Granite Construction Incorporated

Good morning. My name is Andrea, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Investor Relations fourth quarter 2023 conference call. This call is being recorded. All lines have been placed on mute to prevent any background noise and all the speaker's remarks. 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. Please go ahead.

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 fourth quarter conference call. I'm excited to talk about how we close the year. Across the company, our teams had an outstanding fourth quarter. But before I discuss the details and highlights of the quarter, I would like to revisit some significant accomplishments during 2023. Previously, we laid out our investment framework for growth as part of our 2024 strategic plan. Our growth strategy is built upon two pillars, support and strengthen, and expand and transform. When we support and strengthen, we focus on developing and strengthening our core competencies and growing our home markets. As we work to expand and transform, we grow our business with more transformative investments, both in our home markets and new geographies. Over the course of 2022 and 2023, we worked to support and strengthen our businesses. In our construction segment, we strengthened our home markets by selecting the right owners, projects, subcontractors, and vendors, while leveraging our local market intelligence to win more projects at higher margins. We selected work suited to our core competencies, and we constructed these projects with high levels of customer satisfaction and without the types of claims that plague the legacy work. In our materials segment, we invested in our home markets through bolt-on acquisitions, equipment, and plant automation projects, and by investing in additional aggregate reserves. We have had a lot of success strengthening our home markets. Texas is a good example. According to the American Road and Transportation Builders Association, Texas led the country in state and local government transportation construction contract awards at $16 billion. The next closest state, California, is at $9 billion. As discussed on previous calls, the Texas region historically chased work across the Southeast and Midwest. Since we began implementing our 2024 strategic plan several years ago, the Texas region has focused on Dallas-Fort Worth and Houston. Although Granite has been in both of these markets for more than 15 years and has strong relationships with the Texas DOT, labor pool, subcontractors, and vendors, we missed opportunities to strengthen those relationships as we pursued work across the country. Both metros are growth markets with good funding and a resilient pipeline for a range of projects in different end markets, including transportation, water, airports, and private site development. In 2023, we applied a targeted and selective bidding strategy to leverage our strengths and competitive advantages to build a de-risk portfolio of projects. These projects have an average cap size of approximately $30 million per project as of the end of the year. Both the size and quality of the cap is a significant improvement from the historical cap of the Texas region. On the material side, across the company, we supported and strengthened the business with significant investments in reserves, targeted automation projects and aggregate quarries, and the consummation of bolt-on acquisitions. First, acquisitions. In 2023, we completed two bolt-on aggregate acquisitions that added strategic capabilities to our home markets. The first was the purchase of the Brunswick Canyon Quarry, an asphalt plant in Carson City, Nevada. The Brunswick Canyon Quarry added 17 million tons of reserves and expanded our home market's vertically integrated reach in northern Nevada. We also purchased Coast Mountain Resources, which operates the Bamberton Quarry on Vancouver Island in British Columbia, Canada. Bamberton Quarry added 40 million tons of reserves. Grant had previously been a customer of the quarry due to its high-quality aggregates and strategic proximity to our home markets in the Pacific Northwest. We are continually evaluating bolt-on acquisition opportunities and believe we can continue to grow our home market footprint by and through similar feature acquisitions. Aggregate facility automation projects have been another focus, like our recently completed Swan Aggregate Facility in Tucson, Arizona. The new plant averages automated technology to produce aggregates at lower costs while minimizing night and weekend shifts, thereby reducing workforce challenges. The second automation project is expected to be completed at our Solari facility in Bakersfield, California during the first quarter of 2024. While not suitable for all plants, we expect to continue to roll out automation technology to additional aggregate facilities in our network in 2024 and 2025. Moving forward, we intend to continue making investments to support and strengthen our home markets. We will also look for growth opportunities through investments that will expand and transform our business. The acquisition of Lehman Roberts Company and Memphis Stone & Gravel Company is a good example of such an investment. Lehman operates seven strategically located asphalt plants serving the greater Memphis area and northern Mississippi, while Memphis Stone & Gravel operates three sand and gravel mines with an additional mine expected to be operational during the first quarter of 2024, adding in a total of 82 million tons of reserves. I have previously discussed the fact that we are interested in acquiring well-run businesses that can be a platform for growth. The types of businesses that we would consider operate in a market that is healthy and growing and have strong leadership that will continue post-acquisition, just like Lehman and Memphis Dump. They are long-standing, well-regarded companies that are positioned for growth. The acquisition expands Grant's footprint into the Southeast and the attractive growing Memphis metropolitan market. The leadership team is staying and will continue to lead and grow the businesses. We expect Lehman and Memphis Stone to add approximately $200 million in revenue in 2024 with consistent high profitability between 15% and 20% EBITDA margin. We are excited to build on the platform this acquisition provides in growing the Southeast in 2024 and beyond. Now, before I dive into the segments, I'd like to touch on what we are seeing related to public funding for transportation and specifically in the state of California. As we said throughout 2023, we believe the level of federal and state funding throughout our geographies has created a market that we have not seen since the