Good morning. My name is Matt and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Granite Construction Inc. 2021 Second Quarter Conference Call. This call is being recorded. It is now my pleasure to turn the floor over to Vice President of Investor Relations, Mike Barker.

Good morning and thank you for joining us. I am pleased to be here today with President and CEO, Kyle Larkin, and Executive Vice President and Chief Financial Officer, Lisa Curtis. Please note that today’s earnings presentation will be available on our Events and 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 with 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, Committed and Awarded Projects, or CAP, and results.

Good morning and welcome. In past calls as part of our cultural reinvigoration and our refreshed core values, I have provided an overview of our core values of safety, inclusion, and sustainability and how they drive our culture and actions every day at Granite. Today, I will discuss our remaining two core values of integrity and excellence and how our teams integrate these two values into their daily work. Integrity is the foundation of our core values, which underpins all other values. We operate with integrity at the highest ethical standards. We know and do what is right, and we expect all of our employees to speak up when something is not right. The Audit Committee investigation completed this year identified areas where we did not live up to the high expectations that we set as a company. To ensure that we are following best practices, this year, we rolled out a cultural reinvigoration across the entire company, and we have clarified and strengthened our employees’ understanding and commitment to integrity in everything we do. Acting with integrity means doing the right thing all the time, honoring our commitments, holding each other accountable, and voicing our opinions, questions, and concerns in a respectful and transparent way. Acting with integrity allows us to attract and retain the best employees and enables us to be the best builders and material producers for our clients as we approach our second 100 years. Excellence has been a focus within Granite’s culture since our beginning in 1922 and it’s now a core value. This is an area where we are not willing to compromise. At Granite, excellence is achieved through a high-performance culture of continuous improvement, innovation, and quality in all aspects of our work. Through excellence, we strive to be our customers’ contractor of choice, generate efficiencies that drive bottom line results, and transform how we bring value to our stakeholders. There are many examples of excellence through innovation and technology across the company.

Thank you, Kyle. Starting with revenue and gross profit, the second quarter delivered strong results on both fronts. Second quarter consolidated revenue grew 5% year-over-year to $964 million, with gross profit increasing 32% year-over-year to $117 million with a gross profit margin of 12%.

Thanks, Lisa. Let me close with the following points. We had a strong second quarter highlighted by solid execution in the ORP and we are making progress in all segments towards mid-teens gross margins. We are pleased with our cap moving into the second half of the year. It demonstrates our strength as a diversified horizontal civil contractor and illustrates how we provide value across end markets, geographies, and types of customers. We will continue to grow the business of transportation, but also in other end markets by leveraging our relationships, expertise, and vertically integrated structure. Our cash and balance sheet remains strong as we head into the second half of the year. And finally, we continue to be optimistic about the funding environment in the public markets and the strength of the economy in the private market. And we look for greater expansion when our Federal infrastructure bill is completed. Operator, I will now turn it back to you for questions.

Our first question will come from Brent Thielman with D.A. Davidson. Please go ahead.

Thank you. Good morning.

Good morning, Brent.

Good morning, Brent.

Kyle, I wanted to get your thoughts just on cap. I mean it looks like you are picking up a lot of work, but obviously working through the ORP. Do you think it holds at these levels as we move through the remainder of the year as you continue to burn off that old work?

Yes, great question, Brent. And so we have seen, as you saw, a decrease in cap and probably the Heavy Civil Group’s cap in terms of transportation, and that was something that we were doing really intentionally as we kind of changed what we were pursuing from a risk profile perspective within the Heavy Civil Group. So, that was anticipated. And then what we saw on the other side is our vertically integrated businesses working really hard to pick up cap within transportation. I think they are up about $200 million on cap on their end. So, we are seeing nice improvement in the vertically integrated business. We are seeing a drop in transportation because we are burning through that ORP as we planned. But just as a reminder, we are focused within the Heavy Civil Group, really pursuing projects, not just in the Transportation segment, but within all of our segments. So, when we picked up that recent Leon Hurse Dam project that is just an example of how the Heavy Civil Group is now transitioning over to really looking at projects outside where they typically have been, which is really encouraging for us. So, I think really to get back to your question, we feel good about our cap. There is a really nice pipeline of projects that are out there. So, when we look at our Heavy Civil Group projects in the pipeline today, even though we really changed the risk profile of the projects that we are pursuing, we still have the same number of opportunities out there in terms of dollar amount to bid that we had in prior years. So, there is still a really healthy pipeline of larger projects that fit within the risk criteria that we have established. So, we feel really good about where we are headed in terms of cap.

Okay. That’s helpful. And I apologize if you mentioned this, Lisa, but the $470 million that’s still in there for the ORP, can you say how much you expect to burn off this year and what you would expect for 2022?

Yes, definitely. So for the remainder of the year, what we have talked about, that we have kept our burn rate thus far that we talked about at the beginning of the year. So, we have burned a little over $200 million year-to-date through June. So, for the remainder of the year and into – a little bit into 2023, we will have $225 million to $275 million to burn, again, with the majority of that burning in 2022 and about $50 or some-odd million burning into 2023. And again, what we talked about that – what we have in our guidance at 0% margin.

