Good day. My name is Illy, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relations First Quarter 2021 Conference Call. This call is being recorded. All line have been placed on mute to prevent any background noise, and after the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Granite Construction Incorporated, Vice President of Investor Relations, Mike Barker. Sir, the floor is yours.

Good morning and thank you for joining us. I am pleased to be here today with Granite President, 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 Granites Investor Relations website. We begin today with an overview of the company’s Safe Harbor language. 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, growth, demand, strategic plans, circumstances, activities, performance, outcomes, outlook, guidance, backlog, committed and awarded projects, and results. Actual results could differ materially from statements made today. Please refer to Granite 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, whether they are results of new information, future events or otherwise, 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. Reconciliations of 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 President, Kyle Larkin.

Thank you, Mike. Good morning and thank you all for joining us on our call today. To start off the call, I would like to comment on our press release where we announced that we have reached a settlement to resolve securities litigation subject to court approval. Although, it was a difficult decision, we concluded that it was in the best interest of the company, as well as our shareholders to move forward. Following court approval, we will be able to put this litigation behind us and focus on our business and people. Granite portion of the settlement is insurance is $66 million and we expect it to be paid from existing cash on hand. As Lisa will explain in further detail later in the call, despite this event, our liquidity and cash position remains strong. As I’ve discussed in previous calls, our core values guide us in our day-to-day operations and are serving as the foundation of our cultural reinvigoration. On the last call, I provided an overview of our sustainability core value and the efforts that are under way to drive sustainability forward at Granite. Today, I will touch on two more of our core values, safety and inclusion and how we are integrating them into our day-to-day operations to drive desired behaviors. Granite’s choice to continue to include safety as a core value is embedded in our culture and reflects our belief that the safety and well-being of our people, our partners and the public is our greatest responsibility. Every level of our organization supports our safety culture with training, planning and engagement. We approach every task with safety built into the process and we do not sacrifice anyone safety to get the job done. While safety is front of mind every day at Granite, it is…

Thank you, Kyle. Starting with revenue and gross profit, the first quarter delivered strong results on both measures. First quarter consolidated revenue grew 5% year-over-year to $670 million with gross profit increasing 166% year-over-year to $63 million with a gross profit margin of just under 10%. Within our Transportation segment, revenue was up slightly year-over-year to $351 million, led by an increase from the California Operating Group, which offset a revenue decrease from the Heavy Civil Operating Group. Transportation gross profit for the quarter increased 41% to $36 million, resulting in a gross profit margin of 10%. The increase in gross profit was primarily due to a decrease in project losses from the Heavy Civil Operating Group Old Risk Portfolio. Losses from the Old Risk Portfolio in the first quarter of 2021 under $1 million, compared to losses of $13 million in the first quarter of 2020. The Old Risk Portfolio backlog decreased by nearly $100 million during the quarter, which is on pace to meet our estimated project burn of $425 million to $475 million during 2021, that I mentioned in our last call. Our team’s execution in the first quarter, serve to mitigate exposure in the Old Risk Portfolio, and we are optimistic this will continue in the future. In our Water segment, first quarter revenue was down 2% year-over-year as the segment continued its recovery from the COVID-19 pandemic. Water gross profit for the first quarter decreased to 8% to $9 million, resulting in a gross profit margin of 9%. This decrease in gross profit was primarily due to temporarily higher resin costs and Granite Inliner associated with supply chain disruptions due to winter weather events in Texas. Moving on to the Specialty segment, first quarter revenue increased 17% year-over-year to $156 million. Specialty gross profit increased…

Thanks, Lisa. Let me close with the following points. In what is typically a seasonally tough quarter, we are pleased with our first quarter performance across the company. Our teams have done a great job maintaining focus on execution, particularly in the Old Risk Portfolio. We believe the Securities litigation settlement is in the best interest of the company and our shareholders. This will allow us to focus on execution in 2021 as we work to refresh our longer term strategic plan. Across our markets, we are seeing a healthy bidding environment, but we have opportunities to continue the transformation of our portfolio and build quality CAP. Finally, we are optimistic about the funding environment. The economy appears to be strong with continued investment from the private market and public funding environment has been supported by direct and indirect infrastructure legislation from several different measures and we remain hopeful the enactment of a federal infrastructure bill will occur this year and will serve to further strengthen the environment in 2021 to 2022 and beyond. Operator, I will now turn it back to you for questions.

Thank you. [Operator Instructions] Our first question comes from Brent Thielman with D. A. Davidson.

Yes. Thank you. Good morning.

Good morning, Brett.

Good morning.

I guess, first question is, pretty significant growth in CAP within the Specialty and Water segments in the first quarter even on a sequential basis. Can you help us think about that through the timing of conversion about awarded work, I know water tends to be a little faster burn, but could we see the majority of that work in Specialty move through this year?

Yeah. So, this is Kyle. And what we can talk a little bit about that. Certainly, we anticipate in the Specialty segment that that’s going to convert relatively quickly. A big piece of that was the Specialty and the Specialty segment was the project in Ohio for the tunnel group and that job has been awarded. We anticipate that we’ll get kicked off and that will convert relatively quickly. In general, a lot of the Specialty work is site development projects, data centers, supporting commercial builders and networks converts relatively quickly as well.

