Sterling Infrastructure Inc (STRL) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Sterling Construction Company second quarter 2009 conference call. At this time, I would like to inform you that this conference call is being recorded and all participants are currently in a listen only mode.

I would now like to turn the call over to Jim Allen. Please go ahead, sir.

Thank you, Celeste. Good morning, ladies and gentlemen. As Celeste said, I'm Jim Allen, Sterling's Chief Financial Officer. And I would like to welcome you to this Sterling Construction Company conference call to discuss the results of the second quarter ended June 30, 2009, and the first half ended at that same date, which we released this morning. I'm joined today by Pat Manning, our Chairman and Chief Executive Officer; and Joe Harper Sr., our President and Chief Operating Officer.

First I'd like to remind you that this call may include certain statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act of 1995. Any such statements 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. These uncertainties 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 current company's current policy to provide guidance only on annual results, and we normally do not provide guidance or affirm previously issued guidance quarterly.

Turning to the financial results, I'm very pleased to review the results of operations for the second quarter and first half of 2009 with you. Revenues were up 13% to $120 million for the second quarter, and were up 12% or to up -- $215 million for the six months of 2009 from the comparable periods in 2008. The year over year increases were primarily due to the higher level of crew and equipment resources available in 2009, which, together with better weather in our markets, produced higher revenues.

Gross profit was up $6.8 million or 58% to $18.6 million in the second quarter of 2009, and $10.5 million or 53% for the first six months of 2009, due to better execution on contracts in progress, better weather, and the mix in the stage of completion and profitability of contracts in progress at June 30th, 2009. Gross margins increased to 15.4%, and 14.1% in the second quarter and first half of 2009 respectively, from 11% and 10.4% in the comparable 2008 periods. However, the first half 2009 level of gross margins may not be indicative of gross margins that the company will achieve in subsequent quarters of 2009 and in 2010.

Operating income was up 79% to $8.7 million (sic - see press release) in the second quarter of 2009 and 82% to $23.4 million in the first half of 2009. The percentage increase in operating profit was higher than the percentage increase in gross profit because our general and administrative expenses net of other income as a percent of revenues was relatively flat between 2009 and 2008. G&A expenses do not vary directly with the volume of work performed on contracts.

Net income attributable to the company stockholders was up 81% to $9.3 million in the second quarter 2009, and 80% to $14.9 million in the first half of 2009, for the reasons we've just discussed. Net income per diluted share attributable to the company stockholders was up 84% to $0.68 per share and up 80% to $1.08 per share on 13.7 million weighted average diluted shares outstanding in 2009.

Working capital was $113 million at June 30th, 2009, which was up $18 million from December 31, 2008, while stockholders' equity was $174 million, which was up $15 million over year end 2008. Both of these amounts are important quantitative measurements used by our surety in setting our bonding capacity. Additional financial and business information may be found in our 2009 Form 10-Q, which we filed with the SEC this morning.

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

Thanks, Jim. Good morning, everyone. As we are reporting on a record quarter and a record first half, this should be an easy discussion. Gross margins remains very strong, for all the reasons I brought up in our last call. Weather has remained exceptionally dry, with almost no downtime. Costs on petroleum related products has remained stable at a relatively inexpensive level, helping earnings via lower estimated fuel costs on jobs, as well as gasoline for our on road fleet. Emphasis on attention to details and short to midterm planning at the project management level is paying off with good execution on most projects. We are also realizing cost savings on other budget line items, like workman's compensation expense, where our safety program continues to perform very well.

As you recall, we indicated last quarter that reductions in our workforce were likely. As of June 30, our headcount was down 7% from year end to 1,172 employees. With reductions in revenues from current levels, we now expect an additional reduction of approximately 20% within the coming 10 to 12 weeks. Having said that, we are hopeful that forecast will be mitigated with successful business later this month.

For the last several years we have continuously made substantial investments in our company's infrastructure. Over the three years ending December of 2008, we made capital expenditures in excess of $71 million to put in place the plant, equipment, maintenance, and office facilities we believe necessary to best compete in our marketplaces. In the same time period, we continued to change policies and procedures to accommodate the rapid growth that we were achieving. We strengthened the quality and depth of our management team, adding some exciting young talent and promoting those who have shown the intelligence and experience to make good decisions on a timely basis. I believe what you are seeing in the first half results and will likely see in the third quarter are the dividends of those investments. I'm really pleased that we have had the opportunity to show our stockholders what their company is capable of.

There's nothing new to report on the M&A front except to remind you that geographic expansion through acquisitions is still a very important element in our business plan. Pat?

Good morning, everyone. The second quarter results were better than we had hoped for by a wide margin and we are truly pleased with our performance. As we move into the second half of the year, though, the challenges to add backlog and maintain reasonable margins remain. But as you can see by our first half results, the margins we attained can often exceed the margins that we bid on individual projects.

