Granite Construction Incorporated

Good morning. My name is Sarah, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations second quarter 2023 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 1. Please note we will take one question and one follow-up 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 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, 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. Now, I'd like to turn the call over to Kyle Larkin.

Kyle Larkin Good morning, and welcome to our second quarter conference call. I'll start with a quick recap of some significant accomplishments in an eventful second quarter. At the beginning of Q2, we closed on the purchase of Coast Mountain Resources, or CMR, a quarry and processing facility that served as a supplier for our Pacific Northwest region. Our materials business is integral to our home market strategy. As discussed in previous calls, we perform best in markets featuring a combination of an aggregate and asphalt business with a vertically integrated construction business. We believe the CMR acquisition provides our Pacific Northwest region with a competitive advantage. This acquisition, as well as the Q1 purchase of the Brunswick Cannon Quarry in northern Nevada, reflects our commitment to invest in and grow our materials business. In addition to these acquisitions, we also continue to invest in greenfield reserves, plant automation, and other efficiency projects. We are seeing the results of our investment in the materials business and look forward to sharing more as we continue to execute our plan. We also completed the refinancing of our convertible bonds in May. This refinancing resulted in a $51 million non-cash charge that is adjusted in our non-GAAP net income and earnings per share. The new convertible bonds supplement our credit facility and provide Granite with a strong capital structure that bolsters our liquidity position. Our debt structure provides us with both stability and access to funds as opportunities arise. Turning to our response to a slow Q1, while we were happy in Q2 to finally stop talking about atmospheric rivers out west, the historically wet Q1 weather had a lingering headwind as several of our western businesses dealt with delays caused by the historic snowpack and associated runoff. Despite these impacts, I'm encouraged by our team's second quarter performance and ability to overcome the slow start of the year. Now, let's dive into our construction segment. I'm excited to report the total cap increased $334 million from the first quarter and is up over $1.2 billion year-over-year to $5.4 billion. That is an exceptional result for the quarter and a testament to pursuit teams across the company. I'm pleased by both the number of wins in the quarter and the opportunities that we see on the horizon. We are winning our share of high-quality public and private work. This should translate to revenue growth in 2023, but even greater impact should be recognized in 2024 and 2025. I believe current market conditions should allow us to continue building strong quality cap through the remainder of 2023. Looking at our operating groups and starting with the California group, it was another stellar quarter for pursuit teams across the state. The group ended Q2 with another record cap of $2.3 billion, an increase of $432 million, or 23% sequentially, and $716 million, or 44% year-over-year. There have been some concerns around California's 2023 to 2024 budget deficit. However, the finalized budget package keeps infrastructure investment intact and, in fact, is up 5% from the previous year. The state recognizes the need for infrastructure investment and has protected it in the latest budget. In addition, the budget authorizes Caltrans, the State Department of Transportation, to pilot the progressive design-build procurement method. This is an example of an alternative procurement model that we prefer. Like the construction manager general contractor procurement method, progressive design-build is a best value method that generally provides more successful projects by allowing stakeholders to collaborate throughout the design, pre-construction, and construction process. Through the first six months of the 2023 calendar year, Caltrans awarded $3.4 billion of work, including both traditional bid build and construction manager general contractor procurement types. This total was the highest amount in terms of number of projects and dollars awarded in the last five years. Over the past year, the dynamics of the state's funding have continued to improve. Aided by the federal infrastructure bill, our California group has capitalized on the numerous opportunities available. A quick comment on the California emergency work that we discussed in the first quarter. As a reminder, this work was comprised of approximately $100 million of not-to-exceed contracts. Year-to-date, through the second quarter, we recognized $43 million in revenue for emergency work. We don't anticipate significantly more revenue from these contracts. While the California group has the highest cap balance by group, the Mountain group is our largest group by revenue, both in 2022 and through the first half of this year. At the end of the second quarter, cap in the mountain group stood at $1.5 billion, an increase of $52 million, or 4% sequentially, and an increase of $428 million, or 40% year-over-year. The cap growth is primarily driven by the Alaska, Nevada, and Utah regions. The mountain group is the most seasonal group within Granite, as several markets are exposed to more intense winter weather and have shorter construction seasons. With the higher levels of cap in place at the start of this year, the group ramped up quickly as soon as weather allowed and expects to have a very busy remainder of the year. Finally, in the central group, cap decreased in the quarter by $151 million sequentially, while remaining up $81 million year over year. While there was a cap decrease in Q2, the central group was the lowest bidder on several projects which we reflected in third quarter cap, including a $200 million tunnel project in Ohio. The central group continues to pursue quality work and is building up its de-risked cap portfolio. We expect the group to increase its cap in the third quarter, with the tunnel division in Illinois and Texas regions leading the way. While the central group has substantially de-risked its current cap, I am disappointed to report that the construction segment was again impacted by the I-64 high-rise bridge project. While this project continues to move towards final completion, which is now scheduled for early in the fourth quarter, the project suffered cost increases. This resulted in a $21 million impact to gross profit in the quarter, with a net impact to grant of $10 million after non-controlling interest. Winding down these types of risky projects has been a long journey. We remain focused on completing the project as soon as possible. The challenges we have faced on the project are a stark reminder of why we intentionally de-risked our portfolio away from these types of large, complex design-build projects where project risks are shifted to the design builder. Our experience with these types of projects, which often require five or more years to complete, and we are working outside our home markets, has not proved successful. When we are evaluating larger projects, we have emphasized best value procurement delivery methods, such as CMGC. In best value projects, we are better positioned to address all risks, as we work collaboratively with the client to mitigate risk for the project, the client, and for granted. Although some best value projects have high total contract values, they are often separated into smaller work packages, which are then reviewed through multiple project workshops. This process is a win for the contractor and the owner. Projects are generally completed quicker and with fewer claims. We have constructed more than 60 best value projects, and we are very confident in our risk assessment on these types of projects. Overall, assuming the weather cooperates for the last six months of 2023, I expect the third quarter and second half of the year to be very busy, with revenue exceeding the prior year. I also believe we have numerous opportunities to continue to build CAP in every group, setting the stage for strong growth in 2024. Moving to the material segment, I'm excited about the performance in the second quarter and the momentum we have going into the third quarter. In Q1, inclement weather slowed construction and drove significant decreases in volumes. In Q2, our teams got to work and started to make up ground. Aggregate sales volumes increased 9% year-over-year in the quarter, while asphalt volumes were flat. The materials business has performed well, increasing prices both in aggregates and asphalt, resulting in improved revenues and margins. We are investing more in our materials business to maximize production efficiency through multiple automation projects, greenfield reserves, standardization, and implementation of best practices. These initiatives are paying off, and I believe we will see further benefits as we drive towards our 2024 gross profit margin targets of 15% to 17%. Now I'll turn it over to Lisa to review our financial performance for the quarter.