Granite Construction Incorporated

Good morning. My name is Matt, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Incorporated 2021 Second Quarter 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 session. To ask a question, please press star 1. Please note that 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 Vice President of Investor Relations, Mike Barker.

Good morning, and thank you for joining us. I'm pleased to be here today with President and CEO Kyle Larkin and Executive Vice President and Chief Financial Officer Lisa Curtis. Please note that today's earnings presentation will be available on our Events and Presentations page of our Investor Relations website. We begin today with an overview of the company's Safe Harbor language. Some of the discussion today may include forward-looking statements with 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, committed and awarded projects, or CAP, and results. Actual results could differ materially from statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements. whether they are results of new information, future events, or otherwise, except as required by law. Certain non-GAAP measures may be discussed during today's call and from time to time by the company's executives. These include, but are not limited to, adjusted EBITDA, adjusted EBITDA margin, adjusted net income or loss, and adjusted earnings or loss per share. Reconciliations of non-GAAP measures are included as part of our earnings press releases and in company presentations, which are available on our investor relations website. Now, I would like to turn the call over to Kyle Larkin.

Good morning and welcome. In past calls, as part of our cultural reinvigoration and our refreshed core values, I have provided an overview of our core values of safety, inclusion, and sustainability. and how they drive our culture and actions every day at Granite. Today, I will discuss our remaining two core values of integrity and excellence, and how our teams integrate these two values into their daily work. Integrity is the foundational core value which underpins all other values. We operate with integrity and the highest ethical standards. We know and do what is right, and we expect all of our employees to speak up when something is not right. The audit committee investigation completed this year identified areas where we did not live up to the high expectations that we set as a company. To ensure that we are following best practices, this year we rolled out a cultural reinvigoration across the entire company, and we have clarified and strengthened our employees' understanding and commitment to integrity in everything we do. Acting with integrity means doing the right thing all the time, honoring our commitments, holding each other accountable, and voicing our opinions questions, and concerns in a respectful and transparent way. Acting with integrity allows us to attract and retain the best employees and enables us to be the best builders and material producers for our clients as we approach our second 100 years. Excellence has been a focus within Granite's culture since our beginning in 1922 and is now a core value. This is an area where we are not willing to compromise. At Granite, Excellence is achieved through a high-performance culture of continuous improvement, innovation and quality in all aspects of our work. Through excellence, we strive to be our customers' contractor of choice, generate efficiencies that drive bottom-line results, and transform how we bring value to our stakeholders. There are many examples of excellence through innovation and technology across the company. We use technology to automate our materials facilities and to provide remote visibility to identify potential issues. We employ 3D modeling and augmented reality to visualize projects in the design phase and enhance productivity in the construction phase. We use technology to enhance safety and save lives by preventing work zone intrusions and enhancing traffic control systems. And finally, we use data analytics as a guide to help us make better decisions for increased production, more accurate scheduling, and improving safety. These are just a few of the areas where we are focused on using technology to change the way we work, and add more value to our clients and consistent profitability for our shareholders. Underlying the core value of excellence is our focus on lean principles. We are revisiting means and methods that promote efficiency throughout our operations and support functions as we enhance competitive advantages by being lean. Our goal is to get a little better every day by empowering our teams to challenge the status quo, promote new ideas and technologies, and streamline execution through doing things the right way the first time and eliminating rework. I'm energized to talk to our teams across the country who are innovating and driving excellence in all parts of Granite. We have already made good progress. We will continue to innovate as we renew our emphasis on excellence. Okay, let's get into our business segment, starting with transportation. The transportation segment includes results of our core businesses and continues to be the primary driver of our revenue and gross profit. In the second quarter, we saw a continuation of our strong first quarter results, led by the performance of our California and Northwest operating groups and by solid execution by the heavy civil operating group as it works through the old risk portfolio, or ORP. Within the ORP, as Lisa will discuss further, Our teams are currently doing a great job moving the projects forward. As a reminder, the ORP is comprised of projects within our transportation segment, which do not fit our current strategy due to their higher risk nature. As I have stated previously, we are no longer pursuing design-build megaprojects and non-sponsored joint venture projects. The risks inherent in these megaprojects related to design, duration, size, and partners are no longer acceptable within our strategies. The heavy civil operating group continues to pursue projects under our new risk criteria. They are significantly different than projects in the ORP. We are now pursuing