Sterling Infrastructure Inc (STRL) 2011 Q2 法說會逐字稿

Greetings and welcome to the Sterling Construction Company second-quarter 2011 conference call.

At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Joe Harper Jr., acting CFO for Sterling Construction Company Incorporated. Thank you, Mr. Harper, you may begin.

Good morning, ladies and gentlemen. This is Joe Harper, Jr., acting Chief Financial Officer for Sterling Construction Company. I would like to welcome you to the Sterling Construction second-quarter conference call.

I am joined by Pat Manning, our Chairman and Chief Executive Officer, and Brian Manning, our Executive Vice President of Business Development, and Liz Brumley, our Chief Accounting Officer.

I would 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 SEC, which could cause actual results to differ materially from those anticipated. 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 numbers, for the second quarter of 2011 as compared to the second quarter of 2010, volume has increased 10% year-over-year to $128 million while gross profit has increased to $13.6 million and gross margin decreased slightly. While the improvement in revenue and gross profit is a step in the right direction, this is due primarily to the execution of older backlog, not improved market conditions.

General and Administrative costs are up $1.1 million in the second quarter 2011 as compared to the second quarter 2010 due primarily to increased headcount and related benefits.

Operating income is down $92,000 for the second quarter of 2011 and taxes are down $1.1 million in Q2 2011 as compared to Q2 2010 due to an increase in non-controlling owners' interests in subsidiaries and joint ventures of $900,000, and a decrease of the Utah State tax return of $500,000.

Net income attributable to Sterling common stockholders is down $456,000 for the comparable quarters.

Our balance sheet remains strong with working capital of $106 million. Cash and short-term investments decreased by $14 million as compared to December 31, 2010 due to continued investment in equipment of $15 million for the year, an increase of $7.3 million in Accounts Receivable, which is up primarily due to increased volume and billings, and an increase of $9.4 million in costs and excess due primarily to timing differences on cost of vendors and subcontractors versus billings to our customers.

At June 30, 2011 we did not have any borrowings under our $75 million credit facility.

In April, we commenced a program to hedge our exposure to increases in diesel fuel by entering into diesel futures contracts. As of June 30, 2011, we had diesel future contracts for 1.8 million gallons which fixed prices at an average of $3.12.

I will now turn it over to Pat Manning, our CEO.

Thanks, Joe. I'm pleased with second-quarter results.

Weather in all of Texas was good and a drought continues here. Both Utah and Nevada did experience some bad weather in the second quarter. While the drought in Texas is certainly hurting some, it is good for the construction industry. Revenues for the second quarter were up nicely while gross margins were down slightly due to the competitive pressures that we are facing in all of our markets, as we have explained before.

Employee headcount is ramping up. From the end of July last year to July this year, we have gone from just over 1200 employees to 1535, an increase of 23.6%. We are up to 293 employees in Dallas, for instance, and still adding people, and 476 in Utah. Nevada is down to a very few employees but Hawaii has kept the total count relatively steady.

As always lately, it is a mixed bag. Because of the lack of revenue generation in Nevada and to some extent in Texas, we continue to have unabsorbed equipment costs. We have begun work on our $207 million JV in Austin and that will require the hiring of additional people. Also, we began work in Baton Rouge at the end of the last quarter and are adding to headcount there.

The bidding climate, while slow in some of our markets, has been fairly robust in Texas. We bid over $500 million worth of work in July, we have raised our margins. While we were unsuccessful for the most part, we were second on six projects totaling right at $275 million. Included in that number was a tunnel project at around $100 million on which we were a joint venture partner.

We continue to expand the scope of services offered and our ability to bid larger projects and joint ventures. Brian will give you some more color on that when I conclude.

We are bidding $200 million worth of work the remainder of August which includes three different projects for a bonding company for one of their clients they took over here in Houston. We have another one of our competitors in San Antonio and Dallas who has filed for bankruptcy. The results of bidding at loss margins or unrealistic production levels or without covering your equipment costs to maintain cash flow is becoming clear. These events are giving us opportunities to not only pick up work and to add to revenues, but also reduce competition.

