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 places 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. [Operator Instructions]. 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 Inc. Vice President of Investor Relations, Mike Barker. Please go ahead.

Good morning and thank you for joining us. I am 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 maybe 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.

Good morning and welcome to our fourth quarter conference call. I'm excited to talk about how we closed 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 work to support and strengthen our businesses. In our construction segment, we strengthen 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've selected works suited to our core competencies, and we constructed these projects with high levels of customer satisfaction and without the types of claims that play the legacy work. In our material 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 and 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…

Thank you, Kyle. In 2023, we made significant strides in our financial performance on our path to achieving our 2024 financial targets. We finished the year strong with fourth quarter adjusted net income of $36 million and adjusted diluted earnings per share of $0.82. For fiscal year 2023, adjusted net income improved to $140 million and adjusted diluted earnings per share improved to $3.14. Adjusted EBITDA margin for 2023 increased to 7.7%, up from 6.4% in 2022. Excluding the impacts from Tappan Zee and I-64 in 2023, our adjusted EBITDA margin would have been 8.9%. For the year, revenue increased $208 million or 6% with the fourth quarter completing a strong second half of the year. In the fourth quarter and last six months of 2023, revenue increased 18% and 14% respectively over the comparable periods in 2022. In 2023, we began with a weather related slow start to the year, but that changed significantly in the second half of the year and we are poised for that growth to continue in 2024. In the construction segment, annual revenue increased $188 million or 7% year-over-year to $3 billion aided by a strong finish to the year in the fourth quarter with an increase of 19% year-over-year. The increase in revenues for the year and the fourth quarter was driven by significantly higher levels of CAP in the California and Mountain Group over the prior year, resulting in fourth quarter revenue increases of 61% and 12% respectively. Annual construction segment gross profit improved to $325 million and gross profit margin of 11% but was impacted by the Tappan Zee and I-64 projects. Excluding the impacts of these projects, annual construction gross profit margin was 13%. In the material segment, annual revenue increased $20 million year-over-year to $517 million with gross profit…

Thanks Lisa. I'll close with the following points. We finished 2023 with a strong fourth quarter to continue to build on momentum from the third quarter. We demonstrated our ability to drive strong organic revenue growth with higher levels of profitability than Granite has seen in many years. I'm also very happy to say that construction work and paving is substantially complete on I-64, and I want to thank our team working diligently to put this project behind us. I'm also impressed not only with the end of the year CAP, but the quality of the CAP, with 47% of the CAP being best value work in which we were selected by the owner based on our qualifications. It is truly a testament to Granite's strength in our home markets, our experienced teams, and the strong public and private market environment. The positive impact of the IIJA will be felt by Granite and industry for many years. This project continued to be programmed, funded, designed, led, awarded, and constructed. Our acquisition of Lehman and Memphis Stone is a transformational event for Granite. Not only does it provide Granite with a high performing materials-focused business with significant aggregate positions in the area, but it also provides Granite a platform from which to expand. With our de-risk business model, we are seeing the positive effects on our ability to generate cash. We saw the results of our efforts in the second half of 2023, and I expect further gains in 2024. Finally, along with the significant revenue growth expected in 2024, I believe we will achieve our adjusted EBITDA margin range of 9% to 11%. Operator, I will now turn it back to you for questions.

We will now begin the question and answer session. [Operator Instructions] And our first question will come from Steven Ramsey of Thompson Research Group. Please go ahead.

Hi, everybody. It's John calling in for Steven. Can you maybe dig into the material segment a little bit more? Talk about organic growth next year and kind of how you expect volume and price to contribute?

Sure. Yes, good morning. And so I think we'll start with the volume side of things. Certainly, as we look into 2024 from an aggregate side, I think the volume is going to be pretty consistent with what we saw in 2023, which was a healthy market for us. We do see pricing on the aggregates up around 10% going into 2024. That's our expectations for the year. On the asphalt side, that's where we see a volume increase in 2024 versus 2023. And I would say most of that is going to be seen in California, and we expect price increases to be somewhere close to around 5% in 2024.

