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 Investor Relations Fourth Quarter 2021 Conference Call. This call is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' 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 Incorporated Vice President of Investor Relations, Mike Barker. Please, go ahead.

Good morning and thank you for joining us. I'm pleased to be here today with President and Chief Executive Officer, Kyle Larkin; and Executive Vice President and Chief Financial Officer, Lisa Curtis. Please note that today's earnings presentation will be available on the Events & Presentations page of our 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, 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, 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. 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, and good morning, and welcome to our fourth quarter earnings call. Three weeks ago, we announced several important steps as we continue to implement and drive forward our new strategic plan. I'll briefly touch on our strategic plan in a few minutes. But let me begin with a review of the steps that were announced. First, we signed a definitive agreement to sell Granite inliner, and we expect that transaction to close as previously reported. Secondly, we also announced our intent to sell water resources and mineral services businesses. Granite inliner, water resources and mineral services comprise our former Water and Mineral Services or WMS operating group. With these announcements WMS has now been reported as held-for-sale and in discontinued operations in our financial statements. Our company has been through a lot the past few years; we are acutely aware of the need to learn from our recent struggles so that we can improve our performance and create value for all our stakeholders. This was our focus as we revisited our strategic plan over the past year. As our new management team came together and discussed the direction of our organization, it was clear that our company's core competencies lie on our civil construction and material businesses. All the information that we study confirms my belief that Granite's future should be built around return to our core skillset. This is what we have done for 100 years and we're one of the best contractors in the country. As a result, we concluded that our success depends on our team being focused on building our core businesses, and focusing all of our efforts on supporting and aligning the company, with our civil construction and materials business. This is why we decided to divest of the WMS businesses with…

Thank you, Kyle. For fiscal year 2021, revenues from continuing operations decreased 4% from the prior-year, while gross profit improved slightly, resulting in a gross profit margin of 10%. In the Construction segment, full-year revenue from continuing operations, declined $162 million year-over-year to $2.6 billion. This decrease reflects lower revenue in our Central and California Groups. In the Central Group, we experienced an expected revenue decline this year as we transform the Central Group's project portfolio. The California Group revenue also saw a decrease resulting from several factors, including an extended competitive bidding environment in the first half of 2021 and inclement weather in the fourth quarter of 2021, particularly as compared to 2020. The California Group results for 2021 are also contrasted against a very strong second half of 2020, where the group had record revenues. While revenues are down year-over-year, we believe there is underlying strength in California, as demonstrated by the Group's CAP. Construction segment gross profit for the year increased 3%, resulting in a gross profit margin of 10%. This increase in gross profit was primarily driven by a decrease in ORP losses year-over-year, which is partially offset by the impact of several factors, including reduced margins on certain projects from project execution and margin pressure from the extended competitive bidding environment during the first half of 2021. The ORP ended the year with remaining CAP of $319 million, which is higher than our previous projections of $275 million. The variance is due to progression of projects lagging original expectations, and write-downs incurred in the fourth quarter. Fourth quarter and full-year 2021 net ORP losses to Granite, which excludes non-controlling interests were $16 million for both periods on revenue of $66 million and $385 million respectively. This compares to a loss of $81 million on revenue…

Thanks, Lisa. I'll close with the following points. I'm disappointed with results of our fourth quarter, particularly the losses occurred in the ORP. The good news is that we expect to burn through all the $50 million of the ORP in 2022. We fully appreciate the importance of mitigating the risks associated with these projects, and our team remains laser-focused on their completion. We all understand the importance of getting these projects behind us and executed, so that we don't have a repeat of the performance to be experienced in the fourth quarter. We are well on our way in the implementation of our new strategic plan that will allow us to focus on what we do best. Civil construction and materials work in our home markets. We believe that this return to our core strengths will result in a profitable business to provide consistent returns for our shareholders. We move into 2022 with a transform CAP portfolio that has been built to our initiative to pursue best value procurement projects, and reduce exposure to risky design-build projects. I believe we will see the financial benefits of this transformation in 2022 through higher levels of profitability. Our cash and liquidity position remains strong and will grow stronger as we complete our announced divestitures. We will be strategic in investing in our business, and we are positioned to return back to shareholders through our expanded share repurchase program upon closure of the divestitures. Finally, with the passing of the infrastructure bill in the fourth quarter, we believe our business will continue to grow as funding makes its way to state and the project lettings in the second half of the year. Operator, I'll now turn it back to you for questions.

[Operator Instructions]. Our first question today comes from Brent Thielman with D. A. Davidson. Please go ahead.

Okay, great. Thank you. Hey Kyle, I guess my first question would just be on the water portfolio, recognized some of these assets were generating the returns, I think you sort of expected them to get to. Just want to kind of come back to why now, in terms of the rationale to sell some of these businesses and if possible, if you can offer any range of what you might expect for the two remaining businesses in terms of what that could bring to Granite in terms of new capital, that that'd be great?

