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 Incorporated 2022 first 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 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 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 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 the 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, 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. Good morning. In our fourth quarter conference call, we briefly discussed our new strategic plan. Today, we will share more detail about our plan and how we believe it will position Granite for success. I want to start with an overview of the foundational strides we have made to deliver consistent profitability and measure growth. We have made substantial progress in de-risking our project portfolio by narrowing the footprint of our former heavy civil group and introducing rigorous project selection criteria. This represents a transition away from mega design build and P3 projects to project delivery methods that more appropriately share project risks. This reduces grants exposure to the types of complex design-build projects that we and others have struggled with recently. We believe that this transition has increased the quality of our committed and awarded projects, or CAP, and that our existing CAP portfolio positions us for increased profitability in 2022 and beyond. Our strategic plan contemplates a return to strong profitability by focusing on our core construction skills, the skills that we have developed and honed over the past 100 years. As part of this focus on core competencies, and as previously announced, we are in the process of digesting our former water and mineral services through businesses. Proceeds from these sales will add to our already strong cash position and support strategic investments and new opportunities to grow both organically and through M&A. Our new executive leadership team is in place and working to return Granite to the profitable company that our shareholders expect and that we insist upon. Recent key decisions include lowering SG&A and driving efficiencies across the company by restructuring our operating groups from five to three. These revised groups, California, Mountain, and Central, are focused on a home market strategy to build on the strengths that made us one of the most respected contractors Before we get into the details of our strategy, let me revisit the four key themes of our strategic plan. First, develop our people. Developing our people is the foundation of Granted's strategy and success. The financial performance of Granted depends on engaged employees executing on our strategy. In a strong macroeconomic environment with lower unemployment, there is unprecedented demand and competition for talent at all levels. We want to be the employer of choice for our industry, and we are committed to identifying, hiring, and retaining the best talent. We believe we can do this by modeling inclusive diversity, providing career advancement through training and development, and accelerating opportunities for all employees throughout our talent pipelines. As we look to capitalize on increased funding from the Federal Infrastructure Bill, it is critical to have skilled, trained teams ready to execute work across the organization. To further this goal, we are investing in our college internship, co-op, and graduate recruitment programs. We are also focused on enhancing our craft recruiting. These efforts allow us to identify talent early, introduce them to the Granite family, and convert them to full-time employees. We are implementing more rigorous and standardized continuous training at all levels of the organization, which will enhance the flexibility of our workforce and promote the growth of our people. Additionally, for high-potential employees, We have developed and implemented a suite of leadership training programs focused on business acumen, managing people, and strategic planning with a goal to graduate 250 employees annually with 40% being people of color or women. We are proud of our inclusive diversity program as both the right thing to do for our people and as a differentiator in the construction industry. We believe that we are an industry leader in inclusive diversity, and we plan to continue our focus in this area. We set company-wide goals to increase total women's representation at Granite from 13% in 2021 to 18% in 2025. Our goal is to increase women in leadership from 15% in 2021 to 20% in 2025, and we are working to increase people of color in leadership from 17% in 2021 to 20% in 2025. We are well on our way to meet these targets as we continue to build on the real strength of Granite, our people. Second, raise the bar. In the construction segment, we are focused on three key factors, appropriate project selection, an accurate estimate on bid day, and execution during construction. To enhance our work on these factors, we established the Construction Leadership Council, or CLC, to identify and promulgate best practices in the bidding, estimating, and project execution processes. Due to CLC, we are focused on further strengthening these processes with increased training, enhanced standardization, improved database projections, and universal adoption of best practices. The construction industry overall has been slow to adopt technology-based solutions to augment the project teams, and we look to make this another differentiator for Granite. We believe these actions will translate to improvements in gross profit and gross profit margins. Within construction materials, we are raising the bar by automating our plants to increase production capacity while lowering our per unit costs. Investment in technology to support our materials facilities is ongoing and a major component of the strategic plan. At the beginning of 2021, we opened two new aggregate and asphalt locations in California. Utilizing the latest technology, these facilities not only replaced aging plants, but significantly increased production capacity and efficiency thereby lowering our overall costs. Investment in materials facilities continues in 2022 with a variety of upgrades and enhancements to our aggregate plans, which will provide competitive advantages as we work to strengthen our home market positions. The third strategic theme is grow market share. We will continue evolving towards a more client-centric culture and investing in our vertically integrated business model to strengthen and expand existing home markets and strategically establish new ones when the time is right. As I will discuss shortly, this growth will be in two phases, the near-term support and strengthen phase, and the longer-term expand and transform phase. The final strategic theme is Maximize Granite Value Add, or GVA. This summarizes what we believe our mission is as Granite employees, work every day to bring value to our stakeholders and reward