Good morning. My name is Betsy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Incorporate 2022 First Quarter Conference Call. This call is being recorded. And after the speakers' remarks, there will be a question-and-answer period. It is now my pleasure to turn the floor over to 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 the 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 or loss and adjusted earnings or loss 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 Investor Relations website. Now, I would like to turn the call over to Kyle Larkin.

Thank you, Mike. Good morning. In our fourth quarter conference call, we briefly discussed our new strategic plan. Today, we will share more detail about our plan and how we believe it will position Granite for success. I want to start with an overview of the foundational strides we have made to deliver consistent profitability and measured growth. We have made substantial progress in derisking our project portfolio by narrowing the footprint of our former Heavy Civil group, and introducing rigorous project selection criteria. This represents a transition away from mega design build and P3 projects to project delivery methods that more appropriately share project risk. This reduces brand's exposure to the types of complex design build projects that we and others have struggled with recently. We believe that this transition has increased the quality of our committed and awarded projects, or CAP, and then our existing CAP portfolio positions us for increased profitability in 2022 and beyond. Our strategic plan contemplates a return to strong profitability by focusing on our core construction skills, the skills that we had developed and honed over the past 100 years. As part of this focus on core competencies and as previously announced, we are in the process of divesting our former Water and Mineral Services group businesses. Proceeds from these sales will add to our already strong cash position and support strategic investments and new opportunities to grow both organically and through M&A. Our new executive leadership team is in place and working to return Granite to the profitable company that our shareholders expect and that we insist upon. Recent key decisions include lowering SG&A and driving efficiencies across the company by restructuring our operating groups from five to three. These revised groups, California, Mountain and Central are focused on a home market…

Thank you, Kyle. Over the next few slides, I will cover our financial targets and expectations through 2024, starting with revenue. Since the timing of M&A is highly dependent on the market and opportunities, these slides are focused on our continuing operations business and our expected organic growth. As we stated last quarter, our guidance for revenue in 2022 is for low single digit growth from 2021. At the end of the first quarter of 2022, we are maintaining that guidance with growth from the California and Mountain groups expected to offset an intentional decline in revenue from the Central group as we continue to transform that portfolio. As we move into 2023 and 2024, we expect to benefit from a strengthening funding environment with the federal infrastructure bill, resulting in an increase in opportunities that will aid 2023 and continue to grow in 2024 and following years. As we saw in California, when SB-1 was implemented, the full benefit of the infrastructure bill will take time to be realized with maintenance projects funded first and expansion projects funded as designed, right of ways and other requirements are completed. Our focus is on driving sustainable growth in each of our groups by leveraging our home market strategy. We believe we are well-positioned to capitalize on the positive environment in our key vertically integrated markets, including California, Washington, Nevada, Utah and Arizona. Given the public funding dynamics and strong private economic environment, we believe we will reach our target of $3.4 billion to $3.6 billion of revenue by 2024. This slide details the historical gross profit and gross profit margin, both including and excluding old risk portfolio losses for 2019 through 2021. In the Construction segment in 2022, we will work through most of the old risk portfolio, or ORP, with…

Thanks Lisa. I know you are as excited as I am for where Granite is headed over the next few years. We have laid the foundation and are set on making incremental enhancements that will allow us to reach our 2024 targets. Now, let's shift the discussion to the first quarter, starting with the Construction segment. While we saw an overall decrease in revenue in the first quarter from the same period last year, I'm encouraged by the mix of our results for the quarter. Primary reason for the year-over-year decline in revenue was the expected decrease in the Central group as ORP projects continue to move towards completion. In the Central group, this decrease was partially offset by a good performance in the Arizona region, which entered the year with a strong backlog. Taking advantage of temperate climates allowed the region to work throughout the first quarter and expect the vertically integrated Arizona region to have a strong year in 2022. This team continues to benefit from a positive and growing market. In California, while there was a revenue decrease year-over-year, this is primarily due to weather in early California and delays in project starts. We have seen an extension of the period between the award of a project and project start that impacted revenue during the quarter. As we stated in our guidance, although there was a year-over-year decrease in revenue in the California group, we expect that the turnaround in following quarters, resulting in an increase in revenue for the 2022 fiscal year compared to 2021. Increment weather earlier in the year had the most significant impact on our Mountain group as compared to the others. For the Mountain group because of where their operations are located, the construction season generally does not begin until after winter.…

