Granite Construction Inc

NYSE:GVA

Earnings Call Analysis

Robust Construction and Materials Growth, Steady EBITDA

In a quarter marked by strategic project execution, the company's Construction segment gross profit surged by $44 million year-over-year to $137 million, with gross margins climbing from 11% to 14.5%, reflecting better project selection and operational efficiency. This growth includes the $8 million writedown impacts from the I-64 high-rise bridge project, slated to complete by end of 2023. The Materials segment also witnessed a revenue jump by $10 million to $171 million, and gross profit rose $7 million to $29 million, a 17% margin. These segments' performance buoyed the quarter's adjusted diluted EPS to $1.69 and kept the adjusted EBITDA margin steady at 11%. With a healthy cash position and strong operating cash flow, the company retained its 2023 guidance. Looking ahead to 2024, the financial targets remain unchanged with projected revenue between $3.6 and $3.9 billion and an expected EBITDA margin of 9% to 11%.

Maintaining Strong Momentum Amidst Market Changes

The company demonstrated robust performance in the third quarter, marking the second consecutive quarter of top-line growth. This was part of a broader transformation initiated over two years ago to shift Granite from a state of volatility to one of predictable, strong financial results paired with sustainable growth. A strategic pivot away from complex design-build projects towards best value and bid build projects has been a key aspect of their risk mitigation approach. The record-high Committed and Awarded Project (CAP) pipeline, combined with a favorable macroeconomic construction market propped up by federal infrastructure funding, suggests the company is in its strongest growth and profitability position in over a decade.

Solid Segment Performances and Increased Profitability

Granite's Construction segment was notable for a significant year-over-year increase in gross profit of $44 million, leading to a gross margin impact of 14.5%, a step up from the 11% achieved in the previous third quarter. The company also saw a rise in the Materials segment revenues and gross profit, attributable to increases in sales prices for asphalt and aggregates, coupled with stable costs for oil and energy. These improvements were not without their challenges, as a write-down on a key bridge project impacted gross profit margin. However, the overall segment profits still increased, producing strong operating cash flow, and indicating a clear upward trajectory in financial performance.

Project Pipeline Expansion and Focus on Margin Growth

The third quarter showcased a continuation of Granite's strategy to build a strong CAP. This has been a consistent focus for the company across all quarters in the previous year, placing the company in an excellent position entering both the fourth quarter and the year 2024. The company's emphasis on selecting projects that offer better margins demonstrates a disciplined approach towards profitable growth. Investments in the Materials segment are also anticipated to drive both top-line growth and bottom-line expansion as these investments mature and start contributing to the financials.

Stable Guidance Confirms Confidence in Strategic Plans

Granite's third-quarter results were aligned with their 2023 guidance expectations, with no changes to the forecast. The company expressed confidence in potentially achieving the higher end of the revenue and adjusted EBITDA margin ranges for 2023, subject to favorable weather conditions and execution across their portfolio. Their 2024 financial targets portray an optimistic view of the company's future, with revenue targets set between $3.6 billion and $3.9 billion and an adjusted EBITDA margin of 9% to 11%, pointing towards the possibility of gains extending beyond 2024.

Robust Cash Flow and Reduction in Net Debt

The third-quarter profits and favorable movements in working capital accounts culminated in a substantial operating cash flow. A notable reduction in net contract assets and active cash collection during the company's busiest quarter indicates strong financial management. Additionally, the company successfully reduced net debt by $133 million, signaling their commitment to maintaining a healthy balance sheet. As Granite moves forward, the settlement of older claims and the continued adherence to their derisked business model are expected to further enhance cash flows, thereby solidifying the company's financial standing.

Earnings Call Transcript 2023-Q3

[Operator]

My name is Kate, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Third Quarter 2023 Conference Call. This call is being recorded. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Granite Construction Inc. 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, to adjusted EBITDA, adjusted EBITDA margin, adjusted net income and adjusted earnings 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 website, graniteconstruction.com under Investor Relations.