Sure. Well, yes, good morning and thanks for the question. When we look at WMS, we spent the last good part of last year working on our strategic plan as a company and we were very closely with the risk committee and our Board in terms of the process, looked at lot of data, looked at all kinds of information, looked at internal and external. And what it all came back to was really focusing on where we know we do well, where we're successful, and how we're successful. And that really came back to our core civil construction business and our materials business. And really, kind of our home market strategy. And those are the attributes where we do best. And WMS just didn't fit. And so we decided to really divest that portion of our portfolio. So we could reinvest back in our core business and line ourselves up for success moving forward so that that was really the impetus for the sale. In terms of the amount that we anticipate for the remaining two businesses that's to be determined. We just started the process. So we're hopefully going to have something that we could announce later this year, but it's too early to tell at this point in time.

Okay. And then the 6% to 8% EBITDA guidance, margin guidance, obviously still reflects the impact of the ORP portfolio. Maybe just a refresh of what you still expect from the kind of the ongoing business as we get beyond that sort of more on a normalized basis when sort of ORP rolls off?

Yes. I think for us, we see ourselves longer-term towards that 9% to 10% EBITDA margin type business. Obviously, we have to get through this ORP and certainly get that behind us. And I mean the good news is we are seeing that portfolio wind-down at really the pace we thought it would, for the most part, obviously we weren't pleased with how we performed in Q4. But we are looking at that portfolio getting behind us at the end of the year where backlog around $50 million. And we have really two active projects at that point in time. And one is actually in a profitable position. So we are pacing to get the ORP behind us. And then we can really move the business forward in the direction that we're working towards. And if we look at that longer-term guidance, I can tell you the market seems to be improving. We like what we're seeing. And we think by allowing ourselves to really focus on our core business driving improved execution, and get even better at what we're good at. But we think that's going to be how we get to that 9% to 10% EBITDA margin.

The next question comes from Steven Ramsey with Thompson Research Group. Please go ahead.

Hi, good morning. Kind of stay on this margin topic SG&A at 8% to 8.5% includes ORP, is there a way to think about what this looks like excluding ORP would it rise as a percentage of sales somewhat or even decline?

Well, what we've been doing is actually offsetting the decline in ORP with our vertically integrated businesses out in the West. And we see that will continue. But we're also transforming what was the Heavy Civil Group and now it's the Central Group and focusing them in on their home markets. And we are starting to see results. So we're starting to see certainly in Texas, our ability to pick up work on a lot smaller type contracts that fit us very well. So I think the teams are doing a really nice job of transforming beyond just not pursuing big mega project design, build jobs, so really transforming into a home market strategy. So I think as we look forward, and certainly we're well-positioned for the infrastructure bill, and will come out later this year, in terms of lettings, we expect that we're actually able to grow, we would anticipate that our SG&A will actually improve. So that's how we're looking at it.

Okay, okay, helpful. Helpful. And then on that Central Group transformation revenue headwind in 2022, is that purely ORP and then I guess should the transformation of the Central Group proved successful? Is there a way to quantify kind of the gross margin, or SG&A benefit to the Construction segment from that happening and is there a timeline associated with that?

I'm not sure I'm totally following the question. So you're asking --

So for the -- so Steven, this is Lisa. So you were asking about so for the Central Group kind of the change in the revenue going into 2022, that is going to be impacted by a lower ORP burn. We burned through about $358 million of ORP CAP in the current year. And we're going into 2022 with about $319 million. So our expected burn is about $270 million in 2022. So that is a component. But we are transforming that portfolio and shifting it to more of our home market focus. So as that transformation happens, and we stick to our new project pursuit criteria, there is some decline that we are anticipating in our guidance related to Central. So those are kind of the key components. So that may be the first part of your question. And there may have been a part two that we missed.

No, that is helpful. Yes, I guess, yes, that's helpful. What I'm getting at then is the margin benefits or headwinds in 2022 and as a launch pad to next year, is the Central Group ready to grow with this new discipline and track it takes for its strategy?

Yes, okay. I get where you're headed there. So the ORP that we have burning through 2022 is really at a breakeven. And so we look forward, we expect the margins within the ongoing Central Group to be just in line with where we are in the other parts of our business. So we anticipate growing it. There will be employees coming off of projects and going on to the bench, so that's a little bit of why you see a slight uptick in the SG&A off of last year's results, so we anticipate there's going to be opportunities to put those employees to work on projects as infrastructure bill comes out. But in general, we expect our margins in the Central Group to be really looking very similar to what we see out in the West.

