Sterling Infrastructure Inc (STRL) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Sterling Construction Company 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. As the gentleman just said, my name is Jim Allen. I'm Sterling's Chief Financial Officer. I'd like to welcome you to this Sterling Construction Company conference call to discuss the results for the first quarter ended March 31, 2009 which we released this morning. I'm joined today by Pat Manning, our Chairman and Chief Executive, 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 are subject to risk 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, which could cause actual results to differ materially from those anticipated.

Accordingly, any such statements should be considered in light of these risks. Predictions that we may make at any time may not continue to reflect management's beliefs and we do not undertake to publicly update them. It is the Company's current policy to provide guidance only on an annual basis, and we do not issue guidance or affirm previously issues guidance quarterly.

Turning to the financial results for the first quarter of 2009, revenues for the first quarter were up 12% to $95 million. The majority of the $9.9 million increase in revenue was due to higher revenues earned by our Nevada operation. Our projects in Nevada are currently more heavily weighted in Southern Nevada where the weather is less seasonal and work can usually progress during the winter months during this past quarter than in Northern Nevada, where our projects were principally located in the first quarter of 2008.

Gross profit was up $3.7 billion - million -- I wish it were a billion but $3.7 million or 46% to $11.8 billion -- million, again. I'm getting my billions and millions mixed up. And $11.8 million in 2009 due to gross profits earned by our Nevada operation on it higher revenues, also due to the mix and the stage of completion and profitability of certain contracts in progress during the quarter. Gross margin increased to 12.5% in 2009 from 9.5% in 2008 for those reasons; however, the 2009 level of gross margin may not be indicative of the gross margins the Company will achieve in subsequent quarters of 2009.

Operating income was up 87% in 2009 to $8.7 million. The percentage increase of operating profit was higher than the percentage increase in gross profit because our general and administrative expenses, net of other income, was 3.3% of our 2009 revenues versus 4.1% of our 2008 revenues. G&A expenses do not vary directly with the volume of work performed on contract. Net income attributable to the Company's stock owners was up 78% to $5.6 million in 2009, also for the reasons we've just discussed. Net income per diluted share attributable to the Company's shareholders was up 78% to $0.41 per share on 13.7 million of weighted dilutes shares outstanding in 2009 and 2009.

Working capital was $99 million at March 31, 2009, which was up $4 million from December 31, 2008 while stockholder's equity was $165 million which was up $6 million over year end 2008. Both of these amounts are important quantitative measurements used by assurity in setting our funding capacity. Additional financial and business information may be found in our 2009 Form 10Q which we filed this morning.

Now, turning the call over to Joe Harper.

Thanks, Jim, and good morning, everyone. Sterling's first quarter '09 was better than our expectations. Many factors driving that gross profit line.

First, we had exceptionally good weather which translates to better productivity and days worked. As a result, with a few exceptions, our estimated profits increased on the majority of the work in process.

Second, we came into the year with pretty conservative estimates for fuel costs on all of our contracts. During the quarter, we adjusted those estimates by over $1 million, having some impact on our results. We believe that our revised estimates remain conservative and if today's pricing were to carry through to project's completion, we would realize additional margin pickup in future quarters.

Third, we made some adjustments to our operations which appear to have had a positive impact. Sort of a return to basics, assurance that crew sizes are optimal, closer attention to trucking costs, reductions of non-producing personnel. With this increased productivity, coupled with challenging markets which Pat will address in a few minutes, backlog has pulled back somewhat. We are faced for the first time in many years with resource availability within the next couple of months. As a result, we are likely to be reducing our workforce in Texas, hopefully on a temporary basis.

Along with that reduction, we have reduced our capital expenditures forecast for the year and now expect to spend less than $3 million for equipment purchases. We are, however, going ahead with our building program in Dallas and San Antonio, putting in place an office building and maintenance facility at each location. In Nevada, we have picked up a couple of jobs recently and expect good utilization of resources through the balance of the year.

I want to mention that we've now bid three projects in Texas which were similar to the contracts regularly built by Road and Highway. Prior to our acquisition, we would not have considered these jobs. While we have not been successful low bidder as yet the results indicate that we can be competitive in this market. We bid some storm sewer projects in the Las Vegas area, we're bidding a sanitary sewer job in Reno in the next couple of weeks. While this market is currently very competitive, I still believe that it will provide opportunity in the long run.