Now I'd like to turn the call over to Kyle Larkin.

[Kyle Larkin, executive]

Good morning, and welcome to our third quarter conference call. We had a strong third quarter. Q3 marked our second consecutive quarter of top line growth we continue to grow our record cap on projects that should produce margins in line with our expectations.

Just over 2 years ago, we stated that our goal was to transform Granite from what had become a volatile business into a business that earns predictable strong financial results, while also producing consistent, sustainable growth. We also shared our plan to earn adjusted EBITDA margins that Granite had not seen since the housing boom.

To support this effort, we took significant actions on both the construction and material side of the business. For construction, the first step we took was to derisk our committed and awarded project portfolio or CAP. We moved away from complex design-build projects and shifted our focus to best value and bid build projects and best value projects such as CMGC or Construction Manager General Contractor, we are better positioned to succeed as we worked collaboratively with the client to mitigate risk for the project.

Although some best value projects have high total contract values, they are often separated in smaller work packages, which are then reviewed through multiple project workshops. We have constructed more than 60 best value projects, and they are generally completed quicker and with fewer claims. Our record high-quality CAP and macroeconomic construction market fueled by the federal infrastructure bill or IIJA, puts Granite in the strongest position for growth and profitability in over a decade.

On the material side of the business, we said we intended to invest in our materials business and in the home markets to the [ banner of strength ] since our founding.

For the past 3 years, we have invested in green field reserves, a liquid asphalt terminal, new automated aggregate plants and bolt-on materials investments. These actions have strengthened our positions in our profitable vertical integrated markets. We see further opportunities to strengthen our current home markets and to expand into new geographies.

While much of the focus in the past couple of years has been on internal transformation, we are now growing and plan to pursue opportunities to drive growth and expand our footprint in both our Materials and Construction segments. Our 2024 strategic plan is designed to grow our margins. The actions our teams have accomplished over the past 3 years gives me confidence that we are on track to achieve our 2024 financial targets.

Now let's review the performance in our segments for the quarter, starting with the Construction segment. Total CAP grew in Q3, continuing the trend over the last year. CAP increased $147 million from the second quarter and is up $1.5 billion or 37% year-over-year to $5.6 billion. This represents a second consecutive record CAP for Granite.

In what is typically our largest revenue quarter of the year, growing CAP is a significant accomplishment for our teams. Robust market has produced a number of public and private opportunities that should allow us to continue to build high-quality CAP in the fourth quarter and as we move into 2024. Further, I believe the IIJA funding will continue to expand bid opportunities in 2024 across all of our key markets, and we are well positioned to capitalize on those opportunities.

Diving into our operating groups, and starting with the California Group, CAP was flat from the second quarter and increased $792 million or 51% from Q3 2022. This is a really impressive result as the group continued to win a significant amount of work while achieving record third quarter revenue.

Public spending in the [ state ] has been strong and is expected to continue. Earlier in the year, there were concerns about the state budget deficit that these concerns were resolved without impact transportation spending. During Q3, Caltrans, the State Department of Transportation, again, awarded their highest dollar value contracts at least 5 years. Historically, high bid opportunities are expected to continue in 2024.

Moving to the Mountain Group, our most seasonal group, CAP decreased $65 million from the second quarter as the group posted year-over-year revenue growth of 12% in the third quarter. Despite the decrease in CAP during the quarter, the group ended with CAP of $1.4 billion remained significantly higher by $431 million or 43% year-over-year.

Our Utah, Alaska, and Nevada regions continue to lead the group with strong CAP. With budgeted spending in each state and the group expected to increase in 2024 and the Mountain Group is poised for continued growth in the fourth quarter and 2024.

Finally, in the Central Group, CAP increased in the quarter by $212 million sequentially and up $284 million year-over-year to $1.8 billion. The increase in CAP was led by the tunnel division, which landed a $205 million tunnel project in Ohio and continued growth in the Texas region, home markets in Houston and Dallas.

