Sterling Infrastructure Inc (STRL) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Sterling Construction Company First Quarter 2008 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, Chief Financial Officer. Please go ahead, sir.

Thank you, David. I would like to welcome each of our listeners to this Sterling Construction Company conference call to discuss our results for the first quarter of 2008, which ended March 31, and which we announced this morning in our press release. I'm joined today by Joe Harper, our President and Chief Operating Officer, and Pat Manning, our Chairman and Chief Executive Officer.

We are in Reno, Nevada, headquarters of our recently acquired Nevada operation, and where we held our annual stockholders and directors meetings yesterday.

First 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' and customers' and suppliers' actions, and weather conditions and other risks identified in our filings with the Securities and Exchange Commission, which could cause actual factual results to differ materially from those anticipated. Accordingly, any such statements should be considered in light of all those risks.

Although we may give guidance about future results, this is only a statement of management's beliefs at the time those statements are made. Predictions that we may even 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 annual results. We do not issue guidance about quarterly results.

Now, turning to the financial results, I am pleased to report that the Company's results for the first quarter of 2008 are much improved from the comparable quarter in 2007. Revenues were up 23% to $85 million the first quarter of 2008 from $69 million in the same quarter of 2007. Gross profit was 9.5% of 2008 quarterly revenues, or $8.1 million, which is a 44% increase over 2007. Operating income increased 39% to $4.6 million, and income was up 31% to $3.8 million from $2.5 million last year. Our diluted earnings per share were $0.23 for the first quarter of 2008 compared to $0.21 in the first quarter of 2007. This is accurate, giving effect to the 16% increase in average diluted shares from our public offering in December 2007. These results include those of Road and Highway Builders LLC, our Nevada operation, which we acquired in October 2007.

Also, the weather in Texas in the first quarter of 2008 produced less rain, resulting in more progress towards completion on contracts in the first quarter of 2008 than in 2007. Both of these factors contribute to our increased revenues and profitability in the first quarter of 2008 versus 2007.

General and administrative expenses for the first quarter 2008 increased 32% over the first quarter of 2007, mainly as a result of increases in compensation during the last couple of quarters and the first quarter of this year. Our effective tax rate was 31% in the first quarter of 2008 versus 34% of the comparable 2007 quarter due to various miscellaneous permanent differences between book and tax, offset partially by the new margins tax. A portion of our tax liability for 2008 will be offset by excess stock compensation carry-forwards which are credited to additional paid in capital, whereas tax loss carry-forwards offset most of our federal tax liability for 2007.

The non-GAAP measurement of funds provided by operations was $7.8 million in the first quarter of 2008. The biggest working capital change was the decrease in accounts payable of $5.3 million, which resulted from more timely payment of vendor invoices in March 2008 than in 2007.

During the first quarter of 2008, our principal adjusted activities were $4.5 million of property and equipment, and our principal financing activities was a $5 million net reduction in our credit facility, respectively.

At March 31, 2008, we had working capital of $81 million with a current ratio of 2.5 to 1. Borrowings under our $75 million long-term credit facility were $60 million. Our shareholders' equity was $142 million. All of these give us the resources required for the funding, bidding, and executing projects as we go forward. Additional financial and business information may be found in our first quarter 2008 Form 10-Q, which we expect to file with the SEC on Monday, May 12.

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

Thanks, Jim, and good morning, everyone. Once again we have the pleasure of discussing a good quarter. As Jim has pointed out, year-over-year financial comparisons are all up by more than 20%, and earnings per share increased almost 10% with substantially more shares outstanding. We also increased the workforce compared to the first quarter of '07 by approximately 200 employees, or about 20%.

From an operational standpoint, we had a very good quarter. Changes in estimated profitability on active jobs continued positive in the aggregate this quarter. We have no real problem contracts at present and feel we have below-normal risk in our backlog. Most jobs are ahead of schedule, we are continuing on target to achieve incentives that were included in our guidance numbers, and in general, contract management and execution is performing as expected.

With the addition of the two new contracts in the Dallas area, we will be expanding our capital expenditures for equipment during the second quarter slightly from the $4.2 million expended in the first quarter. We are also well underway with expansion of our office building in Houston and continuing with our plans to build shop and office locations in both Dallas and San Antonio.

