Sterling Infrastructure Inc (STRL) 2007 Q4 法說會逐字稿

Good day everyone and welcome to the Sterling Construction fourth-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 Mr. Jim Allen. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. This is Jim Allen, the Chief Financial Officer, and I would like to welcome you to this Sterling Construction Company conference call to discuss the results for the fourth quarter and the year ended December 31, 2007, which we released this morning. I'm joined today by Pat Manning, our Chairman and Chief Executive Officer, and Joe Harper, our President and Chief Operating

Now the really exciting part of this conference call. I must 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 2008 guidance are subject to risks and uncertainties including overall economic and market conditions, competitors', customers' and suppliers' actions, and 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. Although we may give guidance about future results, this is only a statement of management's beliefs at the time the statement is made. Predictions that we make may not continue to reflect management's beliefs and we do not undertake to publicly update guidance. It is the Company's current policy to provide guidance only on an annual basis. We do not issue guidance about quarterly results.

Turning to the financial results. I'm very pleased to report the Company achieved another record year in 2007 in terms of revenues, profits, working capital and stockholders equity. Revenues were up 23% to $306 million, and pretax income from continuing operations increased 16% over the $22 million of the prior year.

Net income from continuing operations was up 14% to $14.5 million. Diluted earnings per share from continuing operations were $1.22 in 2007; last year we earned $1.08 per diluted share. The results were achieved on a record fourth quarter which was much drier than the first three quarters of 2007. The first three quarters were much wetter than normal and primarily was the reason the gross margin for 2007 of 11.1% was 4% lower than in 2006.

Speaking of the fourth quarter of 2007, it was a record quarter. We had revenues of $88 million in the fourth quarter versus $77 million in our third quarter of 2007 and $64 million in the comparable fourth quarter of 2006. Our pretax income from continuing operations for the fourth quarter of 2007 was $4.7 million or up 62% over the $2.9 million for the comparable period of 2006. Diluted earnings per share for continuing operations were $0.39 in the fourth quarter of 2007 or up in excess of 60% over the fourth quarter of 2006.

As noted above, the weather in the fourth quarter was drier than the first three quarters and we did not have any hurricanes in this past season, so we got a lot of work done and better utilized our crews and equipment than in the first three quarters of 2007. The fourth quarter was indeed a strong quarter for our Company.

Now back to the full year -- excuse me -- 2007. Our effective tax rate was 35.3% for 2007 versus 34.2% for last year. The increase was due to the new margins tax -- Texas margins tax and higher statutory rate resulting from the higher level of pretax income. As many of you may have estimated, our tax loss carryforwards continued to offset most of our federal income tax liability in 2007 as they did in 2006. With the benefit of these tax loss carryforwards and depreciation of $9.5 million, cash flow from consolidation operating activities was $31 million in 2007 as compared to $27 million in 2006.

Following our [1,840,000] share stock offering in December 2007 with strong operating results, stockholders equity at the year end 2007 rose to $139 million and we had total cash and cash equivalents of $81 million. At the end of 2007, we entered into a new $75 million credit facility to replace the then existing $35 million line of credit that we had. At December 31, 2007, there was $8.5 million in undrawn balance on the credit facility.

Year-end 2007 working capital was $82 million and the current ratio was 2.3 to 1. Our strong working capital and ratio were achieved even though we had record level of capital expenditures in 2007 of $36 million including approximately $10 million of plant, property and equipment we acquired with Road and Highway Builders LLC, which we referred to as RHB.

A note about RHB. While it was accretive to our revenues and net income in 2007, its effects on our results of operation were nominal due to its results being included in our financial statements for only the last two months of the year or since this date of acquisition and the seasonality of the Nevada construction business. Even with a $34.5 million of net proceeds of our 2007 stock offering, we achieved a return on average equity in 2007 of over 13%. Additional financial and business information maybe found in our 2007 10-K which we expect to file with the SEC on Monday.

I want to welcome Jeremy Pinchot of Monness, Crespi & Hardt, and Craig Bell, of Sanders Morris Harris. Their firms recently began analyst coverage of our Company. A big Sterling welcome to both of you.

I would now like to turn the call over to Joe Harper to talk about the operating results in more detail.

Thanks, Jim, and good morning everyone. In my opinion, 2007 was a very good year for our Company. We tested our management team and challenged our entire workforce with the poorest weather conditions since we began operations in Texas. You've all heard the statistics before but 41% over normal rainfall for the year was way beyond reasonable expectations.