Thank you, Kyle. In the first quarter, revenue decreased 3% from the prior year while gross profit decreased 7%, resulting in a gross profit margin of 9%. In the Construction segment, revenue declined $32 million year-over-year to $475 million. This decline was primarily due to a $29 million decrease in the Central group year-over-year. The decrease in the Central group in the quarter was consistent with the continuing transformation of the group as the projects within the ORP move closer to completion. The decrease in quarterly revenue in the California group was largely offset by an increase in the Mountain group. The California group was impacted by work start delays, while the Mountain group completed a strong first quarter. The Construction segment's gross profit for the quarter decreased 9%, resulting in a gross profit margin of 10%. This decrease in gross profit was primarily driven by lower revenue in the quarter with a slight decrease in gross profit margin. The ORP ended the quarter with remaining CAP of $246 million, a decrease of $73 million from $319 million in the prior quarter. The burn during the quarter was consistent with expectations and is on pace for the expected progression in 2022, leaving approximately $50 million going into 2023. First quarter net ORP losses to Granite, which excludes non-controlling interest, were $3 million on revenue of $80 million compared to breakeven on revenue of $105 million in the prior year. The Materials segment's revenue increased $13 million or 22%, led by strong demand and volumes, as well as price increases in both asphalt and aggregates over the prior year. Materials gross profit increased $1 million, with a slight year-over-year increase in gross profit margin to 2%. Although cost pressure due to increased liquid asphalt and diesel prices impacted the first quarter,…

Thanks Lisa. I'll close with the following points. We are excited about our strategic plan and where Granite is headed. We expect our plan to unlock tremendous value through consistent profitability and cash flows. We plan to sustainably grow our businesses, strengthen and expand our current footprint and then pursue more transformative platform acquisitions in the longer term. While investing in our business, we are also focused on utilizing our strong cash position to return immediate value to our shareholders. The markets in which we operate continue to be robust as we have seen during the first quarter. While we are keeping a close eye on the overall economic climate, we have not seen a slowdown in activity in 2022 and demand is strong. As increased funding is expected to flow into the market later this year, we expect our CAP to expand with the opportunities leading to organic growth in 2023 and 2024. Operator, I will now turn it back to you for questions.

We will now begin the question-and-answer session. Our first question today comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Hey, good morning. Maybe to jump in kind of big picture, it looks like Granite has a great setup in the year with a lot of excess capital from the divestitures and then the ORP burning off to a very low level. You talked about two phases to growth and deploying capital over the long-term. So, given you'll be in this excess capital position should the divestitures play out, how do you expect to deploy capital in 2023? So, it's early, but just how you're thinking about it from a high level?

Hey, Steve. It's Kyle. And you said 2023?

Just thinking about the excess capital position you would be to end this year and how you think about philosophically deploying capital.

Yeah. So, thanks for the question. From an investment framework perspective, over the next two, three years, we're really focused on supporting and strengthening our existing home markets. That's our priority today and there's kind of a couple of pieces to that. First is around automation and reserve expansion in our materials business. So, we need to continue to ensure we have access to aggregates for our materials business. At the same time, we also think we can drive down our cost to produce through automation. So that's a primary focus for us, let's say, over the next two or three years. And then from there, we're looking at some bolt-on acquisitions. So, we're looking at getting into acquisitions around civil construction and materials within the existing footprint that we're in today. And there's a few reasons for that. One, it complements our current operations. We think it's easier to capitalize on synergies and drive utilization, but it's also easier for us to integrate. So, we think that that's going to give us an opportunity to go out do some deals, demonstrate our ability to do the deals and integrate the deals and set ourselves up down the road, where we want to do something more transformative. And I would expect that our goal will be doing somewhere around maybe one to two deals a year and all those deals will be under around $100 million.

Okay. Helpful. And then, thinking about CapEx this year above levels we've seen in the past three years. Talking about raising CapEx in the next couple of years, does that imply that CapEx in 2023 and 2024 will be higher given the plans for the Materials segment? Or if there's just a way to bogey the level of CapEx that you guys have embedded in the plan?