On the M&A front, we have added a couple of candidates to our pipeline in the last month or so. As I indicated last quarter, it will take an unusually good deal for us to perceive during these challenging times. We will, however, continue to adhere to our business plan, calling for an acquisition every 18 to 24 months, depending on size. We're cautiously optimistic that the right deal will close once we see some normalcy return to our markets.

Pat will give you some details on our marketplace, but I want to assure you that we have the experience of dealing with tough competition and the necessity of weighing temporary excess capacity against available margin. Pat?

Okay, Joe. Thanks a lot. I second you comments on the first quarter results. We performed very well and continue to do so. Our challenge of replacing backlog and maintaining utilization in the third and fourth quarters which if we can would have a positive effect on our results for the year. Along with the jobs Joe mentioned in Nevada, we have picked up some jobs already in Texas this quarter. The municipal markets continue to be very competitive with bidders on jobs under $10 million ranging from $10 million to $14 million.

On the other hand, we have bid four projects recently for the Harris County Toll Road Authority with six to seven bidders typical, and have finished either second or third on all four. The last toll road job we bid we were second by $500,000 or 1.5% on $46 million. We have another one bidding this afternoon and one more advertised for $63 million, bidding on June 1 and more to come.

In addition, we have seem very little of the stimulus funding that is expecting to come and promised by the federal government. Nothing new on light rail and still a fair amount of work to come from TxDOT before their August 31 fiscal year end.

To date, lettings have only amount to $1.9 billion. John Barton, Director of Engineering at TxDOT, Friday promised $500 million lettings through the balance of our fiscal year which amounts nearly to the total that they let in the first nine months. The 2010 budget submitted by the House which is the lower of the two submitted approves a total of $4.0 billion for fiscal 2010, including stimulus funds, but not including amounts of $2 billion available in bond funds and requested by TxDOT. The Senate bill is $1 billion higher.

We should get clarity on the compromise bill in the next several weeks. I'm still hopeful that with the opportunities available, backlog will begin to improve in the latter half of the year. I believe the market will provide the work necessary to get us back to where we want to be. The only issue is the timing.

With that said, we'll entertain your questions.

(Operator Instructions) Our first question comes from Jack Kasprzak with BB&T Capital Markets. Please, state your question.

I guess, Pat, in your comments, it seemed like you were indicating that your lettings in Texas have been slower to come around, I guess slower than what we may have thought one or two months ago with the stimulus kicking in. Is that the case versus previous expectations and why do you think it's been a little slower?

Yes, it's always been an issue of the timing, Jack, and what they said early on was that we would have two lettings a month for the balance of the fiscal year and we did that one month in April and then they stopped for whatever reason and now they're saying $500 million over the next three months which would be very positive. We have to sort of take a wait and see outlook.

With regard to your guidance you guys gave, earnings guidance, sales and earnings guidance on the last conference call, didn't update it in this press release. Is there a reason why? Is that typical practice? If you could address that?

As I said, we don't attempt to update it or reaffirm it quarterly. We make it at the beginning of the year and that's our policy.

If it were going to be materially different, would you necessarily update it? Just trying to bracket -- not addressing it, does that mean we're still comfortable with it?

This is me speaking only at this moment. But if it was going to be misleading to leave it out there, then we would say something.

Right. Back to Texas for a minute. The project for 2010 which you indicated was $4 billion on the low end, doesn't include $2 billion of bonds. When will we know whether they're going to issue the bonds?

According to the House bill, they can go to the Governor and the Legislative Budget Board and seek permission to have those bonds sold and a portion of them used for construction in 2010, 2011. There are some other conditions such as they must reply to the Sunset Commission's recommendations and they've got to show the benefit of them. But I don't think any of them are insurmountable. I think that they could get -- if the TxDOT wants to get that money available, it seems to me they have the ability to respond to it and then it will not help to go to the House or Senate, obviously they're not meeting. You only have to go to the Budget Board and the Governor.

When would you think you'd know the final 2010 budget for Texas?

Excluding those Proposition 12 bonds, the House is meeting today to consider a final passage of this bill, then presumably it goes to some committee to be resolved between the House Senate. The Senate bill is $2 billion more than the House bill. So, once that's resolved and approved by both houses and then to the Governor -- it could be a couple of months, I would say. It could be longer too.

I guess August is the fiscal year end, so presumably they'd have it in place by then.

Not necessarily. But let's hope so.