Backlog at the end of June remained at a healthy $720 million, still up nicely from $660 million at year end 2010.

We are pleased with the acquisition of Banicki Construction in Phoenix, Arizona and wish to welcome Jerry Banicki into the Sterling fold. He has a heavy civil construction company specializing in alternative delivery projects in Phoenix and the surrounding areas, yet another service that we can provide. We accomplished the acquisition through RLW, our Utah subsidiary, and will let them integrate and oversee the operation. They will be working hand in hand to expand Jerry's operation to include major highway projects. RLW will be bidding a project in August with an ADOT estimate of $175 million with Banicki's participation.

Yet with all the positives that are happening, our overall markets remain clouded with the uncertainty of a federal highway bill, the debt crisis, and the economy in general. Competition remains stiff, margins are compressed, and earnings for 2011 will not be what they were in 2010. Offsetting these headwinds are our acquisitions, both past and future, as well as strong execution by all our divisions.

Our course remains to position ourselves to be successful when and as our markets return. We do this by maintaining a strong balance sheet, expanding our service profile, making acquisitions, and expanding our ability to compete on even larger projects through relationships with concessionaires and major construction companies with whom we can joint venture.

I'll let Brian give you some more details about what we see that is becoming available to bid on. Brian?

Thank you, Pat.

We continue to explore joint venture opportunities in our markets. As job contract sizes increase, joint ventures become a necessity for risk mitigation and bonding company requirements. Our ongoing U.S. 290 Manor Expressway project for the Central Texas Regional Mobility Authority, the CTRMA, was funded, engineering design is ongoing and construction began last month. Mopac is another $200 million project for the CTRMA that is in the pipelines.

We continue to follow the 14 projects that were approved by the Texas Legislature for comprehensive development agreements or public/private partnerships. Segments of the Grand Parkway on the north side of Houston will be bid as a single project in excess of $1 billion and will fall under the CDA authority. We expect a request for qualifications to be issued later this month and we will pursue this project.

Outside of Texas, we continue building the I-15 project in Utah with our [Fluoroled] joint venture. The project is approximately 40% complete. Also in Utah, RLW began design work on the $34 million design build Bangerter project we were awarded that consists of a new interchange and concrete paving. We are pursuing in the JV the $250 million I-15/215 design build interchange project in California and have JV opportunities in Arizona as well.

Sterling has over $4 billion in alternative delivery method projects that we are currently tracking. We noted in our last call we continue to pursue acquisitions as part of our growth strategy. We are happy to announce that last month we closed transactions with two companies. Last week, we issued a press release that we purchased Banicki Construction. Banicki is a heavy civil contractor located in Arizona. Based on historical performance and current backlog, it is expected that Banicki will contribute an annual revenue between $20 million and $25 million. Banicki positions Sterling to be competitive on larger projects in Arizona when the market returns. This acquisition is in line with our strategy to increase our footprint throughout the South and Southwest. As Pat mentioned, Sterling purchased Banicki through our subsidiary, Ralph L. Wadsworth. RLW acquired 100% of Banicki's stock for $8 million plus a five-year earnout that will begin once Banicki achieves $2 million in EBITDA annually. Jerry Banicki will remain as president and Banicki will continue to be managed by its current senior management team. The purchase was funded with available cash and short-term investments.

In the 10-Q, we noted that we bought 50% interest of a California company. We are now partnered with Myers and Sons for pursuits in California. Myers and Sons LP is a heavy highway construction company based in Sacramento. Sterling's investment in the transaction was $1.3 million. The company was founded in 2009 and specializes in design build, bridge construction, bridge restoration, and roadway rehabilitation throughout California. Myers and Sons is a company that was started by C.C. Myers. The partnership positions Sterling well for opportunities within the California market.

