Sterling Infrastructure Inc (STRL) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to Sterling Construction's third-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 Jim Allen, Chief Financial Officer. Please go ahead, Mr. Allen.

Thank you, Rachel, and good morning to each of you. And I would like to welcome you to this Sterling Construction Company's conference call to discuss our results for the third quarter and the first nine months of 2008, which we released this morning.

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

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', customers' and suppliers' actions; weather conditions; and other risks identified in our filings with the Securities and Exchange Commission.

Each of these items 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.

Turning to the financial results, I'm very pleased to report that the Company's results for the third quarter and first nine months of 2008 were much improved over the comparable periods of 2007. Revenues were $306 million in the first nine months of 2008, including $114 million in the third quarter -- both record results. This represents a 40% and a 47% increase, respectively, over the comparable periods in 2007. Gross profit was $32 million in the first nine months of 2008 and $13 million in the third quarter, or 10.6% and 11% of revenues for those periods, respectively.

Operating income was $22 million in the first nine months of 2008, including $9 million in the third quarter. This represents an increase of 68% and 102%, respectively, over the comparable periods in 2007. Net income was $14.2 million in the first nine months of 2008, including $6 million in the third quarter, versus $9.8 million and $3.4 million in the comparable 2007 periods.

Diluted earnings per share were $1.04 for the first nine months of 2008, and $0.44 for the third quarter of 2008. That's compared to $0.83 and $0.29, respectively, for the first nine months and third quarter of 2007. The respective increases of 25% and 52% for the comparable periods is after giving effect to the 16% increase in average diluted shares from our public stock offering in December 2007. These results also include those of our Nevada operations, which we acquired on October 31, 2007.

Net cash provided by operations was $19 million in the first nine months of 2008 versus $15 million for the comparable period of 2007. During the first nine months of this year, our principal investing and financing activities were $17 million of capital expenditures, $17 million of purchases of short-term securities, and $5 million of net reductions in our credit facility.

At September 30, 2008, we had working capital of $94 million, with a current ratio of 2.4 to 1. Included in working capital is $80 million of cash, cash equivalents and short-term investments. Total assets were $297 million. Borrowings under our $75 million line of credit were $60 million. And shareholders' equity was $154 million at the quarter end, all of which gives us the resources required for bonding, bidding and executing projects as we go forward.

Additional financial and business information may be found in our third-quarter 2008 Form 10-Q, which will be filed today with the Securities and Exchange Commission.

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

On our call last quarter, I discussed some negative impacts on the Company resulting from spikes in commodity prices. Let me give you a quick update.

The steel supplier who failed to honor their contract with the Company is negotiating with us to reduce prices for shipments in the past month or so, as well as those shipments yet to be delivered. There are also early discussions about making us whole on future orders for our cost overruns on the current project.

This incident has caused us to step up our diligence efforts with all suppliers and subcontractors, so maybe this will all end on the good side.

The situation on our Nevada projects caused by the Sem bankruptcy is not resolved as of today. We are in continuing negotiations with NDOT, including potential design changes. We still believe there will be no material negative results other than delays in the completion of the contracts.

With crude oil prices down at the $70 per barrel range, the prices we are currently paying for diesel and gasoline have obviously come back down to earth. We've chosen to take a conservative stance with our forward-looking estimates and have made no significant changes to estimated costs for jobs in process since the increases reflected in our second-quarter numbers. We will obviously continue to monitor these costs closely.

Field operations continued to perform exceptionally well throughout the quarter across all of our markets. As I expect you are aware, Houston had to deal with Hurricane Ike and its aftereffects. I'm very proud of our management group and superintendents for their exceptional performance in preparing for the storm and in organizing our workforce and the job sites in the aftermath. Company losses were limited to minor damage at our shop facility and one truck, all covered by insurance.

In spite of all the challenges -- the scattered workforce, poor communications, no power, very scarce gasoline or diesel, etc. -- operations in Houston were back to normal in less than two weeks. And with power out at our headquarters, our office staff managed to get payroll run and subcontractors paid on time.

We estimate the short-term impact of Ike at approximately $10 million to $12 million on the revenue line, but the potential opportunities of rebuilding damaged infrastructure are yet to be determined.

