Granite Construction Incorporated

Good morning. My name is Betsy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations fourth quarter 2021 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 one. 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 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 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. 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 investor relations website. Now, I would like to turn the call over to Kyle Larkin.

Thank you, Mike, and good morning, and welcome to our fourth quarter earnings call. Three weeks ago, we announced several important steps as we continue to implement and drive forward our new strategic plan. I'll briefly touch on our strategic plan in a few minutes, but let me begin with a review of the steps that were announced. First, we signed a definitive agreement to sell Granite Inliner, and we expect that transaction to close as previously reported. Secondly, we also announced our intent to sell water resources and mineral services businesses. Granite Inliner, water resources, and mineral services comprise our former Water and Mineral Services, or WMS, operating group. With these announcements, WMS is now being reported as held for sale and in discontinued operations in our financial statements. Our company has been through a lot the past few years. We are acutely aware of the need to learn from our recent struggles so we can improve our performance and create value for all our stakeholders. This was our focus as we revisited our strategic plan over the past year. As our new management team came together and discussed the direction of our organization, it was clear that our company's core competencies lie in our civil construction and material businesses. All the information that we studied confirmed my belief that Granite's future should be built around return to our core skill set. This is what we have done for 100 years, and we are one of the best contractors in the country. As a result, we concluded that our success depends on our team being focused on building our core businesses and focusing all of our efforts on supporting and aligning the company with our civil construction and materials business. This is why we decided to divest of the WMS businesses with full support from our board of directors and focus our energy and resources on our core competencies. We believe this is a simple decision that is in the best interest of our shareholders. Divesting of these businesses bolsters our cash position and allows us to strategically invest in new opportunities to grow both organically and through acquisitions. We will be in position to invest additional capital in developing our people and upgrading our equipment and technology. These investments will create economies of scale, both in operations and in support functions. We will then be in a position to grow a familiar, predictable business model, one that we have run successfully for 100 years. Our future is now truly going to be built by leveraging upon our past. With the planned divestitures of the WMS businesses, we also announced a change in our reportable segments from transportation, water, specialty, and materials to our new segments of construction and materials. We identified our reportable segments based on how we manage the company through the allocation of capital and how we measure and assess performance. With our new strategic plan, we have shifted away from end markets to focus on our core civil construction and materials business. We will continue to operate in a variety of end markets, including transportation projects, private site development projects, mining projects, and water-related construction projects such as dams and spillways. All of these projects, importantly, are bid and built by our teams utilizing the same core competencies that underpin all of our work. Granite strength has always been the ability of our teams working in their home markets to leverage materials, resources, and local market knowledge to gain a competitive advantage in the markets where we operate. Strengthening and growing these home markets across our geographies and leveraging our expertise to secure high-value projects with both public and private customers is the core of our strategy that will lead Granite to achieve consistent profitability and growth. We also announced the reorganization of our operating groups from five to three operating groups. The California and Mountain, formerly Northwest, operating groups remain largely unchanged with the exception of the shift of our renewable energy business into the Mountain operating The central operating group is a combination of the previous heavy civil, Midwest, and federal operating groups with the addition of the Arizona region that was previously in the former Northwest group. As the central operating group, our former heavy civil group businesses will adopt a more focused home market strategy built upon the strengths of our Texas and Florida market areas. We believe this change will allow these regions to capitalize on the benefits of our proven home market model. This is the next phase in the transformation of the former heavy civil operating group. The project selection criteria of the opportunities we are pursuing in the central group have been transformed, and now we are shifting the focus to strengthening our home market presence in these key and growing states. This transformation will take time and will not occur overnight, but we believe we have the right teams and strategy to develop these markets in the image of our California and mountain groups. Finally, we announced an increased authorization in our share repurchase program resulting in an authorization for up to $300 million in purchases. We have maintained a strong cash and liquidity position through 2021, and with the proceeds from the expected divestitures of the former WMS Group, we should have additional flexibility to invest in our business and return value to shareholders through share repurchases. Now, let me briefly talk about our new strategic plan and its key themes. In the near future, we will go into much more detail on our new strategic plan where Granite is going in the next few years. There are four themes to our new strategic plan. Develop our people, raise the bar, grow market share, and maximize Granite value add, or GVA. Our people and refresh core values are the foundation of Granite's strategy. The develop our people theme is centered on that foundation. There is incredible demand and competition for people at all levels of our organizations. In a strong macroeconomic market with low levels of unemployment, we need to not only retain our people, but also to focus on their development to achieve the growth that is possible as a result of the increasing infrastructure funding. We believe our renewed focus on our core competencies as a civil contractor will assist us to be more effective in sharing resources and developing leaders using standardized processes and best practices. Our next theme of Raising the Bar is centered