Granite Construction Incorporated

My name is Kate, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations Third 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, 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.

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 third quarter conference call. We had a strong third quarter. Q3 marked our second consecutive quarter of top-line growth, and we continue to grow our record cap at projects that should produce margins in line with our expectations. Just over two years ago, we stated that our goal was to transform Granite from what had become a volatile business into a business that earns predictable, strong financial results, while also producing consistent, sustainable growth. We also shared our plan to earn adjusted EBITDA margins that Granite had not seen since the housing boom. To support this effort, we took significant actions on both the construction and material size of the business. For construction, the first step we took was to de-risk our committed and awarded project portfolio, or CAP. We moved away from complex design-build projects and shifted our focus to best value and bid-build projects. In best value projects, such as CMDC or construction manager general contractor, we are better positioned to succeed as we work collaboratively with the client to mitigate risk for the project. 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. We have constructed more than 60 best value projects, and they are generally completed quicker and with fewer claims. Our record high-quality cap and macroeconomic construction market, fueled by the Federal Infrastructure Bill, or IIJA, puts Granite in the strongest position for growth and profitability in over a decade. On the materials side of the business, we said we intended to invest in our materials business, and in the home markets that have been our strength since our founding. For the past three years, we've invested in greenfield reserves, a liquid asphalt terminal, new automated aggregate plants, and bolt-on materials investments. These actions have strengthened our positions in our profitable, vertically integrated markets. We see further opportunities to strengthen our current home markets and to expand into new geographies. While much of the focus of the past couple years has been on internal transformations, We are now growing and plan to pursue opportunities to drive growth and expand our footprint in both our materials and construction segments. Our 2024 strategic plan is designed to grow our margins. The actions our teams have accomplished over the past three years gives me confidence that we are on track to achieve our 2024 financial targets. Now let's review the performance in our segments for the quarter, starting with the construction segment. Total cap grew in Q3. Continuing the trend over the last year, cap increased 147 million from the second quarter and is up 1.5 billion or 37% year-over-year to 5.6 billion. This represents a second consecutive record cap for Granite. In what is typically our largest revenue quarter of the year, growing cap is a significant accomplishment for our teams. The robust market has produced a number of public and private opportunities that should allow us to continue to build high-quality cap in the fourth quarter and as we move into 2024. Further, I believe the IIJA funding will continue to expand bid opportunities in 2024 across all of our key markets, and we are well positioned to capitalize on those opportunities. Diving into our operating groups and starting with the California group, cap was flat in the second quarter and increased 792 million, or 51%, from Q3 2022. This is a really impressive result as the group continued to win a significant amount of work while achieving record third quarter revenue. Public spending in the state has been strong and is expected to continue. Earlier in the year, there were concerns about the state budget deficit, but these concerns were resolved without impact to transportation spending. During Q3, Caltrans, the State Department of Transportation, again awarded their highest dollar value contracts in at least five years. Historically, high bid opportunities are expected to continue in 2024. Moving to the mountain group, our most seasonal group, cap decreased $65 million from the second quarter as the group posted year-over-year revenue growth of 12% in the third quarter. Despite the decrease in cap during the quarter, the group ended with cap of $1.4 billion, remained significantly higher by $431 million, or 43% year-over-year. Our Utah, Alaska, and Nevada regions continue to lead the group with strong caps. With budgeted spending in each state and the group expected to increase in 2024, the Mountain Group is poised for continued growth in the fourth quarter and 2024. Finally, in the Central Group, cap increased in the quarter by $212 million sequentially, up $284 million year-over-year to $1.8 billion. The increase in cap was led by the Tunnel Division, which landed a $205 million tunnel project in Ohio and continued growth in the Texas region home markets in Houston and Dallas. While the central group revenue was flat year-over-year in the quarter, I expect the group to return to revenue growth in 2024. The transformation of the central group's cap has been tremendous and a key component to our expected margin expansion in 2024. Overall, the construction segment had an outstanding quarter. We continue to build high-quality cap, grow revenue, and increase profitability in line with expectations. I believe we will continue to grow cap and revenue in the fourth quarter and enter 2024 very well positioned to achieve our financial targets. Moving to the materials segment, we built on the momentum of the second quarter with another strong performance in the third quarter. As I mentioned last call, cost inflation significantly impacted profitability last year, normalized in 2023. Destabilized costs combined with aggregate and asphalt price increases resulted in margin gains in the second and third quarters of 2023. Materials volumes and orders remain strong throughout the third quarter and going into the fourth quarter. In this market environment, I expect to realize further price increases in 2024. As we have previously reported, we've been investing in our materials business in numerous ways over the last two years. In the fourth quarter, we're expecting the completion of major investments in two automation projects, including a new fully automated aggregate plant. These investments in our materials segment should drive cost efficiencies and further margin expansion in 2024 in line with our gross margin expectations of 15% to 17%. Now I'll turn it over to Lisa to review our financial performance for the quarter.