Granite Construction Inc (GVA) 2021 Q4 法說會逐字稿

Good morning. My name is Betsy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Fourth Quarter 2021 Conference Call. This call is being recorded. (Operator Instructions)

It is now my pleasure to turn the floor over to your host, Granite Construction Incorporated Vice President of Investor Relations, Mike Barker. Please go ahead.

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 an overview of the company's safe harbor language. 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 whether they are results of new information, future events, or otherwise, 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 or loss and adjusted earnings or loss per share. 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 Investor Relations website.

Now I would like to turn the call over to Kyle Larkin.

Thank you, Mike, and good morning, and welcome to our fourth quarter earnings call. 3 weeks ago, we announced several important steps as we continue to implement and drive forward our new strategic plan.

I'll briefly touch on our strategic plan in a few minutes, but let me begin with a review of the steps that were announced. First, we signed a definitive agreement to sell Granite Inliner, and we expect that transaction to close as previously reported.

Secondly, we also announced our intent to sell Water Resources and Mineral Services businesses. Granite Inliner, Water Resources and Mineral Services comprise our former Water and Mineral Services, or WMS, operating group. With these announcements, WMS is now being reported as held for sale and in discontinued operations in our financial statements.

Our company has been through a lot in the past few years. We are acutely aware of the need to learn from our recent struggles, so we can improve our performance and create value for all our stakeholders. This was our focus as we revisited our strategic plan over the past year. As our new management team came together and discussed the direction of our organization, it was clear that our company's core competencies rely on our civil construction and material businesses.

All the information that we studied confirmed my belief that Granite's future should be built around return to our core skill set. This is what we have done for 100 years, and we are one of the best contractors in the country. As a result, we concluded that our success depends on our team being focused on building our core businesses and focusing all of our efforts on supporting and aligning the company with our civil construction and materials business.

This is why we decided to divest of the WMS businesses with full support from our Board of Directors and focus our energy and resources on our core competencies. We believe this is a simple decision that is in the best interest of our shareholders. Divesting of these businesses bolsters our cash position and allows us to strategically invest in new opportunities to grow both organically and through acquisitions.

We will be in position to invest additional capital in developing our people and upgrading our equipment and technology. These investments will create economies of scale, both in operations and in support functions. We will then be in a position to grow a familiar, predictable business model, one that we have run successfully for 100 years.

Our future is now truly going to be built by leveraging upon our past. With the planned divestitures of the WMS businesses, we also announced a change in our reportable segments from transportation, water, specialty and materials to our new segments of Construction and Materials.

We identified our reportable segments based on how we manage the company through the allocation of capital and how we measure and assess performance. With our new strategic plan, we have shifted away from end markets to focus on our core civil construction and materials business.

We will continue to operate in a variety of end markets, including transportation projects, private site development projects, mining projects and water-related construction projects such as dams and spillways. All of these projects importantly are bid and built by our teams utilizing the same core competencies that underpin all of our work.

Granite's strength has always been the ability of our teams working in their home markets to leverage materials resources and local market knowledge to gain a competitive advantage within the markets where we operate. Strengthening and growing these home markets across our geographies and leveraging our expertise to secure high-value projects with both public and private customers is the core of our strategy that will lead Granite to achieve consistent profitability and growth.

We also announced the reorganization of our operating groups from 5 to 3 operating groups. The California and Mountain, formerly Northwest, operating groups remain largely unchanged with the exception of the shift of our renewable energy business into the Mountain operating group. The Central operating group is a combination of the previous Heavy Civil, Midwest and Federal operating groups with the addition of the Arizona region that was previously in the former Northwest group.

As the Central operating group, our former Heavy Civil group businesses will adopt a more focused home market strategy built upon the strengths of our Texas and Florida market areas. We believe this change will allow these regions to capitalize on the benefits of our proven home market model. This is the next phase in the transformation of the former Heavy Civil operating group.

The project selection criteria of the opportunities we are pursuing in the Central group have been transformed, and now we are shifting the focus to strengthening our home market presence in these key and growing states. This transformation will take time and will not occur overnight, but we believe we have the right teams and strategy to develop these markets in the image of our California and Mountain groups.

Finally, we announced an increased authorization in our share repurchase program, resulting in an authorization for up to $300 million in purchases. We have maintained a strong cash and liquidity position through 2021, and with the proceeds from the expected divestitures of the former WMS group, we should have additional flexibility to invest in our business and return value to shareholders through share repurchases.

Now let me briefly talk about our new strategic plan and its key themes. In the near future, we will go into much more detail on our new strategic plan and where Granite is going in the next few years. There are 4 themes to our new strategic plan: develop our people, raise the bar, grow market share and maximize Granite value add, or GVA. Our people and refreshed core values are the foundation of Granite's strategy. The develop our people theme is centered on that foundation.

