Granite Construction Incorporated

good morning my name is renan and i will be your conference facilitator for today at this time i would like to welcome everyone to the granite construction investor relations third quarter 2022 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 session to ask a question please press star 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, sir.

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 judgments 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. Check is 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 margins, 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.

Good morning, and welcome to our third quarter call. We'll start this call with an update on our efforts to drive improved gross profit margin across our portfolio of projects. I'm pleased to report that excluding the ORP, our construction gross margin improved to 14.8% in the quarter. I want to congratulate our teams on this accomplishment. This margin improvement validates all the hard work we have been performing across the company to improve profitability. I will talk more about this improved performance later in the call. Before we dive into performance, I also want to mention an update to our divestiture plan that occurred this quarter. As we announced in September, we are retaining the water resources and mineral services businesses. These businesses will report into the mountain group in the construction segment. Both businesses have performed very well this year and have market outlooks to support future growth. We are confident the decision to retain these businesses is in the best interest of our shareholders and we intend to invest in and grow these businesses to their full potential. As a reminder, Water Resources provides full lifecycle water management, from supply to treatment to delivery and maintenance for government agencies, commercial and municipal water suppliers, industrial facilities, and agricultural and energy companies. Through water well drilling, installation and rehabilitation of wells, pumps and water treatment technology, our teams identify and develop water sources, recharge aquifers, and deliver potable water. Mineral Services provides mineral exploration services for the largest mine operators in North America, particularly copper and gold operations. While the business is cyclical and there has been recent weakness in copper and gold prices, we believe the push from fossil fuels to electrification will support a strong cycle of growth in the mining industry. We are well positioned to support our mining partners in this growth, not only in mineral exploration, but also through civil construction services on their mindsets. Now, turning to the broader view of our three operating groups. We remain laser-focused on achieving our 2024 strategic plan targets of construction segment gross profit margin of 14% to 16% and consolidated EBITDA margin of 9% to 11%. As I mentioned at the start of this call, we are seeing progress in this area, the third quarter gross profit margin excluding the ORP of 14.8%, which is an improvement quarter over quarter from 14.1%. The improvements we are experiencing are credit to the steps we have been taking to implement our strategic plan throughout the project lifecycle. We have been focusing on two primary areas of the project lifecycle across our groups. Project selection is one area of emphasis. We are pursuing projects suited to our strengths, and we are being selective with the clients that we choose to work with. Disciplined project pursuit focuses on jobs where we have a competitive advantage based on our knowledge of the project and home market. On bid day, we are disciplined on margin expectations, and our project portfolio consists of higher quality work than Granta has had in years. The second area of the project lifecycle focus has been project execution. and best practices across the company. During the third quarter, we saw our focus on bid-day margin and project execution gain momentum as demonstrated by our non-ORP construction gross margin. We are pleased with this progress and we are positioned to build upon these results as we work to achieve our 2024 sheet of planned gross profit margins of 14% to 16%. Through the third quarter, we continue to see positive funding levels and project opportunities across our footprint. Although there have been instances where inflation has caused low bids to be above owner estimates, delays or project cancellations have been limited. Public markets and project opportunities continue to be strong despite minimal benefit to date from the Federal Infrastructure Bill, or IIJA. In the private market, which accounts for around 25% of our business, inflation is causing some uncertainty. We are still seeing a number of clients pushing forward with planned work. Grant does not have significant exposure to the residential market, which is showing signs of significant slump. Turning to the ORP, we continue to burn through the remaining work on these projects. There is $150 million of cap remaining on the ORP projects at the end of Q3, and we expect approximately $90 million to carry into 2023. As a reminder, $35 million of the ORP cap expected to carry into 2023 relates to one small profitable project. that is included in the ORP because it is a non-sponsored joint venture. Excluding this profitable project, there is $55 million of ORP cap expected to carry in 2023 related to challenging projects. Of the four current active challenging ORP projects, two are in the closeout or punch list phase and two are completing construction. During the third quarter, losses in the ORP, primarily from one project on the East Coast, negatively impacted our results. The losses arose out of the scheduled delays, which drove increased costs with remaining paving work. We expected the paving to be completed this year, but it is now