Good morning. My name is Shannon Ginza and I will be your facilitator for today. At this time I would like to welcome everyone to the Granite Construction Investor Relations First Quarter 2019 Conference Call. This conference is being recorded. All lines have been placed on mute to prevent any background noise. And after the presenters’ remarks, there will be a question-and-answer period. [Operator instructions]. It is now my pleasure to turn the floor over to your host to Granite Construction Vice President and Investor Relations and Government Affairs, Ron Botoff. Sir, the floor is yours.

Good morning. Welcome to the Granite Construction Incorporated first quarter 2019 earnings conference call. I am pleased to be here today with President and Chief Executive Officer, Jim Roberts; and Senior Vice President and Chief Financial Officer, Jigisha Desai. Please note that today's earnings presentation references slide available on the Events and Presentations page of Granite Investor Relations website investor.graniteconstruction.com. We begin today with an overview of the company's safe harbor language. Some of the discussion today may include forward-looking statements. These forward-looking statements are estimates reflecting the current expectations and best judgment of senior management regarding future events, occurrences, growth, demand, strategic plan, circumstances, activities, performance, outcomes, guidance, backlog, committed, reward, process and results. Actual results could differ materially from the 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 projections and assumptions. The company assumes no obligation to update forward-looking statements whether as a result of new information, future events or otherwise. In October 2018, the company filed an 8-K, with a quarterly and annual look back and mapping of reportable end-market focused segments. Our results reflect this reporting. Certain non-GAAP measures may be during today's call and from time-to-time by the company's executives. These include, but they are not limited to adjusted EBITDA, adjusted EBITDA margin, adjusted net income or loss, adjusted earnings or loss per share, committed and awarded projects, backlog or results. Please note that some metrics also may reference or include non-recurring acquisition related expenses and one-time integration costs. Reconciliations of certain 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 Granite Construction Incorporated President and Chief Executive Officer, Jim Roberts.

Thank you, Ron, and good morning, everyone. Thank you for joining us today for a first quarter update on Granite's strategy and performance and how it shapes our outlook for 2019 and beyond. We are quite proud to begin by acknowledging Granite employees for exhibiting our core values every single day. As a result, Granite was named one of Ethisphere Institute's World's Most Ethical Companies for the 10th consecutive year. And just over a week ago, Granite was named by Forbes as one of America's Best Midsize Employers for the fourth year in a row. Our unwavering commitment to do things the right way every day creates value for all Granite stakeholders, from investors and employees, to partners and clients. Working safely and striving for our ultimate goal of zero injuries also aligns us well with our stakeholders. During the first full week of May, Granite teams and companies across the country are participating in the now well-established annual Construction Industry Safety Week. By emphasizing best practice training methods, sharing nears miss stories and raising awareness, construction industry employees nationwide will collaborate to develop solutions to work more safely. Granite teams have started 2019 well, and understanding the extremely busy construction season ahead of us, we are committed to a healthy construction season as we work to ensure that all Granite employees make it home safely every single day. Now, let's jump into the trends that are driving our business. Oh, yes, weather. Let's just get it out of the way to begin with. Consistently extreme weather across the US, which began last November, continued to create headwinds for our businesses and their markets into the early part of this quarter with a particularly negative impact on Granite's first quarter operations. If you're looking for a number, we conservatively estimate…

Thank you, Jim, and good morning, everyone. I'm happy to join you for a brief overview of our first quarter 2019 results. Granite's consolidated revenue increased 10% year-over-year to nearly $620 million. Gross profit totaled $40.5 million, which translated into consolidated gross margin of 6.5%. As we have highlighted this morning, poor weather was a significant revenue and profit headwind during the quarter. We are now launching quickly into a very busy construction season. First quarter 2019 SG&A was $81.2 million with most of the increase from our acquired businesses, including some acquisition-related costs. The balance of the increase was a result of larger administrative and estimating staff who were kept from working on projects by poor weather. We continue to work to rationalize and scale acquired overhead. But as we anticipated, it will take some time to allow us to reach our previous target of 7.5% of revenue. Certainly, the solid rebound to growth will help significantly in this effort. First quarter net loss grew from last year to $34.6 million or $0.74 per diluted share. On an adjusted basis, net loss was $26.4 million excluding acquisition-related expenses, or $0.57 per diluted share. And with that, let's move now to the segment detail. We do not provide individual segment guidance, but we remind you that we believe Granite must be a consistent mid-teens consolidated gross margin performer over time, driven by the performance of our end market focused segment. Transportation segment revenues declined about 6% with weather headwinds, especially in California, the largest driver of the revenue and of the year-over-year margin decrease to 6.3%. In Water, revenues reflect our acquisitions increasingly significantly year-over-year to more than $99 million. But as Jim mentioned, segment profitability declined to 8.2%, largely as a result of early season work last year that…

