Sterling Infrastructure Inc (STRL) 2009 Q3 法說會逐字稿

Good day, everyone and welcome to the Sterling Construction Company third quarter 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 call over to Mr. JIm Allen. Please go ahead, sir.

Thank you. Good morning, ladies and gentlemen. I am 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 for the first quarter ended September 30, 2009 and for the nine months then ended, 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 are subject to risks and uncertainties, including overall economic and market conditions, competitors, customers and suppliers actions, weather conditions, other risks identified in our filings with the Securities and Exchange Commission, all of 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 make at any time may not continue to reflect management's beliefs and we do not undertake to publicly update them.

Turning to the financial results, I'm pleased to review the results of operation for the third quarter and first nine months of 2009 with you. Revenues were up 4.4% to $319 million for the first nine months of 2009, but down 9% to $104 million for the third quarter of 2009 from the comparable periods in 2008. The year-over-year increase for the nine-month period was primarily due to a higher level of crew and equipment resources utilized in the first two quarters of 2009 than in 2008, and better weather in the first nine months of 2009 than 2008. The better weather allowed our crews and equipment to work more productively during 2009 and make more progress towards completion of our contracts than in the 2008 period.

During the third quarter of 2009, we begin to reduce the number of our crews as a result of completing certain projects. And the lower crew level and equipment utilization in the third quarter of 2009 resulted in lower revenues in that quarter. While revenues increased during the 2009 nine-month period, we anticipate that full-year revenues for 2009 will be lower than our revenues for 2008, due to the increased competition, we have had in our markets and the uncertainties surrounding funding at the Federal level.

Gross profit was $47 million in the first nine months of 2009 or up 44.8% to the comparable 2009 period. Gross profit was $16.5 million for the third quarter of 2009, or up 31.6% from the third quarter of 2008. The increase in gross profit for the 2009 third quarter and nine-month periods over 2008 were due to better execution on contracts and progress, and differences in the mix in the stage of completion and profitability of contracts at September 30, 2009 compared to September 30, 2008.

The gross margins of 15.9% and 14.7% in the third quarter and nine-month periods of 2009, respectively, are not expected to be indicative of the gross margins that the company will achieve in subsequent periods in 2009 and 2010. Operating income was up 63.2% to $36 million in the first nine months of 2009, and up 37% to $13 million in the third quarter of 2009 from the comparable 2008 periods. The percentage increase in operating profit was higher than the percentage increase in gross profit because our general administrative expenses, net of other income, as a percentage 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's common shareholders was up 61.2% to $23 million in the first nine months of 2009 and 35.4% to $8 million in the third quarter of 2009 for the reasons we have just discussed. Net income per diluted share attributable to common stockholders was $1.67 in the nine-month period versus $1.04 in the comparable 2008 period, and $0.59 in the third quarter of 2009 versus $0.44 in the third quarter of 2008. There were approximately 13.7 million weighted average diluted shares outstanding in the 2009 and 2008 periods.

Because of the unusually high gross profit margin in the first nine months of 2009 and barring unforeseen events, we expect net income and diluted net income per share to exceed our previously announced full year 2009 guidance.

Working capital was $116 million at September 30, 2009, which was up $21 million from December 31, 2008. And this is after reducing long-term debt by $15 million over the same period. Stockholder's equity was $183 million, which was up $24 million over the year end 2008. Both working capital and stakeholders equity are important quantitative measurements used by our surety in setting our bonding capacity. Additional financial and business information may be found in our 2009 third quarter form 10-Q which we filed this morning with the SEC.

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

Thanks, Jim, and good morning, everyone. We had another great quarter for the three months ended September 30. Many thanks to the project managers and superintendents who were responsible for another surprise on the upside. The weather continued to cooperate through September, and several substantial projects progressed toward completion better than was anticipated. I can't tell you how proud I am that the organization we have assembled has the ability to continue to build high quality on all contracts and produce the kind of financial results reported in our nine-month numbers. For the last three or four quarters, we have experienced substantially increased competition in all of our markets. The causes may be slightly different by region. Contractors bidding projects on which -- that have not been their historical work; contractors entering the market from other geography; reduction in contracts led by the DOT and other municipal owners. The results have been a contraction of new contract availability at reasonable margins.

As we look ahead, we will face some serious challenges attempting to maintain productivity, and at the same time retain the managers and skilled work force necessary to take advantage of market opportunities when they develop. Our executive management team has the experience from past difficult markets. And I'm confident that we are up to those challenges. While some under-utilization of plant and equipment is inevitable in the short-term, I am hopeful we will be successful in keeping idle equipment at reasonable levels.

