Granite Construction Inc

NYSE:GVA

Earnings Call Analysis

Granite’s Q2 2024: Strong Growth and Strategic Acquisitions

In Q2 2024, Granite Construction reported robust growth, with revenue rising 20% and gross profit soaring by 60%. The Construction segment drove this performance, led by higher CAP levels in markets like California, Nevada, and Alaska. The Materials segment also saw a 9% increase in year-over-year revenue due to higher sales prices in aggregates and asphalt, despite lower volumes. Additionally, Granite announced the acquisition of Dickerson & Bowen, which will further its materials-focused strategy. Revenue guidance for 2024 was updated to $3.9 billion to $4 billion, reflecting confidence in continued growth, while adjusted EBITDA margins are expected to remain between 9.5% and 11.5%.

Strong Financial Performance in Q2 2024

In the second quarter of 2024, Granite Construction demonstrated robust financial growth, with total revenue increasing by $184 million or 20% compared to the previous year. This upswing was underscored by a 60% gain in gross profit, reaching an increase of $62 million. Additionally, adjusted net income improved by $30 million, and adjusted EBITDA rose by $48 million. For the first half of 2024, operating cash flow saw a significant increase of $141 million, illustrating a positive trend in cash generation.

Sector Performance: Construction and Materials

The construction segment reported revenues of $918 million, marking a 22% increase, largely driven by higher capital spending in various markets, particularly in California, Nevada, and Alaska. This segment's gross profit margin improved to 15%, reflecting gains from a transition to a higher-quality project portfolio. Meanwhile, the materials segment experienced a modest revenue increase of $15 million to $165 million, driven mainly by price increases rather than volume, with cash gross profit margins rising from 20% in 2023 to 24% in 2024, a 180 basis point improvement year-over-year.

Guidance Revision for 2024

Granite narrowed its revenue guidance for 2024 to between $3.9 billion and $4 billion, indicating confidence in continued operational momentum. Adjusted EBITDA margin guidance remains unchanged and is projected to be in the range of 9.5% to 11.5%. This strategic adjustment takes into account strong first-half performance and anticipates further growth as the company enters its busiest months.

Key Strategic Acquisitions

The planned acquisition of Dickerson & Bowen, a regional aggregates and asphalt company, represents a significant strategic move aimed at expanding Granite's operational footprint in the Southeastern U.S. This acquisition is expected to close in Q3 2024 and could contribute an approximate $30 million to revenue. Such acquisitions are vital for Granite's ongoing strategy to grow through vertical integration and enhance its materials segment.

Continued Investments and Market Expansion

Granite is committed to expanding its materials segment through investments, including a new aggregate plant in Salt Lake City and an asphalt plant site in Washington. Price increases of 10% in aggregates and 5% in asphalt have been successfully implemented, enhancing profitability despite volume constraints. This indicates a proactive approach to managing market dynamics and improving cash flow within its operations.

Future Outlook and Challenges

Looking ahead, Granite anticipates a continued strong bid environment, with a capital asset base (CAP) of $5.6 billion, reflecting a healthy project pipeline. However, challenges remain, specifically regarding the potential impact of weather on Q4 performance. The company emphasizes its focus on disciplined bidding practices in key markets, underlining their commitment to project execution and operational excellence as drivers of future growth.

Earnings Call Transcript 2024-Q2

[Operator]

Good day. My name is Jason, and I'll be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Incorporated 2024 Second Quarter Conference Call. This call is being recorded. [Operator Instructions]

It is now my pleasure to turn the floor over to Vice President of Investor Relations, Mike Barker.

[Michael Barker, executive]

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, adjusted earnings per share and Materials segment cash gross profit. 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 would like to turn the call over to Kyle Larkin.

[Kyle Larkin, executive]

Good morning, and welcome to our second quarter conference call. Before I discuss our financial results for the quarter, I want to mention an exciting development and our ongoing work to expand our vertically integrated operations.

This week, we entered into an agreement to acquire Dickerson & Bowen, a leading regional aggregates, asphalt and highway construction company, serving Central and Southern Mississippi. Subject to customary closing conditions, we expect the transaction to close in the third quarter.

The acquisition is a highly complementary bolt-on to our 2023 acquisition of Lehman-Roberts and Memphis Stone & Gravel, as Dickerson & Bowen is also a materials focused vertically integrated operations.

The acquisition will add 3 sand and gravel pits and 4 asphalt plants to our Southeast home market, extending our footprint down the I-55 corridor through Jackson, Mississippi and to the southern end of the state.

This purchase continues our strength-and-expand capital allocation strategy by investing in the types of materials-focused vertically integrated operations that have been our core business for over 100 years. I expect Granite to continue to grow organically and through M&A as we continue this strategy. While we are very selective, we are continually evaluating M&A opportunities within our existing footprint as well as in our new geographies.

Now let's jump into the quarter. I'm pleased with our strong second quarter. We are executing on our plan. We continued to build CAP, we organically grew revenue, and our profitability increased. While we have made notable progress, we remain focused on driving even higher levels of execution on our projects and in our plans as we continue to work to raise the bar on profitability.

In the Construction segment, the second quarter is typically when we see projects in the majority of our markets ramp up for the busy summer construction season. Entering Q2 with high levels of CAP across our markets allowed us to achieve a 22% increase in revenue over the prior year. Most of our businesses across our geographies posted revenue increases year-over-year. As we transition into the heart of the construction season, I expect this dynamic to continue through the third quarter.

In addition to a strong quarter of revenue growth, we also added $77 million in CAP during the quarter to end at $5.6 billion. This is an increase of $139 million for the second quarter of 2023 and $1.4 billion from the second quarter of 2022.

Our markets continue to be robust. Through June, the amount that we have bid on projects for both the second quarter and first half 2024 exceeds the amount bid for the same period in 2023. As mentioned previously, we continue to be very selective in the projects that we bid, with a specific focus on [indiscernible] categories.

First, we are focused on our home markets with owners, vendors and subcontractors, along with a robust employee base that we already know well. Second, we are focused on best value projects where we can leverage our established relationships in our home markets to deliver larger projects while minimizing risk. Best value projects represent $2.3 billion or 42% of our total cap at the end of the quarter. This is an increase of $98 million from the second quarter of 2023 [indiscernible] $584 million from the second quarter of 2022.

The collaborative delivery methods utilized in best value projects like construction manager, general contractor or progressive design build better position us for success by allowing us to work with our clients early to identify and 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 identify, assess and address risks than large bid bill projects.

We have a history of successful best value projects and generally find that these projects are constructed more efficiently and with significantly fewer claims compared to other contracting methods.

Our Construction segment is growing, and I believe that in this market, we are in a strong position to win work and drive growth for the remainder of 2024 and into 2025.

Moving to the Materials segment. During the second quarter and through July, we continued to execute on the organizational changes announced last quarter. With the changes, we centralized management functions, such as sales and quality control, allowing for more consistency both in pricing decisions and in efforts to drive higher levels of efficiency and automation across our plants.

Our teams across the business are executing. We are already seeing increased profitability. The exciting news is that we are just getting started. We have also continued our strategic investments in the Materials business, led by the materials focused agreement to acquire Dickerson & Bowen in Mississippi.

Growing our Materials segment through vertical integration, both in new and existing markets, is central to our strategy.

Also in Q2, we announced a new lease that we entered into in southwest Washington that will serve as an asphalt plant site. It will also allow us riverfront access to barge aggregates into the site via the Columbia River.

In Salt Lake City, we placed a new aggregate plant into production to support the booming market there. We will continue to invest in our materials business both organically and through M&A, driving further margin expansion.

As previously discussed, a focus of our Materials segment has been price increases in both aggregates and asphalt. Through the first half of 2024, we are realizing our targeted price increases of 10% in aggregates and 5% in asphalt on average across the segment.

We are also seeing the effects of these price increases and the impact of acquisitions on our second quarter results, with profit margin increasing 180 basis points year-over-year. Materials segment cash gross profit margin, which excludes Materials segment depreciation and amortization from gross profit of $10 million and $6 million in the second quarter of 2024 and 2023, respectively, increased to 24% from 20%.

We are executing on our strategy and is driving results. Now I'll turn it over to Lisa to discuss our financial performance for the quarter.

[Lisa Curtis, executive]

Thank you, Kyle. In the second quarter of 2024, our strong performance continued from the first quarter. Revenue increased $184 million or 20%. Gross profit increased $62 million or 60%. The adjusted net income improved $30 million. Adjusted EBITDA improved $48 million. And for the first half of 2024, operating cash flow improved $141 million.

In the Construction segment, revenue increased $169 million or 22% year-over-year to $918 million, primarily driven by higher levels of CAP. The increase also includes approximately $30 million of incremental revenue from acquisitions. Multiple markets across the company entered the quarter with higher levels of CapEx, and our teams quickly ramped up work on projects. The increases in revenue were led by California, Nevada and Alaska.

Construction segment gross profit improved $56 million, with a segment gross profit margin of 15%. The increase in gross profit margin was largely driven by the transition to our higher-quality project portfolio, which has been bolstered by our focus on project execution.

In the Materials segment, revenue increased $15 million year-over-year to $165 million, with gross profit up $5 million to $29 million. The increase in Materials revenue was primarily due to acquired businesses as well as increased sales prices offsetting lower volumes. The increase in gross profit was led by increased margins resulting from higher sales prices in both aggregates and asphalt. Cash gross profit margin during the quarter increased from 20% in 2023 to 24% in 2024. Our investments in and focus on the Materials segment are paying off. and we expect to see further gains in the future.

Turning to cash. Our operating cash flow significantly improved compared to the first half of 2023, with operating cash flow of $22 million or $141 million improvement year-over-year. Historically, the second quarter is seasonally our lowest cash period of the year as many projects are ramping up for the summer construction season. We saw this dynamic again in the quarter, but we continued making important strides in this area.

Cash generation is a key focus at all levels of Granite. With our performance in the first half of the year, I believe we remain on track to meet our operating cash flow target of 7% of revenue for 2024.

During the quarter, total debt increased $186 million with the issuance of our 3.25 2030 convertible notes. We executed the convertible note transaction during the quarter in order to take advantage of the positive convertible loan market and attractive interest rates. Following the transaction, we no longer have any borrowings on our credit facility with revolver availability of $333 million.

As Kyle mentioned earlier, we are excited to announce the agreement to acquire Dickerson & Bowen. We plan to fund the transaction using our cash on hand. With our cash generation, strong balance sheet and secured borrowing capacity, we can be flexible and execute on further M&A opportunities in the future.

Now I'll briefly touch on an update to our guidance for 2024. With the strong performance of our teams across the company through the first half of the year, we are narrowing the revenue guidance range to the upper half of the previously communicated range. Our revised revenue range for 2024 is now $3.9 billion to $4 billion. With our CAP entering the busy second half of the year, I expect further organic revenue growth both in the remainder of 2024 and in 2025.

There are no changes to our remaining guidance, including our adjusted EBITDA margin guidance range of 9.5% to 11.5%. We believe we are on track to meet that range with what are usually our busiest months ahead.

Before I turn it back over to Kyle, since this is my last earnings call, I would like to thank our teams across the company as well as all of Granite's external stakeholders. Granite is a special organization and I have been honored to be a CFO for the last several years.

Compared to where we were only 3 years ago, Granite is a transformed company. I couldn't be more proud and excited for where Granite is headed. I have worked with my successor, Staci Woolsey, very closely for years. She is ready for the role, and we will have a seamless transition.

And now I'll turn it back over to Kyle for closing remarks.

[Kyle Larkin, executive]

Thanks, Lisa. I can say on behalf of the Board and all Granite team members that we thank you for everything you've done to lead Granite. We'll miss you, and we wish you all the best in retirement.

I'll close with the following points. As expected, we experienced strong revenue growth in the second quarter, largely as a result of the high level of CAP we carried into the quarter. We expect our revenue growth to continue and updated our 2024 guidance to a range of $3.9 billion to $4 billion.

Our CAP of $5.6 billion is a testament to the continued strong public and private market environment supported by the IIJA, healthy state budgets across our geographies, and our experienced teams winning work in our home markets. I believe there are opportunities available in the coming months for us to continue to build CAP in the remainder of 2024 and into 2025.

Our adjusted EBITDA margin guidance for 2024 is unchanged for this quarter. We are executing in both the Construction and Materials segments, and I believe we are on track to meet our guidance.

With our derisked portfolio, we are seeing improvement in our ability to generate cash. We are well ahead of the prior year in operating cash flow, and I expect to reach our target of operating cash flow of 7% of revenue for 2024.

Finally, I'm very excited to be able to welcome the team members from Dickerson & Bowen to Granite soon. This is another important materials focused acquisition for Granite that will further expand our reach in the Southeastern market. We are continually assessing further opportunities to strengthen and expand our footprint. Our strategy is working, and I believe our M&A will drive increased cash flows and shareholder value.

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

[Operator]

[Operator Instructions] Our first question comes from Brent Thielman from D.A. Davidson.

[Brent Thielman, analyst]

Lisa, obviously, huge difference than where Granite is today versus when you came into the role. So a fantastic job, and congrats.