That being said, July ended up a productive month. We picked up a total of $77 million of new work on three jobs, and the August TxDOT letting provides the largest opportunity for awards we have seen to date. Coupled with various municipal projects in and around Houston and several projects in Nevada and California outside Reno, we are turning in over 30 bids in the next 45 days with an estimated value of close to $700 million. This large amount of work will hopefully have a positive effect on our markets. Plus, with all of the major commodity prices down significantly, we expect that the flow of work should increase. The bid prices being received by the various owners are running 20% to 30% under engineers' estimates, therefore using less of the annual budget than anticipated. This should allow for additional projects to be fit in in the current fiscal year.

The Texas legislature in special session reauthorized the Department of Transportation and passed an increased budget for 2010 and 2011. This removes a significant concern for us as we look towards future business. The 2010 budget is anticipated to be $4.2 billion, including stimulus funds, up from a recent low spend in 2008 of $2.1 billion. We believe this evidence is, once again, Texas's commitment to the new build and rehab of the infrastructure, and our long-term success here in our home state.

On the national front, the House and the Senate are in the process of negotiating a new federal highway bill with House [Transportation Committee] Chairman Oberstar pushing for legislation that would authorize $75 billion per year for a six year period for spending on infrastructure. And for the first time, we are hearing talk of raising the gas tax as a method of funding this increase, which is certainly warranted as it's not been done since 1997.

Finally, we are continuing to explore the opportunities that we see in the marketplace, both to make acquisitions and to participate in joint ventures on larger projects to further broaden our overall footprint. Now, if there are any questions, we'd be happy to take them.

(Operator Instructions). Your first question comes from the line of Craig Bell with SMH Capital.

Good morning, guys. I just wondered -- are you seeing any changes, any material changes in the bidding environment? Do you think it's becoming a little bit more rational or normalized than what it was in past months?

Oh, I think we'll see that over the course of this next month. We are hopeful that will be the case.

Okay. Then in terms of the headcount reduction that you have had so far and that you are expecting, if you get -- in the next couple of months here you get a couple of big jobs and you need to get the people back, can you ramp that up pretty quickly? Are these positions that you can fill pretty rapidly?

Craig, this is Joe. I expect that that will be the case. I mean, we've got -- I think there's 20 projects we are bidding here in the next couple of days at the highway letting, and hopefully lightning strikes and we'll be able to reduce that reduction, I guess. But even for those people who have been let go, I believe that they'll be readily available in the next 90 to 120 days to come back.

Okay. Great. When are you guys having the analysts day in Hawaii?

I'm getting my applications for that.

We'll get back to you. The bonding company and the bank are interested, too, so there may be something in the future here.

Right. Thanks a lot. I'll get back in queue.

Next question comes from the line of Rich Wesolowski with Sidoti & Company.

Thanks, good morning.

Morning.

Was the gross margin reported in June mostly the result of contract closeouts? Or of jobs that are still ongoing?

Well, we have jobs closing out every month. But the gross -- that is jobs ongoing for as well for the most part.

I mean, obviously with backlog falling down the way it is, there is a lot of the larger projects that are closing out now, and you are seeing a good, positive impact from that. Also, the savings on fuel and petroleum related products are continuing to have a positive impact for us.

Okay, so without going painstakingly into the front half versus back half comparisons, should we chalk it up to management's typical conservatism that the top end of the guidance wasn't raised? And you will see at least some drippings of this positive phenomenon the second half as well?

We will see continuing positive impacts as we work through this backlog, I believe. But I think guidance is likely correct the way it is.

Okay. The Texas DOT budget you gave in your 10-Q is about $2 billion shy of the previous estimate, and it looks to me like the bond sales wouldn't be included, although I saw the legislature had approved them. Am I missing something there?

No, you're not. When -- if you look over at the bond sales for the two years, and they are in there. $1 billion of that of course is for the revolving fund that they would loan out to various parties to build and that they would get notes back and as they collect that monies, or as they sell those notes they could use the money -- loan the monies out again. But it is in there, Rich. And it's very difficult to get the correct numbers out of the state before they actually pass the final bill.

Right. Okay.

Rich, it's been really difficult to get our hands around this. Some of the data being put out by the state is on a cash budget basis, so it is their expected cash spend during their fiscal year as opposed to new highway lettings. Some of the better information, I think has come out of the AGC. But Jim has been busting his backside here to try and get us realistic letting numbers, and we think that is what our numbers are reflecting.

Okay. Your Q states that you have not bid contracts at loss estimates in order to build backlog. What does a loss estimate translate to on the income statement gross margin line?