Everyone is aware of the crisis we are all facing in the financial markets. We've been reassured by Comerica that they and the other members of the syndicate on our credit facility are not having difficulty meeting their commitments, but current stock price valuations make M&A activity very challenging.

We are currently in ongoing discussions with several potential target companies. However, our expectations are that closing a deal is unlikely until multiples return to historical norms. With backlog north of $500 million, our resource schedules are booked through the first half of 2009, with a few exceptions in the Houston market. We continue to plan on utilizing some Houston resources in the Dallas area, as we've discussed on previous calls, and we are optimistic that the market will provide opportunities to book new work for those crews who are now showing up as available.

Pat?

Thanks, Joe. As Joe just mentioned, we are pleased that we have maintained our backlog at just over $500 million for the second straight quarter. We have continued to pick up new work in the fourth quarter, the largest of which was a $16 million bridge and paving project in Dallas adjacent to our current project for the NTTA on Highway 121.

With the nation having suffered a severe financial crisis, we have had no indication from owners that any of our projects would be either postponed or curtailed. Our crews are fully booked through the end of the year and are slightly overbooked going into the first quarter.

We believe budgets will tighten on the municipal side and continue to monitor those markets closely. We anticipate that this will be offset by increased spending by TxDOT. We are seeing more competition on the smaller projects, which is putting some pressure on margins.

I mentioned last quarter numerous areas of focus that we are exploring potential streams of revenue. We are continuing those and see new ones appearing. The Metropolitan Transit Authority, while still not having awarded a contract on the lightrail, is proceeding with a number of design/build projects for a commuter rail, with estimates in the range of $100 million per each.

The city of El Paso, along with the county and TxDOT, are planning on spending $1.7 billion on infrastructure over the next three years. The Corps of Engineers has a $1.5 billion program which is beginning to bid at Fort Bliss.

The Harris County Toll Road Authority is moving forward with their plans to add to the system here in Houston, with over $1 billion in new construction. TxDOT continues to move forward with their 2009 budget, in excess of $4 billion. On October 30, the Texas Transportation Commission, by unanimous vote, approved more than $1.8 billion in spending on new construction projects using bonds funded in 2003 under Proposition 14.

We are continuing our quest of joint venture partners on the larger design/build projects and are excited about the potential that presents. As we announced last month, we have taken the first small step in the design/build arena, having been awarded a $6 million project for the Corps to design and build a bridge in San Antonio.

Design/build projects are in the early stages in the Rio Grande Valley, and we have two structure crews beginning work in McAllen on a levy improvement project. The city of Galveston has applied to FEMA for a $2 billion grant for repair work related to Hurricane Ike. A portion of that work will be dedicated to the infrastructure rebuild. A billion-dollar-plus program design/build is proceeding on Highway 161 north of Dallas for 2009. We are optimistic about our future.

As we close out this record year, we are confident that our management team can continue to meet the challenges that this economy brings us. With their commitment and what we see as a reasonable market, we will continue to deliver and to meet our goals. We thank all of them, as well as our employees, for their continued hard work and dedication.

I might add one other point about the economy in Houston, as well as Texas as a whole. For instance, the average price of a single-family home in Houston rose 4.4% in September to $211,660, the highest level ever for a September, and inventory was at 6.4 months as compared with 6.3 months in September 2007. Job creation from August '07 to August '08 was 250,000. The economy here remains strong and steady.

On a lighter note, I paid $1.85 for regular this morning. That doesn't hurt!

Now, I will turn the call back over to Jim Allen.

Thank you. I want to welcome Jack Kasprzak, Managing Director of BB&T Capital Markets, to our conference call. BB&T has recently commenced coverage of our Company, and Jack's first report on the Company was a very comprehensive one.

Now, Joe, Pat and I will be happy to answer any of your questions.

(Operator Instructions). Rich Wesolowski, Sidoti & Company.

Do you guys have any even rough estimates about how much of your backlog is now from TxDOT, from NDOT and from Texas municipal work?

If we include the tollroad activity, which is highway work, virtually the same as TxDOT, it's a little over two-thirds.

Two-thirds TxDOT?

Right. I would say two-thirds highway, and that way we encompass the whole operations.