The labor market has continued to provide us with an adequate workforce in all of our markets. While we have seen substantial increases in steel prices being quoted to us on new contract proposals, we have had no attempts to slow delivery or increase prices on our existing contracts.

Petroleum-related products have obviously been increasing at rates higher than we had anticipated in our budgets, but we look at and adjust these costs on a regular basis, and we're comfortable with forecast profitability will cover those costs at current levels. We are continuing to evaluate the pros and cons of hedging our risk as it relates to petroleum-based products but have not reached a decision as yet.

Our workforce and equipment are approaching or exceeding capacity of both our Dallas and San Antonio regions, while we have some resource availability showing up in Houston by late in the third quarter. We're keeping a close eye on our resource schedules and are preparing for possible reallocation of resources later this year.

All in all, it was a good quarter with no significant problems. I'm looking forward to more of the same. And now I'll turn this over to Pat Manning.

Thanks, Joe. Even though many of the analysts' estimates were higher, we were right on target with our internal budget. This being the first quarter that includes the Nevada operations, we think it was important to point that out, and we are confident in our expectation to hit or exceed full year guidance for 2008.

Our backlog continues to increase, being up over $35 million from a record year of $450 million. This is despite the reduced spend from TXDOT and includes approximately $80 million from two jobs we won in the Dallas area, as well as $35 million in smaller projects around the state. Of course, this does not include the $46 million project announced yesterday--announced today that we won yesterday--or other smaller projects that we've picked up this quarter.

We continue to see opportunities in our market that outweigh the softness we are experiencing in TXDOT. Through our vertical integration over the past several years and our additions to personnel and equipment, coupled with our strong balance sheet, we are in a position to take advantage of the larger projects that we see bidding. We see less competition in this area, which should provide us with the opportunity to add backlog at reasonable margins.

One of the advantages in having a market concentration in Texas is that despite the downturn in the national economy, the overall Texas economy remains strong. We see bright spots in Dallas in the TXDOT market, as well as in San Antonio in the municipal market. Toll road projects continue to bid in the Dallas (inaudible) area, and are on the drawing boards in the Houston area for 2009. We also look forward to the start of a large-diameter water program in Nevada next year.

Because of our size and our strong concentration inside a 250-mile radius of Houston, our ability to move resources in between offices and locations is certainly manageable, and we believe we can maintain our revenues and margins, not only this year, but through 2009 and beyond.

Now we'd be happy to answer any of your questions.

(OPERATOR INSTRUCTIONS.) Our first question comes from Rich Wesolowski with Sidoti & Company. Please state your question.

Thanks. Good morning.

Good morning, Rich.

Are you guys, have the ability to say how much revenue RHB added in the quarter?

No, Rich, we would prefer to not make comments specific to individual subsidiaries. I can tell you that it was plus or minus $1 million in relation to our internal budgets.

Okay.

I think it's important to remember that the big quarters for RHB is the second and third quarters as opposed to the first and fourth.

Right. I think I had underestimated the seasonality of that business. That's why I asked. The, were their margins substantially higher or lower than those for Taxes Sterling?

Yes, they were.

Higher.

Okay. Would you expect the margins on the Nevada DOT work generally to resemble those of a typical large TXDOT highway project?

Margins and backlog are higher, Rich. As we go through this downturn that we're experiencing over here in Nevada, I think margins will be similar to what they are in Texas.

Okay. And is that Nevada project you won yesterday, is that going to contribute meaningfully to '08?

We think it will start within about 60 days, which means we'll have two pretty positive quarters. And because it's in the southern part of Nevada, it will be a year-round operation down there. So yes, I think it will have a significant impact.

Okay. And then lastly, the Dallas or Texas, which you mostly gave, so thanks for that, but at the last time we had spoke, Houston was slow, and as you mentioned, here in Dallas it was great, and there were some other areas that you liked. How much of the workforce do you plan to move from Houston to another region, and how much of that shift, if any, has already occurred?

We have a couple of crews who are based out of Houston currently working in the Dallas area and one about to go to San Antonio. The total impact could be 300-plus employees and a substantial amount of the fleet in Houston. But keep in mind that that's only 130 to 140 miles away.

Right.

So we're not expecting a lot of pushback, and besides, the market is slow to nothing in Houston. The alternatives for employees are not there to go somewhere else.