Thank you, Jigisha. And before we turn the call over for some questions, I want to spend just a couple of moments highlighting key themes for Granite's growth in 2019 and beyond, as well as the primary tenets of our strategic plan. As we plan for the rest of this year, we believe there are three key areas of focus that will drive success for Granite this year and for years to come. First, recent project procurements reflect the execution of our strategy to better align backlog composition with our strategic plan. This has resulted in a growing diverse book of business and CAP of $4.5 billion, a historically high figure, which is supported by strong demand across our platforms for growth. Significant CAP now is in place to allow for ramped up production and for continued portfolio evolution, emphasizing risk-weighted returns and shorter duration of higher-margin work. Secondly, robust bidding environments across end markets and geographies point to steady growth opportunities across the enterprise. Additionally, we believe core markets are tight and tightening and poor weather that kept a large swath of our industry idle into April has stacked up demand even further in the near term. Taken together, we believe these factors support our visibility at least through 2021. And finally, the third piece of the puzzle for this year and for the coming years is that our strategy is and will continue to drive results. Granite's platforms for growth will continue to develop into launching pads poised to generate incremental top and bottom line growth and improving cost and revenue synergies, which is a terrific lead-in for a brief review of our strategic plan that now focuses and highlights our vision out to 2023. Our strategic themes remain based on opportunities to develop our people, to execute…

Thank you. [Operator Instructions]. And our first question will come from Michael Dudas of Vertical Research.

Good morning, Jim, Ron, Jigisha. Jim, I'd like to elaborate a little bit more on your prepared remarks talking about the environment moving to six days -- six days a week. Haven't seen it in over a decade, this type of opportunity. Maybe compare how the customer mix or the platform is different than what it was, say, 10, 12 years ago when these types of environments occurred. And what is this moving to -- you know, with all the stacked business, what kind of execution risk does this place upon Granite and your employees as you try to catch up and achieve your targets out into the next -- at least through '19?

Okay, Mike, thank you. That's very important that -- because if you think about where we were, and I'm going to say probably 12 years ago, that's when we were in an environment where the residential market was really hot and a lot of our demand was being focused on beefing up, I'll call it, the infrastructure for big residential projects. At this point in time, we have none. That is not even in play today. What we've done since the downturn is diversify our business to be able to focus on all different markets and different funding mechanism. So the pent-up demand today is not just in, I'll call it, the Transportation segment and basically in all parts of our business. For example, site development, we are really tracking and negotiating a strong portion of our work with private companies today, the high-tech companies. We're building business parks. We're working in refineries. And what happened was, they have a very strong CapEx, capital improvement program and expansion program, and that work wasn't able to be performed over the winter months for obvious reasons due to weather. So a big host of our large equipment and people are now focusing on making up lost time over the winter to work for a lot of private customers. It's not as much on the public customer side, on the DoTs, although we have a significantly very healthy backlog in that environment, you don't typically get a lot of paving type of work done because you have ambient temperature requirements. So what you would try to do in the winter months is do a lot of earthwork and underground and things that don't -- that you can do in the winter months, and we did none of that because of the rain this…

That's encouraging, Jim. And follow-up is, you did mention a tempered view on what's coming out of Washington. What's the -- what's most important that we could -- what we -- you'd want to see, what the industry is trying to extract from the committees to -- if we really don't get a big grant bargain, something that can give some visibility for the '21 to '22 outlook?