best value procurement projects such as CMGC projects, as well as bid-bill projects and smaller, less complex design-bill projects where the risks are well understood and priced into the bid. We are leveraging a model that has worked well for our vertically integrated groups and pursuing projects where we believe we have a competitive advantage. Both of our vertically integrated groups recognized revenue increases during the quarter as compared to prior year. Transportation cap for our vertically integrated businesses also ended the quarter strong, led by the California group with an increase in cap of 25% year-over-year to $1.2 billion as of the second quarter. Our teams continue to do an excellent job of working with state and local municipalities to secure projects suited to our expertise. With a spending of SB1 expected to increase from an annual average of $4.4 billion in 2017 through 2021 to an annual average of $6 billion for 2022 through 2027, we believe we are well positioned to continue to grow our business in California. For infrastructure funding, we continue to monitor the discussions in Washington as Congress debates an infrastructure bill. While we are hopeful that an agreement will be reached in the near term, we believe a deal will most likely not be completed until the fourth quarter, resulting in the need for another continuing resolution of the FAST Act at the end of the third quarter. The current funding environments in our markets are robust at the state and local levels, and there are many opportunities we are pursuing. A federal bill will only serve to strengthen the environment further with meaningful impacts starting to be felt in mid to late 2022 and then building into 2023 and beyond. Turning to the water segment, the business climate has largely recovered from the pandemic-related decline. The Water Resources Division of our Water and Mineral Services Operating Group, which provides water supply and maintenance services across the U.S., has been very active with drought conditions covering most of the western states. The drought in the west shows no sign of relief and is expected to continue through the summer and into fall. This should result in a busy schedule for our teams in this division for the remainder of the year. Segment cap as of the second quarter stands at $532 million, including the addition of the $160 million Leonhurst Am Project during the quarter. This is an increase of 129% year-over-year from water segment cap of $232 million as of the second quarter of 2020. Whether it is the Water and Mineral Services Group, the Vertically Integrated Groups, or the Heavy Civil Group, there are many opportunities in the water end market that we are pursuing. The market for this segment continues to be strong, and draft legislation such as the Drinking Water and Wastewater Infrastructure Act will further the positive environment if completed. Moving to the specialty segment, both the private and public markets spurred a strong increase in activity in this segment in the second quarter. This was led by recovery of the mineral exploration business within the Water and Mineral Services Group. This business line had been largely shut down in the prior year quarter. In 2021, commodity prices are driving increased mineral exploration by mining clients. In the second quarter, we began and ended with a specialty cap of over $1 billion. The markets that continue to drive this segment include public work with the US government, such as our projects with the US military in Guam, private projects within the mining industry, such as mineral exploration, civil construction and reclamation projects, site development work for private clients, such as data center work for technology companies and renewable and solar energy projects where opportunities are increasing with the country's focus on expanding energy from renewable sources. The growth in CAP in our specialty segment, as well as in the water segment, highlights our team's ability to execute on horizontal civil construction projects across end markets for both public and private owners. In the future, we will continue to grow CAP by leveraging our team's capabilities and expertise where we believe we have the greatest competitive advantage regardless of the end market. In the materials segment, the second quarter continued the themes of the first quarter, with demand driving volume increases for the same period year-over-year, an aggregate of 42% and asphalt of 25%, including both internal and external construction materials sales. These increases were broad across our locations in both the vertically integrated groups, with California leading the way. This is an impressive increase in volume when compared to a strong second quarter of 2020. Our investments in new aggregate and asphalt plants in California in the last year helped position us to respond to the increased demand. In addition, we continue to invest in technologies to make our facilities as efficient as possible through automation, innovative energy conservation projects, and water recycling initiatives. It's exciting to see the improvements innovation is driving at our materials facilities and there are many more in progress to be implemented in the coming months. As of the second quarter, our consolidated cap was $4.4 billion. While cap from our vertically integrated operating groups within the transportation segment continues to grow, cap from the heavy civil operating group continues to decrease in this segment as intended. This decrease in cap in the transportation segment is offset by increases in cap in our specialty and water segments as we leverage our diverse expertise and strong customer relationships to pursue projects across all our end markets. Across our footprint of regional offices, we continue to capitalize on our local relationships and market intelligence to be the contractor of choice for both public and private owners. With the decrease in the ORP, higher risk design bill cap continues to decline as we continue our efforts to transform the heavy civil operating group and the overall risk profile of the company. With that, I'll turn it over to Lisa to discuss our financial results. Lisa?