Good morning. My name is Nick, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Investor Relation Second Quarter 2022 Conference Call. This call is being recorded. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer period. It is now my pleasure to turn the floor over to your host, Granite Construction Incorporated’s Vice President of Investor Relations, Mike Barker. Please go ahead, sir.

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 the statements made today. Please refer to Granite's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these 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’d like to turn the call over to Kyle Larkin.

Good morning and welcome to our second quarter call. Before we jump into the results, Lisa and I will discuss a few significant accomplishments during the quarter and the execution of our strategic plan. As I mentioned on our last call, our plan to achieve consistent profitability and sustainable growth is built around four strategic themes, develop our people, raise the bar, grow market share and maximize value add. These things are essential to our success and develop our people we have seen a historically tight construction labor market become even more competitive as we emerge from the pandemic. The current labor environment is the most challenging I've seen in our industry. This challenge exists at all levels and craft and project executives. Granite's best-in-class human resource professionals have risen to challenge with innovative recruiting programs and by providing our existing workforce with training and development to prepare us for upper mobility and new opportunities within the organization. The return of our strategic focus to a civil construction and materials provider within our home markets allows us to better leverage our teams recruiting and training programs across the company and meet the people challenge the industry faces. With the rollout and funding of the infrastructure to build, our future success and growth will hinge on our ability to continue to attract the skilled workforce to meet the labor challenges for all of the expected opportunities. To do so, we must be the employer of choice to have the best people in the industry to execute on new opportunities as we grow our market share across the country. I believe we are well-positioned and we will continue to invest in our people to make it happen. Within raise the bar and grow market share themes, we are bolstering on our standardized…

Thanks, Kyle. I'd like to focus on one of our core values and a key aspect of our business strategy, sustainability. At its heart, sustainability is about improving quality of life and making sure that we preserve resources for future generations. Sustainability is not just a reporting exercise for Granite. It is something that is integrated into our core business purpose, which is to create value for shareholders by delivering infrastructure that provides essential services and improved quality of life. An important part of our strategic vision is to be a leading provider of sustainable infrastructure solutions because we believe it will competitively position us to win work and attract talent. The diagram on the right hand side of this slide shows our holistic view of sustainability, where sustainability is at the center of three strategic objective areas: environmental stewardship, social responsibility, and enduring value. Overlaying all these areas is dependable governance because we recognize we must have the right corporate governance structure in place to ensure accountability for performance in these areas. Sustainability is important to us, not just because it's the right thing to do, but because we see sustainability as a value driver that is also important to our customers. We aim to leverage our strong sustainability program to improve long-term profitability and to support all areas of our strategic plan. In terms of developing our people, our sustainability program aims to attract, engage and retain top talent. For raising the bar, sustainability helps us improve efficiency and execution and reduce risks. For growing market share, we aim to leverage sustainability as a differentiator to help us win more work. And for maximizing value add, we aim to reward investors through value creation as we lead the industry in ESG performance. You can learn all about our…

Thanks, Lisa. Before I jump into the segments to the quarter, I want to touch on safety and our performance through the second quarter of this year. Safety is a core value, which is embedded in our culture and reflects our belief that the well-being of our people, our partners in the public is our greatest responsibility. Every level of our organizations 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's safety to get the job done. I'm proud of our team's exceptional safety performance through the first half of this year. Across the company, our recordable injury rate, which is a metric that measures frequency of the number of recordable injuries to the hours worked, in our days away restricted or transfer or , which is a metric that measures severity of recordable injuries, and the lowest in recent history. This performance does not happen by chance. It is accomplished through the planning and hard work of each team every day. We had great success with the rollout of the STCKY or the Stuff That Can Kill You program, which is focused on avoiding and reducing serious incidents in the company. While sending every team member home safe every day is priority number one, safety is also a leading indicator of good employee morale and engagement, which translates to higher levels of financial performance. I want to thank all of our employees for achieving this accomplishment. Now, let's shift the discussion to the operation results of our construction segment in the second quarter where our results were impacted by ORP losses and increased fuel costs during the quarter. The performance in the ORP contrast with the improvement we are seeing in the rest…