While the Central Group revenue was flat year-over-year in the quarter, I expect the group to return to revenue growth in 2024. The transformation of the Century Group's CAP has been tremendous and a key component to our expected margin expansion in 2024. And Overall, the Construction segment had an outstanding quarter. We continue to build high-quality CAP, grow revenue and increase profitability in line with expectations. I believe we will continue to grow CAP and revenue in the fourth quarter and enter 2024, very well positioned to achieve our financial targets.

Moving to the Materials segment. We built on the momentum in the second quarter with another strong performance in the third quarter. As I mentioned last call, cost inflation to significantly impacted profitability last year normalized in 2023. These stabilized costs, combined with aggregate and asphalt price increases resulted in margin gains in the second and third quarters of 2023.

Materials volumes and orders remained strong throughout the third quarter and going into the fourth quarter. In this market environment, I expect to realize further price increases in 2024. As we have previously reported, we've been investing in our materials business in numerous ways over the last 2 years.

In the fourth quarter, we're expecting the completion of major investments in two automation projects including a new fully automated aggregate plant. These investments in our Materials segment should drive cost efficiencies and further margin expansion in 2024 in line with our gross margin expectations of 15% to 17%. Now I'll turn it over to Lisa to review our financial performance for the quarter.

[Lisa Curtis, executive]

Thank you, Kyle. In the third quarter, revenue increased $108 million or 11% year-over-year to $1.1 billion while gross profit increased $52 million to $167 million or gross profit margin of 15%. These results reflect a strong performance in both the Construction and Materials segments during the quarter.

In the Construction segment, revenue increased $98 million or 12% year-over-year to $946 million, an outstanding result for the segment. The revenue increase was led by the California and Mountain Groups which were up an impressive 21% and 12%, respectively, year-over-year. Entering the quarter with record CAP, the California Group's significant year-over-year revenue increase was in line with our expectations as the group overcame a historically wet and slow start to the year.

Heading into Q4, I expect continued top line growth in the fourth quarter year-over-year and in 2024. The Mountain Group's 12% year-over-year growth was led by construction revenue increases in the Alaska and Nevada regions, with our larger regions such as Utah and Washington also contributing meaningfully to revenue.

Finally, in the Central Group, revenue in the quarter was flat year-over-year, with revenue in the growing Texas, Arizona and Illinois regions, offsetting declines in the Florida region as legacy projects rep up. Construction segment gross profit increased $44 million year-over-year to $137 million, with a gross margin impact of 14.5% up from 11% in the third quarter of the prior year.

The gross profit margin includes a write-down on the I-64 high-rise bridge project of $8 million during the quarter with an impact to granted after noncontrolling interest of $4 million. The project continues to move towards completion, which is expected by the end of 2023.

Despite the impact of I-64 in the quarter, Construction segment gross profit margin improved year-over-year as expected, led by our higher quality CAP compared to the prior year. Over the past year, we have won work at higher margins and we are seeing the benefits in our gross profit margin.

In the Materials segment, revenue increased $10 million year-over-year to $171 million, with gross profit increasing $7 million to $29 million or a gross profit margin of 17%. The improvement in gross profit margin was primarily due to sales price increases in both asphalt and aggregates and stable oil and energy costs. The year-over-year increases in revenue and gross profit resulted in third quarter adjusted diluted earnings per share of $1.69 and adjusted EBITDA margin of 11%.

Our non-GAAP adjustments during the quarter included a litigation charge of $8 million in other costs related to the settlement of the Salesforce Tower matter. At the end of the third quarter, our cash and marketable securities totaled $329 million, up from $251 million in the second quarter.

During the quarter, we also paid off our outstanding revolver draw in the amount of $55 million, resulting in a net debt reduction of $133 million.

Third quarter profit and favorable movement in key working capital [ full of ] accounts produced strong operating cash flow in the quarter of $153 million. We reduced net contract assets by $55 million from the second quarter as billings, cash collection and overall activity from projects ramping up in the second quarter progressed through the heart of the construction season. I am pleased with our progress in the quarter and expect the trend of strong cash generation to continue in the fourth quarter as seasonally high receivable balances are collected. I believe as we settle older outstanding claims in conjunction with our derisked business model, our cash flow will continue to significantly improve.

