Sterling Infrastructure Inc (STRL) 2007 Q3 法說會逐字稿

Good day everyone and welcome to Sterling Construction Company's Third Quarter 2007 Conference Call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen only mode. I will now turn the conference over to Jim Allen, Jr., Chief Financial Officer of Sterling Construction. Please go ahead, sir.

Thank you, Jennifer. I'd like to say good morning to each of the -- you who are listening on the phone call. We welcome you to our conference call, while we discuss the results of our third quarter and the nine months ended September 30, 2007, which we announced this morning in a press release. For the purpose of this call all figures discussed are continuing operations which is our construction business.

I'm joined by Pat Manning, Chairman and Chief Executive Officer, and Joe Harper, our President and Chief Operating Officer.

First, I want to remind you that this call may include certain statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act of 1995. Any such statements including our 2007 guidance are subject to risk and uncertainties, including overall economic and market conditions, competitors, customers, and supplier actions, weather conditions, and other risks identified in our filings with the Securities and Exchange Commission, which could cause actual results to differ materially from those anticipated. Accordingly, any such statements should be considered in light of these risks.

Also, although from time to time, we give guidance about future results, these are only statements of management's belief at the time they are made. These predictions may not continue to reflect management's beliefs and we do not take any obligation to publicly update such guidance. Because of the variability of results in the construction industry from quarter-to-quarter, especially due to weather, our policy is to provide guidance only for the annual results. We do not issue guidance about quarterly results and we encourage readers of our financial information to view quarterly results in the overall context of our annual results and guidance.

Turning to the third quarter and nine months financial results revenues rose $32.7 million to $218 million for the first nine months of 2007, and rose $9 million to $78 million for the third quarter of 2007 from the comparable periods in 2006. Operating income decreased $600,000 to $13.3 million for the first nine months of 2007 and decreased $400,000 to $4.7 million for the third quarter of 2007 from 2006. Net income from continuing operations decreased $100,000 in the nine months and also in the third quarter to $9.8 million and $3.4 million, respectively as compared to the prior comparable periods.

Diluted earnings per share from continuing operations were $0.83 for the nine months of this year as compared to $0.84 in the last year's first nine months and $0.29 for the third quarter of 2007 as compared to $0.30 in the prior year's third quarter.

The balance sheet continues in very good health at September 30, 2007. Cash and short-term investments were $47.5 million and we had $5 million of unused capacity on our $35 million revolver. As announced last week, we replaced the revolver with a new $75 million credit facility in connection with the RHB acquisition and currently have approximately $46 million available under the new credit facility.

Working capital was approximately $60 million at September 30, 2007 with a current ratio of 2.2. Stockholders equity exceeded $100 million for the first time and increased to $102 million by the end of the quarter at September 30, 2007. Now I'll turn the call over to Joe and Pat to talk about the operating results in more detail.

Thanks, Jim and good morning, everyone. We're disappointed to be reporting the results you just heard from Jim. However, I can assure you that they are not the result of poor operations or lack of good executions. Through the first week or two of September we're dealing with extremely poor weather conditions. The rainfall data for the year with comparisons to the averages in Houston are as follows.

The first quarter we were 31% over average rainfall. In the second quarter that was 20%. In the third quarter we were 86% over average rainfall and on a year-to-date basis for those first three quarters the totals were 44% over averages. While there's some variation in each of the San Antonio and Dallas areas, the numbers are quite similar.

We've discussed on previous calls how the weather impact operations and costs. I'd like to expound on these effects. It's obvious that rainfall has a negative impact on the efficiency of operations causing our two primary variable costs, labor and equipment, to increase. As actual labor costs incurred begin to exceed our estimated unit costs, our project managers adjust their estimate of total labor causing a reduced estimate gross profit on the jobs.

Under utilization of our equipment has a similar effect due to the needs of fully absorbed actual equipment costs on a periodic basis. The resulting lower gross profits flow through our income statement until those contracts are completed. Under normal circumstances the total impact of poor weather for a month or two can be offset by positive changes in the projects and historically that has been the case.

This year with rainfall more than 40% above the normal for the first three quarters, we do believe we can overcome these higher costs. Consequently, including two months of activity for our new Nevada operations, we are affirming our previous guidance ranges and indicating that expectations are toward the low end of those ranges.

But all is not bad news. We strongly believe that the building of our organization and the resources necessary to continue to grow profitably are far more important to the long term success of our company. So far this year we've expanded our management. We've added several project managers. We increased our workforce by over 100 employees and invested $23 million plus on new equipment. To date, we've not had the opportunity to translate this additional capacity to the revenue line, but we have position the Company positively to take advantage of opportunities as they develop. Pat?