Thank you, Kyle. In the first quarter, revenue decreased 8% from the prior year, while gross profit decreased 20% resulting in a gross profit margin of 10%. In the construction segment, quarterly revenue declined 81 million year-over-year to 632 million. This decline was primarily due to an 81 million decrease and the Central Group as ORP projects move towards completion and as recently awarded projects startup. Decreased revenue in the California group was partially offset by an increase from the Mountain Group. The revenue decrease in the California group was largely driven by project start delays, while the Mountain group continued its strong revenue performance from the first quarter. The Construction segment's gross profit for the quarter decreased 20% resulting in gross profit margin of 10%. This decrease in gross profit was primarily driven by losses incurred in the ORP in the quarter and to a lesser extent lower revenue in the California group. The ORP ended the quarter with remaining CAP of 195 million, a decrease of 47 million from 242 million in the prior quarter. The burn during the quarter was less than expected, due to project cost increases, so we expect more burn in the ORP in the second half of 2022. The amount of ORP CAP expected to carry into 2023 remains at approximately 50 million with only two active projects and most of the remaining CAP attributable to a small profitable project in the portfolio. Second quarter net ORP losses to Granite, which excludes non-controlling interest, were 18 million on revenue of 49 million, compared to a profit of 4 million on revenue of 115 million in the prior year. Excluding ORP, construction segment margin during the quarter improved to 14%, compared to 12% in the prior year. We continue to make progress towards our…

Thanks, Lisa. I'll close with the following points. In alignment with our strategic plan, we are focused on our core civil construction and materials business with divestitures moving forward as planned and strategic investments in our home markets. We can't complete the ORP projects soon enough. While some of the ORP work has shifted to the second half of the year, we can continue to be on track to largely put the ORP behind us in 2022. While overshadowed by the ORP losses, in our second quarter financial results, we are making progress to increase profitability in our Construction segment with 14% gross profit margin we would in the ORP. We continue to make strides to reach the level of consistent profit that we expect across our business and expect to reach our strategic plan profit margins discussed last quarter by 2024 unlocking value for shareholders. Finally, the amount and quality of our CAP going into the second half of 2022 is not the stronger in recent history. Our teams are being selected with while growing CAP at the same time. We have not seen any benefit from the infrastructure build through the second quarter and we believe the build should result in increasing opportunities late in 2022 that should then carry into 2023. Operator, I will now turn it back to you for questions.

First question, comes from Brian Russo with Sidoti. Please go ahead.

Yes. Hi, good morning.

Good morning.

Good morning.

Just on the California Group, do you still expect the California Group revenue to be up year-over-year despite the ongoing project delays in 2Q similar to what we saw in the first quarter?

Yes, we do. And this is Kyle. And we expect to see the revenue in the back half of the year accelerate. And out of the – some key projects in California have just delayed really due to contract administration on the owner side. So, we expect those projects to ramp up. We expect it also to correlate over into our materials business in California as well. So, we're still comfortable with what we're seeing in California.

Okay, great. And just on the vertical integration strategy and you mentioned the California acquisition and in the Utah, can you give us a sense of how long does it take to integrate some of these acquisitions for you to capture the incremental productivity that you've laid out previously? And I think it's 20 basis points to 40 basis points improvement into 2024 through a vertical integration?

So, a couple of things there. I think first off is, we look at our – really our longer-term strategic plan and what we shared on Q1 in terms of increasing the margin in our vertically integrated business. I mean, I think what you see in the quarter is, we've actually shown some indicators that we're making progress there and we've been working really hard at it. So, our margins are up. If you look outside of the ORP, we're up at about 14% in the quarter and construction, which is really encouraging and that certainly indicates that we're on our way. And if you look at our CAP, we have really strong CAP in our business. We've overcome really that decline in CAP as part of our Central Group of the ORP wind down. And we're seeing things really pick up in California and Mountain. So, we think that we're well on our way to doing the two things that we certainly want to do in the last call, which was raise margins on bid day and improve execution in all the work that we're doing. I think our teams are actually well on our way there. The other part of the question was right around how quickly we can do some, sort of M&A and integrate it into our business. And certainly with the that we shared that's something that's going to come online next year. And so, we're going to start to see the benefits of that and it will ramp up over the next year or two, and then Centennial Asphalt is really the Asphalt Terminal in Bakersfield. We expect that to really provide value in 2023. We are out looking at opportunities to do some bolt-ons that we share, that we want to do one or two a year. And we are actively pursuing those out in the West in the markets that we're in today.

Okay. And as we look through the second half of 2022, are the risks of further ORP losses on a margin basis, are they diminished naturally just given that you're burning through the portfolio or are the losses incurred in the second quarter? Is that indicative of losses that we might see in the second half?