Our third quarter performance was directly in line with our 2023 guidance expectations, and we are not changing our guidance. I believe we could achieve the higher end of our revenue and adjusted EBITDA margin ranges, if we continue to have favorable weather conditions in the fourth quarter, and we continue to execute across our portfolio. We are also maintaining our 2024 financial targets of $3.6 billion to $3.9 billion in revenue and adjusted EBITDA margin of 9% to 11%. We believe we have the market opportunities and the CAP to reach our 2024 targets that will then lead to even further gains beyond 2024.

Now I'll turn it back over to Kyle.

[Kyle Larkin, executive]

Thanks, Lisa. I'll close with the following points. Although we grew our top and bottom lines in the quarter in alignment with our guidance for 2023 and 2024 financial targets, our results were impacted again by I-64, while less impactful than prior quarters, we can't finish this job soon enough. Fortunately, we expect to complete the project this year.

Revenue growth during the quarter was consistent with the strong CAP position our teams had when heading into the quarter. I'm impressed that even though the third quarter was our busiest quarter, we were still able to continue to build CAP as we have done in each quarter over the last year.

We ended the third quarter with another record CAP in a great position for the fourth quarter and 2024. I believe we will continue to build CAP over the next year as we are still in the early stages of projects going out for bid funded by the IIJA. We're being selective in the projects that we bid that are winning or better margins year-over-year. That is really a good sign for Granite and the industry.

Lastly, the Materials segment is performing very well. We continue to invest in the Materials segment, and I believe we will see top line growth and bottom line expansion as those investments come online. Operator, I will now turn it back to you for questions.

[Operator]

[Operator Instructions] Our first question is from Steven Ramsey with Thompson Research Group.

[Brian Biros, analyst]

This is actually Brian Biros on for Steven. First of all, the CAP growth in the Central region was very strong. Can you guys just talk more to the project set that you fill the CAP with there? I think you mentioned a few projects in the prepared remarks. Are there any other specific types of projects you're targeting? And just how does the margin profile on those compared to the other Mountain California regions?

[Kyle Larkin, executive]

Yes so good question. Our business down in Texas and our Texas region. That was one of our initiatives a couple of years ago to really shift back to that home market strategy, specifically within our Texas region. And they've been focused on two primary markets today: Dallas Fort Worth, which we've been in the market for a long time and also in the Houston market. And so we're seeing that home market strategy pay off for that team.

Historically, we've been pursuing large projects and mega projects out of that office across the country. So this home market strategy for them is really focusing on smaller DOT jobs, projects that are fully designed, the [ bid build ] type projects that they can execute on and perform at a high level. And that's really what their portion of the CAP is. It's -- the average job size now for them is probably pretty close to $50 million, maybe $75 million, which is a lot different than historically the type of work that they would have on the book.

So that's just a great example of how we shifted away from really risky projects and asked our teams to focus on a home market strategy, and they've done a really nice job of executing on that. From a margin profile perspective, it's right in line with the rest of the company and where we expect to be directionally as an organization moving in 2024.

[Brian Biros, analyst]

And then a follow-up, maybe as the construction gross margins overall, looks like it might have been above 15% if you exclude the I-64. Is that the right way to think about the gross margins there? And if you can just put kind of the year-to-date gross margins of that segment [ ex ] the oldest projects in the perspective kind of seems like you're maybe already within the targeted zone for next year. So just thinking about how to reach the high end of that in '24?

[Kyle Larkin, executive]

Yes, we're pretty close. I think if you adjust out I-64, we're just below the kind of the range that we put out there of [ 14% to 16% ] for 2024. We have a few other things going for us. Certainly, we've been focusing on execution as a company for a while. We put in place our construction playbook across the company, and that's been moving forward, and the team have been adopting the playbook and implementing it across the organization. And so we expect to see further margin expansion and construction through our efforts on that front.