Good morning, everyone. In our third quarter we added $41 million in new projects combining Road and Highway Builders backlog with Sterling at September 30th, the total backlog exceeds $490 million. This record backlog will help assure our anticipated growth in 2008. We have seen some increased competition in Dallas in the state highway market in the last half of this year but believe 2008 will provide us with significant opportunities.

Statewide, $500 million was taken from the $4.2 million state highway budget, but was earmarked for comprehensive development agreements in that same year. In addition, the state approved $1.5 billion in pass-through tolls and both Harris County Toll Road Authority and North Tarrant Toll Road Authority have forecast spending $1 billion each for new toll facilities.

Finally, the voters in Texas approved two days ago a $5 billion bond issue for additional highway funding. Although the majority of these funds will not reach the market in 2008, they will continue to support our ability to win new projects in the future. We are further encouraged by our municipal markets in Boston and San Antonio as well as Houston. We have continued in October to pick up good margin work in all of these areas.

The acquisition only a few days ago of 92% of Road and Highway Builders, a Nevada based heavy civil contractor provides us with both economic and geographical diversification and we are extremely excited about the potential. This is a well run, well positioned company in which we have great expectations both for their home market of Nevada as well as for expansion into adjacent markets. Now, if there are any question, we'd be happy to answer them.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Richard Paget; Morgan Joseph.

Good morning, guys.

Good morning.

Good morning, Rich.

I wondered if maybe you could get a little bit more detail about backlog trends. I mean we have seen them go down a little bit. You mentioned some increased competition. But I mean would you characterize that given all the bonding that's been past kind of a positive in the market or is it you've not got into bidding too low so you wouldn't pick up some bad contracts that will bite you later on and waiting for some of the bigger projects to come through?

Yes, Rich. This is Joe. We've consistently said over the last two or three calls that backlog grew really rapidly and got to levels that we didn't feel we needed to have in order to sufficiently continue the growth and the profitability and that's still the way we feel today. Yes, backlog has slipped a little bit and it may slip a little more but we don't need to have backlog running at or above the revenue line for the following year.

In terms of the markets in Houston there's been some problems getting jobs out -- the core has to put their blessing on most of the projects coming through on -- in the Houston market and they've just had a lot of problems, but for some reasons staffing levels for engineers at the local core office have been diminished or decreased and it has been an issue. So through the first half of the first quarter volumes is coming out here are pretty low but I think we're in great shape.

Okay. So you would characterize that as kind of a bottleneck versus a drop-off in funding or demand?

Yes, I would.

Okay. You gave the statistics on the weather issues. How should we look at that going forward? I mean your lowest margins, or gross margins were in the first quarter when it was 31%, the next quarter you had some rain but the gross margins were pretty strong. This one you had a ton of rain which weren't as good as the second quarter but definitely better than the first quarter. I mean can we look at the rain and draw any conclusions or is it more directional?

I think -- let's see. I think that the rainfalls has the biggest impact on the revenue line. We certainly have increased costs and I tried to explain it in a lot more detail on this call just to give you guys a better sense, but it certainly has an impact primarily on the revenue line.

Okay. And then one of your competitors in Nevada released numbers today and backlog was down there year-over-year. I wonder if you could maybe give us any updates on the Nevada market. I mean this might have been they're more focused on Las Vegas versus Reno, but I wondered if maybe you can give us some updates there.

Yes. Their focus is primarily in the Vegas marketplace we're really dealing with two distinct and different beasts and looking at the history of RHB and the volumes of work that we see on the horizon for them and the kind of work that they do, we like what the future looks like and sitting on the backlog that he has there's no urgency for Rich to be picking any work up in the near future.

Okay. Were there any large bonding issues or anything that got passed this week with the elections in Nevada that come to mind?

[Riley] You know what? I don't know.

And we haven't seen Nevada yet.

Okay. And then finally with added personnel costs are those ongoing or was it you had to do a lot of hiring new people, setting them up, et cetera or should we think of it as having a larger staff?

I think you should look at it as ongoing Rich. Some of that was first the impact. There are several of us here who are on three year employment agreements and those began a new three year cycle so the increases we're addressing those additional costs are in line and the rest of it was additions of personnel. We have beefed up the management structure here some and we've added some project managers.

Okay, thank. I'll get back in queue.

Your next question comes from Rich Wesolowski, Sidoti & Company. Please state your question.

Thanks. Good morning.

Good morning.

Hey, Pat could you back up and just review the various agencies and spending measures that you expect for this year? You mentioned the DOT and then a couple of counties and then the bond measure.

Sure Rich. The state highway funding was as we expected except they took out the $500 million of the general fund and earmarked it for those comprehensive development agreements which are agreements with the counties that they reimburse the monies they spend on roads so that the counties can build them sooner than the state had anticipated.

Right.