Well, our managers passed the test and laborers through superintendents met the challenges with flying colors. Our crews under direction of experienced superintendents and project managers managed to keep projects on schedule and were successful in achieving more contract incentives than we had anticipated. Working with site conditions that were less than ideal, they found ways to contain costs, complete contracts on time, and earned the vast majority of available incentive payments.

In addition, we continued our record of successfully making changes to projects, redesigned traffic control, and phased sequencing embankment or backfill materials, etc., which substantially enhanced our margin on several contracts. As a result of their hard work, our financial performance was beyond our expectations. Revenues and net income were very close to the mid point for our guidance for 2007 issued in January.

During 2007, we continued to build our construction resources adding 230 employees and spending over $26 million on capital expenditures to increase concrete plant capacity and provide equipment to our new crews. With the expansion of resources, we are ready to capitalize on the opportunities Pat will discuss in a few minutes.

Aside from operations, we had several successes during the year. Our first sizable acquisition, Road and Highway Builders LLC, closed on October 31 brings us new construction expertise in new geography. This transaction positions us to participate in highway and water infrastructure build in a growing market with great demographics and a substantial water program expected to begin in late 2008 or early 2009.

Our bonding company confirmed at a recent meeting that we have in place bonding capacity more than sufficient to meet all our program needs. We more than doubled the size of our credit facility with Comerica Bank and want to thank them for their confidence in our management team.

Coupling that with the successful share offering in December, we have positioned the balance sheet to allow us to take advantage of new opportunities. Whether these are designed build programs, participation in larger projects in our traditional markets, or potential acquisitions, we are ready. We have put in place a lot of assets over the past couple of years, the use of which have been constricted by poor weather. Looking ahead to 2008, our resource schedules indicate that all crews are fully deployed through the third quarter of the year with the vast majority busy into 2009.

We just completed a record quarter for revenue and operating income, a quarter inhibited by two weeks of low productivity due to holidays and fewer hours of day light than other times of the year. This year we should see the fruits of these investments.

We're continuing our efforts to look for good acquisitions in new regions up the country. We are pleased with the number and the quality of heavy civil construction companies which we have the opportunity to consider. Of course in some markets, the competitive landscape is changing, but you can rest assured that we will be taking that into consideration. Overall we are optimistic about our chances of finding the right company and meeting our criteria in the foreseeable future.

Now I will turn this over to Pat to expand on our markets and potential opportunities.

Thanks, Joe. Good morning, everyone. First, I'd like to congratulate the management as well as all the men and women working in our Texas region. With one of the wettest years on record with no hurricane activity, they were able to produce record revenues and record profits. The effort necessary to do that to work day in and day out in the rain and the mud was truly amazing.

Second, since it is important to our overall success, I'd like to comment on Texas and our local economy. That economy overall remained strong. For the fiscal year ending August 2007, Texas had an $8.5 billion surplus in the General Fund. Texas added more jobs in 2007 than any other state. In fact, Texas added more jobs than second-place Florida and third-place California combined.

With oil at historically high levels and the housing downturn not near as severe as in the rest of the country, the outlook for our industry is bright. [TxDOT] as we have previously mentioned has cut back on their proposed spending for the fiscal year especially in the Houston district. But there are still 10 projects for TxDOT valued in excess of $95 million that we have identified to bid on or before September 1. There are another four pass-through toll projects valued in excess of $130 million bidding in the same area and the same timeframe. The Harris County Toll Road Authority has a $1 billion plus program expected to start bidding in the fourth quarter of this year and continue through 2009 and 2010.

Further, the Metropolitan Transit Authority has the next phase of the light rail coming as well as multiple city and county projects. And after speaking with a representative of the Associated General Contractors, he has information that the Lieutenant Governor of Texas and the Chairman of the House Appropriations Committee has signed a letter requesting the authorization of the sale of $1.5 billion in bonds to increase the 2009 TxDOT funding level.

With current resources in both San Antonio and Austin at maximum utilization through the fall, we see good opportunities for expansion and increasing margin. Couple that with the robust bidding climate in Dallas and the fact that for the most part the projects are long in nature, typically two to three years, the prospects for 2009 and 2010 look very good. We were low bidder on the last two projects that we bid in Dallas with five bidders on one and only four on the other.

There is also $150 million plus job just advertised on the George Bush Toll Road and there are many more projects yet to come. There are two projects advertised by [SART] for a design build of additional sections of the light rail system in Dallas, one for $165 million and one for $425 million. I mention these opportunities more specifically because there seems to be a perception in the marketplace that replacing backlog over the foreseeable future will be challenging. This is hardly the case.

