Granite Construction Inc. 2026 Q3 Earnings Call

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, Staci Woolsey. Please note that today's earnings presentation is available on the Events and Presentations page of our investor relations website. We begin 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, adjusted earnings per share, cash gross profit, and cash gross profit per ton. The required disclosures regarding our non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our website, graniteconstruction.com, under Investor Relations. Now, I'd like to turn the call over to Kyle Larkin.

Thanks, Mike. Before turning to our Q3 results, I want to begin with our 2029 financial targets and the strategy that supports them. Over the last several years, we have built a more resilient Granite by improving the quality of our project portfolio, investing in materials, expanding our home markets, and developing capabilities in attractive growth markets. Our home market model remains at the center of this strategy. Local relationships, market knowledge, materials resources, and our people provide the foundation from which we compete and grow. Our 2029 financial targets reflect our earnings and cash flow potential from continuing to execute that strategy. Starting with revenue, we are targeting an organic revenue CAGR of 10%-12% through 2029. This target does not include future M&A, which should be additive.

We expect growth to come from three primary sources: continued growth in core public infrastructure, market share gains and disciplined expansion within our home markets, and faster growth across key end markets of federal, rail, and mission-critical infrastructure. Public funding remains at historically high levels across our footprint, and a significant portion of IIJA funding has yet to be spent. That spending should continue to support state and local transportation programs over the next several years. The Highway Reauthorization Bill continues to be under discussion in Congress, although the timing remains uncertain. We are currently operating under a continuing resolution that provides a short-term extension of surface transportation programs, maintaining funding at IIJA levels while work continues on fiscal year 2027 appropriations and a longer-term surface transportation reauthorization.

Even though we are in a wait-and-see period with Congress, transportation infrastructure continues to have bipartisan support, although future extensions may be required before a longer-term bill is enacted. Publicly funded transportation work has always been the foundation of Granite's business in both our construction and materials segments. Over the last several years, we have invested significantly in our home markets, including investments in aggregate and asphalt facilities to increase automation and to take advantage of waterborne logistics. We have also invested heavily to hire and retain the best people as we continue building our relationships with key customers and partners. We believe we can continue to grow in this core transportation market in the mid-single digits through 2029 by leveraging our existing customer relationships and by relying on our experienced local teams to leverage our vertically integrated operations to increase market share.

We have demonstrated that we can grow even when market funding and lettings are relatively flat by remaining disciplined in project selection and working to increase our portfolio of collaborative contracting projects. Through collaborative contracting, Granite is selected based on its qualifications. Once selected, we work closely with the owner early in the project life cycle to improve alignment on design, cost, schedule, risk, and execution. We believe that this delivery method results in a higher quality project portfolio where there is more balanced risk allocation and more predictable project outcomes. Our confidence is also supported by the visibility provided by our record CAP and the bidding opportunities we see ahead of us in the next year. Outside our core transportation market, we have also invested significantly in developing this federal, rail, and mission-critical infrastructure end markets. I will discuss those markets in more detail shortly.

Turning to profitability, we believe we have a clear path to achieve an adjusted EBITDA margin of 14%-16% in 2029 through continued gross profit margin expansion in both segments and through greater SG&A leverage as we grow. In the construction segment, disciplined project selection, collaborative contracting, and improved execution have significantly improved the quality and risk profile of our project portfolio. We see further margin opportunity by remaining selective on the projects we pursue, continuing to increase bid margins, and expanding federal, rail, and mission-critical projects. In materials, we anticipate that the pricing discipline, increased volumes, greater vertical integration, plant investments, and automation will generate margin expansion over the next three years. We expect greater operating leverage as we continue to grow.