So that was one funding issue. Also, they put in play let me see. It was a billion and a half dollar in pass-through tolls and those are for different toll road authorities to initiate their own spending for roads that they believe are necessary. I was reading just this morning in E&R that Dallas is doing a toll road or planning a toll road and that just passed on the Trinity River.

We have been mentioned as one of three potential contractors to submit on a toll road in San Antonio that's in the neighborhood of $125 million to $145 million. So that covered those types of things. In addition to that, Harris County's toll road has earmarked $1 billion to spend on continuing the toll road program down here.

They by the way have something in excess of $7.5 billion in their coffers right now that's not earmarked for anything. So the toll roads are doing very well down here and there was also a toll road I think we mentioned on previous calls up in Dallas -- the North Tarrant toll road which is planning on bidding work in the upcoming year.

Okay. And then there was a $5 billion bond measure. When would that money be apportioned?

That probably be down the road 2009, 2010 but it's just more money going into the system so they can obviously build more roads so it wouldn't have passed in 2008.

Is that similar -- I don't know if you guys are familiar with the proposition on California. I mean say the general fund goes south. Can the general fund still siphon that $5 billion away or is it been legally diverted towards transportation?

It is earmarked for transportation. I have not read the exact language of the bill to see whether for some reason or another they could take it. That's not is what's anticipated though.

Yes. The way it was worded on the issue to be voted on it appeared to me that it's earmarked exclusively for that purpose. Yes, but Texas is continuing to run surpluses in the general fund and we're not really -- we don't really have any concerns that the highway funds are going to be tampered with.

How well are your construction crews aligned with where the money is being spent over the next 12 months?

I think pretty good. I think there's going to be some opportunities in San Antonio that we'd have to add some capacity for. Dallas in the near term is just fine. Houston with the backlog we're sitting on here you know we may see a little expansion here. I wouldn't expect a whole lot Rich but I think we're sitting pretty good.

Okay. And just on the tolls especially the big artery coming out of San Antonio, who on your team would operate the road and would you only have construction exposure?

Yes. It's a non-operational facility so San Antonio authority would operate the road, collect the tolls, maintain it where we would be in charge of designing and build.

Great. Thanks a lot.

You're welcome.

Your next question comes from John Rogers with D.A. Davidson. Please state your question.

Hi. Good morning.

Good morning, John.

I was just -- most of my questions were answered but I'm curious -- your as bid margins on projects now how do they compare -- you don't have to give us exact numbers, but to what they were six months or a year ago?

Well we're going to be different in different places John.

Directionally?

Dallas I think -- I think they're a little softer than they would have done six months ago. San Antonio is very strong but it's primarily on the municipal side.

Austin also is real strong.

Right. And Houston, again there's been sort of a lull here in highway work bidding and we've seen margins go down as a result of that but I think it's a temporary situation. In the municipal market here we've been pretty successful and we're getting good margins on.

In Houston I guess or all over Texas are you seeing a pick up in water works or is that about the same?

Well we picked up three, four contracts recently in the last three or four months in Houston that were solely water works and so that was a little stronger than we had seen in recent years.

I think the outlook is pretty steady for the next couple of years. They're still building all of the northern districts trying to get them off of wells and they still have transmission work to get to the existing plants up here.

And are you doing much water works outside of Houston now?

We did one big project in Dallas that was connected to a state highway job and outside of that we have not been doing, except for smaller diameter water mains in San Antonio and Austin.

Yes. When you say water that's in a more tight sort of definition of it John. We're doing a lot of municipal work in the San Antonio Austin areas and it might have some small water on it but it's also got sanitary and storm and repaving and the kind of work that we really like to do best, but not specific big transmission line, no.

Yes, that is what I was asking. Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Richard Rossi with Ferris, Baker, Watts. Please state your question.

I just have a couple of questions. One, in looking at the Nevada acquisition how much of your management time has been spent overseeing that operation or should we look at it as mostly a standalone?

Well it's sort of a mixed bag, Rich. I'm personally going to be spending some time over there for certainly the next six months or so. We have a very experienced project manager level guy here who's going to relocate over there to help Mr. Bunting out into really learn the kind of work that Rich is doing. And he'll also be taking a good look at municipal markets over there to see what opportunities could come.

And in terms of his bidding on work how much leeway does he have in oversight? What level project et cetera?

We expect and yes we'll require the same kind of oversight that we give all of our project managers here and whether it's the manager running our Dallas operation or whether it's the new Nevada operation, we put a lot of eyeballs on our proposals.

And one final on that acquisition. I think it was mentioned that they haven't done muni water work and clearly that's an opportunity given your expertise in the area. What would be required for you to enter that market in Nevada?