A negative margin, I suppose.

A negative gross margin?

Right.

Yes.

Okay. And then lastly, you seem to paint a picture that the current bidding environment is aggressive. It will affect margin for the next two quarters, and then perhaps or hopefully improved conditions will allow for margin to return to historical levels. Considering that many of your jobs last a year or longer, wouldn't you expect today's bidding to affect at least the first half of 2010? And then looking further ahead, do you gain any evidence now that general contractors are beginning to fill up their back logs and that the bidding will turn lenient in August, September et cetera?

Oh, I think that's pretty much a work in process. We -- there's certainly been a large amount of work that's bid over the last 90 days. And then as we mentioned, a big letting here in the next several days for TxDOT. So we are hopeful that that's going to change some things around. As far as the margins that we're bidding and how they portend to 2010, I think as durations go up, our margins, at least, will be higher than on short duration projects. And as I mentioned in my comments, we can still improve those as we move along.

Great. Thank you.

(Operator Instructions) Your next question comes from the line of John Rogers with D.A. Davidson.

Hi, good morning.

Good morning, John.

Just getting back to the TxDOT environment and the budget there. The uptick you are looking at or expect in terms of market activity for the fiscal year 2010, is that something that's -- based on your experience we start to see right away? Or are we going to be in a situation where it is going to be heavily back end weighted again?

We don't have the lettings information for the by month for next year yet. We have seen September. It's not a particularly big month. I guess we just don't have the visibility to say which months it might come in. Joe and Pat's been around this business a long time. They may have some other observation, but I surely don't.

Yes, I think that's correct. Visibility as far as what months will come on, we'll just have to wait and see.

I'm hopeful it will be toward the end, or -- yes, toward the end of our fourth quarter into the first quarter of next year, John. But I think with the stimulus money becoming available, there's been a pretty rapid scramble here to get work out. So, I'm hopeful that we are going to see a lot more of it in the first half of the state's fiscal year than we will in the second.

And that's what I was wondering. I mean, are they actually trying to take advantage of that stimulus money?

I believe they are. And I'm certainly hoping they are.

Okay. And then, just back to the Hawaiian project, and your thoughts there. I mean, that is out of your, what has been your historical geographic market. And I realize you saw an opportunity there. But are you looking outside your historical geographic market at other projects? I mean, are we going to, in this kind of environment, will we see more of that?

Our Nevada group has historically always watched the federal lands projects, and in any geography where wages don't cause them to be not competitive. So, I mean, they are looking at anything in California, for instance, anything in the state of Nevada. They watch the jobs, but they really can't do very much with like Utah or Arizona just because of the wage differential. They wouldn't have any mobility of their workforce. But our group out there has been watching that particular job in Hawaii for a little over six months. It wasn't a surprise to us, although I realize it was to most other folks.

And Joe, when you talk about the wage differential, is that union versus nonunion primarily for that?

Yes.

Okay.

Yes, I mean the federal lands minimum wages in their contracts are the prevailing wages in the area. So in Hawaii, in fact on that project, it's the same union local for engineers for the operators there on that project as we have in Reno. So we have great transportability of the workforce. But yes, that's the differential, John. If minimum wages in the contract are in the teens, we just can't use any of our existing workforce to build a project.

And then just lastly, very quickly. In terms of -- you mentioned oil prices or gasoline and diesel prices being lower. Are you still hedged there? And then secondly, in terms of steel aggregate, some of those commodity prices, are you seeing any benefit? Are you able to take advantage of some of the lower costs there?

We completely unwound the hedges maybe a month or 1.5 months ago, John. We are watching it though, and it wouldn't surprise me that we don't reinstate that here in the next quarter or two. As far as other commodity prices, most of them have pulled down pretty dramatically. But it doesn't really have any impact. We still stay real close to the discipline of committing to our vendors very timely after we are announced low bid, and lock in prices. And sometimes it's to our advantage and sometimes not. But that's still the philosophy that we follow.

Your next question comes from the line of Jack Kasprzak with BB&T Capital Markets.

Thanks, good morning, everyone.

Good morning.

I was going to ask about Hawaii as well, but maybe some more specifics just as a practical matter, how were you going to pursue that project in terms of moving any workforce there, or I assume you will be renting equipment. Will there be any other sort of mobilization? Could you maybe talk a little bit more about that?

I have got to do it a little carefully, Jack. Because we are still making some decisions about that. Some of the local suppliers who did not quote us at bid time are coming to the forefront, and it may change what our original plan was. But no. We embedded in the project, we thought, sufficient money to mobilize the majority of our equipment, all of our plants, and we planned on bringing maybe eight to 10 very key people for building the project.