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

Kyle, could you share your thoughts on you see pretty happy about the CAP that you're going into 2022? How does the margin that's booked into that CAP heading into 2022 compared to what you're going into 2021. And on top of that can you share, you mentioned about the competitiveness in 2021, how's it look today, as less competitive, more competitive, is that going to be a hindrance, because of your new selectivity until some of this federal funding starts to flow-through more aggressively to help fill some of those competitors backlog?

Sure. And you look at the CAP, I mean, I can tell you, as we wind-down the ORP, and maybe replacing the CAP with quality CAP in our VI businesses, and even in Central Group with new work, the quality of our CAP is a lot better than what we've seen year-over-year. So we're excited about the CAP for sure. As you look at kind of back in the prepared remarks, in the presentation, a big shift is that move from design-build two years ago, around 25% of our portfolio, and now we're sitting right around 10%, so that that risk profile of our CAP has changed dramatically. And we've also, our best value component has gone from 24% two years ago to 46%. And we know we do very well on these best value projects. So we're excited about our CAP and we're moving the company forward in that regard. And to your question around the market last year at this time, we were kind of walking into Q2, Q3 where we saw that market in the competitive landscape, we made more competitive than it usually does in the Q2 and Q3 and we shared that part of it was lettings start slow, private lettings, public lettings there is some really trying to figure out where things are going with the infrastructure bill, the pandemic inflationary pressures, supply chain issues, things were a little bit different a year ago than they are today, what we've seen in the last three or four months, we've seen the bid volumes go up, which is very encouraging. We're seeing that in really every one of our markets. So that's encouraging. We're picking up about the same amount of work. But the really good news is our margins are a little bit higher. So we see all the indicators are pointing in the right direction right now. And we'll see how things progress. But we are excited about our market. So overall, I say they're all looking strong. Obviously, some are stronger than others. But for me, we are in a healthy position today.

And when you think about the positive risk profile shift in your backlog with less design-build, more best value, which I understand is that an overall net positive, neutral, negative to absolute margin and expectations of generating that margin?

Yes, our expectation is margins will increase certainly. I mean, that's, we need these design-build projects that we've been building for years. Some of them go back to 2000, really maybe 2012. And so these projects that design-build criteria, the margins didn't deliver. Based on our CAP today, we're feeling very confident around the quality of our CAP.

That's encouraging. And my follow-up question would be, so I think in response to a question in your remarks, you talked about your share repurchase program that's expanded and your capital spending for the year. And you mentioned you are comfortable maybe executing on that program. Do you feel you can do that now given with a cash and balance sheet, do you have to wait for the proceeds to come in on this transaction, you have to wait to both transactions get closed? How are you guys thinking about that on the pace given where the valuation stock is coming? And then with the pace of M&A and opportunities especially maybe in that Central Group where you may want to or you think about adding more materials backward integration to kind of make it a lot more structurally like your vertical business that you had. Is that going to be a product simply had a lot of moving parts with the cash and also what the drain on cash would you expect from the new options in 2022, so just give me -- just give us sense on how that's been that efficient?

Okay. Hey, Mike, this is Lisa. So I'll touch on your question about liquidity and our share repurchase. So, we ended the year strong with our liquidity position. We had year-end cash a little over $410 million. And then we did announce that we received the increase authorization from the board in early February, related to our share repurchase programs, to increase that up to $300 million. So we're really positioned nicely to be able to take advantage of that. So we're keeping an eye on the market. We don't have specific timing at this point. But we expect it in the near-term. So we're keeping an eye on the market, and we are monitoring for appropriate opportunities. We also talked about that in the prepared remarks anticipation of paying down debt. So with Granite, we -- our liquidity position has remained strong, even through the past couple of years and some of the challenges that we anticipated. We also do not have any borrowings drawn on our revolver. So we have full capacity related to that. So that's from a just overall balance sheet and liquidity position we're sitting strong. To then ultimately, when we close on the inliner transaction in the near-term, we'll have an infusion from cash related to that. And then we'll be able to act accordingly between a balance -- between debt pay down and actually returning value back to shareholders through share repurchases.

So maybe, and then I'll piggyback and talk a little bit about what we're doing in terms of reinvesting back in our business. And maybe when we talk about Central or so any part of our business today, we're looking at strengthening our existing home markets. So that's going to be kind of our first step over the next year or two. We see opportunities to invest in agate reserves. We talked about technology earlier in automation. We see an opportunity to lower our cost produced in our materials business and many of our facilities, you'll also see opportunities to do smaller bolt-on M&A deals within our existing footprint. So we're really looking today at strengthening and supporting, even growing our existing home markets. And that could be even within say Texas or Florida. And again, a home market for us is where we have really the labor, the equipment, the materials resources, we have the relationships, we have the market intelligence. We're in those markets, and we're part of the communities. And so we want to ensure that we're strengthening those the best we can. And really, I would say in 2024 and beyond, that's when we'll start to be prepared to do something more transformational as a company in terms of M&A, but today, it's really about strengthening and supporting our existing home markets and growing them.