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

(Operator Instructions). Avi Fisher, BMO Capital Markets.

When you talked about some of the surety work you're picking up. How do surety margins compare to the margins on projects you bid at?

They're generally better because you have a larger number of unknowns given that typically you have to guarantee the work that was previously put in by the contractor that went down. Obviously, it's conceivable that they took shortcuts and did things like that. So the risk profile is a little higher, gives you some better margins.

So higher margins to offset the risk profile?

Right.

I think it was the press release or the Q on in the revenue side called out not just severe weather but delays on two projects. Can you -- if you can't specify what the projects are, can you give us an update on whether they are moving ahead now?

Yes, there were two projects in Dallas and they were for the Toll Road Authority. We have contracts on both but -- so the projects are assured, but no notices to proceed because of some minor right-of-way problems and other things that the Agency is working on. We expect those to go this quarter.

So 3Q they should start up?

Yes, sir.

When you talk about the gross margins, how much of that impacts or how much of that reflects the absolute margins from prior-period bookings versus any issues on the projects?

I didn't quite understand that. Can you repeat the question?

The gross margins were down year-over-year. I'm wondering how much of that reflects as-sold margins on projects you booked over the last 12 months versus just issues on projects.

It's much more reflective of the market conditions rather than poor execution or writing jobs down.

one last question, and I apologize if this is a little bit detailed, but the 10-Q calls out notes to the JV revenues and the JV net income that you're booking. I'm trying to tax-adjust the JV net income to get a sense of what your margins are in the JV work. If I use a 35% tax rate, I get to about a 12% to 13% margin on your JV work. Is that in line with what you expected when you acquired RLW?

There were some specific jobs in backlog -- there's more than one joint venture going on. There were some that have turned out that low. And then don't forget that you've got the non-controlling interest factor in there too.

So joint ventures are not (inaudible).

Alright that's it for me. Thank you.

Todd Vencil, Davenport and Company.

First of all, congratulations on this couple of deals. I don't think I heard it. Have you mentioned how much backlog you're going to be adding from either or both of those deals?

We did not in the press release or in my comments.

I assume you probably don't want to right now.

Not currently, no.

They have backlog enough to continue their operations as we anticipated they would move forward.

Got it. Turning to the orders, obviously we've been running at nice rates for the last three quarters in terms of new contracts, and then it fell off a bit this quarter. It sounds like you've got a lot of bidding opportunities still out there. So is it safe for me to assume that we shouldn't look at this kind of decline in order activity as a trend but rather regular lumpiness in terms of awarding?

Yes, we've always said that the contracts award would be lumpy and if backlog grows up and down quarter by quarter, which doesn't necessarily affect the year. So yes, we're comfortable where we're at now and good solid backlog.

Good. Then final one for me, if I look at the G&A, is there any seasonality in there or should we look at this as a pretty decent run rate? How should we think about G&A?

It's going to be relatively consistent. We've added some headcount. We're not planning on decreasing headcount. Some of the related benefits that we mentioned in the Q is related to health insurance costs where we are partially self-funded, so that caused some lumpiness in the quarter. But at the end of the day, we found that we were running probably a little too lean. In order to maximize profitability in the backlog that we have and position ourselves to take advantage of opportunities, we needed to add a few more bodies.

So if I look at last year, G&A was almost $25 million. Fair to say it might be a bit above that this year?

A bit part of that G&A is related to variable comp and it will depend on how the year turns out. $25 million should be pretty close.

Okay. That variable comp all comes through basically in the fourth quarter? Is that the way to think about it?

No it --

-- come through the year?

Yes, we accrue for it.

Okay, thanks.

David Wells, Thompson Research Group.

First off, just to get a sense of -- in your commentary, you talked about being able to raise margins on projects in July that you were bidding. Can you give us a sense of the order of magnitude? Were we talking like 100 basis points or more in terms of the ability to push that margin number up?