With backlog anticipated to be at a relatively low level and funding uncertainties in our markets and poor visibility as to time of return to more normal markets, we have decided to discontinue guidance. At the same time, we continue to have confidence that on a long-term basis our markets will provide the opportunity to build backlog and return financial results to our historical levels. Across the country and specifically in our geographic reach, the need for replacement and expansion of transportation and water infrastructure continues to grow. And there seems to be some recognition and consensus in Washington that our Legislature must find the necessary funding. The only question in my mind is the timing.

With that, I'll turn it over to Pat Manning.

Thanks, Joe. We are pleased that in this economic climate we've picked up more new work in the third quarter than we've built. But the fourth quarter has typically been our slowest quarter for picking up backlog, which will put added pressure on our first and second quarters results for 2010. We still believe that this will ultimately correct itself. The economy in Texas remains strong. Unemployment has not spiked up tremendously and is currently at 8.2%.

We believe Congress will enact a new transportation bill, and that they will increase spending across the nation on infrastructure and provide us the opportunity in the marketplace to grow. We also believe that normalcy will return to the bidding environment and we see evidence of that on selective jobs, as it turns the opposite direction. We believe we have demonstrated in this quarter and also in the previous two quarters what Joe has consistently pointed to, that we have the personnel and infrastructure in place to produce dramatic results.

Our goal is to bid and obtain larger products on which generally the margins are better. We have successfully completed our first design and build project for the US Army Corps of Engineers and brought it in ahead of schedule and under budget, i.e., we produced better margin than we originally estimated. We are bidding on a $100 million road project for the central Texas RMA near Austin on November 23. We are doing our first job in El Paso for the Corps at Fort Bliss and are beginning to explore opportunities for the Corps through their district offices in Galveston, Fort Worth and New Orleans. We have been awarded a $1.8 million contract for utility relocation via the joint venture on the light rail project here in Houston, which is part of the first subcontracts to be let. While the August TXDOT letting was robust, the 2010 fiscal year. While the August TXDOT letting was robust, the 2010 fiscal year lettings through November have been extremely soft. through November have been extremely soft. That, plus the balance of the stimulus funding starting in January should provide a strong bidding environment. So while the short-term climate is challenging, the long-term opportunities remain. We have have the personnel and the infrastructure in place to produce those dramatic results that I spoke of.

Now if there are any questions, we'd be happy to take them.

(Operator Instructions). And our first question will come from the line of Kathryn Thompson with Thompson Research.

Hi. Thank you for taking my questions. I have two questions, first off, on backlogs. Could you detail any backlogs that have been added since the quarter end? And, also, are we to assume that the composition of the backlogs are at lower margins?

Yes, Kathryn, we have picked up a couple of smaller jobs under the $20 million range that we announced this quarter so far. And, yes, the margins in the backlog would be lower than historical levels.

In early October, you were bullish on 2010 based on the Texas DOT budget and letting schedule. What, if anything, has changed since then and specifically, are you -- are the changes related to continuing -- operating under a continuing resolution or are there other factors we need to take into consideration?

Well, I think all of those things and that which I mentioned, which is even with the stimulus funds, the lettings outside of August for TXDOT have been much less than we anticipated. I think that means that when they add the stimulus funds going forward, that will be a positive for us next year. There, of course, is the rescission that you mentioned, which is yet to be fixed, and the uncertainty with SAFETEA-LU at this point.

So is it your impression in talking to TXDOT that they're holding back on projects to be bid until they get some resolution with the continuing resolution?

I think that's part of their problem. I think it's been a design problem in getting out the major projects quick enough. So both of those, I think.

Okay. Is there anything else that should be taken into consideration just on the change in TXDOT and their budget specifically?

I'm sorry, can you repeat that?

Is there anything else we need to take into consideration about the TXDOT budget that would have changed your bullish opinion on it into 2010?

Kathryn, this is Joe Harper. I have not seen anything that would indicate that the budget has diminished any, but, the impact of the $8.7 billion shortfall last year that still isn't resolved had a $720 million plus impact on us, and I believe that's impacting our lettings currently.

Okay.

That is without that money being freed up again, I believe they are holding back some.

So it's really a function of the continuing resolution?

I think that, Kathryn. I'm not sure of that. But it's clear that if the state is going to let what they have told us that they're going to let, the size of our highway lettings has to increase rather dramatically. I think that will start next quarter.

Okay. That's helpful. And just to clarify, how much stimulus work do you think are in your backlogs on a percentage?

I think only one project for $30 million, the 610 project is the only stimulus project, I believe.