There's incredible demand and competition for people at all levels of our organization. In a strong macroeconomic market with low levels of unemployment, we need to not only retain our people, but also to focus on their development to achieve the growth that is possible as a result of the increasing infrastructure funding. We believe our renewed focus on our core competencies as a civil contractor will assist us to be more effective in sharing resources and developing leaders using standardized processes and best practices.

Our next theme of raising the bar is centered on our unrelenting focus on execution and process efficiency to drive profitability. We have talked a lot over the last year about the significant changes we made in our project selection process and the types of projects we are pursuing compared to previous years.

We have made tremendous progress in this area as we transform the mix and quality of our CAP. We expect to see benefits in 2022 but even more in 2023 and 2024 as some of our lower-risk, best-value projects such as construction manager general contractor, or CMGC, projects have an extended initial construction manager time line that typically lasts over 1 year before the construction contract is awarded and construction work commences.

We have also experienced certain project execution issues that have prevented us from achieving the levels of consistent profitability that we should be delivering each period. Within this theme of raising the bar, we are focused on driving improved and consistent execution with renewed focus on standardized requirements and best practices across all of our businesses.

We believe this focus will translate into improved profitability. Finally, this theme also includes our efforts to drive efficiency within SG&A. While we have made good progress, SG&A remains an area of continued focus.

The third theme is grow market share. A key conclusion of our strategic plan is that we perform best when we utilize our home market competitive advantages. This has been demonstrated over Granite's history by the performance of our vertically integrated businesses. Unfortunately, the typically strong performance of our vertically integrated businesses have recently been overshadowed by losses on the higher-risk large project work in our Old Risk Portfolio, or ORP.

We intend to invest in our vertically integrated business model organically and through M&A to strengthen and expand existing home markets and to establish new home markets. We see many opportunities to invest in our home markets, such as through acquiring additional material reserves and equipment as well as opportunities for bolt-on acquisitions. Our liquidity and balance sheet provide us the ability to invest in our business and we intend to do so in 2020 and beyond.

The final theme of our strategic plan is maximize GVA. This theme pulls together the impacts of the strategic plan by and through growth in terms of earnings, consistent profitability and capital management, or in other words, bringing value to our stakeholders. As I mentioned, you'll hear much more about these themes and our new strategic plan in the near future, so stay tuned.

Now let's talk about our Construction segment. As a reminder, this segment includes all Construction projects across the company, excluding the former WMS group, which is now presented in discontinued operations. For fiscal 2021, approximately 41% of Construction revenue was earned by the Central group, 32% came from the California group and 28% came from the Mountain group.

In the Central group, revenue declined $87 million in 2021 compared to the prior year as work progressed through the ORP. As I have discussed this past year, our focus has been to transform the group by completing the ORP as we pursue projects that meet our new project selection criteria. We have made substantial progress in this transformation, and we continue to work to build new backlog that should deliver the returns that we expect.

The decreases in revenue in the group, which were intentional, were partially offset by increases in revenue in the vertically integrated Arizona region. Based in Tucson, our Arizona region expanded to open a second office in Phoenix in 2021. These region offices serve customers throughout Arizona and New Mexico.

The market and opportunities are significant in the Arizona region, and our organic expansion in Phoenix reflects the implementation of our new strategic plan. The California group comprised 32% of our construction revenue for fiscal 2021.

Revenue decreased $106 million in this group from the prior year. There were several factors that contributed to the decrease of revenue. The first factor was the record results recognized in the second half of fiscal 2020. This was led by the acceleration of projects as we work with owners to gain accommodations arising from the pandemic-lessened traffic conditions.

With these accommodations, our crews were able to complete a significant amount of work in our CAP in the third and fourth quarters of 2020. The second factor reducing revenue in the California group was an increase in weather-related disruption in the fourth quarter of 2021. This contrasts with the dry fourth quarter of 2020.

Lastly, in the third quarter of 2021, I mentioned the impact on revenue we were experiencing as a result of the extended competitive environment during the first half of 2021. The result was a reduction of revenue in the third quarter that carried over into the fourth quarter. While these combined factors reduced revenue for the California group in the fourth quarter and the fiscal year 2021, our outlook for the state is still very bright. Funding and budgets are strong, and we carry strong CAP into 2022, which I will talk further about in a few minutes.

Finally, the Mountain group finished 2021 strong with 28% of our total construction revenue, an increase of $31 million from the prior fiscal year. Driving the year-over-year increase in revenue were the Nevada, Washington and Utah regions, coupled with the renewable energy division, all turning in strong performances.

