Granite Construction Incorporated

Good morning. My name is Debbie and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Incorporated 2021 Third Quarter Conference Call. This call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer period. To ask a question, please press star, then 1. Please note, today 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. Please go ahead.

Good morning, and thank you for joining us. I'm pleased to be here today with President and Chief Executive Officer, Kyle Larkin. and Executive Vice President and Chief Financial Officer Lisa Curtis. Please note that today's earnings presentation will be available on the events and presentations page of our investor relations website. We begin today with an overview of the company's safe harbor language. Some of the discussion today may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, opportunities, targets, growth, demand, strategic plans, circumstances, activities, performance, shareholder value, outcomes, outlook, guidance, objectives, committed and awarded projects, or CAP, and results. Actual results could differ materially from statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these forward-looking statements. The company assumes no obligation to update forward-looking statements, whether they are results of new information, future events, or otherwise, except as required by law. Certain non-GAAP measures may be discussed on 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. Kyle Larkin Thank you, Mike. And good morning, and welcome to our third quarter earnings call. Today, I'd like to begin by discussing our sustainability program. Sustainability is one of Granite's five core values, along with safety, integrity, inclusion, and excellence. In September, we published our 2020 sustainability report, and it's our most comprehensive report to date. This report illustrates the emphasis Granite has placed on sustainability as a core value and as a foundational concept for our business strategy. The report highlights the company's advancement of environmental, social, and governance initiatives and articulates our vision to be the leading provider of sustainable infrastructure solutions. As part of our commitment, we are integrating new sustainability goals and targets into our company's refreshed strategic plan to ensure effective implementation of our sustainability initiatives. Environmental highlights from the report includes the result of Granite's first climate risk assessment, a new carbon emissions reduction target, and efforts to minimize waste and maximize recycling to conserve natural resources. The importance of Granite's activities and projects on the environment has been a focus with embedded environmental leaders and our businesses for over 20 years. With our environmental initiative, we are taking our efforts to the next level. Within the Social Responsibility Initiative, we disclose a comprehensive strategy to promote diversity, equity, and inclusion across our workforce, including new priority targets. We believe that our hard work is paying off as we have been recognized as a great place to work for three years in a row. By fostering an inclusive culture, Granite aims to attract and retain top industry talent and create a fully engaged workforce. In the area of governance, We have also worked closely with our board to establish a new framework to support the implementation of our sustainability objectives, which formalizes board oversight of the company's environmental, social, and governance initiatives and clarifies organizational roles and responsibilities. Granite has selected industry-specific metrics that align with stakeholder expectations, which measure material sustainability goals relevant to our operations, and Granite's report aligns with standard sustainability reporting frameworks. With Granite's new sustainability framework, we aim to create shareholder value and address relevant societal needs. As we move forward, we intend to reduce our carbon footprint, enhance positive social impacts in the communities where we work, and strengthen our position as a leading provider of sustainable infrastructure solutions. Now, let's go through our business segments for the quarter, starting with transportation. Our teams across the country turned in strong segment results during the busiest construction quarter of the year. Revenue in the quarter for our transportation segment reflects an increase from the Northwest group that was offset by a small decrease in the California group and anticipated decrease in the heavy civil group. Within the heavy civil group, we saw an expected year-over-year top-line decrease in the quarter as we continue to work through the Old Risk Portfolio, or ORP. We continue to narrow our risk profile as we remain focused on procuring projects with greater visibility to project design, smaller project size, shorter durations, and geographies that allow us to capitalize on existing relationships with owners, suppliers, employees, and subcontractors. During the quarter, we burned $100 million of ORP cap, which is in line with what we have discussed previously. While these projects are challenging and complex, We continue to be focused on execution and mitigating risk as they arise. This quarter, we saw some gains and fades in project margin in the portfolio, but are meeting our expectations with only a slight loss to granite year-to-date through September. Our vertically integrated California and Northwest groups have delivered solid results this quarter. In the Northwest group, the increase in revenue was spread across the different geographies within the group, from Washington to Nevada to Arizona. In California, we saw a decrease in revenue during the quarter when compared to 2020, primarily driven by two factors. First, earlier this year, I mentioned that we were experiencing an extended competitive bidding environment. Typically, this is experienced early in the fiscal year as contractors are focused on securing work. While the bidding environment returned to more normalized levels of competition this summer, it impacted California during the third quarter. The second important factor when I compare the third quarter of 2021 to the prior year is the impact of owner worksite accommodations in 2020 due to the pandemic. While we were able to obtain accommodations from owners in most geographies in 2020, this was more significant in California. While revenue is lower year over year, the performances quarter is in line with expectations and reflects a very positive environment driving higher cap in our California group as of the end of the quarter. Segment cap increased sequentially from the second quarter, reflecting the strength across our markets and our ability to offset decreases in our heavy civil group cap with increases from our vertically integrated businesses. I am pleased when I look at the mix in our transportation cap and the progress we have made with the ORP. We have seen wins across the company highlighted by the California group. Transportation cap for California is $1.3 billion at the end of the quarter, which is up approximately $166 million sequentially