Okay. Great.

Kathryn, to my knowledge -- this is Jim Allen. To my knowledge they've not been identifying any of the other projects as strictly stimulus. That does not mean, though, the stimulus money is not being used.

Okay. Great. And finally, today, could you give any clarity on -- just other coverage, any clarity on aggregate or cement pricing trends in the State of Texas?

Aggregates have stayed pretty level, I think, without much fluctuation. And cement prices have been down some.

Actually they're down close to 20% from their peaks.

Yes.

But, yes, that was from the peak in maybe the summer, not this last quarter.

Okay. Great. Thank you very much.

You're welcome.

Our next question will come from the line of Rich Wesolowski with Sidoti & Company.

Thanks, good morning.

Good morning,.

First, on the third quarter gross margin. Were there a great number of strong close outs or jobs nearing completion that spurred the 16% margin or was it just a few?

Typically across the -- typically, I think it's across the board. We've had some very strong finishes. Not all of those jobs are finished either. It's just as we go along, we continue to revise as we get more visibility on our total estimated cost of revenues. So that's where we -- typically where we stand right now, that the mix is -- the jobs that are further along in their progress towards completion and that's increased the third quarter profit level.

So the next part of the question is we should expect to see at least partial help of this kind in 4Q and maybe even in 1Q numbers?

Without getting into trying to predict fourth quarter, I will say this, while you have those jobs, you also have jobs bid at lower margins and so you're going to -- there's going to be a mix in the fourth quarter as well. We don't -- we're not predicting yet what that will be, but there will be a mix.

Okay. By my back of the envelope math, about $35 million of your backlog is scheduled to be worked off in 2011. Is that about accurate?

I don't have those numbers and we would -- during the year we've only -- 2011.

2011. I think that's probably pretty close, Rich.

Okay.

I don't have that forecast in front of me either, but, yes, I would say that's pretty close.

You won a job earlier this summer in Hawaii. Are you bidding any other projects outside of Texas, Nevada and maybe California?

We're looking at core projects kind of all over right now, and some of those would be in Louisiana.

We bid a Cal Trans project three weeks ago.

He said outside of California, though.

Oh, I'm sorry.

California, Texas, Nevada are the three main states, but we do look outside of that.

I think where we see a bidding opportunity that we think we've got a chance at, we're going to go over it if it fits our criteria.

Okay. And then lastly, a couple of cash flow questions. Would you expect your net overbuild position to reverse course as you move through 2010, and have you looked at a budget for 2010 CapEx?

Wow. 2009, I think we're going to be around a $5 million level of cap spend, is that right, Jim?

Well, we were $4.9 million, I believe, at the end of the third quarter, so a little bit higher.

I think early in the year, Rich, we're going to be spending at about that same level with some minor replacements and no expansion. So that is a question of how soon do we start adding backlog and how much does that impact 2010 CapEx? Because it could have a substantial impact on it. I can tell you we've got resources to be building at the revenue rate that you've seen us at in some of these quarters, some of which is sitting on the sidelines. So CapEx is likely to be pretty light next year.

Okay. And then the -- you had mentioned your jobs had a lower margin profile. Do they have a lot different cash flow characteristics in terms of when you get paid?

No, not at all.

Great. Thank you.

Our next question will come from the line of Jack Kasprzak with BB&T Capital Markets.

Good morning, everyone.

Good morning.

Good morning.

I was going to ask about -- I mean the time -- is much of what we're talking about a timing issue here, meaning the positives of the quarter in addition to the earnings seems to me were good awards. Your awards were ahead of revenue in the quarter, so good book to bill. But are we just facing a fourth quarter that just looks particularly uncertain given funding delays, push outs of bids, of things you mentioned about TXDOT to where you just want to get into next year before you hope for some better clarity on trends? Is it just that the fourth quarter itself looks particularly uncertain?

That's generally a big part of it. The fourth quarter is typically a soft quarter for us for getting backlog because a lot of the agencies just don't bid in December and so forth. And then that affects, certainly, the first two quarters and our backlog is lower than it's historically been, I guess, for these revenue production levels.

Jack, it's hard for us to tell how much volume has to hit the street before we see margins start to pick up. And the margin levels we've been seeing are very difficult for us to try and compete at. So I think the uncertainty extends beyond the fourth quarter, I just can't tell you when it's likely going to make that turn for us.

Clearly it seems there's been no bottom yet in the competition issue. The severity of the competition remains as intense as you've seen it?

Yes.

Okay. Thanks very much.

Our next question will come from the line of Todd Vencil with Davenport & Company.