Right. And the highway work, you're not seeing a lot more competition on. I suspect those are the bigger jobs. But you are seeing more competition for smaller and municipal?

Yes, that's correct.

Okay. Good news on the $1.7 billion Proposition funding that you mentioned, but there was also a $5 billion measure that the legislature was set to consider in January. Is that still the case?

Yes, consider it is -- the legislature begins in January of '09, and yes, they are still considering that.

We've seen early estimates, Rich, of 2010 and '11 numbers that do include sales from that bond referendum passing.

Whose estimates are those? Is that a private company or is that the government?

That's TxDOT, and they appear to be slightly in excess of $5 billion for those two years, including that $5 billion of bonds.

The moratorium on the public/private partnerships expires in 2009, unless I'm mistaken. Does the credit environment preclude some of those jobs from going forward, or is that still a possibility?

You know, I'm not sure that we have clear insight to that, Rich. I mean, the tollroad authority in Dallas recently sold just short of $0.5 billion of bonds. The pricing went from -- it went to 6% versus 5 5/8% on their other most recent issuance of bonds. So obviously there is a cost impact, but the markets accepted it pretty readily.

We haven't seen or heard of a municipal sale being canceled down here, at least I have not. So I think it's unclear. Obviously, it's a lot more difficult.

Okay. And then finally, can you discuss the strategy of hedging fuel costs and, as discussed previously, locking in forward steel prices as you bid larger and larger tail jobs?

Yes. On fuel, we haven't taken any action yet. We have the authority to do that amongst the three of us here on this call, and we are watching those markets, but we have not hedged any fuel to this date. And steel, we have been getting pricing on for the last six months or so, maybe a little longer, good for contract duration, most of them being quoted with escalators as we go out past nine months or a year. So we are pretty comfortable that we don't need to be hedging on the steel side. We have two good, sound suppliers in all of our markets, and we are comfortable with steel right now.

So as you mentioned, in the second quarter, you had some project write-downs due to the commodity cost escalation, but you haven't changed the estimates as of now. So that means that over the course of the next couple quarters, that money could come back on the income statement?

Yes, it could, Rich.

Great, thanks.

Craig Bell, SMH Capital.

Joe, you had talked about some of the impacts from commodity costs on the second quarter earlier. I was just wondering, one of the other items you mentioned on the second-quarter call was some operational issues in the Dallas market. Did those get resolved during the quarter, as you had expected?

Well, realize that call was like in August or so. Yes, I'm going to say that we have resolved to our satisfaction most of the issues up there. We still had some impact in the third, but we think we've got it under control right now.

Okay. Then with regards to the Sem bankruptcy and the delay there, I guess the last time, you had said it was about $25 million that was going to be pushed out. Is that amount reflected in your backlog, or is that separated out?

No, we are continuing to work on the project, and it is still in backlog. I mean, I'm not sure how the whole thing is going to settle out, but I believe we will have answers and be moving forward full steam within the next 30 days or so. So there's no reason to be pulling it from backlog.

Right. So that means you are pretty optimistic that you're going to have a resolution with NDOT in the near future, then?

Yes, we are.

30 days (multiple speakers).

I believe the delay is just waiting for oil prices as it pertains to asphalt oil to come back down to earth.

Okay. And then lastly, as we look at your backlog here, north of $500 million, as you look -- how much of that do you think is going to burn off in 2009? Should that be about an 80% rate, do you think, for the year, or maybe looking at it for the next 12 months rather than '09?

We are likely going to be putting guidance out certainly before the holidays, Craig. And I'd rather not -- you know, if we tell you that number, then you zero in on the revenue line, and we've been advised we shouldn't be doing that.

Certainly a portion of it will go off to 2010.

Right, okay. And then just real quickly, what about your CapEx expectations for Q4?

They will be down from the rate that we've been incurring them for the rest of the year, less than a couple million.

Okay, great. Thanks a lot, guys.

Jack Kasprzak, BB&T Capital Markets.

I wanted to ask about G&A expense, which was down slightly in the quarter in absolute dollars, and of course down significantly as a percentage of sales. Could you just talk about what's going on there? It seemed to be a very good performance on that line.