Got you. Okay. And then just one more on the construction CAP side, is there an area or region that we can think about driving further than others, or we kind of think about it broad-based?

I would think about a broad-based. I think all of our markets are healthy. Certainly, the IIJA funds are helping contribute to that. And we spoke about that in the prepared marks. So we got a healthy market both on the public side and the private side that we're excited about. I mean, one of the highlights certainly was what we saw in California. And we know there's been a lot of discussions around what's going on in California overall with its budget. Yet the transportation and highway infrastructure spending in California is really strong. And I think our CAP really reflects that today. And so we're really excited about what we see out in the West.

That's great. Thanks so much.

Thank you.

Thank you.

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

Yes. Hi. Good morning. Just to follow up on California. You know, obviously a lot of extreme weather and flooding in late January and through the month of February. I'm just wondering how that's impacting your business, et cetera, considering what occurred in the first quarter of '23?

Yes. So in '24, actually, being this year, January was very dry out in the West. So we're very fortunate to have good weather. Our team has been busy. So we're already off to a really strong start in Q1 of this year. Last year, obviously, we had a really tough quarter weather-wise. We did get some emergency work last year, but it wasn't enough to really offset the weather that we were impacted by. So this year, we are off to a better and stronger start. And '23 really kind of created a low bar. I would say year-over-year. So we have that going for us from a comparison perspective. But I think our materials business, where we're going to see the impact, probably the greatest. And Q1 of this year, with the emergency work last year, there wasn't a lot of materials opportunities for us. This year, having better weather, our materials teams are getting out of the gate faster than they did last year.

Okay, great. And just curious, could you just talk more about the water and wastewater business, your outlook there? What's the financial contribution now? I think it's just embedded in the construction segment and then the strategy as well?

Yes. I mean, I think it's really changed for us, except that we've been able to take that business incorporated into our construction business and create some efficiencies as part of that business. Obviously, we do a lot of repair and installation work. We work for municipal staff, clients, and the market's strong in a little bit of a higher end of the range that we have for construction in '24 14% to 16%. So we feel really good about the opportunities there and an opportunity to continue to grow that business for us.

Great. Thank you.

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

Good morning, Lisa, Mike, Kyle.

Good morning.

Good morning.

Kyle, I want to follow up on your comments, or your comments in the prepared remarks about execution and the strong markets that you see across the board. How did that translate as you saw the '23 on bid day margins relative to what you've been booking in the past? And on the execution front, when you have your 13% gross margin of construction for helpful. How that could combine to impact and help you achieve the '24 type targets relative to the better, more higher quality book of business? And is there a burn rate, because of the best value practice, some contracts may be a little bit more delayed, or may not flow through as quickly as some of your normal book of burn business? How that translates on the cadence through the year?

Yes, thanks, Mike. So I think maybe I'll address the question is really how do we bridge between our 2023 results on margins, performance, and how do we get to that 14% to 16% in '24? And I think there's a few things that they were looking at. I mean, one of you, if you adjust out in Tappan Zee and the I-64 project, we're sitting right around 13.3%. So we're not quite up to that 14% to 16% gross profit margin that we are expecting in 2024. And I think your comment around the pipeline and projects is important, because the pipeline of projects we have in company today are much better higher quality margins type projects than we had in 2023, and so you kind of think about that pipeline of work coming through. In 2023, we're still burning through some of that work we picked up in 2021. In 2022, there was a little bit more tougher market I should say, than what we have historically seen and what we have in the last couple of years. So the pipeline has gotten stronger, margins gotten better. And I think those projects are going to really start to hit our books in 2024. So I think that's going to help. Our execution hasn't changed around what our focus is. And we have our construction playbook. We're focused on operational excellence. We continue to see opportunities to get better on year-over-year, and we're focused on that. And I can tell you the market's still healthy. We talked about that. So our margins are getting better, if not pretty consistent with what we saw last year, which are really healthy margins in the market. You can tell you the first month or so, we're seeing the bid volume is very consistent with what we saw last year. And margins are very consistent as well. And our hit rate's been strong. So we feel like we have the market, we have the work on the books today to hit those margin expectations of 14% to 16% in 2024.