So, the answer is, we have these projects forecasted based on what we know today. And that's been how we've been forecasting these projects. They're complex projects, they're big projects, so when there's movement on them, it can be big. So, we don't ever want to suggest that the risk associated with the ORP it doesn't exist until those projects are truly really complete. Now, the good news is, we are further along on the projects. As you indicated, we're almost through these things. We expect our on track for the year, which is good news. So, we're down to really $50 million worth of ORP CAP going into 2023. So, these projects are winding down, they're closing out. We're getting it towards final completion. And really our plan as we get to the end of the year is, we're not going to have to talk about the ORP in a meaningful way into 2023. So, we're close. I can tell you that, but I do not want to tell you that there is any further risk in these projects, but we do believe we're at the point where we're really focused on closing it out. And then I just want to add, as we go into 2023, we have about $50 million of CAP in the ORP. The majority of that is one project and that project is in California. We're now partner, which is something that we wouldn't be doing moving forward. So that's why it's called, putting the ORP bucket, but that project is actually profitable and so really ORP changes as we move into 2023.

Okay, great. Thank you very much.

Thank you.

Thank you.

Thank you. Next question comes from Jerry Revich, Goldman Sachs. Please go ahead.

Hi, this is Adam on for Jerry today. With your 2022 guidance unchanged, that implies a pretty significant improvement in the back half growth rate. So, wondering if you can just talk about how much visibility you have today in the project burn in the back half, and what's driving your confidence levels there?

Yes, Adam, this is Lisa. So, I'll touch on some points on your question. So, for the most part, our guidance remained unchanged. However, there is a component that did change and that's our EBITDA margin. So, we had projected at the beginning of the year a range of 6% to 8% and we did lower that range to 5.5% to 6.5%. And what that is, is we took the midpoint down by about 1%, which equates to around $30 million and that represents the impact that we took in Q2, primarily with the ORP phase in the quarter. So that is a change in our guidance that we communicated through our press release and through the script. So, for the second half of the year, we expect a very robust second half. As Kyle just talked about in the last question, ORP still remains a risk for us, and we are actively managing it and based on the best available information, we do update our forecast. So, that is reflected when we look out for the rest of the year. California did have a slower start, but it's really due to project delays. And so, we expect that to pick up in the second half of the year. And the Mountain Group is performing very well. They performed well in Q1 and that continued into Q2. So, we expect a continued strong quarter for them in the second half, along with materials overall in all three of our operating groups.

Got it. Thanks. That's helpful. And then you announced a pretty meaningful $55 million project on the Alaskan roadway this quarter. Just for clarification, are there any other contractors on this project? And do you have full scope of that entire $55 million?

Yes. So that would be under our Scope on that project.

And can you just comment on margins for this project? Are they in-line with construction segment average or how should we be thinking about that?

Yes, I will look at it that way. I mean, we obviously release a lot of projects along the way. And I would just – I think the best way to look at any project we release is they in alignment with what our margin expectations are in the construction segment.

Okay. Thanks so much.

Thank you.

Thank you. Our next question is from John Ramirez, D.A. Davidson. Please go ahead.

Hello. This is John Ramirez from Brent Thielman.

Hi John.

Good morning.

Good morning. My first question is looking at some additional color on the cost of the additional losses on the legacy projects. We just want to know were there any unique issues to the project themselves or are the inflationary or labor issues that are being cost – impacting costs?

Well, when it relates to the ORP, I think it's probably all of the above. These are again, they are complex projects, they're large projects, they're in varying geographies. But in general, I would probably summarize the phase that we saw in Q2 around scheduling issues and some cost inflation. Certainly there were some supply chain issues on one project with steel and steel delivery. There was a longer punch list and they electrical items on a project and one project slipped a little bit due to some weather. So, that's really the primary driver. But again, it's kind of all above, as well as even some production issues as we kind of wind those projects down, things get a little bit harder. But again, I just want to reiterate, we're close. These projects are getting completed and we're close to getting these projects wrapped up to where – going into next year, we will be down to that 50 million. So, we feel good about that.

Thank you. And to what extent is having an impact on the business either directly or indirectly?

I missed the first part of that question. Can you ask that again? I'm sorry.

No problem. Just in general, to what extent is the slowing of housing having an impact on the business either directly or indirectly?

To date, we haven't seen that impact hit us certainly through Q2. So, I think that's something that we'll certainly keep an eye on what that looks like moving forward. We did see some materials business slowdown in terms of sales to ready mix suppliers on the aggregates side and that was more associated with this and then shortage, which I think was partially fueled by the housing and growth in housing. So, we'll kind of see where this all goes. But at this point in time, we're not seeing a big slowdown in housing that's affected us through the first two quarters.

Okay. I appreciate the time. Thank you so much.

Thank you.

Thank you, ladies and gentlemen. At the end of the question-and-answer session, I'd like to turn the call back over to Mr. Larkin.

Okay. Well, thank you for joining the call today. And as always, I want to thank all of our employees and the work they do every day that will allow us to meet our strategic goals. And thank you for your continued interest in Granite. We look forward to speaking with you all soon.

Thank you for attending today's presentation. You may now disconnect.