And then the other thing to think about is our CAP. So our CAP has gotten stronger. As we've talked in the last few quarters now, we're picking up more work with higher margins. And so we've seen that trend continue through Q3. And so as projects get burned through in construction. We bring new CAP into construction, we expect margin expansion on that end. So that gives us with the confidence that we're going to be well within that range of [ 14% to 16% ] as we get into 2024.

[Operator]

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

[Brent Thielman, analyst]

Kyle, you mentioned several times through the commentary, just better bid margin. within the book of business that you have today? And obviously, you've been more selective as well over the last couple of years in terms of what you're pursuing any more sort of granularity on how the bid margins within the CAP look today relative to a year ago or 2 years ago as we think about you executing on that book over the next 12 plus months?

[Kyle Larkin, executive]

Yes. I mean I think if you go back a couple of years, certainly, we saw the market tighten a little bit in early '21. We talked about that. And as we've seen the market kind of adjust and grow, and certainly with the IIJA funds coming in, I think over that 2-year period, we've seen our margins improve probably pretty close to 1.5%, maybe up to 2% on the day, I think might be a good proxy for what we've seen.

So we'll start to see that really transition in. I mean, some of that already has. So I don't want to overpromise and suggest there's another 2% in margin expansion just in our CAP. But we've seen some of that CAP already get burned through and some of the newer CAP coming in certainly better margins than we had a couple of years ago.

[Brent Thielman, analyst]

Okay. And then obviously, some of the concerns in the market right now, these days seem to be around the private sector. You're obviously much more focused within the infrastructure side. Maybe can you talk about any slack in your markets that you may be seeing across your geographic regions, things you might be concerned about? Do you feel like you're capturing that in these growth expectations for the business into 2024?

[Kyle Larkin, executive]

Yes. I think I look at the public side is really strong. I think as we look at what's coming for our teams, really across our entire footprint is growth in 2024, certainly from a public spending perspective.

I mentioned in the last call, the American Road Transportation Builders Association website had a lot of good information around the opportunities that are out in front of us, specifically in our markets, and they all show really strong public funding for us in 2024. I know our teams see a lot of opportunities for growth in '24 and beyond as a result of that.

On the private side, our focus has really been around mining, rail, industrials and Solar has been a little bit soft this year, I think as the Solar developers kind of worked through some of the funding that came their way, and we expect that to pick back up. And I think the only softness we've seen is probably around residential. And I would look at that more on the material side, but as we talked before, we don't really correlate high with the presidential, we correlate higher with transportation for a couple of reasons.

One is our asphalt is about 2/3 of our materials business versus aggregates. But most of it has been kind of isolated up in the Northern California, Northwest, Washington, but that's been in place for a few quarters now. So we think that, that softening is kind of hard [ to into our numbers ].

[Operator]

The next question is from Brian Russo of Sidoti.

[Brian Russo, analyst]

Just curious, when we look to 2024, and the targets you've given a 9% to 11% EBITDA margins in the top line and gross margins by Construction Materials segment. Are those kind of considered normalized? Or can you improve upon that as well, maybe as you referenced better bidding or maybe it's incremental vertical integration or even a different public versus private mix, which I think is approximately 60-40. Just wanted to get your kind of strategic thoughts on that.

[Kyle Larkin, executive]

Yes. Good question, Brian. I mean first of all, we feel good about where we're headed directionally and what we look like for 2024. We have put out there the 9% to 11% EBITDA margin. You look at where we are today in terms of our midpoint of our guidance around 8%, there's obviously some nice improvement as we have I-64 wrapped up and behind us. That gets us pretty close to the bottom end of that range.