Our 2029 targets contemplate SG&A of approximately 7.5% of revenue, even while we continue to invest in the people, technology, and capabilities needed to support organic growth and M&A. We are confident that we have the markets, plan, resources, and people to achieve our adjusted EBITDA margin expansion target. This expansion should support significantly greater operating cash flow. For 2029, we are targeting operating cash flow of approximately 13% of revenue, supported by higher adjusted EBITDA and by maintaining consistent working capital efficiency. We expect CapEx remaining approximately 3% of revenue, resulting in free cash flow of approximately 10% of revenue. That cash generation gives us the capacity to reinvest in the business, pursue disciplined M&A, and return capital to shareholders. Since 2023 and through the third quarter of 2026, we have deployed more than $1.4 billion on acquisitions.

The acquisition pipeline in both materials and construction segments remains strong, and I am hopeful that we can announce new additions to Granite in the near future. Over the next three years, we expect to continue to deploy capital on acquisitions to support and strengthen our home markets and expand into new geographies, subject to the availability, timing, and quality of opportunities while maintaining our long-term net leverage target of approximately 2.5 times. The strength of publicly funded highway and bridge markets should provide a durable foundation. Our ability to increase market share, improve execution, expand margins, leverage our home market platform to develop additional end markets, and invest in our vertically integrated materials business gives us confidence that we will achieve our 2029 targets. Turning to slide 5, I will discuss key growth markets that complement our core transportation business.

For the last several years, we have focused on leveraging our home markets to serve national clients across key growth end markets. Dedicated national leadership works alongside our home market teams, bringing specialized expertise, consistent client engagement, and the ability to coordinate resources across Granite's geographic footprint. We believe this structure allows us to serve national clients locally while providing a consistent experience across our network. We initially established this model in the federal and rail end markets and have now extended it as we work to grow our presence in mission-critical infrastructure. We have invested for more than a decade to build our federal capabilities, customer relationships, and geographic reach. Our federal work is far-reaching. It includes airfield and runway paving, roads, site infrastructure, civil work supporting military campuses and other secure facilities, tactical infrastructure, flood control, shoreline protection, and water infrastructure.

We have performed federal work from Guam to Alaska and across the continental U.S. We had approximately $1.3 billion in federal CAP at the end of the third quarter and expect to bid on billions of dollars of opportunities over the next several years. Importantly, our federal growth expectations do not depend on securing additional tactical infrastructure work. Current federal pursuits include airfield recapitalization in Alaska, naval infrastructure modernization in Washington State, integrated air and missile defense infrastructure in Guam, and space infrastructure. The federal procurement environment is also evolving. The 2026 National Defense Authorization Act introduces collaborative contracting procurement to federal work and creating opportunities for progressive design build, construction manager at risk, and other flexible procurement approaches for military construction.

With Granite's experience in collaborative contracting, we believe this change in federal procurement practice aligns with our capabilities and will create additional opportunities across much of our footprint. Federal work is expected to represent approximately 15% of construction segment revenue this year, and we believe the federal business can continue to grow through 2029. In rail, we have established relationships with Class I railroads and transit agencies, and we have a strong history of project execution in this end market. Our capabilities include intermodal and logistics terminal site work, grading, drainage, paving, utilities, grade crossings, structures, roadway improvements, and other supporting infrastructure. Class I railroads continue to invest in intermodal capacity and freight mobility. Granite's broad civil capabilities, transportation expertise, and geographic footprint position us to support these customers as our programs expand.

Notably, we are in the pre-construction with a Class I client on a major intermodal project in Southern California. The proposed development is a 4,500-acre integrated rail facility intended to expand intermodal capacity along a major east-west freight corridor and improve the movement of freight from the ports of Los Angeles and Long Beach. The project remains subject to the permitting process. If it advances to construction, it could represent a meaningful opportunity beginning in 2027 and ramping up in 2028. Finally, mission-critical infrastructure represents another significant growth opportunity across our home markets. Today, for Granite, mission-critical infrastructure includes data centers and other facilities supporting the AI build-out, battery storage, and space sector clients. Granite has more than a decade of experience working on data center projects in the Pacific Northwest and Northern Nevada.