mike. So, going into 2021, we basically intend to stay on course with what we've been doing. As a reminder, we have our capital allocation strategy, which consists of primarily four areas. One is to invest back in the business through organic growth. The next is, from an M&A perspective where it makes sense, expanding strategically, additionally share repurchases. And then lastly, for dividends, through 2020, we were able to maintain our dividends, where a lot of companies did suspend it for various reasons. So, for capital, those are things that we look at from a spending perspective. So, anyway, steady state, but the teams did a great job in 2020 for expediting cash management of working capital in general. And so, we plan to continue that trend into 2021.

[Michael Dudas:]

Excellent. Thank you very much.

[Lisa Curtis:]

You're welcome. Thanks Mike.

[Kyle Larkin:]

Thanks Mike.

[Operator:]

The next question is from Steven Ramsey of Thompson Research Group. Please go ahead.

[Steven Ramsey:]

Good morning. Maybe to follow on the cash flow topic. I guess, do you expect working capital to be a source of cash again this year? And then maybe can you share more on CapEx down a bit, CapEx for fiscal year 2021 do you expect that mostly to go to the Materials segment, are there other places you expect to focus CapEx?

[Lisa Curtis:]

Yeah. Hey, Steven. Good morning. So yes, we anticipate for 2021 carrying forward with what we did in 2020 from an operating cash perspective. Again, we've had good momentum and from a working capital management perspective, the teams, again, did a great job going through 2020. We anticipate that will continue through 2021. So, for CAP, what we provided for guidance of $80 million to $100 million really is pretty much in line with what we've done historically. I mean, obviously that's a lever that we can pull as needed, depending on how the year goes on. But mainly -- so that's used for maintenance of existing facilities, let's say for Materials that is a larger part of the CapEx budget. And again also for other equipment and things of that nature as well. But -- and from an investment perspective, this doesn't include any sort of M&A related activities. And we would -- from a Materials perspective, we're always looking for strategic expansion, as we come across it.

[Steven Ramsey:]

Okay. Great. And then next question, on the guidance, I guess, first, pretty wide low end of margin guidance, barely above fiscal year 2020. Can you share the underlying assumption for mix -- from the low to the high end? And then maybe within that, you can share kind of just the high end of revenue guidance, not necessarily translate to the higher end of EBITDA margin guidance, just given the moving factors.

[Kyle Larkin:]

Okay. Well, thanks for the question. I'll go ahead and start with this one and Lisa can add on as we need to. But I think, we look at the three primary drivers in terms of our guidance and kind of where we fall. First off is project execution. As we've talked on our last call, we have a lot of work to build within the Heavy Civil Group Old Risk Portfolio as we called it. So, we're going to be busy across the country, delivering on those projects. And again, those projects are riskier than we would be in a desire state in the future. So project execution is probably the number one thing we see out there that could change our guidance up and down. We also have a lot of work that we have to go win and build in 2021, going back to Mike's question originally. And so our teams are out there, working hard to get to work on the books, then actually deliver it within the 2021 year. Then the third piece is just weather. Obviously, weather has a big impact on our business, primarily in Q1 and Q4. And so while a little bit more visibility into where we're going to end up from a weather perspective as the year progressive. So, those are kind of the three primary drivers around our guidance. And I think just adding on there, there's still some lingering issues with some of the pandemic. We're not through the pandemic, but I would say that that's still hanging out there and we'll see where that goes.

[Lisa Curtis:]

Yeah. And Steven, also for us, we have -- weather it can be a big contributing factor one way or another for how performance goes throughout the year.

[Steven Ramsey:]

Gotcha. And to make sure, so if you worked through a greater degree of old risk heavy civil projects, that's a short term headwind for EBITDA margins and might push you to the low end, but certainly a good thing for the business longer term, is that a fair assessment?

[Kyle Larkin:]

Yeah. That's a fair assessment.

[Steven Ramsey:]

Okay. Great. Thank you.

[Kyle Larkin:]

Thank you.

[Operator:]

The next question is from Jerry Revich of Goldman Sachs. Please go ahead.

[Jerry Revich:]

Yes. Hi. Good morning, everyone and congratulations for all the progress over the past year.

[Lisa Curtis:]

Yeah. Thank you, Jerry.

[Jerry Revich:]

I'm wondering if we could just talk about your win rates in California. It's pleasantly surprised by the top line performance and the comments Kyle that you laid out on the bid environment considering the Caltrans lettings that did have pretty tough comps and did CAP down. So, can you just talk about, what you're seeing in your California business? Are your win rates up significantly or are there other job types that are helping fill in for what might be some lumpiness in the overall Caltrans numbers that we're seeing for a little bid awards?