over the second quarter, At the end of this quarter, the California and Northwest groups amounted to 73 percent of the total segment cap compared to 61 percent at the end of the third quarter of 2020. This demonstrates not only our team's ability to obtain high-quality work, but also the broader market strength in terms of leadings across our geographies, and in particular, California. Through the third quarter, we have seen continued strong project leadings ahead of the prior year, which should continue to support our ongoing transformation of the segment portfolio. Related to infrastructure funding, late last month, Congress authorized an extension of the FAST Act funding levels through the end of this month, pending continued negotiations on the bipartisan long-term infrastructure bill. The infrastructure bill provides for significant new funding, most likely impacting our businesses starting late in 2022 and building into 2023. Moving to the water segment, the Water and Mineral Services Group performed well during the quarter. Our trenchless and pipe rehabilitation and water supply and maintenance businesses both increased revenues compared to the third quarter of 2020. Water supply and maintenance continued a strong performance from previous quarters across the U.S. This includes opportunities related to water infrastructure needs, not only in the drought impacted western U.S., but also across the country with strong demand in the segment. Segment cap as of the third quarter stands at $524 million, a slight decrease compared to the second quarter and an increase of $178 million over the prior year. Segment cap as of the third quarter stands at $524 million, a slight decrease compared to the second quarter and an increase of $178 million over the prior year. As debate continues in Washington around the funding of water infrastructure projects, the need for investment is largely acknowledged across both aisles of Congress. We believe we are well positioned to take advantage of the numerous civil construction opportunities in the water and market as funding negotiations proceed to address the critical needs across the country from flood prevention to dam and reservoir construction or repair. In the specialty segment, revenue continues to grow with each of our operating groups contributing to a segment diverse in end markets and customers. While the segment includes a significant amount of work with public customers such as the federal government, it is also the segment with the largest percentage of work for private customers. In the public sector, we continue to grow our work with branches of the federal government, including the military through Best Value, NAITOC, IDIQ, and task order contracting. We are proud of our work and relationships we have built with the federal government over many years and intend to continue to build upon those relationships as the country is expected to expand spending in many areas in the years to come. The private sector of the specialty segment has been a focus at Granite and resulted in significant successes allowing us to steadily increase cap. With the pandemic and the inflationary environment, although we have seen some slowdown in private commercial site development investment, we continue to pursue numerous opportunities, including in the mining and renewable energy industries. To start with mining, Grant has had a longstanding relationship with mining clients within our Northwest group. We typically have served our mining clients through a variety of civil construction projects, from road construction to site development, to reclamation. More recently, we have extended our services to mining clients and mineral exploration. With commodity prices such as copper showing strength currently, we expect investments and opportunities to continue in the future. The renewable energy industry is also an area where we have invested and had success in building relationships and growing revenue. Over the past several years, we have developed a focused strategy in pursuing renewable energy projects which includes solar field installations and battery storage. While currently not a significant component of our overall revenues, with our industry-leading position in solar installation projects and the current administration's plan to move the U.S. toward a greener future, we believe there will be significant growth in investment and project opportunities in the coming years. As of the end of the third quarter, segment cap remains robust, with project progression during the busy third quarter resulting in a $130 million decrease of cap sequentially from the second quarter. With our relationships across end markets within the specialty segment, we believe Granite's diversified civil construction expertise will allow us to capitalize on the increasing public funding and resilient private markets and continue to drive revenue growth in the future. Now turning to the materials segment. The third quarter continued with the strong levels of demand that we have seen in the first two quarters of the year, with overall higher sales volumes of aggregates and asphalt as compared to the prior year period. While we have seen broad support for materials across our locations, we have also seen demand shift across our geographies, partially offsetting the continued strong demand and sales volumes for increasing prices for fuel and liquid asphalt. These price increases started at the beginning of 2021 and their impact accelerated in the second and third quarters resulting in oil-related costs returning to the 2019 levels. The results in 2020 reflected the benefit of these lower costs, with 2021 being more indicative of historical performance in this segment. Oil price volatility has been and will continue to be a focus of our materials teams across the business in the fourth quarter and beyond. Overall, our consolidated cap as of the end of the third quarter was $4.3 billion, slightly down sequentially from the second quarter of 2021. This decrease was not unexpected in our busiest construction quarter, where project progression can exceed new awards. Consolidated cap, however, did increase $135 million from the third quarter of 2020. Cap from our vertically integrated groups continues to grow, now at 61% of our total. The heavy civil operating group cap decreased to 19% compared to 31% for the same period one year ago. We've been successful in replacing the heavy civil operating group ORP with work from other operating groups as we maintain discipline around our heavy civil group portfolio. We believe we have also been successful in our efforts to de-risk our portfolio through increasing the amount of best value procurement work. Best value procurement awards now comprise $1.7 billion, or 39% of our total cap. while the design bill continues to decline to $487 million, or just under 11% of our total cap. While there is more work to do, and we are not taking our eye off the need to focus on project execution, I'm confident we are positioning the company to continue on the path for improved financial performance. With that, I'll turn it over to Lisa to discuss our financial results for the quarter. Lisa?