Granite Construction Incorporated

Good morning. My name is Dave, 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 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 period. To ask a question, please press star, then 1. 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.

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 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 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, and adjusted earnings 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 website, graniteconstruction.com, under Investor Relations. We will also be discussing comparable results, which excludes the effects of Granite Inliner, which was sold in March 2022. Now, I'd like to turn the call over to Kyle Larkin.

Good morning and welcome to our fourth quarter conference call. We have a lot of good news to discuss today. However, before we share our strong results, I would like to briefly discuss the need to restate our first three quarters of 2022. As Lisa will discuss in more detail, the restatement was primarily caused by our failure to record a $12 million tax accrual in the first quarter resulting from the sale of Endliner. Importantly, we do not expect any impact to our fourth quarter or year-end results we are discussing today, and we expect a timely file our Form 10-K. Now, turning to our strong results. During 2022, our centennial year, Grant achieved a number of important accomplishments, including the safest year ever in both frequency and severity of safety-related incidents. We made notable progress towards achieving our strategic plan goals. We invested in our home markets and procured work with margins that align with our 2024 financial targets. At the same time, we work through the majority of the central group's challenged old risk portfolio, or ORP, and our committed and awarded projects, or CAP, has continued to grow in both amount and quality. Our focus on execution is resulting in higher margins, and I believe we are positioned to experience margin expansion and sustainable growth as we continue to execute on our plan in 2023. Okay, let's jump into the construction segment. As I've said in previous calls, our markets are strong, and we are pleased with the mix of opportunities available across the company. As of the end of the quarter, our cap totaled $4.5 billion, a sequential improvement of 10% or $408 million, and a year-over-year increase of 12% or $475 million. Our cap has also been transformed. We've moved away from complex, longer-duration, higher-risk projects and towards more best-value and bid-bill projects in our current and future home markets, but we can leverage our existing relationships and resources to execute upon a balanced portfolio of quick-turn and longer-duration projects. We believe the combination of smaller and larger projects in our home markets allows us to maximize utilization of our material, equipment, and personnel while providing predictable work and stability for our regions. Turning to our operating groups, in the California group, we ended the quarter with record cap of $1.7 billion. This reflects a 13% increase from the California group's third quarter cap and an 18% increase over the prior year. Although the end of the year is typically a little slower in the bid room, we won more projects at higher margins when compared to the same period in the prior year. The increase in cap reflects high levels of funding across the state and our team's successful effort to capture work. Approximately 50% of California's cap at quarter end were best value projects. Caltrans, the California State Department of Transportation, has embraced the construction manager general contractor procurement method, and Granite has demonstrated our ability to partner with Caltrans to deliver high-quality work which increases the value of the end product for the customer. In our experience, collaborative contracting, such as CMGC, allows us to partner and innovate with owners before construction begins to mitigate potential risks and successfully deliver more complex projects while avoiding disputes and claims. We are proud of our long history working with Caltrans. We believe Caltrans is well positioned to deliver central transportation projects and are excited for increased opportunities to partner with them to maximize value for the traveling public. Despite an overall deficit in the proposed California state budget, the state's transportation budget remains strong in 2023. supported by funding from the Federal Infrastructure Bill, or IIJA. During the first year of the IIJA, California's federal formula transportation funding increased 42% for approximately $1.5 billion, with funding expected to remain at this level for the next several years. Although the majority of this funding has been allocated to projects, as the state completes its planning and engineering process, it may still take considerable time for projects to reach the bid schedule. Despite possible delays in releasing IIJA-funded projects, we believe opportunities in California will continue to increase, allowing us to build CAP and grow revenue in line with our strategic plan. Moving to the Mountain Group, we finished the year with CAP of $1.1 billion, up 8% sequentially and 14% year-over-year, inclusive of CAP in the Water Resources Division, which was held for sale as of December 31, 2021. As a reminder, the Mountain Group has diverse geographies, including Alaska, Washington, Nevada, Utah, as well as diverse businesses, including our water, solar, and mineral exploration businesses that have a national footprint. Many of our businesses in the Mountain Group are vertically integrated and operate in long-established home markets. Each of the Mountain Group geographies are different, but like California, the markets will benefit from strong public funding aided by the IIJA. In the fourth quarter, although we remained selected and bid fewer projects, we won more projects by dollar volume at higher margins in the same period of the prior year. This excellent result is a testament to the disciplined work of the pursuit teams across the group. During 2022, the Mountain Group generated the most revenue of any group while securing a strong portfolio of projects in markets where we believe the group can continue to grow CAP in the first quarter of 2023. The central group ended 2022 with a sequential cap increase of $135 million and a year-over-year increase of $76 million. As a reminder, the central group includes the Arizona, Illinois, Texas, and Florida regions, as well as the federal and tunnel divisions. 2022 was a year of transition for the group. The group was focused on two primary goals. First, complete the challenged ORP projects as efficiently as possible, and second, secure new work in their home markets, which aligns with our risk criteria. As anticipated, winding down the ORP projects presented challenges, but the group did well in pushing the projects towards completion. The central group enters 2023 with remaining challenged ORP cap of approximately $85 million, which is less than 3% of the company's expected 2023 revenue. As a result, our focus in 2023 will be on our construction segment as a whole, I don't expect to talk about the ORP anymore, and that is good news for the company. During 2022, the central group did a nice job of focusing on their home markets and winning projects aligned with our strategic plan targets. Approximately 50% of the group's cap are in the established home markets and the vertically integrated Arizona region and Illinois region, which is just over 25% of the cap in the Texas region. During 2022, the Texas region has been successful transforming their portfolio while focusing on the opportunities in their home markets. Our focus across the group is to remain disciplined in our bids and win projects so we can leverage our competitive advantages and generate returns in line with our margin expectations. Overall, I am very encouraged by the tailwinds we are seeing not only in our construction segment, but also throughout the entire civil construction industry. While it has taken longer than hoped for, Our IJA funds have reached the states. Money has been allocated to projects, and the states are working to get the projects out to bid. Our teams are focused on operational excellence, both in the bid room and during project execution. We made a lot of progress in 2022, and I believe we will continue to see meaningful improvement in profitability in the construction segment in 2023 as we continue on our path to the 2024 EBITDA margin target of 9% to 11%. Now, on to the materials segment, where I am pleased by the strong finish to the year. 2022 presented challenges driven by high inflation and commodity-related costs and the general inflationary climate across the nation and world. This volatility resulted in margin pressure despite strong materials volumes throughout the year. Our materials business is a central component of our home market strategy, and in 2022, we made several investments to support the business. We acquired 99 million tons of aggregates in Utah, purchased a liquid asphalt terminal in Bakersfield, California, and initiated automation projects at multiple facilities. These investments were in addition to the normal capex related to our materials business. In 2023, we plan to strengthen and expand our materials resources in our home markets, both organically and through bolt-on M&A. While we did not complete any bolt-on M&A in 2022, We explored numerous opportunities and are continually assessing new opportunities across our footprint. We are being very selective, but there are many worthwhile prospects to consider in 2023. This year is off to a slow start with rain across California and much of the western states in January, but our materials backlog volume is ahead of 2022 in both aggregates and asphalt. I am encouraged by the bid activity across the company, and the declining impact of inflationary pressure on energy costs as we enter the first quarter of 2023. Now, I'll turn it over to Lisa to review our financial performance.