Yes. So, Mike, when I look at D.C., I say to myself two things. First of all, do we have an environment where anything can productively get done? And I think we all question that every day in all facets. So when I look at infrastructure, what I'm really hoping for is that there is a -- I'll call it a very intelligent discussion about the long-term stability in infrastructure investment across the nation with two things. First of all, shoring up the Highway Trust Fund. That is the first thing they should always talk about, not having to go into any individual year and have to borrow from the general fund in order to shore up this fund. Second of all, what they need to focus on is, I call it, diversified infrastructure investment and not just look at the Surface Transportation Act, but look at infrastructure as a whole and work into the power, water, transportation segments and other segments as we define infrastructure today. And then lastly, what I'd really like to see in D.C. this year is the House to come out with a bill and to come -- and what's going to happen. I believe that our new leader of the House T&I Committee, Mr. DeFazio, has a -- truly wants to put out an infrastructure bill. Let's get something through the House that is of reasonable nature, large I'll call it federal investment. Let's not push it on the private sector, keep it as a federal investment in the future of this country, and then let's use that as a foundation to build on. Whether we can take that into the Senate and the Administration and get it passed or not is probably questionable, and then how you fund it is probably even more questionable. Well, let's get a foundation started so that we can work on that as we progress and maybe hopefully get something done this year, but if not, use it as a foundation into 2020 and 2021. The key ingredient here -- and I firmly believe this -- is that even if we don't get anything passed, we'll get an extension of the FAST Act, and that will occur sometime next year, so we won't have any interim interruptions in funding. But I am not a fan of stimulus. I hope they do not use that word at all in D.C. To me, that's a lack of true belief in investing in infrastructure. It's a financial play, not an investment in the future of the country. But I do think there's an opportunity here to get a foundational bill in play. And if we get fortunate, we get it all the way through the Senate and the Administration, but if not, we've got a foundation to work off in 2020.

And our next question will come from Joe Giordano of Cowen & Company.

Hi, good morning. This is actually Rob in for Joe this morning. Just a quick question on the $884 million in alternative procurement work that's not included in backlog. I just wondered how long do you expect that work to take to work through? And then, is it like shorter or a longer duration than your typical backlog?

Okay. Yes, that's really -- and we tried to help out a little bit of that last quarter when we started talking about this alternative procurement jobs because of the way they literally show up in backlog. That's why we now have Committed and Awarded Projects as a terminology called CAP. Because of that, that $880 million, Rob, so to speak, actually burns at a rate very similar to what I'll call a large project. It just doesn't show up in a lump sum backlog up front. What they'll do is take -- let's say, if you take a $200 million project, they -- what we do is, we go through a negotiation and we actually come up with an agreed upon number, which we've always gotten to with the owner, and then we'll do it in task order. So we could do a $40 million segment, a $50 million segment. And we'll still build the project out over, let's say, a two-year, three-year period, but we'll do it in lots, in $40 million, $50 million lots, so to speak, probably at a very similar pace. Then we would have burnt the work that we would normally put into backlog. It just that we don't put it into backlog until we have an approved task order.

Okay, that helps. And then, just another quick one. I know you talked about this last quarter, but the two big projects that you're close to completion on, and I know you said you'd start the dispute settlement process. I just wondered if you can provide an update there and how that's progressing.

Well, I don't want to get too far into much detail relative to the dispute resolution process. No doubt that in general, these jobs that we've talked about and large projects in general, since they're so complex, Rob, they tend to always have some type of dispute. And we hope in every single case that the opportunity arises so that we can settle up before we go to the judicial system. So far, we have a couple of them that are heading down the path for a potential of getting into the court system and they're very slow-moving. And so I don't want to suggest that we're going to settle these outstanding disputes anytime soon. But what I have seen historically is that once the two sides of the equation start really spending time and energy on it, you typically almost always come to an agreement prior to getting into the court system. So on these larger projects with larger numbers in play, it might take a little bit longer. You could see some settlement of these disputes in 2019 and they could roll into 2020. But I don't want to really dive too deep into them because of the sensitive nature of the actual disputes.

We'll now move on to Brent Thielman of D.A. Davidson.