We have long-standing and established vertically integrated businesses in these regions, and they all represent growing markets and opportunities for us to build upon. Our renewable energy division operates across the U.S. and primarily focuses on installation of solar power generation and battery storage facilities. Granite has a strong presence in this growing market, which has been fueled by the U.S. government's push to expand the nation's shift to renewable energy sources.

Now onto our construction CAP, which ended the year at $4 billion. And as a reminder, this is the only CAP that is continuing operations from the California, Central and Mountain groups and excludes CAP from discontinued operations or WMS. CAP of $4 billion represents slight decreases from the third quarter and the prior year of $55 million and $15 million, respectively. On the slide, you can see 2 different views of our CAP: by procurement type and by operating group. These are 2 key ways that we measure and assess our project portfolio mix and quality.

The CAP by procurement type provides a view of the percentage of CAP in the bid build, design build and best value procurement types. Bid build is a procurement type that is most commonly used by departments of transportation and other municipalities when letting projects. Bid build is when the project owner is responsible for the design of a project and typically the lowest bid wins the job. This procurement type is widely used throughout our markets, particularly on smaller, quicker trim projects that we typically construct by our vertically integrated businesses. In the last 2 years, the percentage of bid build projects in our CAP has remained consistent, and we expect bid build work will remain the majority of our project portfolio mix.

Design build procurement is frequently used for larger projects and allows project owners to more quickly release projects to contractors. Contractors are responsible for design risk and construction risk, and bids are often submitted with approximately 30% of the design of the project completed. This procurement type introduces more risk to the contractor who takes responsibility for the majority of the design of the project. Historically, Granite was a joint venture partner on very large design build projects. These projects now represent the majority of our remaining ORP and were the impetus for development of our new project selection criteria. Over the last 2 years, CAP for such design build projects has been reduced by over half as we continue to complete the ORP. We expect that design build will remain a component of our CAP in the future. However, we intend to target such projects in our home markets where we can leverage our team's local knowledge and where we are fairly compensated for the additional design risks inherent in this procurement type.

In best value procurement projects, contracts are primarily selected based on qualifications and experience and awards are not solely based on low price. Similar to design build, this procurement type also allows project owners to release projects to contractors much quicker than bid build as the design and construction of the project is a collaboration between the owner and the contractor. Best value projects have longer lead times, including preconstruction phase work that can last several years before the actual construction begins.

Granite has been very successful in procuring best value projects due to our project teams strong qualifications and experience. We have increased the percentage of this type of work in our project portfolio over the last 2 years. We believe this procurement type, due to the collaborative nature of the relationship with the owner, allows us to provide a high level of value and simultaneously to mitigate risk before they arise to the level of a legal dispute or claim. We are very pleased with the increase of best value procurement in our portfolio and expect it will continue to be a significant component of our CAP in the future.

The next view of our CAP is by operating group. When we review our CAP, we look at diversification by risk and contract type but also geography. Over the last 2 years, you can see the reduction in CAP in our Central group, including the ORP within the Central group. Keep in mind that this group now includes our vertically integrated Arizona region, our formal federal division, our civil division in the Chicago region and our Texas and Florida regions. With the reduction of ORP CAP and the more selected new project selection criteria, the Central group's CAP as a percentage of our total has decreased by 17% in the last 2 years. As we remain diligent in transforming the project mix in the Central group, we expect their CAP to stabilize or grow modestly in 2022.

Offsetting the decrease in Central group CAP is the increase in both the California and Mountain groups. The increase in CAP in these groups reflects the strong economic and funding environments in those markets as well as the success we have demonstrated to owners in adding value and thus being selected as partners in the best value procurement projects. We are excited when we look at the transformation of our CAP and how we are positioned going into 2022. It is a stronger portfolio with less risk than Granite has had in recent years. We are not only pleased with our CAP in our largest markets in California but also across the country. I believe we are very well positioned with our new home market strategy to grow our CAP as funds are distributed from the federal infrastructure bill and allocated to DOTs, municipalities and state agencies.

Now turning to the Materials segment where, although the Materials business was impacted by wet weather in the fourth quarter, we finished the year with an annual revenue increase of 12% over the prior year, led by higher volumes across the operating groups. For 2021, aggregate volumes increased by 11% and asphalt increased by 6% over the prior year. During 2021, we derived approximately 65% of our Materials revenues from asphalt sales. These percentages are calculated on a gross basis and include not only external sales but also internal sales of aggregate to our asphalt plants as well as sales of asphalt through our construction projects. A significant component and variable in asphalt production is liquid asphalt, which has had volatile pricing along with other oil-related products over the last 2 years.