[Kyle Larkin:]

Yeah. So, in the state of California, we actually saw Caltrans the bid environment dip a little bit in the single digits last year. For us we've been a little bit less Caltrans work than we had in previous years. Looking longer term, we anticipate their spending to go up to about $6.2 billion for the next five to seven years. That's a significant improvement over the prior years up to around 44% or so, I think is what we see moving out longer term with Caltrans in terms of increased funding going out into a project. So that $6.2 billion includes engineering, includes right away purchases, so that doesn't all translate into construction projects, but we do think that the Caltrans market continues to be a great opportunity for the company. From a win rate standpoint, I won't get into specifics, but we have grown our market share within California and specifically with Caltrans.

[Jerry Revich:]

Good. Thank you. And then, as you look across your footprint today, can you just talk about where the bid activity is the strongest? Can you talk about where the pipeline of works stands in aggregate, as well as just to help us get a flavor for the pace of activity this year versus last year?

[Kyle Larkin:]

Yeah. I think, it's really across the entire portfolio, I would say today because we've kind of looked at the first couple of months within 2021. We're seeing a nice uptick in bidding in California as I just mentioned. We're seeing that also in our Northwest operating group, which is the other five or six states and some adjacent states and in the western part of United States. We're seeing it at the Midwest division or in groups that we have in Chicago. And then we're seeing lots of opportunities even within our Heavy Civil Group. And those opportunities are within -- are kind of our new parameters. And so that's actually really exciting for us. We were recently the apparent bidder on a project down in Texas on a dam project for about $160 million. So, we're starting to see -- our teams see some success with where we're headed with Heavy Civil Group as well. So, I think, all-in-all, we're seeing a nice uptick across the entire organization.

[Jerry Revich:]

Okay. And lastly, Lisa, your EBITDA was very much half loaded in 2020. How do you expect that to look in 2021?

[Lisa Curtis:]

Yeah. So we -- again, it depends on, as you know, weather can really dictate the lumpiness of that. So, kind of anticipating kind of air quotes a normalized year, we expect it to be -- it's definitely heavier in the second and third quarters and then tailing off a little bit in the fourth quarter, kind of a normal -- we've assumed kind of our normal -- a normal pattern, so to speak for us.

[Jerry Revich:]

Thank you.

[Lisa Curtis:]

You're welcome.

[Operator:]

The next question is from Brent Thielman of D. A. Davidson. Please go ahead.

[Brent Thielman:]

Hi. Thanks. Good morning.

[Lisa Curtis:]

Hey, Brent.

[Kyle Larkin:]

Good morning.

[Brent Thielman:]

Hey, Kyle. If you guys work beyond the old risk portfolio in the Heavy Civil Operating Group over the next one to two years, is there a level in mind that you'd look to manage that operating group to over time as -- either as a percentage of total Granite revenue or total Granite CAP? I guess I'm just trying to get a sense of how large you want that business to become for Granite over the long-term.

[Kyle Larkin:]

Yeah. And that's a great question, because if we go back to what we shared in Q3 of 2019, we did indicate that we wanted to have a civil group to being less than 50% of the overall company revenue. That's changed for us. And going back to kind of where we've revisited our -- kind of our re strategic review of the Heavy Civil Group, we talked about how we've further shifted away from projects over $500 million or mega projects. We've shifted to these maybe value based selection projects. We'll still pursue design build projects, but the smaller ones where we can get the pricing that reflects the risk. And then, of course, we're still chasing bid build work. So, we're actually chasing a different work today than we did in the past. I mentioned before that the average projects in the pipeline right now were $20 million to $500 million and the average job size previously is around $225 million at least last month or so. So the kind of that portfolio has changed as we look at the pipeline of work. And so the 50% really isn't applicable for us anymore. So as we derisk that business, it starts to look a little bit more like our other businesses in some ways. We don't think we need to CAP it as being 50%, as long as we continue with the lower risk profile. Hopefully that makes sense.

[Brent Thielman:]

Yeah. It does. No, I appreciate that. I guess to follow-up, again kind of bigger picture. Kyle, as you look at the broader portfolio, I mean, to all things seem core to you as you sort of move beyond these filings and all that sort of stuff. I think about the water business and the other businesses within the portfolio. I mean, do you view all things core here today?

[Kyle Larkin:]

Yeah. I think we look at our business today as being core. I mean, we've come a long ways certainly within the Heavy Civil Group and as we continue to derisk that part of our portfolio, but, I think our teams are doing a fantastic job of continuing to work through the projects that we have. And I think they're doing a really nice job of transforming that business for us as we move it forward. I think, once we get the over it burned off and we moved the business forward, I think we're going to be very pleased.

[Brent Thielman:]

Okay. Thanks for taking the questions. Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Kyle Larkin for closing remarks.

[Kyle Larkin:]

Okay. Well, thank you for your questions. And as always, I want to thank all of our employees for everything you do every day for Granite and for our customers. Your hard work and dedication is undoubtedly the cornerstone of this company's success. And with that, thank you for your continued interest in Granite. We look forward to speaking with everyone very soon.

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.