Maybe back just on the backlog methodology, is there a way we can think about the timing of conversion of this alternative procurement work, I guess, into backlog or ultimately revenue? In other words, would you expect to burn 25%, 50%, 75% of that this year? Any help there?

Okay. So what I would do, Brent, because again we've got this new terminology now called CAP, and really what's happening is -- what we were hoping would happen is that we would provide more effort upfront in developing relationships with our customers. We would negotiate work. And part of a CMGC job -- and you can almost think about it as design build probably 15 years ago. So it's a new form, but the burn rate shouldn't change. So even though we don't call it backlog, what I was trying to say earlier was that if you've got a $200 million job, we'll still burn that over the next three years, or two years, whatever the original expectation for the time frame was. But what we'll do is, we'll move it from Committed and Awarded into backlog in segments, in task order. So there could be a $40 million move from the overall CAP just directly into backlog, let's say, in May, and we build a $40 million section of a project from May to September. And while we're negotiating the next section, we could move another $40 million in December into backlog. So I would not suggest to you that the burn rate on that $884 million is any different than any other backlog that we already have in place. It's very similar. Now, with that in mind, what we have been focusing on is trying to build a backlog that you have a higher velocity of burn rate so that if we have a, we'll call it, $500 million of backlog on the books and we historically would burn it over four years, we're trying to burn -- find projects that we can burn that over, let's say, 2.5 years, and we think that's more valuable for the Company. But I would not look at this alternative procurement burn rate any differently than our core business.

Yes. Okay. Appreciate that, Jim. And then, maybe just thoughts on the California transportation work, your thoughts in terms of how SB 1 work is proceeding. Are you starting to see your win rates improve and I guess getting more comfortable with the bid margins now in the market?

Well, certainly, California is a good place to be today, and it's going to be a good place to be for quite a few years. We have seen the State of California do exactly what they said they're going to do. Their budget proposal provides about $4.8 billion in new SB 1 funding for the '19-'20 budget, which is right on target of what they said they were going to do. Remember, they were going to ramp it up on average to about $5.2 billion a year over 10 years. Here we are in the third year of the program at $4.8 billion. They'll pull it back up over $5 billion next year, I'm fairly certain. What we have seen is a little bit of a change in the bidding environment. Our hit rate has gone up from 2018 to 2019. I don't want to say exactly, but our hit rate is going up and quite nicely. And we have a very healthy backlog in California, and we do not see the rate of bidding slowing down in California. So I would say that SB 1 is really hitting the street as planned. Now, if you're a tax payer, they want to know where all the road repairs are. They keep looking for them. And what people don't realize is that it takes time to procure the project, physically get notice to proceed and get out there and get the work done. And as we said, that's part of the reason for the six-day workweeks as well going into this summer and fall months. It is hitting us. We have the backlog. And California is going to be a very busy place to be for quite some time.

[Operator Instructions]. Our next question will come from Steven Ramsey from Thompson Research Group.

Good morning. A couple of different segments I'm curious about, so in Specialty, is there pent-up demand there? Is there any verticals you would call out where there is pent-up demand or lack of it? And are you -- with the projects you've secured or that you're looking at, can you discuss kind of the burn rate time frame in that segment?

Sure. So one of the things, Steven, about the Specialty is that the host is kind of the -- we call it the incubator of all of our -- a lot of segments that don't fall under Water or Transportation. And let's go through it a little bit because a site development is really, I would say, the hottest market, and that's where we have developed relationships with private clients, a lot of them in the high-tech industry. We have a lot of industrial parks for the high-tech industry that we are heavily invested in. And in fact, some of those are using a big portion of our heavy equipment, our large earth-moving fleets that were basically stuck in the mud over the wintertime, so not much happened there. But I don't see that slowing down. That is a sector where these projects grow in size and they burn very quickly. I'll give an example. If you're going to build, I'll call it, a new data center for a high-tech company, and let's say it's a $50 million job, you're going to burn that all in one season, and because they are on rapid paces to get their processes in place to create value for their company. So we see the private sector actually moving at a faster pace than the public sector, which I guess in general, you would expect. They need to get their operating businesses up and running to create value for the business. So the site development business is a quick burn, nice margins, repeat work, negotiated work. And we do a lot of that same work for the refineries. We're in doing their CapEx projects for them today, and we see that really working nicely. The other part of that also site development is, we…

Excellent. Helpful color. And then last question, does faster burn rates in the Transportation segment -- as that continues to be a focus, does that provide any benefit or challenge to the Materials segment when that comes into play for your own projects?