No. I think the CapEx -- the guidance that we provided is going to be pretty consistent. We do have our maintenance CapEx that Lisa spoke to. The balance of that really is more in our materials business. That's where we're going to be making the larger of the investment from a CapEx perspective as we move forward. But I think the guidance we provided this year is pretty consistent with what we'll see in subsequent years.

Okay. Helpful. And then one more, thinking about the near-term, good to hear the bidding environment year-to-date is better than last year. A couple of questions. How does this compare to pre-COVID levels? And are the benefits of this better environment baked into the margin guidance? Does this imply that margins could go to the high side of the EBITDA margin?

Well, so as we shared, we're really looking to get, I would say, outside of the ORP, about a 2% margin improvement by 2024. And that's going to come really in two components. One is going to be on bid day, getting more money on the projects that we're bidding in the market. And the second is improved execution across the board, even outside of the ORP. So, the good news is in terms of the market is the market is healthy. Now we talked in the last call that we had started to see more bid opportunities and higher margins on bid day even though our hit rate hasn't gone up. I can tell you at this point through the year and 2022, we are seeing -- our hit rate improve with higher margins on the work that we are procuring. So, you add that to our materials business that have higher volumes in the quarter and higher margins, everything is really pointing towards a much better market in terms of health than we saw last year at this time. And so that's really encouraging. And that's in advance of an infrastructure bill that will really hit later this year. So, everything is kind of set for us from a market perspective today. I mean we're still cautiously optimistic it's going to remain that way. But today, it's looking very strong.

Understood. Thank you.

Thank you.

The next question comes from Michael Dudas with Vertical Research. Please go ahead.

Good morning, gentlemen and Lisa.

Hi, Mike.

Good morning, Mike.

Kyle, on your goal for revenues and margins of 2024 versus where we are today and you put forth some very helpful guidepost. But what are the -- again, economy aside because there's -- GDP came out negative this morning. So, what are two or three things that are the uncertainties or risk mitigation to -- that you need to overcome or set up for to achieve those goals? How much of the capacity of your employees and your asset base you have now to achieve those goals? Can you do it without significant? I know you're going to be making some investments, but those can I think will kind of be fruitful and pulling wise. So, do you have that? And will it be much to get to that market share growth that you discussed in your prepared remarks?

Yeah. I would say that we do have the capacity. I think we've been demonstrating that with our California and Mountain teams over the last couple of years, they've been growing their CAP. And we believe those teams are well-positioned. They've been in those markets for a long time. They are the employer of choice. We think we can recruit the people we need in those businesses to deliver on the growth. I think as we wind down the ORP, we're actually in a position this year where we can take those employees and resources and put them on to these projects that we're going to see that are going to allow us to grow our company, they are going to be quality projects. So, the timing is working out quite well for us, assuming the restructure bill starts to flow in to good opportunities late this year and we can actually turn those into construction projects in 2023. So that winding down of the ORP really allows us to take that Central group team and put into work on projects that will create value for the company. So, I think that's probably the opportunity for us. I think, just in general, I mean we are focused on our people. I mean, that's a big piece, if not the foundational piece of our strategic plan, is to make sure that we're recruiting and developing and retaining our employees and creating opportunities for them that will create more opportunities for the company.

Second, I guess, follow-up. So, certainly, your California and Mountain businesses, given your historic and your levels and the level of integration and your -- the execution of those divisions have been quite good. But how does the Central division kind of fit into this plan over the next three years? You talk about Texas, Florida. How much is that going to be helpful additive to those goals and beyond? And what are the strategies there to -- once the ORP projects for an officer to get to that business or that division to achieve the quality and, I guess, result levels that your other two have historically provided?

Sure. A good question. And Central group today includes our Arizona region. It also includes the team up in Illinois and our talent division. So, it's got a whole different mix than what we probably used to when we talked about, say, the Heavy Civil group which is a little bit different. And we did that to help move in some of the BI business type work and help them create that type of environment within Florida and Texas. And so, we knew that it was going to take some time as we wind down the ORP to transition the Central group into more of a BI type business. And I don't know if that's even the ultimate goal today or being in the near-term, but we really are pushing them to look at different types of work. So, we talked about really resetting the type of work that we're pursuing. So, no longer pursuing these big large mega projects, design build projects that got us into trouble. So, now we're focused on smaller work, and we even went further with this home market strategy. So, they're no longer even called the Southeast region as the Florida region or the Central region, it's now the Texas region. So, we're really starting to narrow in their home market, because we know they can procure work in their home market. They have the resources. They have the relationships, all the components to go into a home market, they can be more successful. So that transition isn't going to happen overnight. They've been working really hard on it over the last year, 1.5 years, and I think they're doing a nice job. And I do think as we sit through today in 2022, that team is starting to procure work and the right kind of work that's going to help the company achieve the goals that it wants to achieve. So, again, it's going to take time, but I think they're making really good progress in the transformation.