on our unrelenting focus on execution and process efficiency to drive profitability. We have talked a lot over the last year about the significant changes we made in our project selection process and the types of projects we are pursuing compared to previous years. We have made tremendous progress in this area as we transform the mix and quality of our cap. We expect to see benefits in 2022, but even more in 2023 and 2024 that some of our lower-risk, best-earning projects, such as construction manager, general contractor, or CMGC projects, have an extended initial construction manager timeline that typically lasts over one year before the construction contract is awarded and construction work commences. We have also experienced certain project execution issues that have prevented us from achieving the levels of consistent profitability that we should be delivering each period. Within this theme of raising the bar, we are focused on driving improved and consistent execution with renewed focus on standardized requirements and best practices across all of our businesses. We believe this focus will translate into improved profitability. Finally, this theme also includes our efforts to drive efficiency within SG&A. While we have made good progress, SG&A remains an area of continued focus. The third theme is grill market share. A key conclusion of our strategic plan is that we perform best when we utilize our home market competitive advantages. This has been demonstrated over Granite's history by the performance of our vertically integrated businesses. Unfortunately, the typically strong performance of our vertically integrated businesses have recently been overshadowed by losses on the higher risk large project work in our old risk portfolio, or ORP. We intend to invest in our vertically integrated business model organically, and through M&A to strengthen and expand existing home markets and to establish new home markets. We see many opportunities to invest in our home markets, such as through acquiring additional material reserves and equipment, as well as opportunities for bolt-on acquisitions. Our liquidity and balance sheet provide us the ability to invest in our business, and we intend to do so in 2022 and beyond. The final theme of our strategic plan is maximized GBA. This theme pulls together the impacts of the strategic plan by and through growth in terms of earnings, consistent profitability, and capital management, or in other words, bringing value to our stakeholders. As I mentioned, you'll hear much more about these themes and our new strategic plan in the near future, so stay tuned. Now, let's talk about our construction segment. As a reminder, this segment includes all construction projects across the company, excluding the former WMS group. which is now presented in discontinued operations. For fiscal 2021, approximately 41% of construction revenue was earned by the Central Group, 32% came from the California Group, and 28% came from the Mountain Group. In the Central Group, revenue declined $87 million in 2021 compared to the prior year as work progressed through the ORP. As I've discussed this past year, our focus has been to transform the group by completing the ORP as we pursue projects that meet our new project selection criteria. We have made substantial progress in this transformation, and we continue to work to build new backlog that should deliver the returns that we expect. The decreases in revenue in the group, which were intentional, were partially offset by increases in revenue in the vertically integrated Arizona region. Based in Tucson, our Arizona region expanded to open a second office in Phoenix in 2021. These region offices serve customers throughout Arizona and New Mexico. The market and opportunities are significant in the Arizona region, and our organic expansion in Phoenix reflects the implementation of our new strategic plan. The California group comprised 32% of our construction revenue for fiscal 2021. Revenue decreased $106 million in this group from the prior year. There were several factors that contributed to the decrease of revenue. The first factor was the record results recognized in the second half of fiscal 2020. This was led by the acceleration of projects as we worked with owners to gain accommodations arising from the pandemic-lessened traffic conditions. With these accommodations, our crews were able to complete a significant amount of work in our cap in the third and fourth quarters of 2020. The second factor reducing revenue in the California group was an increase in weather-related disruption in the fourth quarter of 2021. This contrasts with the dry fourth quarter of 2020. Lastly, in the third quarter of 2021, I mentioned the impact on revenue we were experiencing as a result of the extended competitive environment during the first half of 2021. The result was a reduction of revenue in the third quarter that carried over into the fourth quarter. While these combined factors reduced revenue for the California group in the fourth quarter and the fiscal year 2021, our outlook for the state is still very bright. Funding and budgets are strong and we carry strong cap in the 2022, which I will talk further about in a few minutes. Finally, the Mountain Group finished 2021 strong with 28% of our total construction revenue and increased to $31 million from the prior fiscal year. Driving the year-over-year increase in revenue were the Nevada, Washington, and Utah regions, coupled with the Renewable Energy Division, all trained in strong performances. We have longstanding established vertically integrated businesses in these regions, and they all represent growing markets and opportunities for us to build upon. Our renewable energy division operates across the U.S. and primarily focuses on installation of solar power generation and battery storage facilities. Granite has a strong presence in this growing market, which has been fueled by the U.S. government's push to expand the nation's shift to renewable energy sources. Now on to our construction cap, which ended the year at $4 billion. As a reminder, this is only CAP that is continuing operations in the California, Central, and Mountain groups, and excludes CAP from discontinued operations, or WMS. CAP of $4 billion represents slight decreases from the third quarter and the prior year of $55 million and $15 million, respectively. On the slide, you can see two different views of our CAP, by procurement type and by operating group. These are two key ways that we measure and assess our project portfolio mix and quality. The cap by procurement type provides a view of the percentage of cap in the bid build, design build, and best value procurement types. Bid build is a procurement type that is most commonly used by departments of transportation and other municipalities when letting projects. Bid build is when the project owner is responsible for the design of a project and typically the lowest bid wins the job. This procurement type is widely used throughout our markets, particularly on smaller, quicker-term projects that we