short-lived housing bubble of the mid-2000s. This strong public market is complemented by a private market in which various industries are increasing investment in their infrastructures. Together, this benefits the civil construction industry and Granite. We believe that the robust level of funding will continue and present opportunities for revenue growth for years into the future. In California, our largest market, transportation funding has translated to high levels of project awards and record cap. Within the California State Transportation Budget, there are two areas that most correlate to future bidding opportunities for Granite. Capital outlay projects and local assistance expenditure allocations. Capital outlay projects are primarily Caltrans projects, whereas local assistance expenditure allocations are funding provided to local municipalities for transportation projects. Actual and estimated allocations for the previous and current fiscal years, which ended June 2023 and will end in June 2024, respectively, show a consistent allocation level for these accounts at $8.3 billion and $8.5 billion, respectively. This level of funding resulted in a 38% increase in Caltrans project awards during calendar year 2023 compared to 2022. The proposed budget for the fiscal year ending June 2025 shows an increase in the level of transportation funding to $8.9 billion despite the overall budget deficit in California. This funding is supported by the transportation specific SB1 revenue and the federal infrastructure bill. we believe that these funding sources will continue to support the transportation budget in California at these levels for several more years at a minimum. As a reminder, these amounts represent allocations for construction projects, which will then need to be prepared for letting, awarded, and then released for construction. For example, an allocation made to a project in the current year budget may not turn into revenue for a contractor for several more years based on the time period between allocation, letting, award, and construction. Moving to the construction segment, it was frustrating that our really strong fourth quarter was tempered by negative impacts from the legacy Tappan Zee and I-64 high-rise bridge projects. Although a non-cash event, we adjusted our probable claim recovery estimate on the Tappan Zee project to reflect developments in the dispute review process. This resulted in a negative impact to gross profit of $19 million during the fourth quarter. In addition, even though construction activities are now substantially complete on the I-64 project, Weather-related delays negatively impacted costs and fourth quarter gross profit by $14 million or $7 million after non-controlling interest. However, it was a tremendous growth quarter for the construction segment. Revenue grew by 19% year-over-year driven by the record cap it carried into the fourth quarter. While cap decreased sequentially from the third quarter, it remained higher than the prior year by $1.1 billion or 24%. Even though this record cap led to significant revenue growth, we were able to win work during the quarter to replace much of this revenue burn, which is a testament to the market environment and a holiday-shortened bidding quarter. Diving into our operating groups and starting with the California group, cap increased $91 million to $2.4 billion from the third quarter, and the group enters 2024 with cap 39% higher than the prior year. With a record cap in California, the group experienced tremendous revenue growth in the fourth quarter, of 61% year-over-year, and has another record cap balance going into the first quarter of 2024. Also, and importantly, California continues to lead the company in best value projects, which represents $1.5 billion, or 61%, of its total cap. This best value cap at the end of the year includes $345 million added during the fourth quarter for a private rail facility project in the state. These collaborative delivery methods, like construction manager, general contractor, and progressive design build, better position us for success and allow us to work together to mitigate risk with the client. Larger best value projects are often separated into smaller work packages, which are then reviewed through multiple project workshops, providing more opportunities to address risk than large bid-build projects. In the last 15 years, we have completed or have under construction 87 best value projects. We have found that these projects are generally completed more quickly and with fewer claims. As mentioned, public funding remains elevated in the state, and we see continued investment and opportunities in the private sector. We believe this trend will continue for the foreseeable future. In the Mountain Group, CAP decreased slightly by $26 million from the third quarter, but ended 2023 30% higher year-over-year. The group ended the year with an impressive revenue increase of 12% year-over-year for the fourth quarter, led by increases in the Alaska and Utah regions. The budgeted spending in each state in the group expected to increase in 2024 with a higher level of cap. I expect the mountain group to continue to grow revenue cap in 2024. Finally, the central group. Although cap decreased during the quarter by 104 million, the group finished with an increase of 46 million year-over-year to 1.7 billion. While the quantity of the central group's cap has remained consistent, I believe the quality has increased significantly. I expect the group to return to revenue growth and be a key contributor to our expected margin expansion in 2024. I believe that a high-quality cap, coupled with a macroeconomic construction market that is fueled by the IIJA, puts Granite in the strongest position for growth and profitability in over a decade. Moving to the materials segment, we completed another strong performance in the fourth quarter. Over the last two years, we have taken actions across this segment in support of our 2024 gross profit margin targets of 15% to 17%. Our focus on raising prices, investing in automation, purchasing reserves, bolt-on acquisitions, and geographic expansion not only gives us confidence that we will meet our financial targets, but that we will continue to sustainably grow revenues. In 2023, we added 140 million tons of reserves through bolt-on and geographic expansion transactions, including the materials-focused Lehman and Memphis Stone acquisition. With stabilized costs, more efficient operations, and consistently strong quarter volumes, when combined with further expected price increases, we anticipate growing segment revenue and profitability in 2024. Now, I'll turn it over to Lisa to review our financial performance for the quarter.