And what is just approximately your total workforce in Houston now?

About 600.

Great. Thank you very much.

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

Hi. Good morning.

Good morning, John.

In terms of the--I know you didn't say what RHB was doing, and I guess I was curious. The weather that you talked about, or at least, I guess, returned to more normal weather. Any sense of how big an impact that was?

It's hard to gauge it that way, John. '07 was bad, and the first quarter was bad. It got worse as the year went on. It really is hard to measure how much of it was weather-related, but I can tell you that workdays and the ability to produce on the job were up very substantially this year versus last.

Okay. And then secondly, just in terms of the projects that you're looking at to come to bid this year, both in Texas and Nevada, can you give us a sense--you say some bigger projects are out there, but rough scale? Are you looking at more $40 million, $50 million to $60 million type projects like you booked this morning?

Yes, I think that seems to be the way TXDOT's going, and certainly we'll continue to look at the smaller projects and the municipal markets. But there are opportunities in the $100 million range.

And, Pat, I guess that's what I was wondering. I mean, are we looking at projects that are substantially bigger, $100 million plus type work?

Yes, we bid several of those earlier this year. One of them, I think, as we see projects coming out in the $150 million range, $125 million, that kind of thing.

Last month, John, we bid, we were second bidder on a $122 million or $123 million for the North Texas Toll Authority.

Yes, and we're seeing job sizes increase pretty generally.

On the municipal side, we've even seen job size increases in San Antonio where a lot of the jobs are $10 million plus, and those are sizable contracts on the municipal side.

Okay. And then lastly, just on the water side, you mentioned the big Nevada pipeline project. Is it your expectation that that goes to bid this year, or is that--?

Not this year. I believe it will be the first part of, the first quarter of next year they'll start bidding.

Okay. So what about in Texas? Are there water projects there?

We're working on water projects now, and there continually comes jobs out to bid, and nothing near the size of what we're expecting in Nevada.

Okay. And then last thing, given you're with RHB, the integration process, are you at the point now where you're starting to look at other opportunities?

We're sort of early in that stage, and we bid one job down in Las Vegas and just sort of threw a loose curve at it to try and get a sense. But yes, we're making progress there, John. It's going to be a slow process. We're going to do it carefully and make sure we understand the competitive markets, et cetera, over here.

Sorry, I meant on the acquisitions.

Did you mean acquisitions, John, or--?

Yes, I was referring to acquisitions.

Oh. Yes. We continue to have those in the pipeline and are continuing to look. So it's an ongoing process that I believe we'll do on a regular basis, trying to find the right one, and like I think we mentioned on the last call, that's like up to a nine- to 12-month process.

Okay. Thank you.

Our next question comes from Craig Bell with SMH Capital. Please state your question.

Yes. Good morning. This is kind of following up on the last question there on project size. Last month you did that North Texas Toll Road one, $120 million. I guess the next two sections of that are coming out over the summer. Are those ones going to be similar in size to that last one?

I think they are both in the mid-80s with their estimates, and we've seen jobs both below and above there--I mean prices, eventual pricing, above and below their estimates. But I think they'll be just under $100 million.

Okay. And then sort of related to that on the cost side of it, recently seen some TXDOT work on some of the larger contracts, including one I think you guys were bidding on yesterday, where the low bid was actually coming in above the estimated cost. And it seemed to be, from what I've seen on the larger projects rather than the smaller ones. Just wondering if there's anything unique there. Are you seeing cost issues on these projects?

We're seeing steel prices escalate extremely rapidly. On a water main job last month, we bid two jobs within about a week and a half of each other, and there was like a 40% difference in the price per foot of steel pipe. So we're seeing escalation in steel prices pretty dramatic. But the way they're quoted to us, we're still covered in terms of contract duration. Sometimes escalator's built in on a calendar time basis, so we have to compare it to our schedules, but--and that, of course, has an impact versus an engineer's estimate, because those may have been prepared as long as six months or a year ago.

Okay. And then lastly, I guess a couple of weeks ago the City of Houston, or Metro, had decided not to go with the contractor for the light rail there. Does that have any implications for you guys?

It hasn't as of yet. We are continuing to explore what that means, and there's been very little said so far.

Do you have any idea what the time line might be for Parsons reaching an agreement with the City and then finding out what you guys might get?