Okay. Got it. I was going to ask, too, specifically, in Texas, over the past few years, there has been just general inflation in materials. What are you seeing with things like stone, aggregate, concrete in particular, in Texas? Any noticeable change in the pricing of those materials?

I don't think there's been any noticeable change. There's been some more competition by some of the larger vendors on aggregates, and a significant part of the cost of aggregates is the trucking, and the trucking has come down. So that's moderating the cost some.

We've seen cement pullback and lime to a little lesser extent, but I think most of the stone and ags have stayed pretty constant.

Thank you very much.

Your next question comes from the line of David Wells with Thompson Research.

Good morning. Looking at the gross margin benefit in the quarter, can you quantify like X basis points were due to weather, and X basis points were due to the mixed benefit you talked about earlier?

No, that would be a very difficult quantification, if at all possible. Suffice to say that the weather has been very good. The execution on the projects has been good. Everything just came together at the same time.

If you look at the backlog number that you put out, can you give a sense of how much of that is going to be work that is at better margins relative to projects that have been awarded more recently that reflect the tougher margin environment you have been discussing?

I guess as a general comment, you can expect that anything added fourth quarter of last year through now is likely going to be at margins below historical levels. And I think I'm safe in saying that results for this quarter are going to be awful tough to match again in the near future. I'm not sure, David, what -- I can't get terribly specific with that. But obviously our bidding market has been very competitive for the last three quarters. And likely going to be, I guess, another quarter or so. I think by then with the flow of work we are seeing, at least we are hopeful that capacity is pretty well absorbed and we should see some return to normalcy.

Okay. That's helpful. Work that's in there -- is there any stimulus work that's reflected in that? Or is the Harris County project the first stimulus dollars that you are seeing flow through?

There was one other project that we got that was stimulus money on it. There are certainly a number of projects that we're bidding in August with stimulus money on it, but we haven't quantified that. We are more in the throes of getting the right numbers together.

Perhaps my question is, are you noticing anything on stimulus work relative to regular lettings, just in terms of increased costs due to the so-called stringent reporting requirements that go with that? Is there even a margin differential for stimulus work relative to other work that's out there?

The stringent reporting requirements are more out of -- in quote -- a nuisance than an actual cost. I mean it may require us to put an additional clerk on or something like that, because they're interested in knowing the number of jobs that was created through the stimulus jobs. But not a significant number. And I don't think that's particularly, per se, changing anybody's bidding mentality.

Are you seeing any projects that have been let previously where the DOT's -- like TxDOT is coming back to you and trying to rework the contract just because it is a more competitive environment? Is that even a risk that you could see something like that happen?

No. Once we sign a contract or even once they let it, they have never, to my knowledge, come back and tried to renegotiate.

As Pat said in his comments, also the bids are coming in 20% to 30% below what the engineers' estimates are, and those are TxDOT's engineers' estimates. So they are seeing the benefit of the markets out there now.

And I guess lastly, I think on the last call, you talked about some of the private competitors that you are dealing with in your markets, where they were just trying to refill their backlogs. Have you gotten a sense of the competitive environment in your peers in your areas where you are competitive -- if some of their backlogs have filled up and they're going to be -- I guess perhaps there was a question about this earlier, but if the bidding environment will be more rational just by virtue of the fact that they have got more food to chew on here?

Certainly that is I would guess a natural phenomenon. The question is how quick it happens and whether it will happen -- as Joe mentioned, this month or next month or the month after. So we have to sort of wait and see. But it is certainly moving in that direction.

Great. Thank you very much.

David, I want to welcome you and Thompson Research to -- as our new analyst. And also, to the conference call.

Great. Thank you very much.

Your next question comes from the line of Rich Wesolowski with Sidoti & Company.

I was curious about the municipal work in Texas. Traditionally that's been more profitable than TxDOT dollar for dollar. Are you seeing margin pressure there as well or no?

Yes. Probably worse than we are seeing on most highway projects, Rich. And we have been seeing that for two or three quarters now. I really think that we are, we are very close to a low point in that market. We are starting to see irrational bids. We are seeing bids so far below cost that there is no cash flow, at least based off our costs, and I think we're at the bottom point and the light at the end of the tunnel's starting to brighten up a little bit. What does that mean? It might mean another quarter. It might mean two quarters. But clearly there's going to be bonding company work coming on the street here coming in the next year or so.

We have seen one competitor already who was on the municipal side and moved into the state highway side, now has moved out of the state highway program. So I mean, it's happening.

And you have no further questions at this time. I would now turn the conference back over to management.

We thank you for joining us today. If you have any additional questions, please do not hesitate to call us. As I have said earlier, we have filed our 10-Q today, and I encourage you to read it. And we wait, we are anxiously await until the end of the next quarter to talk to you.

Thank you, everyone.

Thanks, guys.

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