Granite Construction Incorporated

Good morning. 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 Incorporated Investor Relations fourth quarter 2020 conference call. This call is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. To ask a question, please press star, then 1. To withdraw from the question queue, please press star, then 2. Please note we will take one question and one follow-up question from each participant today. It is now my pleasure to turn the floor over to your host, Granite Construction Incorporated Vice President of Finance, Mike Barker. Sir, the floor is yours.

Good morning, and thank you for joining us. I'm pleased to be here today with Granite Construction Incorporated President 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 Granite's 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, growth, demand, strategic plans, circumstances, activities, performance, outcomes, outlook, guidance, backlog, committed and awarded projects, and results. Actual results could differ materially from the 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. Please note that some metrics may reference or exclude nonrecurring acquisition-related expenses, nonrecurring legal and accounting investigation costs, and noncash impairment charges. Reconciliations of certain 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'd like to turn the call over to Granite Construction Incorporated President, Kyle Larkin.

Thank you, Mike. Good morning, everybody, and thank you for joining us on our call today. Lisa and I are glad to be talking with you as we reach the final chapter related to our delayed financials. We expect that our 2020 Form 10-K will be filed in short order and we will now be able to resume a normal filing and reporting cadence. I'd like to start off by providing more color around the refreshed core values I introduced during our last call at the end of February. As a reminder, grant's five core values are safety, where the safety and well-being of our people, our partners, and the public is our greatest responsibility. Every level of our organization is engaged in our safety culture. Integrity. where we operate with integrity and the highest ethical standards. We know and do what is right, and we are expected to speak up when something is not right. Excellence, where we strive for a high performance culture of continuous improvement, innovation, and quality in all aspects of our work. We always perform and deliver our work the right way for our stakeholders. Inclusion, where we value and respect a workforce diverse in perspective, experience, knowledge, and culture. we are committed to an inclusive environment where everyone feels equally valued and welcome, and sustainability, where together we build a better future by integrating values of social responsibility, environmental stewardship, and dependable governance to deliver enduring economic value. Our core values guide us in our day-to-day operations and serve as the foundation of our cultural reinvigoration. Before I move to discussing our segments, I would like to discuss Granite's commitment to sustainability. Sustainability at Granite is not a new concept, and our decision to include sustainability as a new core value was a natural progression to the actions we have been taking as a company. We have a long history of operating responsibly and have been reporting on sustainability for a decade. In the last two years, we have made a lot of progress in our sustainability program, including completing our first materiality assessment. As part of our assessment, we engage stakeholders directly to better understand their expectations and priorities around sustainability. With a better understanding of our stakeholders' priorities, we built new strategic foundations for sustainability at Granite. Our four strategic foundations are social responsibility, environmental stewardship, sustainable economics, and dependable governance. Help us increase transparency and provide the information stakeholders want to know We have completed a data gap analysis to standard reporting frameworks. In response to growing concerns about climate change, we formed a Climate Awareness Task Force, a group of subject matter experts charged with creating and implementing a strategic approach to integrating climate awareness into grants operations. Even though we report annually on sustainability, we published a supplemental sustainability update in January 2021 to keep stakeholders apprised of our efforts ahead of our next annual One focus of our current efforts is aligning to standard reporting frameworks. You will see the results of this effort in our next Annual Sustainability Progress Report this fall. Where data gaps exist, we are improving and expanding data collection and reporting systems. Additionally, we are focusing on climate risk to ensure they are fully considered as part of our strategic planning process, and we are taking steps to reduce our carbon footprint. One example is our Renewable Diesel Initiative in California. which is expected to reduce greenhouse gas emissions in our equipment fleet by 60% to 80%. On the social side, we have increased our focus on inclusive diversity and plan to share more about this program in our next investor call. Going forward, we are integrating new ESG goals and targets into our company strategy to ensure effective implementation throughout our organization. With these goals, we will reduce our carbon