Hello. Thanks. Good morning.

Good morning,.

Good morning, Todd.

Just to follow up on the last question, and I think you alluded to this in your comments, that -- I believe you said something along the lines that you had seen competition sort of get a little better and then come back and be difficult again. I mean, has that been the trend? Am I correct in thinking that a couple of months ago it was maybe seeming as though the number of bidders was dropping off and then has that gotten worse since then?

Well, yes, that's why I said in my comments -- and we did pick up more backlog than we ran off. So that was positive, for awhile to me at least it was looking better, and then it seemed to turn downward again.

Any thoughts on why that would have happened or just too tough to say?

No. It's just sort of a market function and, for whatever reasons, I think maybe because they anticipated less work coming out in the fourth quarter and wanted to take it or less work for the first -- fourth and first and second quarter. I'm not sure.

Got it. Got it. As you're thinking about the margins, I mean you've said that the backlog -- the margins and backlog are lower than what you had historically seen. As we sort of look, and, Jim, I think -- you mentioned that there's obviously going to be a mix of some projects that are closing out that are profitable and new projects that are perhaps less profitable. As you sort of look out over the next couple of quarters, several quarters maybe without trying to begin pin you down on guidance in any sense, what do you think the trend of margins should look like? Is it going to drift lower or do you expect to see a step down in the fourth quarter or first quarter? How do you expect that to trend.

My expectations are that we will -- unless we start to pick up a substantially -- unless margins improve on what we're bidding, then we're going to see a trend that will go down. If the market turns around, we're able to bid and get jobs at a more normal profit, then certainly in 2010 we ought to see margin pick up. But as Joe said earlier, right now it -- trying to look at this is timing. We just don't know when all of this is going to happen. If the Federal government was to do something about the funding level, I think that would be positive to the market.

Right.

And so there's a lot of variables out there that it's hard to really predict.

On that front --

Unless you know a crystal ball maker, I don't know.

I don't, unfortunately. That would be helpful. What are you hearing on the rescission and on the reauthorization and the extension and things like that? What are your guys telling you?

I think our guys are telling us about the same thing you're hearing, that perhaps there's something coming down the pike, but we don't really -- I still don't really expect to have a big bill out before the elections next year. I just -- it doesn't make sense to me that they're going to cut their throats because they're going to have to find revenues to fund it. And they don't want to be raising taxes before that point. So we might have an extension. I can see certainly an 18-month extension at the levels it was prior to the recent month to month cuts.

We rely on the AGC and some other professional organizations to try and give us their outlook. And I think Jim's view reflects what we expect to see happen. There's likely going to be a continuing -- or an extension, what level they fund that at is unknown, but they likely fix the rescission, the $8.7 billion left over from last year. I think that's the best we can hope for for the short-term.

You think if we got that in the short-term that that would be modestly helpful to the sort of waiting game the states appear to be playing? Or are they just going to wait around on the big bill, do you think?

I think specific to the DOT, it would -- if they'd fix the rescission, if they'd take care of that $8.7 billion hangover, then our expectation is that the DOT here spends the budget that they've put out, which is in the $4 billion level versus 2 point --remember what it was, Jim, last year?

$2.7 billion, I believe it was.

Yes, $2.7 billion or $2.8 billion. So that's a huge increase, it's just we haven't seen it yet and I think until they fix that rescission, we're not going to see it in our lettings.

Got it. That makes sense. And final question, I guess, do you -- and this is a smaller issue, obviously, but do you have any update on how things are progressing on the Hawaiian job that you guys did pick up? Are you still seeing some potential for maybe some cheaper options from local contractors or suppliers, things like that?

We're going to kick that off either later this week or next week, Todd, and I'll --

Know a lot more then.

-- give you a heads up then. In terms of buying out the contract versus the way we went into it, it's all been pretty favorable.

Got it. Okay. And thanks for that and, Jim, I'll let you know when I find a good crystal ball manufacturer.

Thank you very much.

Okay.

(Operator Instructions). Our next question will come from the line of John Rogers with DA Davidson.

Hi, good morning.

Good morning, John.

I guess first thing, just in terms of the TXDOT budget, I thought I heard you say that you thought spending in 2000 -- in fiscal 2009 was, did you say, $2.7 billion?

I think it was $2.9 billion. The budget, I think, was $2.9 billion, if I'm not mistaken. That may have been without the stimulus money, though. It may have been $3.5 billion with the stimulus money.

Okay. And I guess of that, how much do you think was -- I mean is that what was allocated and spent?