our employees. We intend to maximize value add by improving capital management growing earnings, delivering consistent financial results, and leading the industry in environmental, social, and governance performance. We will deliver value back to shareholders while simultaneously investing in growth organically and through M&A. You've heard us mention our home market strategy on multiple occasions. Now, I will walk you through the advantages of this strategy and how it differentiates Granite from our competitors. Through experience in markets where we have an established presence, we build market intelligence and insights, which allows us to read the competitive landscape, identify the best project opportunities, and implement the most effective strategy to win and execute work. In a home market, we are an active member of the community with longstanding, trusted relationships with vendors and subcontractors. These hard-won relationships with key stakeholders may grant the contractor choice within our home markets. Our home markets have readily available resources, both in terms of quality construction materials and workforce. In these markets, we have many long-tenured employees and believe we are the employer of choice among contractors for both salaried and craft workforce. We can leverage our solid relationships with our union partners to obtain the workforce that we need for our projects, even in the current challenging labor conditions. These relationships will be ever more important in funding for projects and demand for labor expands in the next several years. Finally, having strong relationships with project owners and regulators is crucial to driving our client-centric culture and a key aspect of our home market strategy. Our goal of being the contractor of choice is not only to be selected for emergency work or best value procurement projects, but to maximize collaboration with our stakeholders throughout the full lifecycle of a construction project. In home markets, we know the clients and representatives from working together for many years and enjoy the strong relationships that support long-term success. In fact, we still work with clients that we had worked for a century ago. This reduces disputes and legal claims, improves profitability, and helps us bring the most value to our clients. These critical components of a home market result in a balanced project portfolio combining larger projects, It increased retention and workforce stability with smaller, quick-term projects. Home markets are also areas where we have built relationships with public and private owners. From 2018 to 2021, we increased the percentage of construction revenue from private owners from 17% to 24%. This was a result of building over several years, and we see this investment further diversifying and potentially expanding our portfolio of private work in the future. Better portfolio balance will allow us to maximize our capabilities and resources, driving better returns for all stakeholders. In 2022 and beyond, we will continue to strengthen existing home markets and develop new ones. Vertical integration is key to granted success. A fully developed vertically integrated model aligns the strength of our construction materials segment with our construction project acumen. In some markets, it is difficult to secure work at acceptable margins without access to quality materials. Vertical integration maximizes our project productivity and scheduling while being able to rely on high-quality materials, avoiding dependence on the capacity of other material suppliers with competing priorities. Vertical integration allows us to reduce costs in several ways. First, we can reduce costs with internal purchasing compared to relying on external pricing. Selling materials to our project increases volumes for our materials plants, lowers our fixed costs per ton, and maximizes profit. Second, we collect millings from our projects to use as recycled asphalt pavement or wrap in future asphalt mixes. By reducing the amount of virgin material utilized, we lower potential costs of projects, thereby increasing the profitability of our materials business. In addition, our aggregate quarry locations backhaul materials for construction projects to utilize as fill or for use in future projects. This benefits the construction project that may otherwise need to pay to place the materials, while also adding value to our aggregate plans. Finally, we achieve tax savings through the transfer of materials internally to construction projects, rather than purchasing the materials externally and paying applicable sales taxes. GrantsMaterials' business has been integral to our strategy for 100 years, and through vertical integration, it will continue to drive our sustainable, profitable growth in the future. Turning to our investment framework for growth over the next few years, our liquidity, balance sheet, and cash generation allow us to invest in our business, which we will continue to do this year and moving forward. We intend to invest in our vertically integrated business model organically and through M&A to strengthen and expand existing home markets and eventually establish new home markets. Our strategy is separated into two phases, support and strengthen, and expand and transform. Within the support and strengthen phase, we plan to invest over the next three years in solidifying and bolstering our core competencies and expanding within our existing markets. Within the materials business, we are making investments to upgrade production capacity to aggregate facilities while increasing automation and energy and water conservation. These investments are underway in 2022 and will continue in 2023 and 2024. In addition, we continue to invest in materials reserves to ensure targets for today and into the future. In the near term, we intend to strengthen and expand our current markets with bolt-on acquisitions. These acquisitions of construction materials for vertically integrated construction businesses would most likely be less than $100 million, would complement our existing operations, and provide uplift from utilization of adjacent facilities and assets. We are continually evaluating bolt-on acquisition opportunities and are excited to strengthen our home market footprints through future transactions. Looking to 2024 and beyond, we plan to expand and evolve through more transformative investments in the new geographies through vertical integration expansions and platforms. As we move into this period of our plan, we will have built our M&A and integration capabilities through small to mid-sized bulletin acquisitions and will expand to more transformative acquisitions by entering new markets or adding materials assets where we currently do not have a vertically integrated presence. Now, I'll turn it over to Lisa to go over some of our financial expectations within our strategic plan.