Okay, great. And then I would love to just get your expectations for the water business as we move into the second half of the year. It seems like you have been challenged to kind of get back to the levels of profitability that I know you are expecting from it. But it sounds like you are picking up some new good work there. So, what’s the expectation for water because it seems like some of the bigger-picture factors are starting to align for it?

Yes, it is. And I think certainly with the pandemic last year, our Water segment was hit hard. There was a pullback in terms of spending for municipalities as well as on our well drilling business. So, we saw the water business take a little bit of a pandemic-related hit in 2020. It’s since recovered. I think certainly with the drought conditions that we have seen out in the West that’s really shored up our well drilling business, and we are seeing nice improvement there. And then we are seeing increased spend again in the rest of our water business. And that includes whether it’s the Leon Hurse Dam, our cured-in-place pipe business as well as well drilling. So, we see really nice improvement getting back to where things were at pre-pandemic.

Okay. And then just the last one is on the materials profit margin. Headwind attached to commodity prices, I assume that’s sort of baked into the guidance for the second half of the year as far as you guys can see today, that should continue in the short-term?

Yes, we feel really good. I think if you look at Q2, our performance in materials business was strong. It might be down just slightly from where we were at in Q2 last year. But we feel really good about kind of the 18% margins in that business. We had nice volumes in Q2. And so we did have really nice weather in Q1 and again in Q2. And I think our teams have done a really nice job of selling and producing materials in that segment. We think moving forward for the rest of the year, we think things will be a lot of alignment with where we were at last year. That said, I would probably caution that certainly, in Q4, there could be some weather challenges that might be out in front of us. And that’s not just for materials, but our entire business. Q4 is always a little bit of a wildcard, but we are going to see from a weather perspective. Last year, in 2020, we had a really dry Q4.

Okay. Thank you for taking the question.

Thank you.

Thank you, Brent.

Our next question will come from Michael Dudas with Vertical Research Partners. Please go ahead.

Hi. Good morning, Mike, Kyle, and Lisa.

Good morning.

Good morning.

So, maybe a couple on the materials side any observations on pricing? And also, is there a concern like as things pick up over the next 12 months, 18 months, 24 months and more projects and larger projects. We are seeing a lot of tightness in certainly different markets for a lot of materials. How you can see that? Do you get a sense of that or how you guys are planning for that?

So, if I get back to really the materials margin and the materials business question. So, from a – I guess from a supply side standpoint, we have been able to really pass on the cost of the oil increases, diesel increases on to our customers. That’s been something that we have been able to do. If you kind of go back into 2020, we saw oil prices and diesel prices drop. And so our pricing was fixed, and we are able to kind of get a little bit of a pickup on that end of things. But as we look into this year, really trying to pass those costs on to our customers and we have been able to do that. We have seen price increase pretty much in line with our cost increases. So further out, Mike, I am not sure we have the visibility yet in certainly 18 months and 24 months. I would say that certainly, if the Federal bill is passed, we are going to see an opportunity where that might be something that we can see more meaningful price increases down the road.

Turning to your specialty business, some of the – interesting, there has been an uptick in activity certainly in the mining side on exploration, given where metal prices are in capital, especially in Nevada, Utah, and Arizona. Are you – any other areas on the private sector side that you might see some improved maybe potential bookings? And the size of the bookings, is that going to pull in some of your Heavy Civil folks as well as you are thinking about where they are going to be allocated on some of the larger risk-mitigated projects?

I think in the Specialty segment, you can see our cap increase. I think that just really kind of tells you the strength of what we think is predominantly private type of work. So, we see really nice strong market opportunities in the private market. The Heavy Civil Group doesn’t necessarily participate a whole lot today in that private market certainly an opportunity as we kind of partner across different groups internally. But all-in-all, we are seeing private market increases on site development, data center work opportunities that’s really across the board. And really, almost all of our groups and businesses have an opportunity to participate.

I appreciate it. Thanks, Kyle.

Thank you.

Our next question will come from Steven Ramsey with Thompson Research Group. Please go ahead.

Hey. Good morning, everyone.

Good morning.

Maybe to start with – good morning, maybe to start with on the residential side, clearly, extending times between the start of a home and finish due to labor and supply constraints, is that happening in your project set either currently or in the cap, where you are seeing extended times?

I would say no, we are not seeing anything out of the ordinary. Typically, when a project comes out to bid, it’s a bid process that will take somewhere between, say, four weeks, five weeks to eight weeks. We have actually provided a price or a proposal. Typically, there is 60 days, 90 days to award to when we start that work. And that’s pretty consistent. Some owners can turn projects from letting to actually performing the work a little bit quicker. But that hasn’t really changed for us at all a whole lot.

And Steven, I would add that on the labor side for our Western states, a lot of that labor comes from the Union pool. And so that really helps from a stability perspective to have the labor that we need to build the work.