That was what was let -- that was what the budget was. The letting came in less than that, and to the extent that they're less, TXDOT had intended to use that additional money to let additional projects. The rescission on -- that we had at the Federal level, though, I -- I don't know how that's affected all that.

Okay.

It's a question mark to us. We have some good information on what the budget was supposed to be for 2010 and 2011, even know what funds were -- are being used for it. But we don't yet know what's happened with respect to the rescission.

Okay. I guess what I'm trying to understand is you look at what you've been awarded so far this year. Is it your sense that you've lost a lot of market share to people who were willing to come in and bid a lot lower?

I don't think that overall -- when you say market share, when we look at our traditional competitors and certainly on the bigger jobs, I don't think so.

Yes, this is Joe. We may have -- I mean all this letting was very, very robust and we clearly didn't get our share of that pie and that was a big pie. But I don't think we've lost to our traditional competitors. We've lost to some of the smaller and newer players that have shown their heads.

Okay. And I guess what -- so as you look at the entire market, including Nevada and the municipalities, has the market contracted or is it -- how does it look in 2009 versus 2008? Because I can see what the budget numbers are, but not all of it has been spent and I guess as we look --

Yes, you can't see it regionally either, John. I mean in Dallas, I would say it has not contracted. All other markets that we are in, municipal or DOT, I would say we've seen a pretty big contraction.

Okay. And as you look out to 2010 at this point then, some of these budgets call for increases, but is it your sense that at least for the first part of 2010 we're not going to be at that pace? Is that sort of what your concerns come from?

Well, that's a concern because we can't tell when it may change.

Yes.

Especially with the Fed money question mark out there. I mean, if they end up running at 70% instead -- with continuing resolutions instead of running at the old pace, then how does that impact our state budgets. And we really don't have good clarity to that.

But it's certain that it's not going to be good at least for the next couple of quarters because they just can't turn that fast, is that fair?

I think that's fair.

Okay. And what about on the acquisition front? What's happening there? Are there more opportunities, fewer opportunities, or are you -- and what's your kind of attitude in this market? Are you trying to take advantage of it or just wait and see --

Well, we're still looking, it's still ongoing and it's the light -- we've always said it's the process that we want to do one that's good and accretive. So we're fairly narrowly focused and when we find one that fits, yes, we're still in the mode to do it.

Yes, John, there's very few markets right now that would provide comfort,. So finding the right target company where long-term markets would appear to be good and backlog is strong enough to bridge that period is a bit of a challenge. But we're continuing to work hard at it.

Okay. Okay. And then as far as your work with the Army Corps, you mentioned New Orleans, El Paso and these are regional opportunities that you're looking at? Is that the way to think about it, just in close to your region or are you going to start looking at projects further afield?

No, regional, I would say, would be the correct way to look at it. I mean we can service those jobs that are bid out of the Fort Worth district or the Galveston district relatively easily and/or the New Orleans district,. And as I think we've said on a number of occasions, we wouldn't particularly like to work in Louisiana on the one hand. On the other hand, for the Corps and those type of things, I think it would be fine.

All right. Thank you.

You're welcome.

Our next question will come from the line of Craig Bell with SMH Capital.com.

Yes, good morning. Just wondering, looking at the minority interest line this quarter and even last quarter for that matter, it looks like it really popped up. I mean, is that really indicative of the profitability that you guys are experiencing in Nevada?

I'm sorry, repeat the last part of your question.

Is your minority interest line, with it popping up, is that really showing that your Nevada operation is really performing pretty well?

I guess it is, Craig. We're real pleased with that.

Okay. And then as you look out, I mean, you had made the comment earlier on the TXDOT for December saying it wasn't that great. I mean, is that what your overall sense is of what's out there for the TXDOT business in December is sort of just so-so?

That's our feeling. We haven't got all the project announcements yet, so that may change. They typically put out one to five announcements on what's going to bid.

Okay. The list that I had seen made it look like the headline numbers were not too bad, but given the location of some of the projects, it wasn't necessarily in your wheel house.

And you also got to look at the scope of the work. If it's asphalt, we will bid on that. But we don't bid on every asphalt project.

Okay. And then just lastly, what are you seeing out of the Nevada DOT in terms of the outlook there as you go into the last part of this year and into next year?

With the stimulus money, it's going to be about the same kind of number that they had in 2009. They've got some bond repayment that has to come out of that DOT fund through 2011. Subsequent to that, we expect it to pick up rather substantially.

Okay. Great. Thanks a lot, guys.

There are no further questions at this time. I would now like to turn the call back to Management.

We appreciate all your interest. Thank you very much. We'll talk to you next quarter.

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