Okay. And I guess my follow-up, I mean, the 10% gross margin in Transportation and -- in a first quarter is particularly good for this time of the year and I don’t think weather was entirely in your favor this period. So, I guess just looking for any additional color, is it the work that you’re pursuing, Kyle, just the execution, would love to just get some more color on that margin this quarter?

Yeah. I would say, the weather was actually pretty good in the west. And so we saw similar weather this year in Q1 that we saw in 2020. So that’s certainly helped that segment. Is -- I looked just in general, I think, our teams executed very well in Q1, which they’ve kind of building on some really strong momentum coming from 2020.

Okay. Thank you.

Thank you.

Our next question comes from Michael Dudas with Vertical Research Partners.

Good morning, gentlemen, and Lisa.

Hey. Good morning, Mike.

Good morning.

Kyle, you mentioned about the first quarter competitive nature on bidding from the competitors and such, as you’ve gotten through April looking into May, are you still -- are you able to be more selective, has competitors backlogs been filling up rather quickly? And maybe as you talked about, as you indicated your range between 5.5% and 7.5% EBITDA for 2021, what are some of the drivers that might move you from one end of the range to the other?

Okay. So, I will start with the first question around the bid environment. We are seeing a really nice bid environment across our entire portfolio. Certainly, that’s being led with our BI business where we’re actually increasing the amount of work, we’re bidding even on some of the large projects under our new Risk Portfolio Profile and even the Water segment as you’ve seen. So, we’re really pleased with the amount of work that’s out in front of us and our bid schedule is stronger than it was last year at this time, which is really good news. In terms of the competition, I think, it’s a little bit different everywhere. We’re still seeing a lot of competitors on bid day. But we are seeing opportunities in certain markets, but we’ve been able to start raising prices moving forward. That said, we are being selective on some of the larger projects. We certainly don’t want to go backwards. We want to really drive our business toward the new Risk Profile and so, that Leon Hurse Dam project was a nice representation of that. The second part of your question is around the key drivers and in terms of the guidance, and there’s really three components that we would probably put that into. One is around project execution. So we’ve been acutely focused on execution across all parts of our business, and primarily, in the Heavy Civil Group around the Old Risk Portfolio. And so we’re actually really pleased with the performance. Our burn rate is right on target with what we shared with everybody in the last couple of calls. And the margins, although, there is a little bit of some margin data, there is also some margin gain within those projects. So, we haven’t seen that for quite some time, and all-in-all, it had little effect on the gross profit for the quarter. So execution is obviously a big piece and so we’re quite pleased with our execution in Q1. Now the second is weather. Obviously, weather is a factor primarily in Q1 and Q4. And so we got through Q1 with nice weather very comparable to 2020. And then, obviously, we don’t know what Q4 is going to look like but we’re hopeful that it will work out well for us. And really, the third is just our ability to win work and put work in place in 2021. So that’s something that our teams are focused on. As I mentioned, the opportunities are out there in front of us. So that’s really good news and now our teams just have to go out and capture the work and then deliver on it in 2021. And if we can do that than that -- if those three things line up, that will move us to the upper end of our guidance.

It sounds like you’ve got comfortable…

Yeah.

… with your revenue coverage, like, what you have in the pipeline relative to your revenue with targets that you’ve set out for 2021?

Yeah. Yeah. I think we feel good.

We do. And Mike, this is Lisa. Just to add a little bit on that -- on CAP. We’re continuing to see the shift in mix that started last year, so while Heavy Civil Group, that portion in the portfolio continues to decrease as expected. We’re still maintaining our overall CAP balance. So we’re seeing increase in the Vertically Integrated business and our Water business. And then what we have in the end of Q1 does not even include the $160 million Hurse -- Leon Hurse Dam project. Of course, specialty is up and then we’re still seeing a good market for the CMGC work. And when we look at the pipeline for Heavy Civil Group, a large component of that is the CMGC kind of, best value procurement work. So it’s nice to see that strategy continuing to play out for us.

I appreciate it. And then just my quick follow up would be on Material side, certainly, a very good start, Q1. We’ve been hearing from other building products providers, good pricing, good volume expectations. Do you see that in your worlds on the asphalt side and any price cost issues that we might see roll through? But I would think that given your opportunities for the bidding and for the good start that that Materials segment could see some upside as we move through 2021.

Yeah. We think that we are encouraged by what we saw in Q1. I think that’s more indicative of overall better market and we do think that there is going to be opportunities for us to push pricing in certain markets this year.

Excellent.

Our next question comes from Steven Ramsey with Thompson Research Group.

Hey, Good morning.

Hey. Good morning, Steven.

Maybe to start with, I guess, just to think about winning work in a competitive bidding environment, I know it’s always competitive. I mean, is the bidding environment now similar to the past all in and in what ways is it different in may be a good or bad way? And then, lastly there, in what segment is bidding most challenging?