As a matter of fact, as we move into 2008 to date, we have more than replaced runoff in backlog companywide with the two wins in Dallas, $26 million and $55 million, and a new numerous smaller wins under $20 million that we don't announce.

We continue to be excited about the opportunities that we see in Nevada. Recently the Southern Nevada Water Authority raised their rates an average of 30%. They have announced plans to bring water into the Las Vegas area with over 300 miles of large diameter pipelines that they are anticipating to begin bidding toward the end of the year or the first part of next year. This is a program valued at approximately $2 billion. The NDOT bidding activity is strong with many larger projects scheduled to bid in the next two quarters.

All of these opportunities in both Texas and Nevada are not based on housing starts or the national economy but on demographics, the need for services and the local economies. On the national level, the House and Senate Committees have approved a budget blueprint proposing additional highway spending over and above the President's request in November.

We now have over 1200 employees committed to achieving the best possible results. With good weather and attention to detail, we hope to deliver on our goal.

That concludes the formal part of our remarks. Before moving on to your questions, I should mention that on March 25th and 26th, we will be presenting at the Sidoti 12th Annual Emerging Growth Institutional Investment forum in New York. And on April 4th and 5th, at the B. Riley & Co. 9th Annual Investor Conference in Las Vegas. We hope to see some of you there.

Now I'd be happy to answer any questions.

(OPERATOR INSTRUCTIONS) Rick Wesolowski, Sidoti & Company.

The gross margin was a big surprise to us. It was higher than I even thought you could get to on a good quarter. How much was the value of work versus the incentives versus the redesign of the projects? Is there any way to quantify those?

Those are pretty tough to quantify, Rich, but there certainly was an impact of all of them. The incentive recognition in the fourth quarter if I remember correctly was not terribly material, it was pretty typical. But redesign and changes in projects to enhance the profitability, we had some good things happen for us.

I just want to understand what that means. When that occurs, you lower the total expected cost of the project which enables you to raise the profit recognition on the work already done?

That is correct. If we have a change in gross margin or gross profit on a job and we are 50% done, we have $100,000 change, $50,000 of that flows to the income statement in the quarter that we recognize it.

Is that mainly a 4Q phenomenon? I think I remember that happening last year as well.

No, it's a random phenomenon --

It just happens when it happens.

-- (inaudible) event I guess you would say.

Okay. It seems that you guys are obviously bullish on your bidding activity except for the Houston area which seems like a hole in the middle of Great Dallas and still strong for Nevada. Why would it be weak there and strong elsewhere?

Well, when the DOT had to pull $1 billion from the budget, it seemed to us as though Houston bore the brunt of that pullback. And I don't have exact statistics by all the districts where it came from, but the list of jobs pulled from [weddings] for the Houston District were pretty numerous. These are jobs now that are fully designed and sitting on the shelf and if we get the kind of bounce that Pat's comment with the sale of bonds in the 2009 fiscal year, it should improve an awful lot out there. But you are right; we are very comfortable every place but the Houston district and we will have the challenge potentially of moving some labor and other resources from Houston to Dallas potentially.

Okay, lastly. Could you just flesh out the comment -- I'm not sure whether it was on competition for buying acquisitions or competition from other contractors in bidding, but either way, can you review the competition in both Nevada and Texas? Are you seeing more bidders because housing has collapsed? How widely can that affect the good margins?

We've seen in the Nevada markets, we are seeing one or two bidders on projects who would not have been bidding say a year or a year and a half ago. That is big on a percentage basis that is a big increase. In the past, there would be two to three bidders and now there is one or two new players there. So that could have an impact in the short run, Rich. In Texas, I don't think we've seen -- well in Houston we have -- we've seen one or two contractors who primarily work for developers in the past come into the municipal markets but we are talking about one or two job capacity on an annual basis. SO we haven't seen a significant impact there.

Right, so it is much bigger in Nevada than in Texas?

Yes.

Thank you.

Craig Bell, SMH Capital.

Good morning. Just wondering, can you give any of the metrics on RHB's contribution or are you going to do that in the K?

Jim, can you answer that?

Yes, we are doing that in the K. But the RHB's contribution was rather nominal. From the standpoint of revenues for the year they had about $7 million out of the total $306 million. And from the standpoint of income, it was substantially smaller. Percentagewise it was for the whole year 2% to 3%. And as I said earlier, that is due to one, they were only in our financial statements for two months since the date of acquisition. And two, the seasonality out there in Nevada, in Northern Nevada particularly, snow, cold weather and so forth like that. The fall season to the winter season is really slow.