We do not. It's a negotiated thing, so it's hard to say.

Craig, early indications are telling us that most likely [Braniff] stays in the lead on the construct side, at least on the Phase One of this project. Phase Two has not been discussed in any formal way. You know, Washington Group was in there for 14 or 15 months and couldn't come to agreement on pricing issues. So how long it will take Parsons is really a big question mark.

Okay, great. Thanks.

Our next question comes from Mark Rogers with Gagnon Securities. Please state your question.

Good morning, gentlemen, and thank you for taking the call.

Good morning.

I guess I have a series of questions. The first question--backlog. I know we just talked a little bit about it, but if there's any more color that you could give on the backlog other than $80 million for two jobs, $30 million in smaller projects, adding the $46 million project that you guys just got yesterday--congrats. What are we seeing as we move along throughout the year?

We don't typically announce, or we don't announce period, jobs under $20 million, so there's various municipal jobs that we have picked up in that group. And I think as we mentioned before, we're looking towards bidding on larger projects, and hopefully we'll be successful on some of those and--.

So there should be a little more transparency.

We're bidding on the smaller municipal side.

Great. So they'll probably, as you guys get bigger projects, we'll see a little bit more transparency in the backlog numbers.

Yes, I would, that would be true.

Okay. Another question I had. You guys said some projects are coming, are being completed ahead of schedule, so you might be getting some incentive payments. Could you describe some of these incentive payments, how they're structured?

They're normally a fixed dollar amount per calendar day for either segments of the job or the entire job completion dates. So, for instance, recently--last year--we had a project where a bridge had to be demolished and a new bridge built in its place, basically. They gave us 70 days to accomplish that. Incentives were in the neighborhood of $20,000.

Per day?

$20,000 per day, and for a maximum number of days of--?

37.

Thank you.

He thought that $150,000 was a bonus.

And we achieved that on both of those bridges.

Okay. How big were those projects?

We do include in our guidance what we reasonably anticipate getting an incentive. Although certainly not 100%.

Yes, I understand. And if you could just kind of, sort of macro idea, municipal budgets and then state budgets. What are you seeing right now in the landscape of both of those?

Let's take the state first. The state's general budget is generating very large surpluses for the fiscal year--last year and the current fiscal year. The DOT budget is in August year end, and in '08 they had made an error in their original numbers. They were $1 billion off, so we've seen a pretty dramatic reduction in '08 spend or lettings from the DOT. Fortunately for us, it's been picked up to a very large extent by the toll work coming out on the Dallas area. Looking forward, the expectation is that they will sell bonds that were approved by the general populace last fall and that we will see the '09 budget for highway spend at or above those fixed levels, $4.0 billion to $4.4 billion. Now, there is some disputes going on, and the legislature is not necessarily in agreement with the governor, so there's a little bit of a question mark on that. But the latest thing we've seen out of the agency is they expect that will happen.

On the municipal budgets, San Antonio sold $700-plus million in bonds last fall, and we're seeing that work now hitting the streets. It started coming out for bid about a month ago. We've picked up a couple of jobs there, and we think it's a great market. Dallas sold in excess of $500 million in bonds for water, sewer, and street improvements, and we've not seen any of that come to the market yet, so we're expecting we'll see that in the next three to six months. Houston's budget is slightly higher for this year than it was last, but it's been very slow coming to market. So the third and fourth quarters could provide us a pretty good market rebound in Houston.

All right. Thank you very much, gentlemen, and best of luck.

Thank you, Mark.

(OPERATOR INSTRUCTIONS.) Our next question comes from Rich Wesolowski with Sidoti and Company. Please state your question.

Thanks. I was just hoping you could maybe elaborate a little bit on the effect of some of the redesign of the projects and taking something that was engineered by somebody else and doing it yourself and making more money on it, especially the last two quarters. If you look at December and you look at March, you made 50% more income in December on about the same type of revenue, even though you had some more higher-margin RHB in here. You also mentioned some redesigns that hit this quarter. The timing of those--is that just whatever stage of the project comes up but it's, kind of from an investor's standpoint, you never know it until it happens?

That's right. It's completely random as the project goes through, and depending on the particular phase that's designed, that we may be able to enhance cost savings, et cetera. So it might be on the first stage of one project, and it might be on the last stage of another project.