In 2020, we saw a benefit in our results from lower cost for liquid asphalt. In 2021, oil prices increased throughout the year and into 2022. While we apply measures such as bulk purchases, forward contracts and other hedging to mitigate our exposure to oil prices, we did experience a negative impact in our results from rapidly rising oil prices during 2021. In 2022, we continue to see a rise of oil prices due the concerns over the economy and the conflict in Eastern Europe. We will continue to closely monitor oil prices and apply measures to mitigate risk.

Now I'll touch on the market and what we are seeing in terms of funding and the economy. At the federal level, in November of 2021, the Infrastructure Investment and Jobs Act was finally signed into law after being in discussions for many months. This law represents a generational investment in the critical infrastructure needs of the country. The bill provides $550 billion in incremental funding over 5 years, including $284 billion for transportation and $261 billion for utilities. This funding is for a wide variety of infrastructure needs, many of which Granite participates in directly or indirectly, from roads and bridges, airports and water ports to power and water construction. As a diversified civil contractor, we believe we will benefit from the additional funding for many different types of projects.

The bill is also expected to drive economic expansion that should benefit the private market. Granite has steadily built upon relationships with private market clients over the last several years in various industries from mining and renewables to tech companies and should benefit as these clients expand their footprint in a strong economic environment. At the state and local level, our markets vary based on geography, but there is general continued support from voter-approved transportation measures. We believe the environment is healthy. We expect that once Congress funds the infrastructure bill through appropriations, more activity and opportunities will be generated as 2022 progresses. However, the more meaningful impact should occur in 2023 and 2024.

Now I'll turn it over to Lisa to go over our financial results.

Thank you, Kyle. For fiscal year 2021, revenue from continuing operations decreased 4% from the prior year, while gross profit improved slightly, resulting in a gross profit margin of 10%. In the Construction segment, full year revenue from continuing operations declined $162 million year-over-year to $2.6 billion. This decrease reflects lower revenue in our Central and California groups. In the Central group, we experienced an expected revenue decline this year as we transformed the Central group's project portfolio. The California group revenue also saw a decrease resulting from several factors, including an extended competitive bidding environment in the first half of 2021 and inclement weather in the fourth quarter of 2021, particularly as compared to 2020. The California group results for 2021 are also contrasted against a very strong second half of 2020, where the group had record revenues. While revenues are down year-over-year, we believe there is underlying strength in California as demonstrated by the group's CAP.

Construction segment gross profit for the year increased 3%, resulting in a gross profit margin of 10%. This increase in gross profit was primarily driven by a decrease in ORP losses year over year, which was partially offset by the impact of several factors, including reduced margins on certain projects from project execution and margin pressure from the extended competitive bidding environment during the first half of 2021. The ORP ended the year with remaining CAP of $319 million, which is higher than our previous projections of $275 million. The variance is due to progression of projects lagging original expectations and write-downs incurred in the fourth quarter. Fourth quarter and full year of 2021 net ORP losses to Granite, which exclude noncontrolling interests, were $16 million for both periods on revenue of $66 million and $385 million respectively. This compares to a loss of $81 million on revenue of $410 million for full year 2020. The fourth quarter illustrates the complexity and risk of these challenging projects and continues to support and validate our new strategy.

During 2021, we reduced ORP CAP by $358 million, leaving $319 million going into 2022. Only one project in the ORP has CAP in excess of $50 million at this point, and the majority of the projects should be completed in 2022. We expect that we will have approximately $50 million of ORP CAP that will remain at the end of 2022 and carried into 2023. This figure remains consistent with our previously communicated expectation.

In the Materials segment, our teams completed a strong year despite the inclement weather in California in the fourth quarter. For the year, the Materials segment revenue increased $43 million or 12%, led by strong aggregate and asphalt volumes throughout the year. Materials gross profit for the year declined by $6 million with a gross profit margin in 2021 of 14% compared to 17% in the prior year. This decrease in margin is largely due to the benefit received in 2020 from lower liquid asphalt costs.

Turning now to our non-GAAP financial metrics. Adjusted EBITDA margin from total operation, which includes both continuing and discontinued operations, was 6% for fiscal 2021 compared to 5.1% for 2020. We ended the year at the low end of our guidance as 2 risks we discussed during the year materialized during the fourth quarter, those being the ORP performance and fourth quarter wet weather.

Adjusted EBITDA and EBITDA margin from continuing operations for fiscal 2021 was $163 million and 5.4% compared to $153 million and 4.9% in the prior year. For fiscal 2021, combined SG&A, including discontinued operations, ended at 8.7% of revenue, which was in the middle of our guidance of 8.5% to 9%. SG&A from continuing operations ended the year at 8.1% of revenue. Adjusted net income from continuing operations for 2021 increased $10 million year-over-year to $61 million or adjusted diluted earnings per share of $1.33 compared to $1.12 in 2020. For fiscal 2021, 1.3 million potential shares were added back to diluted weighted average shares outstanding, representing the diluted effect of our convertible notes, which is offset by a purchased equity derivative instrument.

