Granite Construction 2026 Q2 Earnings Call

Good morning. 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, Staci Woolsey. Please note that today's earnings presentation will be available on the Events and Presentations page of our investor relations website. We begin 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 can 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, adjusted earnings per share, cash gross profit, and cash gross profit per ton. 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. I'd like to turn the call over to Kyle Larkin.

Thanks, Mike. Let's start with the construction segment. I'm pleased to report that CAP growth continued to be strong, increasing $250 million sequentially to $7.4 billion as project wins outpaced revenue burn in what was a very strong growth quarter. The increase was driven by a healthy and active bidding environment across our markets, as well as the addition of Kenny Seng Construction. This record CAP underscores the strength of our end markets, the effectiveness of our growth initiatives, and provides strong visibility into future revenue. We continue to see significant opportunities to grow CAP, leveraging our leadership in publicly funded transportation infrastructure while expanding our presence across a broader set of end markets. Publicly funded work for state and local departments of transportation remains a cornerstone in Granite's business and continues to support both our construction and materials segments.

Over the past several years, the IIJA has provided significant funding to transportation agencies across our footprint. With a substantial portion of those funds still available for deployment, we continue to benefit from a strong and robust transportation market. In May, the U.S. House of Representatives introduced the Build America 250 Act, or BA 250. BA 250 is designed to be the successor to the IIJA, which is expiring in September. While BA 250 does not currently contemplate significant increases in highway funding, we view the draft positively because it shifts the funding mix towards formula-based programs and bridge investments and away from larger discretionary mega projects. We believe this funding approach aligns well with Granite's geographic footprint and capabilities.

While the timing and final content of the bill remain a work in progress, we expect the final bill may have a higher level of funding than the current draft. We believe bipartisan support for infrastructure investment will sustain elevated funding levels, whether through new legislation or by way of a funding extension. Against this backdrop, we see significant opportunities for continued growth through market share gains in our home markets, increased participation in collaborative contracting delivery methods such as Construction Manager/General Contractor and Progressive Design-Build, and disciplined geographic expansion, both organically and through acquisitions. These collaborative contracting delivery methods foster earlier engagement with project owners, better alignment throughout project execution, and more balanced risk sharing. Over time, this approach has enabled us to build a higher quality project portfolio and reduce volatility, allowing us to deliver more predictable outcomes, including improved margins.

Importantly, Granite has a much broader and more diversified growth platform than it did just a few years ago. By leveraging Granite's geographically diverse home markets, we have strategically expanded into attractive end markets to complement our traditional strengths and deepen relationships with key clients. This includes growing our federal business, increasing our participation in rail and transit infrastructure, and establishing a meaningful presence in data center site development. Within federal, we've invested for more than a decade to build our capabilities, establish customer relationships, and broaden our geographic reach.

From the Armed Forces to the Department of Homeland Security to the U.S. Army Corps of Engineers, we have participated in building our nation's federal infrastructure in a variety of civil projects across the U.S. and Guam. While the recently won TASFA infrastructure projects provide near-term revenue growth in 2026 and 2027, we believe the greater opportunity lies in the long-term expansion of our federal business, leveraging the strong customer relationships, proven execution, and expertise we have developed. Class I railroads continue to make significant investments in their infrastructure, with a particular focus on expanding intermodal capacity and increasing the movement from truck traffic to rail. Supported by a strong history of successful project execution and collaboration with these customers, Granite is well-positioned to capitalize on growing opportunities within the rail market over the next several years.

Mission-critical infrastructure, such as data center site development, is another significant growth opportunity that stretches across our footprint. Granite has over a decade of experience working with developers, vertical builders, and hyperscalers on the civil infrastructure needs of data center construction, primarily in the Pacific Northwest and Nevada. Earlier this year, we launched a dedicated data center division with specialized leadership and resources to support these important clients across Granite's footprint. This team works alongside our regional operations to pursue, win, and successfully deliver data center projects while providing a consistent best-in-class client experience. As a result, data center-related CAP has increased from $65 million a year ago to $223 million at the end of the second quarter.

Given the substantial demand driven by AI and digital infrastructure investment, we continue to see a robust pipeline of opportunities across many of our markets and expect these end markets to remain an important contributor to CAP growth in 2026 and 2027. The common theme across our rail, federal, and data center pursuits is our ability to leverage the capabilities of our geographically diverse home markets to serve strategic clients and attractive end markets. We have the people, equipment, expertise, and relationships to capitalize on these opportunities efficiently and at scale. This same platform also positions us to pursue additional end markets over time, including water and power infrastructure, markets that we believe are poised for meaningful long-term investment.

Taken together, our record CAP and strong opportunities across public and private markets give us confidence that Granite can continue to grow while driving sustained margin expansion in both the near and long term. Turning to the materials segment, second quarter results underscore the strength and resilience of our materials platform. Severe weather disrupted production and sales activity across the Southeast during the second half of the quarter. Our teams continued to execute well against those challenges. Overall, aggregate and asphalt volumes increased year over year, both from acquired companies and on an organic basis. Demand for construction materials remains healthy across our footprint, with orders outpacing prior year levels. This demand environment continues to support pricing. Through the second quarter, we are realizing our targeted mid-single-digit aggregate price increases. We also continue to execute on strategic capital improvement projects, including automation, plant investments, and reserves expansion.

These investments align with our long-term strategy to improve production efficiency, lower operating costs, and strengthen our competitive position in our home markets. Finally, we continue to closely monitor the increases in oil prices driven by geopolitical uncertainty in the Middle East. Energy prices during the second quarter were in line with our expectations. The impact on segment performance was minimal. Increases in liquid asphalt and diesel costs were largely mitigated through a combination of fixed forward contracts, physical storage, financial hedges, and energy surcharges. I am pleased with the resilient performance of our teams. Demand remains healthy, pricing is tracking to expectations. We continue to make investments in the materials segment that we believe will support long-term growth and margin expansion. Now, I'll turn it over to Staci to review our financial performance for the quarter.

Thanks, Kyle. We delivered significant second quarter growth by building on the momentum generated in the first quarter and continuing to execute on our strategic priorities. Compared to the same period in the prior year, revenue increased 29% to $1.5 billion. Gross profit increased 20% to $239 million. Adjusted net income increased by $15 million to $101 million. Adjusted EBITDA increased by $34 million to arrive at $186 million. We also generated year-to-date operating cash flow of $142 million. In the construction segment, revenue increased $270 million, or 29% year-over-year, to $1.2 billion. Of the growth in the quarter, $98 million, or 11%, was attributable to acquired businesses, while organic growth contributed $172 million, or 18%. Our revenue growth was driven by our record CAP and strong project execution across many of our geographic markets.

Gross profit margin increased slightly year-over-year, a strong outcome given the difficult comparison against the prior year. We recognized favorable claim recoveries in both periods. However, the gross profit margin impact was less significant in the current year due to increased revenue this year. As we enter our busiest quarter, the construction segment is performing ahead of our expectations and is well positioned to deliver strong full-year results. Materials segment revenue increased $60 million year-over-year to $248 million, with acquired businesses contributing $60 million in the quarter, led by Warren Paving. Total aggregate and asphalt revenue prior to consolidation adjustments between our segments increased $111 million, led by a significant increase in internal asphalt sales during the quarter of $42 million, or 73%. While the majority of our volume growth was driven by the acquired businesses, we also delivered stronger than expected organic volume increases.