Not really much of anything. We would require likely some different equipment than he has currently, which we could either rent, buy out there or ship from here depending on the size of the water mane and then certainly some of our estimating capabilities from -- either from Houston or with [Glen] going out from the Houston area.

We'd probably end up taking if not a full crew at least a skilled parts of a crew out there for the first couple of jobs to Rich.

Okay. And then just one final thing. In the past, I remember you have talked occasionally about project in Texas that were won by other construction companies that didn't at least on the surface have the capacity. I think the Houston Light Rail was one of them. Anything there?

I'm not sure when they're going to break ground but I'm guessing its another three to six months off and we're all scratching our heads because I'm not sure where the workforce is going to come from.

Great. Do you have the capacity?

We certainly do.

We'd have to take a good hard look at how fast the ramp up would be and schedules on other jobs that would be impacted and then we'd have to do what we need to do with our backlog to accommodate it, but yes we have the capacity.

Okay. That's it. Thanks very much.

Your next question comes from the line of Richard Paget with Morgan Joseph. Please state your question.

Just a quick follow-up. I know there was a moratorium on new PPOs in Texas. Do you think that sentiment will change?

That's probably a tough question. There's a new head of the department -- state highway department so I'm sure he'll have some input on that and he just took over recently. The state is obviously putting the moratorium on is -- thinks there's better ways to conduct the business and I think in part there were three to five that were previously approved and possibly depends on how long or how well they do over the next couple of years. Couple that with whether Governor Perry chooses to run again or has other ideas. I mean a lot of input. A lot of variables.

When you talk to citizens over here when we're out with friends or at our local bar or whatever when we're talking with just general populace, it's -- there's really a mixed bag and people do feel strongly but a lot of them on either side. So it's hard to tell for us which way that's going to go.

Okay. So even the ones that are going right now, there haven't been any antidotes of it going poorly or going extremely well so it's still too early to tell?

Yes, I would say that's correct. It's too early and [Zachary] -- let's see. [Ferovial] had one design build that's the toll road authority in Tarrant County took over. They were already awarded then they decided to go the conventional route and so I mean there's a large sentiment against it right now which is all the better for us.

Okay, thanks. That's it for me.

Your next question comes from Mike Christodolou with Inwood Capital. Please state your question.

Good morning, gentlemen.

Hi, Mike.

Thank you for taking my questions. First of all, what percentage would you say of the $367 million of kind of old Sterling backlog and the $120 million of the new RHB backlog might be deliverable in '08? Do you kind of have a range for us?

We can't do that yet Mike. We're going to put guidance out as early as in December as we can. We're trying to answer questions especially with the acquisition this year but yes we can't be talking about '08 yet.

Fair enough and I guess my second question then I'll ask it anyway. I understand you probably wouldn't be able to answer it at this point, but as you said on your call with the RHB acquisition a week ago you'll leave the sell and buy sides to their own devices for calculating the accretion, but the numbers do look to be $0.20 to $0.40 depending on a few assumptions made about the cost of the debt and clearly you used some of your own cash to buy the business.

You will kind of give guidance which will help us kind of eyeball where in that range of -- actually it's more like $0.30 to $0.40 the accretion may be?

No. I think I have to leave you on your own until we give guidance out. In answer really, we will give guidance and hone that number down I guess.

Okay, great. Thanks gentlemen.

And your next question comes from Rich Wesolowski with Sidoti and Company. Please state your question.

Thanks. I'd just like to follow-up on Joe Harper's comment on the backlog will go down some more and may go down some more. Could you just give us a magnitude that you'd be comfortable with so that we could differentiate between a managed backlog reduction and something more ominous that would fall off somewhere?

Yes, Rich. I mean I haven't revisited the numbers, but I'm going to say before we picked up the $90 million project that's somewhere around a three year duration, we were running with backlog at about 70% to 80% of the projected 12-month run rate and I'd be very comfortable at that level. If we slipped a little bit from that I still wouldn't have any concerns as long as the market outlook is as strong as it is here.

But on average, historically you guys have been running at 70% to 80% of four and 12-month revenue already in backlog?

I'd sure like to look at the numbers and confirm that. I'm not positive that it's exactly that but it's somewhere very close to that.

Okay. I -- it sounds like there's a bunch of different things going on. You're adding in what looks to be a little bit higher margin business with RHB. Also a little bit more competitive margins in Texas and a couple of areas. Is there any reason to expect that not in '08, but in any year that your gross margin was apart from that mid-11% historical range?

I think we say 10% to 11% and we're still hopeful that those numbers will continue on.

Okay. And then finally did RHB have substantial SG&A expenses?

No there're really low. He runs a lean ship over there.

Okay, great. Thanks a lot.

There are no further questions. I will turn the conference back over to management.

Wish to thank everybody for joining the call and hope to hear from you in the near future.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.