And are those margins are under -- and relative to the other plant or the construction side or on the BI side? And that's where the level of opportunity in let's say 200 basis point improvement in the next few years from that area? Or is it really just overall on the bidding it right and make sure you can execute the market?

Yeah. The margin profile of the Central group really shouldn't be any different than the margin profile of the California and Mountain group. So, we don't see a difference there. As we get to the margin improvement. If you go back the last couple of years, we've been there before. So, it's not a matter of can we get to the margins that we're talking about getting to. It's really not increasing on a more sustained performance level to where we're at that mid-teen margin consistently. So, again, it's really about -- you can look at it as a percent on bid day and a percent better in terms of execution as a company outside the ORP and we're there.

Thanks Kyle.

Thank you.

The next question comes from Brian Russo with Sidoti. Please go ahead.

Yeah. Hi, good morning.

Good morning.

Good morning.

Just a follow-up on the last question on the top line and the margin guidance through 2024. The top line, are you -- is there any assumption on the IIJA funding, and/or do you need M&A or bolt-on acquisitions to reach that top line target? Or what seems to be kind of a mid single digit growth rate off of a 2021 base. Would that -- is that viewed as -- or assumed to be more organic in nature?

Yeah. So, what we provided was a 6% to 8% CAGR and that's our revenue growth rate organically. So that does not have any sort of M&A or inorganic growth within it. And I think maybe the way to level set that is if you look at the infrastructure bill and really the highway funding portion, we look at that as around a 6% CAGR. So, our 6% kind of marries up with the highway portion of the infrastructure bill. And then, for us to get up to around 8% implies that we're going to get a little bit more market share than we have today.

Okay. Got it. And in the near to intermediate term, are there specific regions where you see more opportunities to vertically integrate the businesses versus other regions currently in the portfolio?

I think, there probably are. I mean, I think it's -- there's certainly markets that we see -- where we could strengthen our vertically integrated position. There are some markets where we don't have vertical -- we're not vertically integrated today, say, Texas or in Florida, those would be opportunities for us. But right now, I think there -- I don't want to tip our hand too much in terms of where we're looking, but we certainly are looking at our existing footprint. When it gets back to that integration piece for us, we really want to do it in markets where we have really strong teams in place so that the integration is a lot easier for us as we do it. So, I think, it's mostly going to be out in the West Coast today.

Okay. And then lastly, your DoT relationships and customers with the sharp increase in inflation. Has there been any impact on lettings or the DoTs having to do some reengineering on projects in the pipeline? Just given the sharp increase we're seeing in raw material costs, et cetera.

No. We saw the dip last year. I think, we saw a little bit of a pullback with supply chain, the inflationary pressures and even with COVID. We're not seeing that today. We had a much better late 2021 or early 2022 letting in terms of volume. This year, again, we're seeing -- through today, we're seeing a really nice improvement in in terms of our ability to capture works or hit rates up and the margins of the work that we're picking up has gone up as well. So, what we're seeing come out is showing a very strong market, and I'll point back in materials business, volumes are up, and that's another good indicator. So, everything is indicating that we're moving in the right direction from a market standpoint.

Great. Thank you very much.

Thank you.

The next question comes from Zane Karimi with D.A. Davidson. Please go ahead.

Hey, good morning, Kyle and Lisa.

Good morning.

So, first off, I'm going to talk about the quarter a little bit here, but 1Q had stronger than anticipated materials revenue and gross profit. But now looking forward to what degree and to what level is the company targeting for materials margins through the year? And can you elaborate a little bit more on how the business is overcoming the higher diesel and liquid asphalt costs? And how you believe those inflationary costs will impact you guys throughout the rest of the year?