typically construct by our vertically integrated businesses. In the last two years, the percentage of bid-billed projects in our cap has remained consistent, and we expect bid-billed work will remain the majority of our project portfolio mix. Design-billed procurement is frequently used for larger projects and allows project owners to more quickly release projects to contractors. Contractors are responsible for design risk and construction risk, and bids are often submitted with approximately 30% of the design of the project completed. This procurement type introduces more risk to the contractor who takes responsibility for the majority of the design of the project. Historically, Grant was a joint venture partner on very large design bill projects. These projects now represent the majority of our remaining ORP and were the impetus for development of our new project selection criteria. Over the last two years, cap for such design bill projects has been reduced by over half as we continue to complete the ORP. We expect the design bill will remain a component of our cap in the future. We intend to target such projects in our home markets where we can leverage our team's local knowledge and where we are fairly compensated for the additional design risks inherent in this procurement type. In best value procurement projects, contracts are primarily selected based on qualifications and experience, and awards are not solely based on low price. Similar to design-build, this procurement type also allows project owners to release projects to contractors much quicker than bid-build is the design and construction of the project is a collaboration between the owner and the contractor. Best value projects have longer lead times, including pre-construction phase work that can last several years before the actual construction begins. Granite has been very successful in procuring best value projects due to our project team's strong qualifications and experience. We have increased the percentage of this type of work in our project portfolio over the last two years. We believe this procurement type due to the collaborative nature of the relationship with the owner, allows us to provide a high level of value and simultaneously to mitigate risk before they rise to the level of a legal dispute or claim. We are very pleased with the increase of best value procurement in our portfolio and expect it will continue to be a significant component of our cap in the future. The next view of our cap is by operating group. When we review our cap, we look at diversification by risk and contract type, but also geography. Over the last two years, you can see the reduction of cap in our central group, including the ORP within the central group. Keep in mind that this group now includes our vertically integrated Arizona region, our formal federal division, our civil division in the Chicago region, and our Texas and Florida regions. With the reduction of ORP cap and the more selected new project selection criteria, the central group's cap as a percentage of our total has decreased by 17% in the last two years. As we remain diligent in transforming the project mix in the central group, we expect their cap to stabilize or grow modestly in 2022. Offsetting the decrease in central group cap is the increase in both the California and mountain groups. The increase in cap in these groups reflects the strong economic and funding environments in those markets, as well as the success we have demonstrated to owners in adding value and thus being selected as partners in the best value procurement projects. We are excited when we look at the transformation of our cap and how we are positioned going into 2022. It is a stronger portfolio with less risk than Grant has had in recent years. We are not only pleased with our cap in our largest markets in California, but also across the country. I believe we are very well positioned with our new home market strategy to grow our cap as funds are distributed from the federal infrastructure bill and allocated to DOTs, municipalities, and state agencies. Now, turning to the materials segment. where although the materials business was impacted by wet weather in the fourth quarter, we finished the year with an annual revenue increase of 12% over the prior year, led by higher volumes across the operating groups. For 2021, aggregate volumes increased by 11%, and asphalt increased by 6% over the prior year. During 2021, we derived approximately 65% of our materials revenues from asphalt sales. These percentages are calculated on a gross basis, and include not only external sales, but also internal sales of aggregate to our asphalt plants, as well as sales of asphalt to our construction projects. A significant component and variable in asphalt production is liquid asphalt, which has had volatile pricing along with other oil-related products over the last two years. In 2020, we saw a benefit in our results from lower costs for liquid asphalt. In 2021, oil prices increased throughout the year and into 2022. While we apply measures such as bulk purchases, forward contracts, and other hedging to mitigate our exposure to oil prices, we did experience a negative impact in our results from rapidly rising oil prices during 2021. In 2022, we continue to see a rise of oil prices due to the concerns over the economy and the conflict in Eastern Europe. We will continue to closely monitor oil prices and apply measures to mitigate risk. Now I'll touch on the market and what we are seeing in terms of funding and the economy. At the federal level, in November of 2021, the Infrastructure Investment and Jobs Act was finally signed into law after being in discussion for many months. This law represents a generational investment in the critical infrastructure needs of the country. The bill provides $550 billion in incremental funding over five years, including $284 billion for transportation and $261 billion for utilities. This funding is for a wide variety of infrastructure needs, many of which Granta participates in directly or indirectly, from roads and bridges, airports, and water ports to power and water construction. As a diversified civil contractor, we believe we will benefit from the additional funding for many different types of projects. The bill is also expected to drive economic expansion that should benefit the private market. Granta has steadily built upon relationships with private market clients over the last several years in various industries from mining and renewables to tech companies and should benefit as these clients expand their footprint in a strong economic environment. At the state and local level, our markets vary based on geography, but there is general continued support from voter-approved transportation measures. We believe the environment is healthy. We expect that once Congress funds the infrastructure bill through appropriations, more activity and opportunities will be generated as 2022 progresses. However, the more meaningful impact should occur in 2023 and 2024. Now, I'll turn it over to Lisa to go over our financial results.