With regard to the competitive environment, I know you guys have been talking about this, at least the last couple of conference calls. So, that doesn't seem like it's a terribly different situation than what we've been - you guys have been anticipating. What seems like what maybe what's a little different right now is just the timing of stimulus related funding and project opportunities? Is that kind of the situation as you see it today?

Yes. That's pretty much it, Jack. Timing continues to be a question. We did anticipate, I believe, the competitiveness of the marketplace and we're seeing that.

Okay. Great. Thank you very much.

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

Good morning. How's it going?

It's going good, Rich.

Can you discuss your broad thinking on how aggressive you can get on current bids to keep people busy in the hope of keeping them for better works later this year or next year versus on the other hand reducing the number of crews working for the Company.

Joe? You want to take that?

That's a -- it's a tough call, Rich. I mean, Pat and I have been through three downturns that were at least this bad or maybe worse, so we've got some experience doing that. But we're going to pretty low on that margin line to keep the very meat of the organization together. I think we're still several months away from that kind of consideration. Hopefully we don't have to go there.

Okay. Do you have any data points that you track internally whether or not you can give them to us here to give you a sense of when competitors would be filling up their backlogs and when the bid list would start to shrink?

We track a lot of things internally but I don't know that we generally like to discuss that. We have a good view of the marketplace and understand where all the bidders are and then review all the bids that go in as they occur and we get a report back of where everybody finished first through fifth or sixth. All that goes into the input I think that we consider every time we put in a bid.

Let's talk near-term. Do those metrics say that the $1.5 billion in TxDOT work to be let before the end of their fiscal year is going to be as competitive as what you've seen recently.

I guess I would not. That's, again, that's $1.5 billion over the next three months and we only say $1.9 billion over the first nine months. So, in my mind that would lead me to believe that it would not be as competitive.

Rich, I think the best indicator we've had recently, especially in the Houston DOT market are these toll road projects that Pat mentioned. We were second on two or three. We were second on three of the four of those projects and the same two bidders were the successful bidders on those four. When we look to the rest of the field who bid, there's a considerable jump from our numbers to theirs. So, to me, that's a very good indicator. We've got two competitors who needed to book some backlog. They've done that. And we have margin uptick room to the rest of the field. I'm looking at that as a pretty positive event.

Okay. Just a point of clarification on the House versus Senate bills for the 2010 TxDOT money, does the Senate bill also include the ability to sell the bonds?

I did not see anything mentioned in there. I need to go back and review that detail. I did see it specifically in the House bill.

So, it may be in the Senate bill? We're not sure.

That's right.

Okay. And then lastly, more just a comment. Sterling has updated its annual guidance at virtually every quarter since the Company had begun to give guidance which I think was in late 2007. So, if you did chose to omit that from future releases, it would be a change in the policy, for better or for worse.

Thanks, Rich.

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

Hi. Good morning.

Good morning, John.

A couple of things. First of all, the award you received in Nevada in April, you mentioned ones in Texas in your release, you referred to them in your comments. Were they large awards?

It falls around the $10 million range, John.

Remember, we don't discuss any individual awards unless they $20 million or greater.

Right. That's what I was trying to --

No announcements, anyway.

No announcements.

Okay. And then I think it was Joe, your comments on fuel, $1 million of lower costs relative to what you assumed going into it. How much of that reserve or however you would refer to it, have you eaten into at this point? Is that $1 million left?

There's probably more in there, John. It just depends what fuel actually costs as we go through, as we burn up that backlog.

Okay. But that's the fuel that you've put into your backlog, into your bid numbers in projects that have been award?

That's right. Throughout 2008, we had increased those rather substantially as fuel prices continued to escalate. And we pulled some of that back out at the end of the year, but it appeared to us that the volatility had been so great that we weren't comfortable projecting it as we would've done historically. We lost quite a lot of money in that.

And then in terms of your comments on acquisitions, I guess 24 months would be towards the end of the calendar year here. It sounds like at least there might be some opportunities nearer-term? Is that what you're implying? Or are you just more willing to wait this out a little bit?

I'm sort of implying that. That's right. We've got a couple deals that I would love to be doing, but with the market uncertainty, I'm reluctant to proceed. I think as I made in my comments, if we see some return to normalcy, there's enough prospect in our pipeline that I'm pretty comfortable a deal would happen relatively quickly.

Okay. And just lastly, you referred to this a little bit, but in terms of the end markets, the retail markets that you're looking at, it sounds as if Houston's the most difficult and the others are a little better and you may be in West Texas soon and Southern Nevada looks better than Northern Nevada? Are those the right implications?