Okay. Well, I would say that, that I have mentioned before that, the bidding environment, it goes through different stages throughout the year where contractors backlog, maybe midyear, they burn through it and they get a little more aggressive in Q4, Q1. And we’re seeing that normal pattern today. Although I’d say, maybe, it’s a little bit more intensified in Transportation today just because a lot of contractors burn through backlog and with the pandemic, some agencies just held back on lettings. So we are seeing competition in many of our markets extend a little further than typical. But our teams have done a really nice job of continuing to capture work. Some markets have already shown improvement and so we’re able to be a little more selective and building the right backlog and our business in those markets. I would say, again, now Transportation is where we see the most competition in our segments today.

But overall lettings, what the states municipalities are putting out, is very strong.

Okay. Okay. Good. And then thinking about the Material segment, maybe to ask a little bit differently than it was. Orders up in Materials and how much of that is due to the vertically integrated business being up strongly, how much of that is external customers? And turning to kind of combine your thoughts on the last question, tough bidding environment and transportation combined with rising costs, does that present price cost challenges down the road or are you factoring that into your positive pricing outlook?

Okay. Let me start with the Materials question. The sales volumes are up and demand is up external and internal so for our BI business, as well as our external sales. So we’re seeing it in on both sides. So I think that’s even better news if you look at our Materials business. In terms of rising costs, we do have the ability to price that into our work. Certainly, the one that jumps out today would be more around diesel and we anticipated that we would see diesel increases in 2021. So our work that we’re pursuing today has those anticipated increases already built in for the most part. And then a lot of our customers have escalation clauses, certainly around things like steel, which we’ve seen, there is some steel increases out there, cement and others as applicable.

Great. Thank you.

Thank you.

Thank you.

[Operator Instructions] Our next question comes from Jerry Revich with Goldman Sachs.

Yeah. Hi. Good morning.

Good morning.

Good morning.

I am wondering if you could talk about just the overall bid pursuit pipeline that you folks are looking at today And just to quantify some of the prior comments on the bid environment, Kyle, if you don’t mind. How does that compare today versus last year as you look across the footprint based on everything you’re tracking?

I’d say it’s up. So, just in general, on projects under about $150 million, we’re up probably about $400 million to $500 million for this, even this month versus what we’ve seen in the prior year, so quite a bit. Projects over $150 million, again, we’ve been a lot more selective in what we’re pursuing and how we’re pursuing it. As Lisa mentioned, the type of work that we’re pursuing over on $150 million, a lot of that is best value procurement, almost three quarters of it is best value procurement. And even with the new constraints we have put on ourselves, the projects over $150 million, the pipeline is very consistent with last year if not up slightly.

Okay. And in terms of with the business model transition, it’s been nice to see the pipeline up with the more strict standards. Can you talk about whether that’s a function of the market evolving on risk terms overall or are you seeing, in other words, the same level of discipline out of your competitors or is it just a function of the market for this type of procurement is just larger than what the company has viewed as possible in the past?

Yeah. I think it’s just a shift. I think instead of pursuing large, I call mega projects. We were pursuing smaller large projects that allow our teams to estimate more work and procure more projects. Although, the dollar amount might be smaller today on the large project side, our average job size in the pursuit is around $300 million. So it’s a lot less than what it used to be and that’s something that we -- that was internally directed.

Yeah. Jerry, this is Lisa. So those what we would consider higher risk projects are still out there. We’re just -- we’ve made the internal decision to not pursue those, so.

Okay. Thank you. And then in terms of on the execution on the legacy projects, really excellent performance this quarter, can you just talk about what went right for you folks, because obviously for these types of projects, history would dictate that there is risk of write-downs from an accounting standpoint as you progress toward project completion and you folks were able to avoid that this quarter. So can you just talk about where productivity improved and just could you give us a little bit more context on what went well?

Yeah. Yeah. And unfortunately, we were out this week with safety week and we got to me a lot of our teams on some of these tough jobs and I mean credit to them. They’re working really hard to focus and bringing these jobs to completion. I think through all of our work over the last year, bidding processes and controls, and ultimately, getting our forecast right. I think that’s a contributor as well. And we’re at a point now where we did have a couple of fades in terms of our forecast margin and we had some the gain margin that kind of offset each other to the point we are. I do, obviously, it’s the old risk portfolio. I think that we have to recognize and respect the risks associated with that portfolio. But I do believe our teams are asking at a high level on those projects, as I said, they are focused on bringing those things to completion.

Yeah. Thank you.

Yeah. Jerry, just to add on to what Kyle was saying as just a reminder. We still have approximately $600 million in our portfolio to work through. So, again, great, it was a really good first quarter and we’ve been relentless on many fronts on dealing with these riskier project, so good to get through Q1.

Yeah. Great. Thank you.

This will end our Q&A session. I’d like to turn the call back over to Mr. Larkin.

Okay. Well, thank you for your questions. As always, I want to thank all of our employees for everything you do every day for Granite and for our customers. Your hard work and dedication is the cornerstone of Granite success. And with that, thank you for your continued interest in Granite. We look forward to speaking with everyone very soon. Thank you.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.