Appreciate that Kyle. My follow-up is back to talking about your recent acquisition in the Southeast. Maybe you can look at that business characterized to what Granite's like-for-like business would be on the materials front. And is that an area that, when you went into here, looking towards going vertically, integrating, and moving into the construction phase more dramatically, is that kind of how you're thinking about? Is that where some of your attention might be placed on some of the acquisition opportunities that may come up for you as you move through 2024 relative to what Lisa talked about in some of the targets?

Well, I think when we looked at the acquisition with Lehman-Roberts and Memphis Stone & Gravel, I look at it like we're getting back to our roots as an organization. We hadn't done a vertically integrated deal since 2008. And it was really important for us to get back to doing the types of businesses and deals that we were comfortable with and how we grew our organization historically over time. And so if you kind of go back to 2023, we were very intentional about supporting and strengthening our existing home markets and reinvesting those. They were underinvested from a reserve perspective. We saw some bolt-on opportunities, ways that we could preserve the market position we had. And so we did that. You know, Lehman-Roberts was an opportunity for us to get outside of our existing footprint and create that real platform for growth. And as I mentioned on our last call, we were looking for a really strong leadership, looking for a healthy growing market, and we're looking for a really good business. And we found that with Lehman-Roberts. And that's going to provide that platform for us to continue to grow in the Southeast and where we can grow that business and really leverage the team to find other opportunities in that marketplace to grow our company. So this is a big shift for us and we're excited about it. We haven't done a vertical integrated deal since, again, it's been 15 years and so quite a while. So that was really kind of our thoughts behind the Lehman acquisition. And as we looked to 2024, you know, I think our investment thoughts are very similar. We're going to continue to reinvest in our existing businesses, support and strengthen. But we are looking for other opportunities like Lehman-Roberts, so we can grow our business. It could be part of the platform to Lehman-Roberts or find other, other areas that we can expand and transform our company. And I think you look at that positive cash flow that we generated on Q3 and Q4 and what we expect to '24, we're going to have the ability to do it.

Okay. Kudos, Lisa, on that cash flow generation. Thanks. Thanks, Kyle.

Thank you.

Thank you, Mike.

The next question comes from Jean Ramirez of D.A. Davidson. Please go ahead.

Hi, good morning.

Good morning.

Good morning.

So, I'll start with a question about the projects you guys did. So under the new discipline, several types of jobs you guys go after. Could you discuss the progress you are seeing on the larger projects under your portfolio?

The progress on the larger projects?

Yes.

Yes. So I would say, we've been through this transformational journey as an organization for quite some time now. We really don't bid these -- the mega projects that we historically had been that it caused us a lot of challenges in organization. We do pursue projects that we would call larger projects that would be in the, say, $150 million to $250 million range. But the big shift for us has been the contract method in which we do that work. So most of our larger projects now that are more complex, or even longer in duration tend to be the best value type projects, or CMGC, or progressive design build. And if you look at the pie chart that has the breakdown of our CAP, around almost half of our CAP now is that best value type projects. And so, we've been able to deliver larger, more complex projects, and very successfully under that contracting method. So it's really a very big difference to entirely different business models than what we were doing several years ago. And that's really why we're excited about our transformation. I think the other thing that's really important is these projects are also being built in markets that we know. These are home markets for us. We're not chasing work into markets with clients that we don't understand. We don't have a really strong relationship with. That allows us to be more successful, but it also does something really important. It allows us to avoid claims. And so that's certainly something we want to get away from as an organization is having these contract claims. They are distraction. They are a challenge and frankly, they're a drag on our cash. And so one of the things you're seeing with our new business model is if we don't have these claims on our books, we can actually drive a lot higher operating cash flow. So in short, we're doing we're doing very well on the larger projects that we're procuring today.

Great. I appreciate the other color there. Shifting focus on California, could you address if you have any concerns around the budget deficit in the state and whether you're either seeing or kind of forecasting the impact projects to schedules or planning for any future work you'll be pursuing?