I would say generally speaking that's true.

Okay. Any other in terms of what's scheduled to come out for bid through the rest of the year, is that also true? Are there other markets that look -- I guess tangential markets or near buy markets that might look appealing that you could talk about?

We have offers in Houston and that's looking like it might be fairly strong the rest of the year. That's an adjacent market. Dallas still looks like it's going to be fairly strong, especially with the toll road work up there. I would say San Antonio right under that and then Houston and Harris County below that.

Great. Thank you. And congratulations on the quarter.

Thanks, John.

(Operator Instructions) Our next question is from Craig Bell with SMH Capital. Please, state your question.

Good morning. Pat, I just wanted to follow-up with you on some of the TxDOT stuff for later this summer. I remember seeing something recently for the August timeframe that sort of indicated that the Dallas market along was going to have $1.4 billion out for letting as they were going to get into the redo of I-635. Is that in your numbers or have you heard anything specifically about that?

I think those, outside of the state highway funds, those are CDAs. So, we have heard rumors of that. I have not seen anything advertised.

Okay. And then I'll ask a similar question. I've also seen about $1 billion over in the Fort Worth area as well. That might be the same thing on a CDA?

I think that's correct.

Okay. And there's obviously been a lot happening recently in the Texas legislature, whether it's with funding options or with Suntech on TxDOT or the Transportation Commission. Is there anything you've seen there that concerns you or has made you optimistic? Either in terms of funding or in terms of implications if they do away with the Transportation Commission and they get more of an elected position?

I don't know. I think it's optimistic that the House bill seems to me to be fairly reasonable and the Senate bill is more than that. But they're talking about using the funds from the $5 billion bond election that the voters passed. And I think there's some internal squabbling going on and the Suntech Commission, as I understand, happens once every 10 years, so they have to kind of decide if they want to continue the approach going forward or if they want to modify it some?

Just lastly, I was wondering if in terms of the overall bidding environment, do you see any significant differences between Nevada and Texas?

I don't know. What do you think, Joe?

We clearly have fewer bidders in Nevada, but we're also dealing with a substantially smaller budget. Obviously, a much smaller population base. The positive thing in Nevada is that they're using stimulus funds to build primarily work that Road and Highway has always been competitive in. It's a very positive impact out here whereas in Texas we don't yet have good visibility how that stimulus money is going to be used.

Okay. And just one more related to the stimulus funding. I think in the last month or so the stimulus money that was spent in Texas was primarily on work that isn't sort of your wheel house. Do you have any view into future lettings and if you're going to see better projects for you guys?

We're hopeful that we see better projects for us, that first, extra letting that they bid in April, I think they got most of the shovel ready projects that they had for the asphalt overlay which is something that we typically don't compete at.

Great. Thanks a lot, guys.

The other thing I might add, Craig, is the other positive thing that we're seeing out of the states is that they typically spend the monies they get back from the federal government some $700 million to take care of the Department of Public Safety and there's some fairly strong talk about taking that out of the state highway budget and putting it into the general fund.

Thank you.

Our next question is from Eric Prouty with Canaccord. Please, state your question.

Great. Thanks a lot. Just to switch over quickly from a federal viewpoint, what are you guys seeing and hearing as far as the federal highway trust beat goes? How long do you think that will take to get worked out down in Washington? And also with what you're doing on the CapEx fund, if we were to get an uptick in highway trust funding, what would that mean for your potential capital purchases going forward?

Joe?

Yes. Anybody who can figure out how fast Washington's likely to resolve the issue is much better versed than I am, I guess. I really can't comment on that, Eric. In terms of our own cap spend, we came into the year with a budget in the higher or mid teens and that's down substantially from prior years. We've got the balance sheet to ramp that up very quickly if the opportunities say that's what we should be doing. It's going to be sort of a wait and see.

If we saw highway trust funding levels go up to the $400d billion, $450 billion level that folks have been kicking around out there, would that necessitate a nice uptick in CapEx spending, or do you have that type of capacity handled at that level already in house?

I think I've given indications in the past. Our cap budgets in '05, '06, and '07 - '06, '07, and '08 were north of $20 million a year. A third to a half of that is replacement CapEx. The rest of it was forward expansion opportunities. So, we have all the equipment we need for the kind of run rate you saw throughout '08. There would've been a little bit of expansion in our guidance revenue line for this year. But I think you can do your own math on that.

Sure. Great. Thank you.