footprint, enhance positive social impacts in the communities where we work, strengthen our position as a leading provider of sustainable infrastructure solutions. Now, I'd like to provide an overview of our segments to give you a view of Granite and the various end markets in which we operate. I will also discuss how a few areas of our business have changed over the past year. This may be a refresher for some of you and possibly an introduction to Granite for others. Let's start with the transportation segment. This is our largest segment and includes projects built by the same core businesses that launched granted almost 100 years ago. This segment is primarily comprised of publicly funded projects and includes end markets such as roads, highways, bridges, airport runways, and light rail systems. While the meaningful but shrinking portion of this segment's revenue is still derived from our heavy civil operating group, most of our transportation projects are performed by our vertically integrated businesses and our California and Northwest operating groups are less than $5 million in size and are constructed in a little more than a year. Our California operating group is the largest driver of revenue in this segment and includes work reform for local municipalities and private owners, as well for the state of California. In fact, Grant is the largest contractor based on number of projects and total annual project awards for California's Department of Transportation, Caltrans. Despite the challenges in 2020, The California operating group's annual transportation segment revenue increased over $100 million year-over-year, a fantastic result for 2020 and tremendous momentum going into 2021. Our Northwest operating group is also a significant driver of revenue in our transportation segment, with its primary operations in Alaska, Arizona, Nevada, Utah, and Washington, as well as in certain neighboring states. While the Northwest Operating Group was more significantly impacted by the unprecedented challenges of 2020, the group's transportation segment performance in 2020 was still very strong, with over $518 million in revenue. Lastly, our civil transportation business in the Midwestern states of Illinois, Indiana, and Wisconsin has grown 66% since 2018, with over $140 million in annual transportation segment revenue in 2020. I look forward to continued growth in this business in 2021 and beyond. Let me dive a little deeper into the heavy civil operating group. Traditionally, the group's projects in the transportation segment have typically been either bid-billed or design-billed procurement contracts with longer durations. Historically, these projects were very large and complex, but there was often limited design visibility at the time of bid. We now refer to these types of projects as our whole risk portfolio. while we still pursue design-build and build opportunities when they meet our revised project selection risk criteria and when we are able to appropriately price the project risk. We are also actively focused on increasing our portfolio of best-value procurement work, such as construction management general contractor or CMTC projects. Best-value procurement work is beneficial for the owner and the contractor. Best-value procurement projects, we work together with the owners to mitigate overall project risk during the design process which subsequently also reduces the likelihood of disputes and claims. Lettings for best value procurement work have grown steadily over the last two years and now comprise $1.5 billion of the $3.2 billion year-end 2020 transportation segment committed and awarded projects per cap. Since year-end 2018, the amount of best value procurement work in our transportation cap almost doubled. We expect best value procurement work to continue to grow in our transportation cap as a heavy civil operating group rebuilds its portfolio over the next one to two years. Our heavy civil group teams have made substantial progress over the past year, however these challenging projects continue to weigh on the results of the transportation segment and dampen exceptional performance across our other operating groups. With regards to the transportation segment funding, we are encouraged by the public funding environment at the federal, state, and local levels. While we wait optimistically for the federal government to align around an infrastructure bill this year, the one-year extension of the FAST Act and $13.6 billion infusion to the Highway Trust Fund for 2021 construction programs provide support for projects across the country. Also, the December 2020 and March 2021 coronavirus relief bills provide state governments with additional funding for infrastructure projects. In California, our top revenue-generating state, SB1 continues to be a significant driver of funding, with annual spending expected to average $6.2 billion from 2021 to 2027, a 44% increase over the average annual spending since SB1's adoption. Overall, I believe our teams are poised to capitalize on the many outstanding transportation opportunities in all of our markets, and I believe the transportation segment will continue to be the primary driver of profitability and cash flow for Granite. Next, turning to our water segment, work in this segment is performed by all of our operating groups and includes end markets such as water transmission and delivery, safety enhancements for dams, locks and reservoirs, and canal lining. Two businesses