As I mentioned in the previous question, our CAP is very different. As we believe there is a margin expansion associated with our CAP as we get newer projects going through the pipeline, so to speak. So that will help drive up margins as well into that range. We think our execution, we're still not there. I mean there's still opportunities for us as a company to improve. We don't want to suggest that we're kind of at the end of the road in terms of operational excellence as a company. That's going to stay a really primary focus of ours next year and beyond. So we think there's continuing opportunities for us on that front. We see opportunities for materials pricing. So we do expect to raise pricing again in 2024, and then we'll kind of see where things go beyond that.

And then the automation effort, we talked about a couple of the facilities we're bringing online next year, and those are nice investments for us and with those facilities, I think that's going to help expand our margins as well. And I think from there, we're always going to expect certainly from our team in 2025 and beyond top and bottom line growth. And so that's something that we can come back to you on in terms of kind of what's the next step for the company longer term and how we can get to the top line and bottom line growth up.

[Brian Russo, analyst]

And just curious on the I-64 project. Obviously, your write-downs are declining each quarter this year. So what is actually or technically left to complete that project by year-end? What's your confidence level that, that can actually happen since I think previously, you were targeting mid-October?

[Kyle Larkin, executive]

Yes, that's right. And really the impact in the quarter was just further delays. We'll see associated with design conflicts that we encountered as we start on the final project together.

So today, we're down to final top with paving. So we're actually putting the final surfacing on the roadway itself, putting the final [ striping ] in and putting the vehicles in their final configuration and expecting to turn it over to the owner in December. And so again, we're working day, we're working nights, 2 or 3 baby crews getting that work complete.

So there's things in our control that we feel good about. So we're confident that we can perform the work for meeting our productions that the project will be complete. I think the only thing that's out there would be weather if some major storm came through the area, that could be a step back for the team. We expect to have a few rain days here and there, certainly normal for that part of the country in this time of the year. But we feel good about the opportunity to get that project behind us this year.

[Brian Russo, analyst]

And then lastly, just you mentioned expanding your footprint into new geographies. Could you just elaborate on that, what might be complementary to, I guess, your existing home markets?

[Kyle Larkin, executive]

Sure. Yes. I mean I think if you go back to Q1 of '22, we laid out a plan that from '22 through '24 and beyond, we're going to focus on support and strengthen of our existing home markets. That was really around small bolt-ons, automation efforts and purchasing material reserves in our existing oil markets. And we've got a lot done, as we mentioned in prepared remarks around Centennial asphalt and oil terminal and Bakersfield [ Brunswick ] Canyon, [indiscernible] Hofland, Northern Nevada, Grantsville Quarry expansion in Salt Lake City and then Coast Mount Resources, which is the quarry up in Canada that shifts material down into our business in the state of Washington.

So a lot of really nice support and strength in our existing home markets over the last couple of years that we're excited about. But we always spoke to doing something larger around an expansion and getting outside our existing footprint, specifically around a very big integrated business in 2024 and beyond. We feel like the timing will be right for us to do that, the large mega project challenges we had as a company would behind us. And so we do feel like it's time for us to take on a new opportunity outside our existing footprint. I think there's a lot in the pipeline that are out there in the marketplace today.

I can tell you what we're looking at is, first off, good businesses to be a platform, and we're still looking for a market that's healthy and growing. And of course, we're looking for strong leadership. And those opportunities are out there. We have a couple of things in the pipeline, and I hope that we'll be able to share some success in the coming months.

[Operator]

The next question is from Michael Dudas of Vertical Research Partners.

[Michael Dudas, analyst]

Kyle, just quickly on following up on the material side. How does -- how do -- you said costs have been normalized? Any insight on maybe cost pressures fourth quarter into 2024? And what kind of range of type of pricing are you anticipating? And is there volume growth associated with that business relative through now, the core businesses. And you mentioned about residential a little bit slower but bottoming, but some of the new acquisitions, some of the new opportunities you got from your bolt-ons?

[Kyle Larkin, executive]

Yes. I think the cost has stayed fairly consistent this year. I mean, there's been some fluctuations certainly of late, we've seen a little bit there. I mean the energy escalator we put in place last April is still out there for us to protect ourselves and also we have public owners that provide some protection on that end of things.

We feel good about kind of the cost components today. We did -- Yes, we're able to raise pricing on aggregate now all it in 2023, and we do expect that to be consistent with what we can do next year, probably in the range of, say, 5% to 10%. But all in all, we do think that the cost components have normalized, and I think that's good news for the business.

From a volume perspective, we haven't seen a drop. So despite the fact that there were a couple of markets that softened with residential. Our volumes were actually up both asphalt and aggregates for the year. So I think that's kind of indicative of the market today.

[Operator]

The next question is from Jerry Revich of Goldman Sachs.

[Adam Bubes, analyst]

This is Adam on for Jerry today. Nice to see the positive free cash flow inflection in the quarter. Can you just update us on how you're thinking about the free cash flow and receivables trajectory in Q4 and into 2024? And then as a follow-up, how are payment terms on new projects you're winning? How do they compare to what you were winning in 2022 and 2021?

[Lisa Curtis, executive]

Adam, this is Lisa. Yes, a really good quarter from a cash flow perspective coming in at $153 million for the quarter. We've talked before about from an internal perspective, how we look at operating cash flow and ultimately, free cash flow is, first, we're incentivized internally at a 5% operating cash flow as a percent of revenue, that being at 5%. And so we manage our CapEx looking at we spend approximately 1% to 2% for maintenance CapEx. And so you take that from our operating cash flow, that leaves about 2.5%, 3%. So that's our target of what we're shooting for.

So as we work through some of our challenging projects from the past, which some of that is included in our contract assets, we anticipate cash to be freeing up as we're moving forward, and we've seen that in Q3 in our operating cash flow. Our net contract assets went down around $55 million, as I mentioned, in the third quarter. And overall, that's just key working capital account movements.

Receivables are up in the quarter, which we expected. That wasn't unusual we started the year off flow and then picked up activity levels in Q2. So we were full speed ahead when we entered Q3 with a very busy quarter was coming in with revenues of $1.1 billion.

So higher accounts receivable that we expect to turn in Q4, along with just other working capital accounts with higher activity. And so going into 2024 at a minimum, we would anticipate our operating cash flow targets being similar or even pushing a little bit higher as we build momentum and start to release some of the contract assets that are on our balance sheet, improvements in our contract liabilities. And then receivables, just from a collections perspective, we're always working with the teams to focus on cash collections and just generation and just speeding up that process. And so that area is working well, but just continue to maintain the focus going into 2024.

[Adam Bubes, analyst]

And I appreciate the color of capped by procurement type. Can you update us on the contract mix of your cap? So how much is fixed price versus fixed unit price? Any color there would be helpful.

[Kyle Larkin, executive]

Yes. I don't know if we have the breakdown between fixed price and fixed unit price on the bid build side of things. But our CAP, if you look at the best value, it's been pretty consistent between last year in Q3 and this year in Q3 of right around 42% or so. Our fully designed projects are at 53% of our CAP today.

And so I think we feel good. We feel like we've derisked the company. Our design build again went from 5% down to 3. And so that's relative -- as you see those I-64 job certainly wind down that we expect -- we don't expect that to go to zero, there's still owners that have design-build contracts that we have a compelling reason to pursue, but they're kind of the exception in our business today.

So I don't -- I think we feel good about where we're at from a CAP perspective and the contracting message we have. I don't think anything shifted by the way, in terms of the payment terms with the contract work, that hasn't really changed a whole lot. What's changed is this home market strategy.

I think one, we're working for clients that we know and we understand, which allows us to move away from having contract claims which is certainly not helpful in terms of generating cash for the business. And also, we're doing work that is best value as opposed to design builds, so there's a lot less claims associated with these types of contracts, too. So I think our entire business model has shifted, which will only help not only derisk the company, but also generate better cash flows in the future.

[Operator]

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

[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. I believe that our company has never been stronger and we're in a better position to grow and deliver shareholder returns. Let's finish the year strong.

Thank you for joining the call and 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.