Yeah. So, let me start, and if I forget part of that, Lisa can jump in there. But we are pleased with our materials business in the first quarter. Our volumes are up. We're seeing our aggregate margins improve. Our asphalt margins are down slightly. So, which kind of gets back to your question around supply chain and some of the costs on the inflation side on commodities. And we did pretty well as a company, I think, in getting out front of a lot of what we see in terms of oil, diesel and natural gas to some level in the company. And that's where we have the biggest impacts today. We've been navigating some of the supply chain issues across the company for quite a while. And I think our teams on the field are doing a really nice job of that, rescheduling projects, their ready mix issues and the like or different shipping issues that they had. So, we've been navigating that. Nothing's really changed there. I would say late last year, we put in place our new diesel pricing into our equipment rate. So we were able to get out in front of that quite a bit. And so a lot of our newer work did have higher cost in the estimates for diesel as well as our pricing on the liquid asphalt side. We do a lot of DoT work and a lot of our DoT clients have escalators and de-escalators. So, we're somewhat protected on that end of things. Our team puts in place physical inventory of liquid asphalt, we do some financial hedges. So, we do a lot to try and mitigate this risk for us in the business, and I think it's paid off for us. And then, we also do some supply contracts with diesel and large earth moving contracts as well. The one area where I think we did struggle a little bit in the first quarter was just on the burned fuel. That's where we use energy to dry out the aggregates before we introduce liquid asphalt. So, we did have a little bit of a natural gas bump in the first quarter. As we talked about in the prepared remarks, we have an energy surcharge notice that went out that goes into place on April 1. So, we're going to try and recover some of those costs moving forward. But I think in general, our teams have done a nice job of ensuring that we're covering those costs and we can pass those on. So, what did I miss in your question?

No. That was pretty solid. Just to understand how the margins could look from a historical or seasonal perspective this year versus last will be the only other point that could be elaborated on.

Yeah. I mean, I think, we feel good about the margin profile on the materials business. I think, it's going to be in line with our guidance. In general, around kind of overall mid-teen margins is kind of the goal for our business. Two years ago, we had the benefit of liquid asphalt and diesel dropping. Last year, it came back up and we couldn't really pass that margin expansion on. I think, this year, in general, we're able to pass those costs on. And Q1 is -- we're pleased with Q1's results and we're looking forward to seeing we can continue that into Q2.

Okay. Okay. Thank you. And my second question is just a little bit more on the ORP. But I recognize the progress made so far. But looking forward, how should we think about ORP backlog and expected revenue burn for 2022 and into 2023?

So, I think, the way to look at it, we're pretty much in alignment with what we had guided towards. Just around $70 million is what we burned through Q1. We have another $250 million still an ORP CAP and we expect to burn through another $200 million, which will be $50 million at year-end.

Okay. Thank you for that.

The last question today will come from Jerry Revich with Goldman Sachs. Please go ahead.

This is Adam on for Jerry today. Thanks for taking my questions. Outside of bolt-on acquisitions, can you talk about if there are any specific areas of your business you'd like to expand either in competency or geographic exposure, and which areas are those?

Yeah. No. I think what we're really focusing on in our strategic plan is getting back to our core civil construction and materials business. I think longer term, we're looking at more of a geographic diversification. I don't think that's going to be something we're focused on over the next couple of years. I think that's longer term to get in the markets that we're not in today. I think our first step is to stay focused on what we do well, get even better at it and strengthen the positions that we have today. And so that's our focus, I would say, in the next two, three years. We'll be better prepared to go out and take on a new market and grow home markets outside of our current footprint.

Got it. And can you provide any more color on the expected time line for the completion of the water resources and mineral resources divestiture?

Yeah. This is Lisa. So, we classified at the end of the year and announced earlier this year, the divestiture of the businesses within the WMS Group. As you know, we completed the Inliner sale, closed out on March 16th. And so, we are continuing to progress on the other two divisions within WMS. Still early, still looking at information that's rolling in. So, we anticipate that to be done with those shooting for by the end of this year.

Great. Thanks so much.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Larkin for any closing remarks.

Okay. Well, thank you for joining the call today. We are well on our way in the implementation of our future plan that will build upon the strengths that make Granite one of the best contractors in the country for 100 years. To our employees, thank you for everything you do and I know we will be building better together. And to the investors and analysts, thank you for your continued interest in Granite. We look forward to speaking with you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.