Yes. And I will just add that we are in a lot of our markets, we have been in our markets for a long time. So, we had really strong relationships with our Union partners out in the West. We also have a lot of our craft employees who have been with the company for years. And so we have the opportunity to have lots of different types of projects and work out in front of ourselves, which provides that continuity of work for our employees, which they value. And so we do have longevity in terms of our craft workforce. And then you add that with our safety performance, we believe we are an employer of choice for our craft teams.

Okay, great. And then I wanted to ask about vertically integrated cap up $200 million, excluding specialty, so further strength there. Can you maybe describe the magnitude of this kind of increase relative to total vertically integrated cap? And then is that broad-based? I am just trying to put it in the context of that $200 million exceeds the first revenue for the materials division. I mean that it’s got to signal pretty strong volumes ahead for materials. Curious if that foreshadows strong results well into 2022 or if that burns off this year?

So, maybe make sure I understand the question. The question is, is our vertically integrated cap growing at a pace that is significant? And especially when you look at the aggregate business, and the volume increases; is an indicator that we are really getting back into a healthier market and now it’s going to continue, is that what maybe your question is?

Exactly. And then kind of to pin down to vertically integrated, is this level of growth outsized versus the norm for vertically integrated?

Well, I don’t think it’s necessarily outside the norm. I think it’s kind of in line with what we anticipated. But I will say that the pipeline of projects that we are bidding, they are smaller, say, under what we would call a large project or $150 million, is up significantly year-over-year. Now that’s coming off of a pandemic year in 2020. So, that shouldn’t be a huge surprise. But we are back at pre-pandemic bid levels. I think we were really concerned last year about state funding that has not lived up to kind of what our worries were. There are some states a little more challenged than others. But we are still seeing really strong funding in the states that we are in within the VI businesses. So, I would say that we expect that to continue. We think there is really a nice pipeline of projects, more than we have seen in a long time. We are also really, I guess, excited about what we are seeing in California. And we are seeing an increase in our California market where their spending is around $6 billion over the next 6 years to 7 years or so. So, we are seeing really nice annual spend within the California market. And so we think we have a really healthy environment that we are pursuing today.

Yes. And one thing to keep in mind, too, Steven, is that our business is obviously cyclical. And so we have just entered our busiest construction season. So, as Kyle mentioned, award activity, lettings, and actually the bidding activity has been really robust. So, that obviously has contributed to the increase. But then we are going to start kind of a little bit of a quicker burn rate as we proceed into the busy time of year for us.

Excellent. Thank you for the color.

Thank you.

Thank you.

Our next question will come from Jerry Revich with Goldman Sachs. Please go ahead.

Yes. Hi, good morning everyone. I am wondering if you can talk about the SG&A outlook from here? Lisa, it looks like you are on track to be, I think, well below the low end of your target range for the year considering how back-half weighted revenue is expected to be this year. So, can you just talk about the drivers of the sequential increase in SG&A that you are looking for or is that just a function of wanting to make sure we deliver on the commitment this year?

Well, there is definitely an element of wanting to deliver on the commitment this year. So as you mentioned, we start off the year, the percentage of SG&A to revenue is typically a little higher and trends downward as the year progresses. So for the quarter, we are at about 7.7%. And we continue to look at our SG&A spend, ensure that we are spending our money wisely. But as we look at it for the rest of the year, I mean, there are no particular anomalies or things that we expect to have spike, but we just want to – we kind of see a normal trend as we continue out through the rest of the year.

So, that’s nice to see. And then in terms of the overall bid environment, I am wondering, can you just talk about the way the pipeline looks and any differences by region, Kyle, anything that jumps out at you in terms of the types of work that you are bidding on in one part of the footprint versus another? And if you could just comment on the competitive discipline that you are seeing in this cycle compared to a couple of years ago?

Sure. And we are seeing, as I mentioned before, a really nice pipeline of projects both on the larger projects side as well as those that aren’t large projects within our VI footprint. So, we are seeing just across the board, really all parts of our business more just a better bid environment for sure, especially since what we saw last year with the pandemic, but we are back, as I mentioned a couple of times now, at pre-pandemic levels, which is really nice. I do want to mention within the Heavy Civil Group that right now, there is still that really strong pipeline of projects. We are bidding work in the range of, say, $20 million to $500 million. Our average job size still remains within that around $270 million. What’s interesting is really the contracting method that we are pursuing today on the pipeline of projects, design-build is really only about 18% of the projects that we are pursuing today. Bid build is more closely around 25%. But this best value seems to see a progressive design-build is actually about 60% of the contracting method of the work that we are pursuing within the Heavy Civil Group today, which is a big shift for us. So, we are excited to see that happen. I mentioned on our last call that typically, our competitors burn through backlog in Q2, Q3, and then Q4 and Q1 are a little bit more competitive on the bid environment. That held true of what we have seen in the last couple of quarters for sure in Q4 and Q1. And I mentioned on the last call that, that might have extended a little bit, and that certainly was the case with the pandemic and lower lettings across the board, a lot of the competitors burn through backlog and they were looking to pick that up in Q1. So, it did extend. I think things are kind of getting back to what we are used to in general. And so I think the market is definitely on the improvement side.

I appreciate the discussion. Thanks.

Thank you.

Thank you.

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

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

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