Absolutely. That's a really good point and a nice way to think about our Materials business. Historically, the construction materials business is tied directly to transportation projects. And as -- and we've been focusing on transportation projects that actually have a large portion of the project with a materials portion attached to it. So ideally, one of the things I mentioned in the discussion earlier was that we see our internal demand going up substantially this year compared to last year, which means the projects that we're targeting in the Transportation segment and in the Specialty segment, because we use a lot of materials in site development as well, have a strong materials component in it. And so, as we start running six-day workweeks on construction, we will be matching that with our Materials business.

And our next question will come from Jerry Revich of Goldman Sachs.

This is Ben Burud on for Jerry. I just wanted to touch on the bidding environment. You alluded to win rates earlier, but just wanted to get an update on how they're trending year-to-date. It sounds like they're pretty positive, mainly for the Company as a whole and specific in California. In the past, you've noted how competitors ideally will fill up on lower margin work and you even specifically called out an instance of that playing out in California. I guess, is this dynamic actually playing out in real time and supporting improving win rate trajectory?

Okay Ben. So thank you for asking that question because I'm actually doing a company webinar in about an hour or two, and as we were developing the -- sharing what's currently going on inside Granite with our employees, we were putting together a package, showing what kind of -- where the market is going in the short term, and I'm going to call it, during the summer months of 2019, where we see it going. And it was very enlightening to see that although we have a very large Committed and Awarded Projects total today, as does the industry. And this is the important part. The entire industry wasn't able to build work over the wintertime, so they didn't burn their backlog so to speak. And so they know that, and so what people end up doing is changing their price structure going into the summer if they don't need as much work. And so you see in general -- and not targeting any individual markets, but in general, you see a reduction in competition or a reduction in, I'll call it, overly aggressive pricing because people already have a lot of work. Now, here's the really important thing that I noticed just in the last couple months. The amount of work being put out to bid that Granite is bidding on is increasing dramatically per month going forward. Let me give an example, in the month of May -- we kind of break our target list of projects up over $150 million to below $150 million. And below $150 million, in the month of May, we are bidding $1 billion worth of work. We have never -- and I've been with this company 37 years -- we've never bid $1 billion in work that didn't fall into that…

Got it. And then in 1Q, weather was obviously a meaningful headwind across your footprint. As we have one month of 2Q here in the books, can you just give us an idea are you seeing any weather headwinds quarter-to-date? It looks like there's been some wet weather maybe in Texas in areas in the Midwest. That's fine as long as it's tracking to plan. Just wanted to make sure that, that was still the case and there's no meaningful headwind quarter-to-date.

Yes. So one of the things that I think is important as we reiterated our guidance or reaffirmed our guidance for the year is that certainly it's going to be weighted in the last three quarters obviously, but I do think that we did have some headwinds in the first couple of weeks of April in the West. It is nice today. It is projected to be really nice from this point out, but we did lose probably 10 days to two weeks in April in the West, and so that would be the only thing I can see as a headwind going into the next three quarters. With that said, we're running on all cylinders right now. But we did lose probably 10 to 15 days -- 10 to 14 days in the month of April.

And our next question will come from Nelson Obus of Wynnefield Capital.

Hi there, guys. Just a couple of questions about our troubled projects in the past. Is this a correct statement? Let me make a quick introduction. These things have a -- they have a tendency to get worse. But am I -- so this is apart from contract resolution. Is it correct to surmise without getting specific that the era of taking additional reserves may be past us. And a second sort of looking-forward question, you've said that in the future, you might take large projects, but you would be in charge. And where are we on that and how do you feel about that, reflecting on what's gone wrong in the past?