Eric, the other thing I might add is I've seen that $450 billion number myself for six years and that's a significant uptick in what the federal government spent with [Safety Loop] over the last five years. It seems to me that President Obama has been very proactive in the stimulus funds and the necessary infrastructure funds. So, again, as Joe mentioned, I'm not sure that either one of us could figure out the timing, but I think it's a positive thing.

One thing that I would add is -- I don't think this has been mentioned, that in President Obama's proposed budget for 2010, he included $72.5 billion for the Department of Transportation. Not all that, all of that will be spend on the highways, but that is up substantially over the $40 billion that was coming out of Safety Loop.

Great. Okay. We'll keep our fingers crossed for a nice high number out of the government. Thanks, guys.

Alright. Thank you.

Our next question is from Rich Wesolowski with Sidoti and Company. Please, state your question.

Joe, a lot has been made of the bids across the country, not just in your markets, coming in way below the engineer's estimates. Can you give us a little background on how those estimates from the engineers are developed, particularly with respect to commodity cost?

In our experience, Rich, I believe those estimates are based on cost to the owners over a previous period and I'm guessing it's probably over the previous year. It might involve several years. So, what they've done is with the commodity costs as high as they were in 2008, we've seen engineers' estimates going up very dramatically and now we've got steel at about half the cost of a year ago, we've got fuel at less than half the cost of a year ago. All the commodities have pulled back down to historical lows or last five year lows kind of numbers. So, the estimates are just clearly too high.

Do they ever adjust them just kind of eyeballing it for the rapid change or they just leave them the way they are?

I don't believe so. Is Brian sitting there with you guys?

He is. Often we get questions from engineers about what things they're doing. But it's rare that the large cross section of engineers will do that. So, select engineers that we work with on a regular basis will ask intuitive questions like that, but overall, in the engineering community, we're not getting those questions.

Yes. Generally by nature, Rich, it's more of a policy decision as opposed to a thought process.

Okay. So, if we see Sterling bid a project that's 25%, 30% below the engineer's estimate, that doesn't necessarily mean that the job isn't sufficiently profitable where it is.

It means absolutely nothing.

Great. Thank you.

Now, if it's 25% to the second bidder, Rich, that's a little different story.

Thanks again.

Our next question comes from Thomas Pfister with RedChip Companies. Please, state your question.

Hey, guys. Congratulations on the good quarter you had and you were talking about the fuel costs and how they've helped lower your costs overall. Have you guys done anything to lock in the lower fuel costs in the future?

It's very difficult for us to lock in fuel costs. We just cannot get quotes from suppliers where they would lock it in for a long-term basis. And so, we've not been able to do that. We've looked at various methods, hedging, et cetera. As of yet, we have not entered into any official hedging program. If you read our Q, you will know that we've tried an alternative to that but we're still evaluating that. Right now, the diesel's staying fairly steady. For right now we're doing okay. Long-term, we still have -- that problem still faces us if prices rise.

Okay. I remember you guys in the past said you wanted to get into many the California market. Has there been any bids placed in that area?

No. We've periodically placed bids in California that are close to our operations in Nevada where we can run them from that same base. If we moved into California in the main course, we would do it through an acquisition.

Okay. And you guys also said you're looking at a lot of merger and acquisition opportunities. So, would those be in additional states other than, say, like Texas and Nevada?

They likely would be. We're pretty well covered in Texas. I mean, there may be some potential for some type of vertical integration in Texas or something possibly out in West Texas. But for the main body of Texas, we have sufficient operations.

Okay. And just one last question on a line item, I saw you guys' general and administrative expenses were lower this quarter that previous quarters. Should we expect that in the future?

I hope not.

I think you're looking at a pretty good, pretty level, pretty lean quarter and we would hope that bonuses would go up some for us. That's about where we are now on this level of volume. Maybe I should say all the guys working here are hoping that G&A doesn't continue to go down.

Okay. Great. Thank you, guys.

You're welcome.

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

Rich, you only get one time now. Maybe two at the most.

There's new rules on that. I'm sorry. I had one more.

That's okay. I'm just teasing.

The amount of your backlog set to be worked off in 2009?

When we announced the annual results, we stated we had $448 million worth of backlog of which $380 million would be completed during 2009.

As we pick up jobs through the first quarter and this quarter, some portion of those will be worked off this year and some into 2010 and possibly 2011.

We don't get into how much other than that annually.

Okay. Thank you.

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

Thanks very much. We appreciate all your time, look forward to another good 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.