One of the things that will always affect G&A expense is the timing of when you incur professional fees. And we have, as you know, a number of professionals with the auditors and the SOx and so forth like that. So part of that was just the timing of when the professional fees were incurred. And they didn't hit us in the third quarter, like, say, if you look at the last year's third quarter.

Otherwise, G&A does not vary directly with revenues, so it's sort of a -- I don't look at it so much as a percentage, but I look at it more in absolute dollars over the time.

Another thing that's affecting it this year is that we don't have as much stock option expense as we did last year, and we haven't granted the stock options in the last couple of years. And so we are not amortizing those, like we don't have to amortize any expense like we were -- other than what's a hangover from earlier years.

Those are the basic reasons. There's nothing else happening in G&A.

Got you. So if I just look at it more on a year-to-date run rate --

I think I would always do that. Any quarter can fluctuate because of timing of period expenses. But look at it on an overall basis, and you'll be pretty close.

And you mentioned in the press release there was a project that I guess went well and helped your margins in the quarter, one of your Texas contracts. Is that contract finished?

Probably about 95%.

Almost finished, okay. And I was just going to ask, too, in a more broad sense, there's been a lot of talk recently about a stimulus plan out of Congress that might include some infrastructure spending. And of course, there's a new highway bill, a new federal highway bill due to be reauthorized I guess sometime next year.

You detailed several spending initiatives just in Texas that seem to be pretty positive. Obviously, more money is better, I guess. But from your perspective, how would you characterize any infrastructure-related stimulus? Is that something that would just be a more longer-term positive?

No, I believe it will be a short-term positive. I mean, they are talking about pumping money in quickly into the economy, and the best way to do it is through public works and therefore infrastructure. So yes, we are I guess guardedly optimistic and waiting to see what happens.

Yes, Jack, this is Joe. My expectation, at least, is that we are likely to see the money from a stimulus package go to states who have projects sitting on the shelf that they can get an immediate impact from. And with the DOT budget having gone from $4-plus billion in '06, and '07 pulled back to $2.8 billion last year, 2008 numbers, we are very well aware of projects sitting on the shelf in the Houston district to a large extent, and in our other markets as well. So I think we will get an impact pretty quickly after Congress passes that kind of a package.

Great, thanks a lot.

John Rogers, D.A. Davidson.

You talked a little bit about Texas, but I was wondering if you could give us an update on what you're seeing out in Nevada in terms of their spending levels and how that market looks in terms of opportunities, especially out over the next couple of quarters.

The sort of broad numbers, John, we're going to see about $200 million come off the table out there, so $700-plus million down to the $500 million range.

You mean because of budget cutbacks?

Yes. I mean, they are also challenged with having to repay old bond issues that are coming out of the highway funds. It's going to hit them for both '09 and 2010, the way it looks right now.

But I think, likewise, Nevada has a large number of projects, I mean, several projects we've been tracking since preacquisition of Road & Highway, that are designed and right away is acquired, and they are virtually sitting on the shelf. So we are hopeful that we see some activity out there as a result of the stimulus program.

And in terms of branching into California, is there still opportunities to go into that market? It looks like there's some more projects coming up in that area on the border.

There's still some projects to complete I-80 through the mountainous region there, and there's some on the other highways going north off of 80 that are close enough for us to be able to reach. And yes, we are going to be participating in those on a bid basis, and looking forward to it, as a matter of fact.

And on (technical difficulty), can you give us a sense of -- I mean, was it accretive in the quarter?

Oh, yes. I mean, I am very comfortable saying that even with the $20 million coming off the revenue line, $20-plus million, they have exceeded our expectations at purchase time. It's a very accretive deal.

And they have -- and there's enough work for them out in, especially out in -- or opportunities for work out into '09?

We will be busy through -- into the third quarter. So we are continuing to monitor closely on anything that's coming out out there.

All right. And in your comment on multiples, in terms of acquisitions, is it your sense of, when you said you have to wait for multiples to come back, is it what sellers are willing to accept, or is it--?

Yes, that's pretty much it, John. I mean, most of these -- all of these are private companies, and their expectation is that financial markets be what they are, their companies are still worth what they thought they were. And getting a deal done at less than 4 times on the EBITDA line just isn't going to happen. That's what we're experiencing in our discussions with them.

Okay. All right, great. Thank you.

Mark Rogers, Gagnon Securities.