Right. But this quarter did benefit a little bit, I'm sure, to a much lesser extent, from that phenomenon?

Certainly to a much lesser extent, and don't forget that you get a mix of materials which reflect our revenues from one quarter to the next, and while that evens out over the year, it does show some bumpiness.

Right. Thank you very much.

(OPERATOR INSTRUCTIONS.) Our next question comes from Craig Bell with FMH Capital. Please state your question.

Yes, I just want to follow up on an earlier statement you made. On the Nevada project from yesterday, you expect that to start in early July? Is that correct?

Third quarter, you know, 60 to 90 days. You can never tell exactly.

Okay. And then the two larger projects that you announced in February, the $55 million and $26 million--are those both underway now?

We're well underway on the $55 million, and I honestly don't know--.

The $26 million we're just starting.

Okay, great. Thanks.

Our next question comes from Sean Boyd with Westcliff Capital. Please state your question.

Thanks. I was just coming back to the comment earlier in the presentation where we talked about the reallocation of resources later in the year, and I'm assuming this is from Texas to Nevada. But can you--?

No, it's not. It's within Texas.

Okay. We have verified this. I apologize for having to bring you guys back through this, but how many people are we talking about, and exactly what's the reallocation?

Reallocation will be coming from our Houston markets, moving highway resources to the Dallas area and moving municipal resources to the San Antonio area. That is our expectation. Now, we still have time, if the market provides the work for us, to add work in Houston. It's just our expectation is that the market's going to be late in providing those opportunities and that likely we'll have those reallocations. In terms of the size of it, it could be as big as 300 employees.

And that's out of 600 employees total?

600 in Houston.

Got it.

We have over 1,200 nationwide.

Okay. I appreciate that. And one other question, if I may. In terms of the cost increases that we're seeing in materials, especially steel and petroleum-based products, when you all quote your contracts, you're--and you made the comment about the water contract and how it moved substantially in a couple of weeks there--your basic pricing in your higher cost of (inaudible) to date, or are you pricing down on the futures curve? How do you mitigate those?

We're pricing in our costs, and within a week to 10 days after we're determined to be low bidder on the project, we lock those prices in. So irrespective of the fact that the next job went up 40% two weeks later, we still have a guaranteed price on the job two weeks ago.

Got it.

The typical quoted bid time from a vendor or supplier would be held firm for 30 days, and then within, like Pat said, a week or two, we have issued purchase orders contingent on eventual award, and that locks in the prices that we were quoted at bid time.

Got it. Okay. And so the only other side to this would be, given the quick changes that we're seeing that is the (inaudible) of escalation, it's not pushing off awards, anyway?

Well, it doesn't push them off so much as if the--if they're working on a total budget of X, they might not be able to do as many projects as they anticipated.

Got it. Got it. Okay. Thank you.

Our next question comes from Shaun Nicholson with Kennedy Capital. Please state your question.

Hi, gentlemen.

Good morning, Shaun.

Just a quick update on integrating RHB into the Texas market or vice versa, what you guys are seeing, potentially bringing them to Texas, their expertise? When do you think you'll be able to realize some of that?

We had talked about that before, and there could be some opportunities out in west Texas to do the same type of work they do here in Nevada. But we haven't seen many of those jobs bidding yet, although we've begun to talk about the ability to move asphalt plants, et cetera.

Okay, great. And on this fuel side, I know there's been a little focus on that. Given you guys lock it in, I guess we've heard a surcharge is coming on top of contract prices. I'm not sure if that relates to the way you guys are bidding it. Have you seen any surcharges in any of those after the fact?

I'm not sure I know what "surcharge" would mean, Shaun. But we see a lot of quotes from suppliers, especially on the steel or cement side, where escalators are built into their quotes to us on a calendar basis. So it might be the balance of '08, X dollars per ton works, and then for calendar year '09, it's a different number, and for calendar year 2010, it's a different number. Our purchase orders address that, so again, we lock in those prices. And then we just have to anticipate in our bid process the timing of when we'll take delivery of those materials.

Right. Great. Keep up the good work.

Thank you.

(OPERATOR INSTRUCTIONS.) There are no further questions. I will now turn the conference back to management.

Thank you, everyone. We appreciate your time. Look forward to talking to you next quarter.

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