within our water and mineral services operating group are dedicated to the water segment and are the primary drivers of revenue. These businesses are Granite Endliner, which is a leader in trenchless and pipe rehabilitation services, with operations primarily located in the Midwest, supplemented by additional operations across the Southeast, East, and Canada, and water resources. One of the largest water well drilling businesses in the country, which also focuses on pump sales and service, well rehabilitation, and water treatment services nationwide. In 2020, these two businesses generated approximately 80% of the total water segment revenue, Their work comprises over 80% of water severance cap as of end of the year. As we discussed on our last call, the water severance results were disproportionately impacted during 2020 by the COVID-19 pandemic due to work stoppages and delays in lettings. While the pandemic depressed spending on water supply and maintenance during 2020, we are encouraged by a recovery we saw late in the year and in 2021. We enter 2021 with over 300 million of water cap and momentum from a solid fourth quarter in recovery from the pandemic. We're also seeing funding support for water-related construction, in part through the Water Resources Development Act, which authorized nearly $10 billion in spending on waterway projects nationwide. I look forward to our teams taking advantage of the significant opportunities ahead of us and continue revenue growth in 2021. Moving on to the specialty segment, Types of projects in this segment include site development work for a variety of private and public clients, including global technology companies, commercial builders, electrical utility operators, tunnel construction, military facility construction and maintenance, renewable power generation facilities installation, infrastructure construction, reclamation, and performance of mineral exploration services for the mining, oil, and gas industries, As you can see, the specialty segment includes revenue generated from a very diverse set of capabilities and at markets, which complement Granite's core competencies. All of our operating groups contribute to this segment with significant growth in 2020, coming from the California and federal operating groups. All projects in the specialty segment are primarily publicly funded. There's a significant amount of work privately funded as well. We have been successful in growing revenue in this segment by strengthening relationships with clients demonstrating our capabilities and experience in horizontal building projects and continuously performing above client expectations. The end markets in the specialty segment are emerging and growing, whether it's site development work for industrial, commercial, or residential builders, expansion of renewable energy facilities, or partnering with the United States military, Grand has demonstrated its capabilities and the added value that we provide. I expect that segment revenue will continue to grow and we will build upon record specialty segment cap in 2021. Finally, I want to discuss our materials segment. Our construction materials business is a stable driver of profitability and it is the foundation of our vertically integrated business. Construction materials revenue primarily consists of sales of asphalt and sales of aggregate for use in the manufacturing of asphalt and concrete and for use as base rock. Approximately 60% of our total annual internal and external materials revenue is generated through sales at asphalt, while 30% is comprised of aggregate sales. We have materials assets in each of our vertically integrated markets, which we believe provide us with a competitive advantage by having a reliable, cost-efficient supply of high-quality aggregates. Over the last two years, we have strategically invested in our materials assets and increased our permanent aggregate reserves by over 125 million tons. We are continually evaluating opportunities to strategically expand and strengthen our footprint We expect to continue to do so in 2021, primarily through capital expenditures. During 2020, despite the ongoing pandemic, we saw overall strong demand in materials led by our California operating group. Across the company, aggregate sales volumes were up year-over-year of 12%, with asphalt sales volumes up over 6%. As of December 31, 2020, construction materials orders were up 34% year-over-year. As we move into 2021, demanding our markets for construction materials, both from internal construction projects and from external customers, remain strong. Going into 2021, I am pleased with our overall cap position of $4.2 billion. We continue to pursue end-market diversification to maximize opportunities for our businesses. Transportation is our primary segment. We are investing in growing our specialty in water segments, adding further diversity mix to our overall portfolio. We are focused on achieving a well-balanced risk profile, but we are not yet where we want to be. We've made progress in a short amount of time. In 2021, we will continue this transformation as we add more projects to CAF to meet our new project selection criteria. Finally, as we move into 2021, our CAF portfolio is more evenly distributed across our operating groups. We have the right approach in pursuing opportunities and are following that approach in the right markets. With that, I'm going to turn it over to Lisa to discuss our financial results. Lisa?