Now turning to our cash and financial position. Operating cash flow for fiscal 2021 decreased to $22 million compared to $268 million in 2020. There were several factors that drove the decrease in cash flows. For fiscal 2020, operating cash flow benefited from approximately $70 million of claims settlements and favorable impacts in working capital, while fiscal 2021 was impacted by the securities litigation settlement and nonrecurring legal fees of $88 million. As of the end of the year, our cash and marketable securities remain strong at $411 million and our revolver availability stands at $232 million with no debt currently drawn on the revolver. Our liquidity position will be further strengthened with the closing of the Inliner divestiture. And later in the year, we also expect cash inflow with the planned divestitures of Water Resources and Mineral Services. With our liquidity position and increased share repurchase program authorization up to $300 million, we expect to pay down debt and deliver value back to our shareholders in 2022.

Now I'd like to discuss our 2022 outlook and guidance before turning the call back over to Kyle. In 2022, we expect low single-digit revenue growth compared to 2021. Our assumptions are driven by expected increases in revenue in the California and Mountain groups, which will be partially offset by a decrease in the Central group as projects in the ORP are completed and the Central group focuses on pursuing work in home markets which fit with our project selection criteria. While we expect to build backlog during the year as more projects are released with the increased funding from the federal infrastructure bill, the benefits of this on our CAP will more meaningfully translate into higher revenue in 2023 and beyond and is not expected to be as impactful in 2022. We are excited about our markets and the industry's outlook over the next several years as the nation makes this generational investment in infrastructure.

We are well positioned in growing markets across the U.S. and are ready to build on our CAP portfolio in 2022 and beyond. We expect adjusted EBITDA margin from continuing operations to improve in 2022. We ended 2021 with an adjusted EBITDA margin from continuing operations of 5.4%, and our guidance for 2022 is a range of 6% to 8%. In 2022, we anticipate the completion of a majority of the ORP projects and have assumed 0 margin in our guidance. We expect SG&A expense from continuing operations to remain largely consistent with the level in 2021, and we are providing a guidance range of 8% to 8.5% for fiscal 2022 as we work to eliminate stranded costs related to the planned divestitures and also work to position ourselves to capitalize on the new infrastructure funding. We remain focused on gaining efficiency in SG&A and believe we will be able to achieve greater economies of scale with our renewed focus on our civil construction and materials business as we standardize and grow the business in 2023 and beyond.

Finally, we expect our effective tax rate from continuing operations to be in the low to mid-20% range and capital expenditures in the range of $100 million to $115 million. This increase in capital expenditures compared to 2021 primarily reflects expected investments in technology in our Materials business to reduce our production costs and to expand our aggregate reserves. Our Materials business remains a critical component of our vertically integrated home market strategy, and we intend to be strategic in investing organically and through M&A to enhance and grow our footprint.

With that, I will turn it back over to Kyle.

Thanks, Lisa. I'll close with the following points. I'm disappointed with the results of our fourth quarter, particularly the losses occurred in the ORP. The good news is that we expect to burn through all of the $50 million of the ORP in 2022. We fully appreciate the importance of mitigating the risks associated with these projects, and our team remains laser-focused on their completion. We all understand the importance of getting these projects behind us and executed so that we do won't have a repeat of the performance that we experienced in the fourth quarter. We are well on our way in the implementation of our new strategic plan that will allow us to focus on what we do best: civil construction and materials work in our home markets. We believe that this return to our core strengths will result in a profitable business that provides consistent returns for our shareholders.

We move into 2022 with a transformed CAP portfolio that has been built through our initiative to pursue best value procurement projects and reduce exposure to risky design build projects. I believe we will see the financial benefits of this transformation in 2022 through higher levels of profitability. Our cash and liquidity position remains strong and will grow stronger as we complete our announced divestitures. We will be strategic in investing in our business, and we are positioned to return value to shareholders through our expanded share repurchase program upon closure of the divestitures. Finally, with the passing of the infrastructure bill in the fourth quarter, we believe our bid list will continue to grow as funding makes its way to states and to project lettings in the second half of the year.

Operator, I will now turn it back to you for questions.

(Operator Instructions) Our first question today comes from Brent Thielman with D.A. Davidson.

Kyle, I guess, my first question will just be on the water portfolio, recognize some of these assets weren't generating the returns I think you'd sort of expected them to get to. Just want to come back to why now in terms of the rationale to sell some of these businesses. And if possible, if you can offer any range of what you might expect for the 2 remaining businesses in terms of what that could bring to Granite in terms of new capital, that would be great.

Sure. Well, thanks for the question. When we looked at WMS, we spent the last -- good part of last year working on our strategic plan as a company. We worked very closely with the Risk Committee and our Board in terms of the process. We looked at a lot of data. We looked at all kinds of information. We looked at internal and external. And what it all came back to was really focusing on where we know we do well, where we're successful and how we're successful. And that really came back to our core civil construction business and our materials business and really just kind of our home market strategy.

And those are the attributes where we do best and WMS just didn't fit. And so we decided to really divest of that portion of our portfolio, so we could reinvest back in our core business and line ourselves up for excess moving forward. So that was really impetus for the sale. In terms of the amount that we anticipate for the remaining 2 businesses, that's to be determined. We just started the process. So we're hopefully going to have something that we could announce later this year, but it's too early to tell at this point in time.

Okay. And then the 6% to 8% EBITDA guidance, margin guidance, obviously, it still reflects the impact of the ORP portfolio. Maybe just a refresh of what you still expect from kind of the ongoing business once we get beyond that sort of more on a normalized basis once ORP rolls off.

Yes. I think for us we see ourselves longer term towards that 9% to 10% EBITDA margin-type business. Obviously, we have to get through this ORP, and we'll certainly get that behind us. I mean the good news is we are seeing that portfolio wind down at really the pace we thought it would for the most part. Obviously, we weren't -- we're pleased with how we performed in Q4, but we are looking at that portfolio getting behind us. At the end of the year, we're -- backlog around $50 million, and we have really 2 active projects at that point in time and 1 is actually in a profitable position. So we are pacing to get the ORP behind us and then we can really move the business forward in the direction that we're working towards. And as we look at that longer-term guidance, I can tell you the market seems to be improving. We like what we're seeing. And we think by allowing ourselves to really focus on our core business, driving up improved execution and get even better at what we're good at, but we think that's going to be how we get to that 9% to 10% EBITDA margin.

The next question comes from Steven Ramsey with Thompson Research Group.

To stay on this margin topic, SG&A at 8% to 8.5% includes ORP. Is there a way to think about what this looks like excluding ORP? Would it rise as a percentage of sales somewhat or even decline?

Well, what we've been doing is actually offsetting the decline in ORP with our vertically integrated businesses out in the West, and we see that will continue. But we're also transforming what was the Heavy Civil group and now is the Central group and focusing them in on their home markets, and we are starting to see results. And so we're starting to see, certainly in Texas, our ability to pick up work on a lot smaller type contracts that fit us very well. So I think the teams are doing a really nice job at transforming beyond just not pursuing big, mega project design build jobs, they're really transforming into a home market strategy. So I think as we look forward, and certainly we're well positioned for the infrastructure bill and what will come out later this year in terms of lettings, we expect that we're actually going to be able to grow. So we would anticipate that our SG&A will actually improve. So that's how we're looking at it.

Okay. Okay. Helpful. Helpful. And then on that Central group transformation, a revenue headwind in 2022. Is that purely ORP? And then I guess, should the transformation of the Central group prove successful, is there a way to quantify the gross margin or SG&A benefit to the Construction segment from that happening? And is there a time line associated with that?

I'm not sure I'm totally following the question. So you're asking…

So for the -- so Steven this is Lisa. So you were asking about -- so for the Central group kind of the change in the revenue going into 2022, that is going to be impacted by a lower ORP burn. We burned through about $358 million of ORP CAP in the current year, and we're going into 2022 with about $319 million. So our expected burn is about $270 million in 2022. So that is a component. But we are transforming that portfolio and shifting it to more of our home market focus. So as that transformation happens and we stick to our new project pursue criteria, there is some decline that we are anticipating in our guidance related to Central. So those are kind of the key components. So that may have been the first part of your question and there may have been a part 2 that we missed.

No, that is helpful. Yes, I guess -- yes, that's helpful. What I'm getting at then is the margin benefit or headwind in 2022 and as a launchpad to next year, is the Central group ready to grow with this new discipline and track it takes for its strategy?

Yes. Okay. I get where you're headed there. See the ORP that we have burning through 2022 is really to breakeven. And so as we look forward, we expect the margins within the ongoing Central group to be just in line with where we are in the other parts of our business. So we anticipate growing it. There will be some employees coming off of projects and going onto the bench. So that's a little bit of why you see a slight uptick in the SG&A off of last year's results. So we anticipate there's going to be opportunities to put those employees to work on projects as the infrastructure bill comes out. But in general, we expect our margins in the Central group to be really looking very similar to what we see out in the West.

The next question comes from Michael Dudas with Vertical Research Partners.

Kyle, could you share your thoughts on -- you seemed pretty upbeat about the CAP that you're going into 2022. How does the margin that's booked into that CAP heading into '22 compare to what you were going into 2021? And on top of that could you share -- you mentioned about the competitiveness in 2021. How does it look today? As, less competitive, more competitive? Is that going to be a hindrance because of your new selectivity until some of this federal funding starts to flow through more aggressively to help fill up some of those competitors' backlogs?

Sure. And you look at the CAP, I mean I can tell you, as we wind down the ORP and we've been replacing the CAP with quality CAP in our VI businesses and even in the Central group with new work, the quality of our CAP is a lot better than what we had seen year-over-year. So we're excited about the CAP for sure. As you look at kind of back in the prepared remarks and the presentation, a big shift is that move from design build 2 years ago around 25% of our portfolio and now we're sitting right around 10%. So that risk profile of our CAP has changed dramatically. And we've also -- our best value component has gone from 24% 2 years ago to 46%, and we know we do very well on these best value projects. So we're excited about our CAP, and we're moving the company forward in that regard. Going to answer your question around the market, last year at this time, we were kind of walking into a Q2, Q3 where we saw that market [and] the competitive landscape remain more competitive than it usually does into Q2 and Q3, and we shared that.

Part of it was letting started to slow, private lettings, public lettings, as there was some -- really trying to figure out where things were going with the infrastructure bill, the pandemic, inflationary pressures, supply chain issues. Things were a little bit different a year ago than they are today. What we've seen in the last, say, 3 or 4 months, we've seen the bid volumes go up, which is very encouraging. We're seeing that in really every one of our markets. So that's encouraging. We're picking up about the same amount of work, but the really good news is our margins are a little bit higher. So we see all the indicators are pointing in the right direction right now, and we'll see how things progress, but we are excited about our market. So overall, I'd say they're all looking strong. Obviously, some are stronger than others, but we feel like we're in a healthy position today.

And when you talk about the positive risk profile shift in your backlog with less design build, more best value, which I understand, is that an overall net positive, neutral, negative to absolute margin and expectations of generating that margin?

Yes. Our expectation is margins would increase, certainly. I mean that's -- these design build projects that we've been building for years, some of them go back to really maybe 2012. And so these projects, that design build criteria, the margins didn't deliver. Based on our CAP today, we're feeling very confident around the quality of our CAP.

That's encouraging. And my follow-up question would be, so I think in a response to a question in your remarks, you talked about your share repurchase program that's expanded and your capital spending for the year. And you mentioned about you're comfortable maybe executing on that program. Do you feel you can do that now given where the cash and balance sheet? Do you have to wait for the proceeds to come in on this transaction? Do you have to wait until both transactions get closed? How are you guys thinking about that on the pace, given, say, where the valuation of the stock is today?

And then with the pace of M&A and opportunities, especially maybe in that Central group where you may want to -- or you think about adding more materials backward integration to kind of make it fit a lot more structurally like your verticals business out in the west, is that going to be a part of it? Because it seems like you got a lot of moving parts with the cash. And also what the drain on cash would be, what you'd expect from the new [RPs] in '22. Just give me a -- give a sense on how that's going to play out, I'd appreciate it.

Okay. Mike, this is Lisa. I'll touch on your question about liquidity and our share repurchase. So we ended the year strong with our liquidity position. We had year-end cash a little over $410 million. And then we did announce that we received the increased authorization from the Board in early February related to our share repurchase program to increase that up to $300 million. So we're really positioned nicely to be able to take advantage of that. So we are keeping an eye on the markets. We don't have specific timing at this point, but we expected it in the near term. So we are keeping an eye on the markets, and we are monitoring for appropriate opportunities.

We also talked about that in the prepared remarks, anticipation of paying down debt. So with Granite, we -- our liquidity position has remained strong even through the past couple of years and some of the challenges that we anticipated. We also do not have any borrowings drawn on our revolver. So we have full capacity related to that. So that's -- from just an overall balance sheet and liquidity position, we're sitting strong. To then ultimately, when we close on the Inliner transaction in the near term, we'll have an infusion from cash related to that. And then we'll be able to act accordingly between a balance between debt paydown and actually returning value back to shareholders through share repurchases.

So maybe -- and then I'll piggyback and talk a little bit about what we're doing in terms of reinvesting back in our business. And when -- maybe when we talk about Central or just really any part of our business today, we're looking at strengthening our existing home markets. And so that's going to be kind of our first step over the next year or 2. We see opportunities to invest in aggregate reserves, and we talked about technology earlier [and] automation. We see an opportunity to lower our cost to produce in our Materials business in many of our facilities. We also see opportunities to do smaller bolt-on M&A deals within our existing footprint.

So we're really looking today is strengthening and supporting, even growing our existing home markets, and that could be even within, say, Texas or Florida. And again, a home market for us is where we have really the labor, the equipment and the materials resources, we have the relationships, we have the market intelligence, we're in those markets and we're part of the communities. And so we want to ensure that we're strengthening those the best we can. And then, really, I would say in 2024 and beyond, that's when we'll start to be prepared to do something more transformational as a company in terms of M&A. But today, it's really about strengthening and supporting our existing home markets and growing them.

The next question comes from Brian Russo with Sidoti.

So we've heard from some of your segment peers regarding general optimism on DOT and state lettings throughout 2022, just based on tax revenues or leftover CARES subsidies, et cetera. Maybe you could talk about your largest market, California, and how that kind of translates in what you see as year-over-year growth in 2022.

Yes. So we -- as I mentioned before, we're seeing really increased bidding opportunities across all of our markets today, which is encouraging. If you look at some of our bigger states in terms of, say, California, we're seeing things come back. Certainly on the public side, Caltrans lettings, we're actually up year-over-year. And we anticipate, based on SB1, their budget is actually improving over the next 5 to 7 years. So we see that as being an encouraging sign. And on top of that, within our California market, we do see the private market coming back to some level in California as well.

So other markets are strong. I won't necessarily go into the details of each one, but I think we are encouraged by what we're seeing. It seems like there was definitely a little bit of a slowdown last year. Again, with the inflationary pressure, supply chain issues, I think everybody paused as well as wondering what was going to happen with the infrastructure bill. So now that that's behind us, it hasn't been appropriated, but I think the DOTs and agencies are starting to see where things are headed. So I guess to answer your question in general, we feel pretty good about our markets today.

Okay. And then just a follow-up on the SG&A, the 8% to 8.5% target of revenue in 2022. Do you think that gives you enough scale to then leverage off of what would be the implied absolute level of that SG&A as we move into 2023 to support the organic growth?

Yes, I do. And one thing that we did late last year is a restructure as part of our strategic plan to line things up around this core civil construction materials business, and we really kind of reorganized the organization. We found ways we could streamline things. And so that did result in cost savings as we move into 2022. We believe that that's going to be scalable. And so as we look at the business long term, as we grow the top line, we expect that SG&A to come down.

(Operator Instructions) The next comes from Jerry Revich from Goldman Sachs.

Lisa, I'm wondering if you could just bridge the 160 basis point margin expansion target that you have? At the midpoint of the range, the ORP lack of losses there looks like it adds about 100 basis points, but maybe you could put a finer point on that and talk about the improvement that you're expecting in the base business profitability and the visibility that you have on that.

Yes, definitely. Some of the points or factors and assumptions that we use related to the midpoint, I mean as you mentioned and I said in the -- mentioned in the talking points, is for the ORP revenue, which is actually anticipated to be a lower component overall, we have no margin or breakeven related to that portfolio. We are working towards our strategic plan overall for all of our businesses is to be like in the mid-teens range, and we're working our way up towards that. But really we're anticipating more in the 14% range. In the guidance, SG&A is at 8% and 8.5%, which is pretty consistent with what we had for the prior year. And then from a weather perspective, we're not expecting necessarily a dry year, but we're also not expecting a lot of inclement weather. We did experience that more so in the Q4 that impacted our results. But weather is more within normal lines with some impact in Q1 and Q4. So those were some of the base assumptions for our guidance of 6% to 8% range.

Okay. And in terms of the first quarter, we've heard Omicron has really impacted absences in parts of the U.S. Can you talk about whether you expect organic growth to be up year-over-year in the first quarter based on what you've seen so far? And if you can, just put some parameters around first quarter margins because of seasonality, it can be pretty volatile year-to-year.

Well, I think it's probably premature for us to really anticipate what Q1 is going to look like. I can tell you, December was very wet in the West. In December, we were at a loss most of the month in California. So far in January, we saw a dry month. Recently, it's been wet, and we've seen some winter -- definitely some winter weather across the United States with freezing temperatures. So I think that we've already seen some weather impacts in February. We'll see what March holds. But of course, in Q1 and Q4, we always have some risk with weather. So it's probably a little early for us to give any sort of indication there.

Okay. And maybe lastly, just a clarification. In terms of ORP backlog entering the year, where was that, Lisa, entering '22?

Yes. So entering the year, we're at $319 million, entering into 2022. And then we anticipate to burn through most of that through 2022 and have approximately $50 million entering into 2023.

This is the end of our Q&A session. And now I would like to turn the call back over to Mr. Larkin.

Okay. Well, thank you for your questions. To all of our employees, we appreciate everything you do for Granite every day. This year, we celebrate our 100-year anniversary while we chart Granite's course for our next 100 years. We are well positioned to capitalize on the numerous opportunities that are in front of us across all of our businesses in 2022 and beyond. And to the investors and analysts, thank you for your continued interest in Granite. We look forward to speaking with you soon.

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