Okay. --

So while we are still we are very positive on RHB and we expect big things from it, the contribution in the last two months was -- while we would have missed it -- it still was nominal.

Right. And then looking at your balance sheet, has there been any significant change today versus at year end? I guess in other words, have you taken any of the proceeds from that secondary and paid down the revolver at all or?

The revolver -- the credit facility goes up and down as the needs arise. And, yes, the credit facility is probably substantially down right now even the level of activity actually goes down a little bit over the Christmas holidays and coming into the new year. So other than that, and the -- but it is still available to be drawn upon.

Okay. And then lastly as we look at the first two, two and a half months here of this year, particularly looking just at Houston and Dallas markets, are you seeing any significant differences in weather versus last year?

I wasn't here last year but I was in Houston and I know it is drier this quarter than it was last quarter, last year. Joe, Dallas and San Antone -- what is your observation?

It is drier across the whole state this year than last year. I don't have those statistics here but there is no question the weather is much more like normal. I'm knocking on wood as I say that. It has been pretty normalized, Craig.

As we look at the weather for you going forward, obviously if you get some days with quite a bit of rain in there that is a problem. But is it more a function of the quantity of rain or is it the quantity of days, do you think?

Quantity of days, no question about it. A half inch of rain hurts us just as much as 12-inch rain.

Okay, great. Thank you.

(OPERATOR INSTRUCTIONS) John Rogers, the D.A. Davidson.

Good morning. Jim, you touched on this in terms of the seasonality a little bit but just so I understand thinking about 2008, will RHB be pretty quiet in the first quarter in terms of activity levels and then most -- the 70% of the work in the second and third quarters?

John, I believe that is the case but Joe has spent quite a bit of time out at RHB. I'm going to let him respond to that.

Yes, John, the primary revenue producer there is the asphalt installation piece work and that is when the revenues will get recognized. So in the Northern Nevada region, which is where the majority of our work is right now, that would point to May through October being by far the highest revenue months. And I think that is what you should expect.

Okay. When you mentioned or Pat -- I can't remember -- talked about visibility out through the first three quarters of this year, given your current backlog, at what point given you've seen these sequential declines excluding RHB, how comfortable are you or concerned are you as that backlog comes down? And at what point do you really have to rebuild it?

We've been talking I think on at least two of the last three calls maybe on all three of them about size of backlog versus our revenue stream.

Right.

Coming into 2008, we had about 370 million I think was the number of the 2008 guidance in backlog at the time. So we needed to book 80 million plus or minus and build it, and we're very comfortable with the ability to do that. My expectation with the Houston district being soft for the next quarter or two is that backlog is going to pull down but I don't think it's going to have any impact on our revenue stream, John.

Okay. And in terms of the shorter term projects, I mean my impression has always been that if you can fill up with a lot of those, they tend to be at least if not more profitable than some of the larger projects.

We get a lot of enhancement of resource utilization on the longer jobs just because we can plan better where we want to have crews down to -- all underground crews are not equals and putting the right personnel on the right projects and that kind of stuff. So we get better utilization with the longer time to be able to plan for the work on the one hand. On the other hand, typically our shorter duration projects are municipal work and margins continue to be stronger there than they are on highway work.

I might add to that, there is so much work coming out in Dallas that that may be different this year with the larger projects up there just because of the inability of contractors to book and build them.

Okay. And then last question just in terms of materials prices and particularly aggregates in the Texas market, what is happening there? Is pricing coming down, and are you seeing any benefit from that or is it just straight passthrough stuff?

Primarily passthrough stuff. Like we've said previously, we lock in all our materials prices as soon as we are found to be low bidder. So they stay fairly static. We neither get to many cuts for that particular project nor do we get any add-ons.

Okay.

John, just let me expand on that for a second. Because that is the way we do operate, we do lock in prices, purchase orders and subcontract agreements work both ways and we don't try and renegotiate midstream.

Okay. Is it a negative in Nevada at this point for you?

I'm sorry?

I mean -- because of you own some of the aggregates there?

No, we haven't seen any pullback. I know that the housing portion of civil construction here in Nevada is basically at a standstill so volumes coming out of quarries and asphalt plants and concrete plants must be down. But we haven't seen any impact in pricing. Frankly we don't buy very much on the aggregate side, so I wouldn't know it.

Okay, great. Thank you and congratulations on the year.

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

Thank you everybody for being with us today and we will hope to see you next quarter. Thanks a lot.

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