Okay, Nelson. Thank you. Those are strong discussion points that I think are very relevant. So first of all, with reserves and dispute resolution. We always do -- when we get into a dispute on a project, we always analyze what our probability of recovery is, and then we hold and we would include in our forecast a calculation of probability recovery based on the value of a client. So we continue to do that and we adjust that every single quarter. If we believe our probability of recovery goes up, then typically, we would take that to the bottom line. If we believe our probability of recovery goes down, we would probably adjust our bottom line down accordingly. And I don't have a crystal ball, Nelson, to tell you if they're going to get better or worse. I will tell you that we look at it every single quarter. In fact in a lot of cases, we look at it every single month. And if there is an event that occurs, then we do a positive or negative adjustment. Now, with that said, I do think as these disputes get into their final stages, the value of disputes get constantly adjusted, but I do think you get closer and closer to more of a finite resolution of numbers. And so I don't have a specific answer for you whether we're done taking reserves or releasing reserves. You can go either way. But I do know that we are -- by the end of 2019, we will physically only have one of these legacy projects to build. And we've --

Actually real quick, that's my question. These legacy -- I understand contract resolution is a nebulous arena. But the actual job that you're doing in the field, are you -- have you basically put your hands around what potential risk could be just engaging the difficulty of the job away from change orders?

Correct, Nelson. So, of the four legacy jobs that we have been talking about, absolutely, there's only one that will have, and I'd call it, potential productivity issues because they don't -- there's only one project of those four legacy projects that has any longevity to it. So the other ones are -- we're just cleaning up right now. And in fact...

Yes, I think that's the Florida one.

It was 95%, 97%, 98% done. Yes. There's only one left that will carry into 2020, of those projects. So let me go back to the next one because I think that's important also, Nelson, is that where is it are we in the evolution of our bidding on large projects. And we have absolutely moved away from being a non-sponsored JV partner. I would say on -- out of, I'm going to say in general, about 20 jobs that we're bidding, I can think of two jobs that we are not the sponsor, and that's it, going forward.

And why do you feel comfortable about them? Is there something about them that -- because obviously, as you move away from the old model, you significantly reduce your risk profile, and you're entitled to a higher multiple.

Well, Nelson, I'll tell you what, because I think on the two that I can think of, because we partnered our project -- or our partner has a very strong relationship with the owner and/or our partner is in that geographic market and is a very strong player in that geographic market and they've asked us to help them build the project. In general, we say no. Then the only time that we would team with anybody in a minority role now is if we talk about margin, contingency and expectations going in, so that they raise their -- we typically are the contractor that requires the highest margins in the industry. And if they're going to partner with us in any sense of the word and even if a minority partner, we would agree in advance that the minimum expectations would be the expectations that Granite has on all of our work. So again, very small. Now previously, we would have 75% of our work, we probably would have been the non-sponsor. So let's call it, 90% of our work today, we are the sponsor. Very unique situations, Nelson, will we be the non-sponsor, very unique.

Just random comment from me, I think that's a major change in your business model and a very positive one, so enough said.

Yes. Nelson, one thing that I will say about it is that it puts the owners on us. We are in charge. And if we have a bad project or a problem, we need to look in the mirror, and that's where we're going. We're going to take complete ownership, responsibility and accountability for our work and make sure that the good, the bad and hopefully there isn't the ugly, but the good, the bad is all ours, and we believe we will end up having better results because we're in charge and we actually create our own destiny.

That's fair enough. Buck stops with you now, but you must have learned something from having too many chefs in the kitchen, so to speak.

We have learned a lot, Nelson. Yes, we have. Okay. Thank you.

And it does appear we have no further questions at this time. I'll turn the conference back over to our presenters for any final or closing remarks.

Well, everybody, first of all, thank you for your questions. And a quick note for our shareholders and our investors, Jigisah, Ron and I will be on the road and at conferences. We're also going to be visiting our operations and investors around the country throughout all of 2019. So please reach out to Ron and we will look forward to speaking with you and, of course, be willing and look forward to meeting with all of you. As always, thank you to all of our employees for keeping your fellow workers safe and for exhibitor Granite's core values every single day. As always, Jigisha, Ron and I are available for follow-up if you have any further questions. Thank you, everyone.

That does conclude today's teleconference. Thank you all for your participation. You may now disconnect.