[Lisa Curtis, executive]

Thank you, Brent.

[Brent Thielman, analyst]

I guess first question would just be, it looks as though Granite has really moved past this ORP portfolio overhang. It seems like you're seeing better leverage of the new work you've added in recent years. Kyle, maybe just your assessment of the progress of that part of the portfolio in terms of margins. And I guess just the overall bid margin environment as you see it today for the Construction segment. Is it advantageous? Is it more advantageous? If you could just talk around that.

[Kyle Larkin, executive]

Yes. Thanks, Brent. And thanks for certainly recognizing Lisa as well. So as she mentioned in our remarks, we are a transformed company. And so we're in a much better position today than we were last year and certainly 2 or 3 years ago. And so what I think the performance you're seeing today really reflects that.

As we look at the CAP we have in our portfolio, it's certainly derisked, it's of higher quality, we've been able to really replace the risky type of projects that we were pursuing years ago. And that's really allowing us to drive higher profitability and consistent profitability as a company.

I would say the bid environment remains extremely strong, and we have a healthy pipeline of bid opportunities in front of us. We bid more work as we mentioned already this year than we did last year. And we have been able to raise our margins as well, and we've been able to do that pretty consistently now since about 2021. So that's really helping improve the CAP and giving us what we believe to be the highest quality CAP we've had in the history of the company.

So we continue to work through newer CAP, and of course, that's higher quality CAP. We think that's going to help drive improved margin progression for this year and to 2025 and beyond.

[Brent Thielman, analyst]

Okay. And then I guess, just off this call, it sounds like Dickerson & Bowen acquisition isn't quite completed, presumably may not be in the guidance. Maybe it is. But I mean any kind of financial details things we can chew on just around that acquisition and what it could contribute. Because I didn't see anything here in the release or this presentation that I could find.

[Kyle Larkin, executive]

Yes. Brent, let me add a little bit. I mean first off, we're really excited about Dickerson & Bowen and having that business part of our Granite team. And it's really just executing on that platform strategy that started last year with Lehman-Roberts and Memphis Stone & Gravel.

And so that business, Dickerson & Bowen, annual revenue is around $80 million to $100 million. And to your point, that is not in our guidance that we narrowed the range on. So we expect that to close in the quarter. being Q3. And depending on the timing of that, it could add around $30 million to the range.

And so we'll take a look at the timing. We'll look at our progression in Q3. And if we have the opportunity to raise at the high end of our range, after Q3, then we'll take a look at doing that.

[Operator]

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

[Steven Ramsey, analyst]

I want to echo the best wishes to you, Lisa, on the next chapter.

[Lisa Curtis, executive]

Thank you.

[Steven Ramsey, analyst]

Maybe to start with on -- yes. On Western markets, clearly still a big focus for you, channel checks that we've done and a large rental company publicly traded called out that the West, the demand there has slowed a little bit, not in a dramatic way, but had slowed a little bit. In trying to connect the dots to your results with lower material volumes, but CAP still growing, curious your assessment of western markets demand, how it's shaping up year-to-date and looking forward.

[Kyle Larkin, executive]

Yes. I mean I think the bottom line is we see demand remaining very strong. And I think you can see that certainly in our CAP results. I don't know how to reconcile perhaps what you're seeing from the rental companies. It could be more on the private side, certainly may be tied to residential, which is not a market that we're really correlated with, certainly on the construction side. So yes, we still see it being really strong.

As I mentioned, we're bidding more work today through the first half of the year than we did last year. And it's not because our teams are casting a wider net. We're still staying very disciplined, focused. We're still taking advantage of our home market strategy. So yes, we're not necessarily seeing that.

I know some questions have always seemed to come up around California specifically. And certainly, our California market continues to be strong as well. Over the last 3 budget cycles now, we've seen the Caltrans budget for local assistance and capital outlay projects only increase. So that budget continues to increase, certainly the budget cycle that we're into now. So that's really encouraging for us.

If you look at it, what gets interesting for last year is they actually allocated more funds than what they originally budgeted, which are projects we're actually pursuing today. So if you look at it just simply year-over-year, it could show a little bit of a slow, but that's actually a little misleading. Over year-over-year, the budget has only increased.

[Steven Ramsey, analyst]

Okay. That's great. And then thinking about the Materials segment, the lower volume and better pricing, can you talk if that dynamic was in both the West and Southeast operations? And do you think the second half has the same drivers, or do volumes and pricing both become a positive?

