Granite Construction is on the hunt for more M&A

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Dive Brief:

  • Taking a picks-and-shovels approach of selling roadbuilding materials to other contractors, Granite Construction said on its first quarter earnings call it has been growing its stockpile of asphalt and aggregate, while increasing its pricing for those commodities by 5% to 10%. 
  • The Watsonville, California-based contractor also sees plenty of opportunity for more M&A activity in the space, following its $278 million purchase of two material yards in Tennessee last year. 
  • Those were the main takeaways from the firm’s Q1 earnings, where executives reported a net loss of $31 million for its seasonally slowest quarter, larger than the $23 million loss it reported a year ago. Revenue grew to $672.3 million, a 20% increase year over year, while backlog increased $395 million, or 7.7%, to $5.5 billion. 

Dive Insight:

Kyle Larkin, president and CEO, told analysts on the call that the firm has been focused on building up the volume of roadbuilding materials it holds in reserve since 2021, and now boasts 1.3 billion tons, an increase of 30% over that time frame. That number includes about 140 million tons it added through its acquisitions in 2023. 

With that momentum, executives on the call were bullish about buying more aggregate and asphalt companies in 2024, hinting that future deals would be forthcoming. 

“We will continue to explore M&A options for more of both bolt-on opportunities and possible expansion into new geographies,” Larkin said on the call. “We remain very selective in our pursuits, but I’m hopeful we will complete additional materials M&A transactions in 2024.”

The firm has raised its prices on aggregates — the gravel and finer mixes used to make roadbeds — by 10%, and asphalt — which is the top seal used on roads — by 5%. It has done so while keeping its costs to produce the materials down via hedges it put in place for diesel and natural gas in 2022, known as an energy escalator, Larkin said.  

While the firm is on the lookout for other material suppliers to snap up via M&A, it has also been homing in on automation gains at its existing plants, and plans to add more technology on that front in the future. 

“We expect this pattern to continue in 2024 with approximately $50 million of planned strategic investments in further automation projects at plants, a new reserve expansion and a new aggregate plant that is expected to come online later this year” in Bakersfield, California, Larkin said. 

New org structure

The company also unveiled a new organizational structure on the call. In the last several years, Granite has focused on simplifying its business model after an accounting scandal in 2021 put the firm on its heels. 

Under its new approach, Granite has focused on bidding smaller contracts — or larger “best value” jobs that are broken down into smaller work packages — rather than multibillion-dollar megaprojects that take years to complete. 

With legacy jobs in what it calls its “old risk portfolio” mostly finished, it has now reorganized the company. Gone are its geographic groups, which included the California, Mountain and Central business units. Instead, it will now only have two divisions – one focused on construction, the other on materials. 

“Our new structure results in our construction experts overseeing construction operations and our materials experts overseeing materials operations,” Larkin said. 

The contractor said it has also seen increased bidding activity so far in 2024 on both public and private projects. That’s a notable contrast to the larger industry-wide trends where publicly funding jobs have continued unabated, but private developments have languished in a higher interest rate environment. 

“We’ve been picking up more work through April of this year than where we were last year at the time, and our margins on that work have increased as well,” Larkin said. “We think the market is very healthy and it remains healthy, both on the public and the private side. So maybe we’re seeing a few things a little bit different than others.”

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