pushing into 2023. This one project represents more than half of the $55 million in challenging LRP project cap, which is expected to be completed in early 2023. We believe our forecasts have captured the cost that will rise out of the delays, and our teams are diligently working to complete the project as quickly and efficiently as possible. As we move from 2022 to 2023, we believe the remaining risk of the ORP has greatly decreased, and our focus will be on the construction segment performance as a whole. As I have said before, we cannot finish this work soon enough. I am excited to see that the end is in sight for the challenging ORP. Now, I'd like to discuss the transformation of our center group, another area of our strategic plan where we are making significant progress. As previously discussed, Having well-developed home markets is key to our strategy. Our vertically integrated California and mountain groups model the structure and portfolio that we are working toward across the company. In our home markets, we have trusted relationships with stakeholders and employees, market intelligence, and access to resources. These attributes result in us winning more projects at higher margins and higher levels of customer satisfaction. Texas region of our central group has historically pursued and constructed large projects across southeastern and midwestern states. Last year, the region was asked to do two things. First, de-risk its portfolio by changing the types of projects it pursued from complex design-build projects to smaller bid-build or best-value projects. Second, build a home market within Texas. One focus of this effort has been to solidify our presence in the rapidly growing Houston metro area. Although Grant has been in the Houston market for over 15 years and has good relationships with the Texas DOT, the labor pool, the contractors and vendors, we have missed opportunities to strengthen those relationships as we chase work across the country. The Houston area is a growth market with healthy funding levels and a resilient pipeline of job opportunities and markets from transportation to water to private site development. We've applied a targeted and selective bid strategy We believe we have a competitive advantage and can leverage our strengths through our expertise in roads and highways, as well as our experience in solar, water, airport site work, and structures. In the third quarter, we had three highway project wins in southwest Houston, totaling $145 million. The projects are in close proximity to each other and should allow us to leverage existing teams and resources we have built in the market. Our center group has done a great job building the foundation for future profitable growth and will be a key component of Granted reaching the targets set out in our strategic plan. Now, turning to cap. We enter Q4 with $4.1 billion in cap, a sequential decrease of $135 million following what is traditionally our busiest quarter of the year. Year over year, excluding Granted's in-liners cap of $205 million in the prior year, cap decreased $45 million. This, again, results from our efforts to de-risk our project portfolio as we move away from large, complex projects to smaller projects that fit within our refined risk criteria. While we have seen resilience in our private market work and continued strength in public market opportunities, it appears that the additional funding from the IIJA is taking longer to turn into lettings than originally expected. State DOTs are still working through the process of prioritizing and advertising the projects. We expect a ramp-up of opportunities over a period of several years, similar to what we experienced in California when SB1 was first passed. We hope to see a more meaningful impact on the project opportunities over the next six to nine months. The good news is that the IIJA will build upon the current positive market. We believe we are well positioned to capitalize on the increased funding through our home markets in large and high-growth states that receive the bulk of the funding as the projects are released. I'm excited as I look at the quality of CAP across our groups and the opportunities ahead of us in the fourth quarter. We believe the quality of our CAP has never been better and will support our strategic plan and profitable growth. Our successful strategy to target best value opportunities has changed the risk profile of our CAP and should lead to more consistent profitability and cash generation for years to come. Shifting to the materials segment, Aggregate volumes remain strong during the quarter, increasing year-over-year across our operating groups. Activity in the markets during the quarter and aggregate orders as of the end of the quarter continue to suggest that the general economy remains healthy, despite inflationary pressure and interest rate increases. This strength is demonstrated by a 16% year-over-year improvement in the volume of aggregate orders as of the end of the third quarter. Asphalt volumes during the quarter increased year over year in the mountain and central groups, but was more than offset by a decline in the California group. The decline in California is primarily due to a decrease in asphalt paving projects compared to the prior year. Despite this decline in volumes in the quarter, we are encouraged that penny orders are now ahead of the prior year as we move into the fourth quarter. During the quarter, we saw revenue and gross profit increase over the same period in the prior year and saw a decrease in gross profit margins. as lower asphalt volumes and inflationary costs continue to impact sediment profitability. We expect that the energy surcharges introduced during the second quarter will continue to offset inflationary pressures and boost revenue and gross profit in the materials segment. Now, I'll turn it over to Lisa to discuss our financial results.