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

So, we've heard from some of your segment peers regarding the general optimism on DOT in state lettings throughout 2022. Just based on tax revenues, or leftover cares subsidies, et cetera. Maybe you could talk about; you have the large market in California, and how that kind of translates and what you see as year-over-year growth in 2022?

Yes. So, we -- as I mentioned before we're seeing really increased being opportunities across all of our markets today, which is encouraging. If you look at some of our bigger states, in terms of say California, we're seeing things come back, certainly on the public side. Caltrans lettings were actually up year-over-year and we anticipate based on SB1, their budget is actually improving over the next five to seven years. So we see that as being an encouraging sign. On top of that within our California market, we do see the private market coming back to some level in California as well. So other markets are strong. I won't necessarily go into the details of each one. But I think we are encouraged by what we're seeing. It seems like there was definitely a little bit of a slowdown last year. Again, with the inflationary pressures, supply chain issues, I think everybody paused, as well as wondering what was going to happen with the infrastructure bill. So now that that's behind this, it hasn't been appropriated. But I think the DOTs and agencies are starting to see where things are headed. So I guess to answer your question, in general, we feel pretty good about our markets today.

Okay. And then just a follow-up on the SG&A, the 8.5% targeted revenue in 2022. Do you think that it gives you enough scale to then leverage off of what would be the implied absolute level of that SG&A we move into 2023 to support the organic growth?

Yes, I do. And one thing that we did late last year is a restructure as part of our strategic plan to line things up around this core civil construction materials business. And we really kind of reorganized the organization. We found ways we could streamline things. And so that did result in a cost savings as you move into 2022. We believe that that's going to be scalable. And so as you look at the business long-term, as we grow the top-line, we expect that SG&A to come down.

[Operator Instructions]. The next question comes from Jerry Revich from Goldman Sachs. Please go ahead.

Lisa, why don't you just bridge the 160 basis point margin expansion target that you have it at the midpoint of the range? The ORP lack of losses there looks like it adds about a 100 basis points. But maybe you could put a finer point on that and talk about the improvement that you're expecting in the base business profitability and the visibility that you have on that? Thanks.

Yes, definitely. So some of the -- some of the points or factors and assumptions that we use related to the mid-point I mean, as you mentioned, and I said in the -- mentioned in the talking point, if you know, for the ORP revenue, which is actually anticipated to be a lower component overall. We have no margin or breakeven related to that portfolio. We are working towards our strategic plan overall for all of our businesses is to be like in the mid-teens range, and we're working our way up towards that. But really, we're anticipating more in the 14% range in the guidance. SG&A is at 8% and 8.5%, which is pretty consistent with what we had for the prior year. And then from a weather perspective, we're not expecting necessarily a dry year, but we're also not expecting a lot of inclement weather. We did experience that more so in the Q4 that impacted our results, but weather is kind of more within normal lines with some impacts in Q1 and Q4. So those are some of the base assumptions for our guidance of 6% to 8% range.

Okay. And in terms of the first quarter, we've heard Omicron has really impacted absenteeism in parts of the U.S. Can you talk about whether you expect organic growth to be up year-over-year in the first quarter based on what you've seen so far? And if you can just put some parameters around first quarter margins because of seasonality, it can be pretty volatile year-to-year?

Well, I think it's probably premature for us to really anticipate what Q1 is going to look like. I can tell you, December was very wet in the West. In December, we were lost most of the months in California. So far, in January, we saw a dry month. Recently, it's been wet and we've seen some winter, definitely some winter weather across United States with freezing temperatures. So I think that we've already seen some weather impacts in February. We'll see what March holds. But of course, in Q1 and Q4, we always have some risk with weather. So it's probably a little early for us to give any sort of indication there.

Okay. And maybe lastly, just a clarification, in terms of ORP backlog entering the year where was that Lisa entering 2022?

Yes, so entering the year, we're at $319 million entering into 2022. And then we anticipate to burn through most of that through 2022 and have approximately $50 million entering into 2023.

This is the end of our Q&A session. And now I would like to turn the call back over to Mr. Larkin.

Okay, well, thank you for your questions. To all of our employees, we appreciate everything you do for Granite every day. This year we celebrate our 100-year anniversary while we chart Granite's course for our next 100 years. We're well-positioned to capitalize on the numerous opportunities that are in front of us across all of our businesses in 2022 and beyond. And to the investors and analysts thank you for your continued interest in Granite. We look forward to speaking with you soon.

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