[Kyle Larkin, executive]

Well, I would say, it's across the board. I would say that, certainly what we're seeing, on the pricing side of things, we came out this year and we were looking to have price increases of 10% on aggregates and 5% on asphalt. And we've been able to get that done. And of course, we still see some opportunities in certain markets to raise prices still this year, and we'll obviously continue to do that.

From a volume perspective, we expected our aggregates business to be relatively flat this year relative to last year. Last year was a healthy year from a volume perspective. We do believe that that's going to be flat, if not maybe a little bit down overall, and that is kind of across the board.

On the asphalt side, we expected it to be a little bit up, and mostly out in the West. We thought our California market would have higher volumes on the asphalt, and we still believe that to be the case along the way this year. So I guess the bottom line is it's really across the board, actually flat, maybe a little bit down. Asphalt should be flat, if anything, a little bit up.

[Steven Ramsey, analyst]

Excellent. And then one last quick one for me. You're tightening the full year sales range to a pretty narrow $100 million or so, yet the margin profile staying at a pretty wide range. Can you talk to the dynamic there of why you're keeping it wide? Maybe how much is just Q4 weather swinging things or any other key impacts to that margin range?

[Kyle Larkin, executive]

Yes. I would say that, certainly, if you look at the revenue growth in Q2 and kind of the progression through the first half of the year, we do have a lot of confidence that we'll be in the higher end of the previously disclosed range. So that's why we narrowed that up. Again, it doesn't include Dickerson & Bowen, so depending on the timing of that deal and the momentum in our business, we'll take another look at the top end of our range in Q3.

I would say from a margin perspective, we feel good. We think that the range still is a good reflection of where we're headed directionally for the year. I would say that weather is definitely the #1 factor that could impact things one way or the other, as it always does in Q4. We expect to have some weather. It just comes down to whether it's going to be abnormally wet or abnormally dry or pretty much what we expect. So more to come in Q4.

I would say execution is really the other piece that we have to consider. So we have opportunities on our projects, and we also have risks. So I think the good news for us is we're not the same company that we used to be. So although we do have execution risk in our business, it's not the risk that we've kind of seen maybe 1, 2 or 3 years ago.

[Operator]

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

[Michael Dudas, analyst]

Well done, Lisa.

[Lisa Curtis, executive]

Thank you.

[Michael Dudas, analyst]

Two questions. One, Kyle, maybe some thoughts on -- you talked about driving your business to home markets and your mix of business on the best value. Could you maybe look forward the next several quarters what home markets better than others? And how much more of a mix do you anticipate working through on the best value projects?

[Kyle Larkin, executive]

So fortunately, all of our home markets are performing very well. So I think that -- I think we're comfortable with certainly the home markets that we have, maybe in terms of just legacy home markets. I think our teams have certainly embraced the concept for those that maybe weren't home market-based that were historically large project based. So we continue to see that transformation, I would say, particularly in Texas. So our office in Dallas-Fort Worth as well as Houston, we're seeing the benefits of that shift and it's paying off for us.

When it comes to the balance of the work around best value, we've been pretty consistent now with best value being just under 50% of our CAP. We'll kind of see where that progresses over time. But I think it will kind of hang in there pretty close to around 50%. I think that's a good balance between most of our projects being the bid build, our typical projects that we burn within, say, 12 months or so, average job size is around $5 million. And we have some more complex projects that we get -- we talk broken down in a smaller contracts so we can manage better and manage that risk through best value.

So I think what you see today in terms of our CAP and how it's spread between the 2, I think it's going to be pretty consistent going forward.

[Operator]

The next question comes from Jerry Revich from Goldman Sachs.

[Jerry Revich, analyst]

Lisa, congratulations.

[Lisa Curtis, executive]

Thank you.

[Jerry Revich, analyst]

Kyle, why don't you just update us on your expectations for free cash flow conversion as you folks close out the prior risk projects completely? What should we be looking for in terms of EBITDA to free cash flow this year in the updated guidance? And how does that -- what's the range of outcomes in 2025 as you get the more consistent performance?

[Kyle Larkin, executive]

Yes. So we've been communicating that we're targeting 7% operating cash flow for the year. And clearly, you saw our cash results in the quarter. We're progressing quite nicely in terms of really generating higher operating cash flow as a company. So I think that we still feel very confident around that 7%.

I think our team has done a really nice job of taking care of the fundamentals in the operations. I think our business model is also shifting away from these claims and [indiscernible] claim positions on projects which is going to help drive continued results. Our CapEx is just over 3% of revenue. So you look at it from 8% to 7% and the 3% in and of around 4%, and so it's around 40% conversion to our EBITDA margin, if that helps.

And so I think as we look forward, I think there's still an opportunity for us to improve. Certainly, as we continue down with our new business model, we think we can get to a range higher than the 7%. And I think -- I know a lot of questions are out there around just guidance for '25 or '26 and '27, and so one of the things we're going to come back with in Q3 is some targets just as we did in Q1 2022, were some targets in '25 and '26, '27 that we believe we can deliver on. So we'll come back in Q3 with those, and we'll include an outlook around operating cash flow.

[Jerry Revich, analyst]

Okay. Got it. And as your folks are putting out bids for contract work in 2025 at this point, can you just talk about what level of construction materials, aggregates, asphalt price increases you're putting through areas where you're vertically integrated and what sort of price increases are you pricing in areas where you're sourcing third-party materials for bids that are starting -- for bids for work starting in '25?

[Kyle Larkin, executive]

Yes. So when it comes to how we're pricing materials into the bids that we have, we're taking the pricing. We tend to get those fixed on bid day. So we'll get quotes from third-party suppliers, and those will be firm quotes for the contract, where they might have escalators built in, but that would be included in the bid.

Last year, we did price increases in October. That's when we started for our following year price increases. And we haven't solidified those yet. So we'll have to come back and we can speak better to those price increases probably in Q3.

[Jerry Revich, analyst]

Super. And lastly, the California initial budget for fiscal '25 is down year-over-year from obviously, really high levels that we've seen and takes a while to flow into bids. But I'm wondering, what's your view on opportunities for the California fiscal '25 budget to be revised higher over time? Are there discrete additional funding mechanisms that are being discussed? Can you step us through that?

[Kyle Larkin, executive]

Well, the current budget cycle that we're in is higher than the original budget prepared for the prior budget cycle, which is in '23 and '24. So as I mentioned, we've seen consistent budget allocation increases over the last 3 budget cycles [indiscernible]. What happened in the last budget cycle is the state over allocated, so they went above what was budgeted and forecasted, which is good news for us. again, because we're starting to see a ramp-up in terms of projects and lettings for us to pursue and ultimately build.

So it does create the step down. But it's really only because there was a spike in spending in '23, '24. So we continue to see really healthy markets in terms of what we see in California, and we have really a lot of opportunity in front of us and expect to continue to build our CAP in that state specifically.

[Operator]

And our final question is a follow-up from Brent Thielman from D.A. Davidson.

[Brent Thielman, analyst]

Kyle, just as a follow-up on materials, I mean, you're putting some real money to work to expand operations here, maybe overall just more of an emphasis on commercial discipline that maybe seen in the past, and also looks like some additional emphasis on KPIs like cash gross profit, obviously, some of your peers provide that. Maybe just an update strategically where do you envision this business becoming over the next few years as we think about kind of the overall thesis for Granite?

[Kyle Larkin, executive]

Yes. So if you remember last quarter, we announced how we reorganized, we aligned our business up better around Construction and Materials. And that was -- it was very intentional. We wanted to get our construction experts leading construction. We wanted our materials experts to lead materials. We can do a couple of things that's going to let our construction teams focus on growth and continued operational excellence in the business, and really finding ways we can serve national clients to really go across all of our geographies better.

But it was really also going to allow our materials teams to focus on digitalizing functions, say, sales or quality. And so we're already seeing the benefits. Certainly the price increases, that's one of the primary drivers that's helping drive that cash gross profit improvement that we shared with all of you today.

And then there's still opportunities for operational excellence within the Materials business. And then we continue to make the investments.

One thing I do want to point out is we are definitely a vertically integrated business. If anything, this is -- really only enhances the value of our vertically integrated model in that way.

So I think overall, we want to come back again in Q3. I think that's going to help us put some targets out there for, again, '25, '26 and '27. But what I can tell you is we expect op and bottom line growth. I think you can expect that. We're going to hold off on -- I'm really putting out there what we think we can do.

I will also add that one of the things we're looking to do in 2025 is increasing disclosures around Materials. So we do think there's an opportunity for us to share more information around our Materials business and really give greater visibility into our financial performance.

[Operator]

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

[Kyle Larkin, executive]

Okay. Well, thank you for joining the call today. As always, we want to thank all of our employees for the work they do every day and for delivering a great second quarter and first half of the year. Thank you for your interest in Granite. We look forward to speaking with you all soon.

[Operator]

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