My question is regarding the hurricane relief, and sadly, the opportunity presents itself to make a good amount of money building the infrastructure of these coastal communities. So how does the revenue recognition and the project timeline look going forward?

Well, I think as I mentioned, Galveston has applied for a grant from FEMA in excess of $2 billion, and they have not yet -- $2 billion, and they have not yet received that yet, which would be the primary source of any future income. As those jobs come out to bid and that infrastructure repair begins, we will obviously bid on them and see what happens.

Revenue recognition, Mark, would be the same as any of our other contracts. I don't think we will be down there on T&M work. That kind of cleanup work is going on now, and we are not participating in that. But what we expect to see are packages of rebuild of infrastructure that was damaged by the storm.

Okay. So if you are to get a good amount of work from hopefully this $2 billion grant that gets passed, what would be the margin profile of these projects in the hurricane-relief area?

Well, I think that would be difficult to tell right now. It still depends on competition and what the projects are, and risk evaluation, and personnel that we have available to do them. So I couldn't specifically give a margin idea. They should be as good or better than any of the margins we are experiencing now.

A lot of that work will end up being municipal type work, Jack. So it will depend a lot on how they package them. If these come out in $15 million-plus packages, which would be a much more efficient way to do it, then we should be very competitive. Margins should be good.

Great. Thanks a lot, guys.

(Operator Instructions). Richard Wesolowski, Sidoti & Company.

Could you just briefly review the circumstances around the Caltrans job?

Yes, I don't want to get into a lot of details, Rich. I mean, our bid was -- our proposal was deemed to be nonresponsive. And there's no definition of that in any literature coming out of Caltrans. We disagreed with them on that, appealed. They continued -- their response was simply that they had not changed their mind. Our bid was nonresponsive. They're going to go ahead and proceed with Granite, who was the second bidder.

We don't need to start a war with Caltrans on a single project like this, and so we've declined to go any further with it.

Right. The corollary to the question is basically that it doesn't preclude you or impede you from going after other work in the region?

No, I don't think we made any enemies, and I don't think that there's any sour blood on either side. So yes, we continue to look at that market as a good opportunity for us.

Okay. And secondly, and this is probably treading on the toes of the 2009 guidance, but I look at your profitability, gross margins. You mentioned competition going up, diesel prices having an effect on the second quarter. There was an incentive here in 3Q, but also a minor write-down in Dallas. I mean, do the margins that you're working off approximate the margins implicit on new work?

A lot of the work that we are currently building had incentive opportunities embedded in them that have tended to keep margins up.

Right.

As we go forward, there are certainly fewer of those available. The Dallas district typically does not allow incentives very often.

But nothing out of the historic range reported since, say, '01-'02?

Say that again, Rich?

I'm just making sure that the margins won't be out of the historic range, at least that you've reported over the last five years.

Yes, we will address that when we talk about -- when we issue our guidance, Rich. I'm really not prepared to do that this morning.

Okay, thank you.

[Jeff Saccoro], shareholder.

Congratulations on a great quarter.

You just answered my question generally on the Caltrans projects, but I'm still a little unclear on what it means to be a nonresponsive bid, number one. And number two, is there anything that you can do in the future to avoid that happening?

Nonresponsive is typically a failure to fill out documents correctly, in our experience, so failure to sign someplace where you needed to sign, or you fail to fill in a unit price and therefore didn't respond to everything they asked you to do. And that would be the typical nonresponsive disallowance or elimination of a proposal. But in this case, it wasn't that kind of an item. And like I say, I think we were correct, and I believe we may have had grounds to continue in a protest effort, but we chose not to.

Typically it won't happen, hasn't happened to us --

Ever.

Ever, I don't think. And it's a new marketplace for us, so they are a little harder on us than they would be normally. But I think in the future, as Joe mentioned, we are fine to move forward, and if we're a little better, we will be awarded the project.

So you don't foresee it as sort of a lack of oversight on local management there? It's just a --

No, not at all. You know, I just wouldn't want to get into the whys and wherefores of what we did. It has a competitive -- it's of a competitive nature. So yes, they had full concurrence with what they did from management.

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

We wish to thank everybody for participating in the call and look forward to next quarter. Thank you all.

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