Joe Harper: I think for probably competitive reasons I'd rather not say but just in general, our margins are positioned based on the risk profiles, the competition we see in the marketplace, the equipment we'll need and a number of factors. So mostly I'm just saying, in general, we are attempting to raise margins.

That's helpful. Then if I look at the differential between I guess on a couple of those projects where you came in second, not huge amounts of differences between I guess the gap between the winning bid and where your bid was doesn't seem astronomically large. So do you get the sense that your competitors are following along with that desire to move margins back up?

I feel like that. As a matter of fact, I looked at those numbers. If you take out the $100 million project that we were second on on the tunnel project, which we didn't bid, the other ones that we were second on we were just less than 2% difference from the low bidder.

The competitor that you referenced I think it was in the San Antonio area, can you give us some sense of the size of that competitor? Was it a decent-size contractor or small? I'm just trying to get a sense of maybe where we are in the bankruptcy cycle, if it's starting to move up channel.

I would say $35 million to $45 million revenue. He's private, so that's sort of what the question mark is -- just what I feel like he is.

Okay, that's helpful. Then lastly for me, if I look at your short-term investments from the Q, a big chunk of those are sitting in mutual funds. I was curious what the equity exposure was there and if you're likely to see any losses just given the turmoil that we're seeing the last couple of weeks in the equity markets.

We have not disclosed what portion is equity. Certainly, there is going to be a piece of it and then some of it is invested in bond-type funds as well, so it's not 100% equity. I think that's all we can say at this point (multiple speakers) haven't said anything --.

Yes, I would say, overall, we're very conservative so it don't anticipate any large losses.

So it's not a situation where it's something attractive on the deal front were to come up, you feel like you'd be able to get the capital and the liquidity there that you would want quickly?

Yes, that's correct.

Great, that takes care of it for me. Thanks.

Rich Wesolowski, Sidoti and Company.

On the last call, someone in management suggested that the bidding conditions would allow for gross margin in the 10% to 12% range or historic range. I know you don't want to get into specifics, but is that still a valid statement?

I don't remember us saying the 10% to 12% range. Certainly, that has been historic and certainly we hope that we can get back there.

Okay, don't mean to put words in your mouth -- that is what I had recalled.

How much of your backlog is scheduled to be executed in 2011?

In 2011. That's a number we don't look at often. We're at $600 --

That would give you the revenues, anticipated revenues for the year.

(multiple speakers)

Well, you'll also have work that you have yet to book that will (multiple speakers) so --

(multiple speakers) earnings guidance.

Yes, that sounds a little close to guidance for me.

The I-15 project that I think Brian mentioned, would you comment on how that is going in the execution and whether the second quarter saw any material change in the profitability as it's being booked?

The project is going along well, been no hiccups. I would say there were some minor upticks in profitability due to change orders but [Fleur] is in charge of that project and takes a very conservative approach on recognizing income.

Would you discuss in a little more detail the program that you're chasing in Louisiana? What kind of work is up there?

That is the EPA-mandated sewer program in Baton Rouge. We've landed two contracts over there. Now, they are rather slow starting. The entire project, that includes right-of-way acquisition and a lot of things is $1.2 billion. Given that we anticipate being over there for several years, as opposed to starting an office over there at this point, while it is an office, it is job-specific to that program.

A while back, the Company had mentioned the potential for two more projects in Hawaii on the same road on which you're now working. Have those been let, and if not, is there any timing estimate as to when they would be?

One of them was bid just this week, as a matter of fact, and we were second on it. The next section we have not heard when it will be out. We're continuing to bid other projects over there also.

Then finally Brian, on the CTRMA project, if I heard correctly, you'll be bidding another $200 million job for that agency. Is that on the same stretch of road on which you've already won work, or is that a new project entirely?

It's very close to it, it's on Mopac, but it's part of that same expansion program and that's just going to be the next project that they look at in their overall system.

Is there any visibility on the total amount of work they have to do in the next, I don't know, two to three years beyond that job?

They do have the information up on their website. It's Conceptual in Design so if you looked up the CTRMA, you may be able to find some of that. But they haven't (multiple speakers) --

It's a little light on the details.

(multiple speakers) -- from a dollar standpoint.

Thanks a lot. Good luck.

Tahira Afzal, KeyBanc Capital Markets.

Congratulations on a good quarter. I'll try to keep my questions broad because I know you don't want to comment on projects specifically for competitive reasons. But if you look at what you have in your bidding pipeline today versus [as developed] at the beginning of this year, do you, A, see it as being a bigger bidding pipeline? And B, would you say the quality is better because it seems you're bidding on larger projects and potentially the quality in terms of competitive factors might be better?

I think the pipeline, if you look at it in two different ways, there are traditional bid/build projects and then where the pipeline is -- we're seeing more visibility is on some of these alternative delivery projects. Yes, they are larger. They are varying in geography, so we're California, Arizona, Utah, Texas. So there's more singular opportunities in these individual locations that we're able to focus in on. Through our acquisitions, we are better to able to position ourselves for those projects. So the pipeline has increased as a result of that.

I've noticed obviously for some of these projects in Texas they are large. They are going to take several quarters and years to play out. Should we be more careful about forecasting how the backlog burns over the next year or two, or would you say that the pace you've seen over the last few quarters is what you think you will see going forward as well?

I think you're going to have to be cognizant that, as projects get larger, they may take longer, so you'll have to look at our press releases and see how long they're scheduled for and so forth.

Got it, okay. The last question is obviously your macro commentary is still pretty cautious and guarded, which makes sense. But if you look at the projects that are likely to go into bid in Texas in particular over the next few quarters, would you say those are the funded projects? Is there some risk that some of these projects might face funding delays because they are unfunded right now?

By nature, some of the [CDA] projects may go as public/private partnerships or availability payments. As such, enrolling these projects out, the funding is usually very complex. But we've been opened up to these different markets for pursuing these projects, and we'll be able to have some more visibility on them. As the RFQs are issued, we will know how we're able to pursue these projects.

Great. Thank you very much.

(Operator Instructions). Craig Bell, Enerecap Partners.

I wanted to follow up on the acquisition of the interest in California there. As you did that, is that really more of an entry into the California market or is that more project-specific, like your JV?

(inaudible) entrance into the California market, C.C. Myers had a family-owned business and started a new business which is relatively new. We've known him for a number of years. He's I would say a bridge builder extraordinaire, worked on the Oakland Bay bridge, as a matter of fact, if you're familiar with that, out in San Francisco. But no, that's we believe a good way to enter that market.

Then looking at Arizona, how does that market, in terms of size or the overall outlook for that, compare? You talked about in the Q the funding for Nevada or Texas or all of that. I'm just wondering how that market looks today and what it looked like maybe a year ago?

That market is very competitive. It is similar to California and Florida in that it's at its low point now but with the population trends, we expect good things out of Arizona certainly. It will continue to be a good market. So we've got a small position there but that position can grow over time.

We're hoping that we can realize some synergies through with RLW out in Phoenix as well with JBC. RLW has been out there in the past and that market, as Brian mentioned, is very competitive. And JBC should help us with some local market knowledge and some contacts.

Then on the Grand Parkway project, did you say when that was scheduled to be bid out?

Yes, the RFQ is due out late August.

Is that being handled through Harris County toll road?

(multiple speakers)

No, the state is handling the procurement.

Okay, great. Thanks a lot.

Craig, what was of interest to us in these two acquisitions, while they were relatively small on a revenue basis, they do give us access to Arizona and California, which pretty much completes acquisitions across the Southwest. So, we're real excited about them.

There are no further questions at this time. I would like to turn the floor back to management for closing comments.

I'd like to thank everybody for joining us and we'll see you next quarter. Thanks again.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.