Not at all. Yes, what we really want to make sure that everybody understood is the Caltrans three-year expenditure allocations are only going up. We're excited about the opportunities we see in the state of California, certainly on the public side, if you look at the SB-1 monies that are out there, they continue to grow. And so we think California is going to be a healthy market for years to come. So yes, we don't have any concerns.

Okay, I appreciate it. Thank you so much.

Thank you.

Thank you.

Our last question will come from Jerry Revich of Goldman Sachs. Please go ahead.

Yes, hi. Good morning, everyone. Nice cash flow this quarter. I just want to ask at the EBITDA outlook that you folks outlined for '24, what level of free cash flow conversion do you folks expect? I know it can be a wide range of outcomes, but we'd love to hear how you're thinking about it? And similar question for longer term as you continue to work off the prior projects. And then Lisa, can I just ask factually, where did claim recovery estimates and bill receivables in the quarter? Thank you.

Yes, thank you, Jerry. So yeah, let me talk about free cash flow. Cash generation, we're excited with our cash generation for 2023. You know, last year, 2023, we talked about cash generation and generating positive free cash flow was really the last major area that we needed to improve upon. And so we made we made nice strides with that for 2023 and we see that continuing into 2024. You know, we we've intentionally changed our business model over the past three years with de-risking the portfolio from anywhere from project procurement methods, which Kyle was talking about, to not entering into non-sponsored joint ventures, so that our model was really broken historically from a risk perspective. And so we're getting to see the benefit of that, because obviously that not only impacted our bottom line, but really our ability to generate cash. And so from an EBITDA to free cash flow conversion, when we look at 2024, and as I said, in my opening remarks that we're targeting OCF as a percentage of revenue of around 7%. And so with our EBITDA projections, that would be ratio conversion of about 35% to 40% for 2024. And if we look out further, let's say to 2026, our operating cash flow as a percentage of revenue, we'll be moving closer, looking to move closer for a target of 9% to 10%, which would be a closer to a 50% conversion ratio. So that is what we're looking at from a free cash flow conversion perspective. As far as unbilled receivables, go ahead. I'm sorry.

No, no, please. Yes. Thank you, Lisa.

Yes, so, you know, claim recoveries, I mean, we do disclose that in our Qs and Ks related to what we have recorded and that will be coming out later today. For unbilled receivables, Q4 was a very strong quarter for us for reduction of unbilled receivables. You know, our DSO, we continue to main DSO, we do not have issues for our collections. Our 2023 Q3 and Q4 were very high activity levels, which generated very nice cash generation, obviously, in Q3 and Q4. And a big portion of that was our receivables, which isn't unusual, which is actually what we expected due to the strong second half of the year, since the first half of the year was delays due to the weather. So, yes, making good progress, contract assets have gone down, and our contract liabilities have increased. So, all of those points are moving in the right direction.

Yes, there isn't any claim recovery in that 7% target in 2024.

Correct.

And can we shift gears and talk about the pricing opportunity that you're seeing in the materials business? I mean, we've seen pretty heavy M&A, particularly in California across the materials spectrum. Is there opportunity for pricing to be stronger than what you laid out, Kyle, in terms of 10% for aggregates? Is there potential for a mid-year price increase? And similar question for asphalt given all the industry consolidation in your market. So is there an opportunity for additional price increases over the course of the year?

Perhaps. I mean, I think it's probably too early to tell for us in that regard. But I think we still feel good about the 10% and the 5%. So I guess we'll see.

Okay. And just clarification, 10%, 5%, that's the January 1 price increase that you're embedding, you're not embedding anything for mid-years?

Yes, I think that's kind of an average. I mean, every market can be a little bit different, but those are averages over the year.

Thank you

Thank you.

Thank you.

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

Okay. Well, thank you for joining the call today. As always, we want to thank all of our employees for the work they do every day. Most importantly, in 2023, we had the best stage results in Granite's history for a second consecutive year. You keep raising the bar and you should be proud of this achievement. Thank you again for joining the call and you're interest in Granite. We look forward to speaking with you all soon.

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect.