Sterling Infrastructure Inc (STRL) 2012 Q1 法說會逐字稿

Greetings and welcome to the Sterling Construction Company first-quarter 2012 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 different is being recorded. It is now my pleasure to introduce your host, Ms. Elizabeth Brumley, Chief Financial Officer for Sterling Construction Company. Thank you, Ms. Brumley, you may begin.

Thank you, good morning, ladies and gentlemen. I want to welcome you to the first-quarter conference call. I am joined here with Pat Manning, our Chairman and CEO; Brian Manning, Executive VP of Business Development; and Maarten Hemsley, our Lead Director. 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 Securities and Exchange Commission, which could cause actual results to differ materially from those anticipated. Any such statement 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.

And now, going to the heart of the call. Results for the 2012 first quarter were impacted by two significant items. Our projects continue to be impacted by a number of the issues identified in the fourth quarter in 2011. The changes in estimated revenues and gross margins on certain construction projects resulted in a net charge of $3.9 million, included in operating results, and a $2.4 million after-tax charge or $0.15 per share attributable to Sterling common stockholders. Results for the first quarter of 2012 were also impacted by an increase in net income attributable to non controlling interest owners, which I will be discussing further.

Revenues for the first quarter declined slightly from the 2011 first quarter. As discussed further in our press release, revenues declined from construction projects in Texas, and to a lesser extent in Utah and Arizona. This decline was partially offset by $11.9 million in revenues, which are attributable to our newly acquired Arizona and California operations. As you may recall, those two acquisitions were made August 1 of last year, so the comparable results do not include any revenues or results from those operations, and won't for the second quarter either.

Gross profit in gross margin for the first quarter of 2012 declined substantially from the first quarter of 2011 levels, and were under gross profit and gross margins for the fourth quarter of 2011, as well. As was the case in the 2011 fourth quarter, revisions to construction projects in Texas was the primary driver. Over 75% of the change is attributable to larger visions on four projects in Texas. With respect to the increase in income attributable to non controlling interest owners, subsequent to the issuance of the financial statements for 2011, the members of 80% owned Ralph L. Wadsworth Construction Company agreed to amend the operating agreement effective January 1, 2012. And this agreement was to provide the goodwill impairments are not to be allocated to RLW for the purpose of calculating distributable net income. This included the 2011 fourth quarter goodwill impairment.

We made this agreement because the write-down of goodwill, attributable to RLW, was not on the basis of RLW's relative financial performance to the company as a whole, but because the write-down -- and because the write-down did not have an impact on cash provided from operations. As a result, the amendment increased net income attributable to RLW's non controlling interest holders by $6.7 million, for the three months ended March 31, 2012. Debt of the related tax impact, the $6.7 million increase, reduced net income to Sterling's common shareholders by $4.4 million, or $0.27 per share. Without this item, we would have had a loss of $0.17 per share.

Turning to our outlook for 2012, as was the case when we had our fourth-quarter 2011 earnings call, we continue to expect the 2012 earnings would be more than 25% higher -- revenues will be more than 25% higher than in 2011. Backlog at March 31, 2012 remains strong at $868 million, and includes $194 million in new contract awards this year end. We currently estimate that $565 million of the March 31 backlog will be constructed during the remaining nine months of 2012. However, based on estimated gross margins in our backlog, we expect our gross margins for 2012 to be lower than the 8% reported for 2011. We also anticipate that net income and diluted earnings per share for the remaining nine months of 2012 will be comparable to the $5.9 million or $0.31 per share reported for the last nine months of 2011, after excluding the 2011 fourth-quarter goodwill impairment.

Although we've implemented changes to our internal controls to improve the processes for estimating revenues and gross margins on our construction projects, there hasn't been adequate time to evaluate the effectiveness of these changes. And, we are continuing to evaluate what if any additional changes should be made to address the material weakness. With respect to general and administrative expenses, the first quarter increased as a result, in part, because of the acquisition of Banicki and Myers. In addition, the professional fees were slightly higher as well. Our overall effective tax rate was impacted by the $2.7 million of earnings applicable to non controlling interest holders -- the tax impact. Excluding that tax impact, the overall effective rate would've been 34%.

Despite these challenges, Sterling is in sound financial condition. Working capital at year-end at March 31 totaled $92 million, and includes $60 million of cash and short-term investments. We had no outstanding borrowings under our credit facility at March 31, and our bonding facility is based principally on the balance sheet strength and is available to support continued revenue growth. I will now turn it over to our CEO, Pat Manning.

Thanks, Liz. As Liz mentioned, revenues were down in Texas, and there were additional write-downs mainly restricted to four projects which have continued to present challenges to our estimated productivity. We have channeled additional resources, especially with regards to management oversight, to these areas. Oftentimes with problem jobs it is difficult to turn them around, but we are focusing our full attention to these issues. Revenues and productivity were both affected by adverse weather conditions throughout Texas in the first quarter, as well as the stage of work we were performing and therefore the revenue recognition and various projects was delayed. We believe the changes in both management and systems that we have made will return us to profitability, but the results will not be achieved overnight. I hope to be able to report on our next quarterly call, significant improvement in our operational efficiency.

Now, in regard to our operations for the second quarter and the balance of 2012, we have begun work on our $78 million project in Turlock, just south of Sacramento, with Myers and Sons, which is scheduled to be completed this year. And our $44 million project in northern California, with RHBCa which s a two-year completion time. We will start to $102 million JV with Shimmick in Los Angeles, later this year, and are working through other backlog with Myers and Sons.

We have just begun work on our $72 million JV between RLW and Banicki construction in Phoenix, on SR 24, and we continue to pick up CMAR work, airport work, in Arizona through our subsidiary RLW -- through our subsidiary, Banicki. RLW is 73% done with the I-15 CORE project in Utah, and still anticipating finishing on schedule, with substantial completion late this year. We are scheduled to work -- start work next quarter with RHP in California around Lake Tahoe, and are working on a number of smaller projects in Hawaii. Now that the weather permits, we are beginning work in Nevada on several asphalt paving projects. Here in Texas, we are ramping up construction on a $92 million road project in Dallas, for the North Texas Toll Authority, while just beginning work on our other toll road projects, project valued at $65 million. Our joint venture project for the [CTR] in May is moving ahead with bridge and dirt work, and will begin concrete paving work this summer. This should all have a positive impact on the balance of the year in 2013.

We are seeing some improvement in our market conditions, as this downturn takes its toll on less well-capitalized businesses and we are seeing opportunities for margin increases as our backlog continues to grow. As reported, backlog is up 17.1% to a record $868 million. And while margins remain compressed, from our historical norms, the resources are in place to capitalize on our future markets.

With the two acquisitions that we made in August of last year, we now have operations in seven states with individual projects in two additional states spread all across the Southwest and western United States, with anticipated revenues being up some 25% year-over-year. As we work through backlog this year, running in from last year, we are replacing it with higher margin work. The opportunities for joint ventures on larger projects for the remainder of the year and 2013, especially here in Texas, are substantial and will be repriced based on their size and difficulty. We have positioned ourselves over the last several years to take advantage of the opportunities that these large project joint ventures will present. Let me have Brian tell you about his efforts on business development.

Thank you, Pat. In Washington, the first meeting of the surface transportation conference committee was held on Tuesday. Senate and House conferees gave opening remarks on what is anticipated to be one of the final hurdles in passing a transportation bill. The Senate will go to conference with MAP-21, a two-year, $109 billion bill, which includes a significant number of policy improvements and reforms. The House will go to the conference with a 90-day extension. The Senate is likely to have the upper hand in negotiations, because it is entering the conference with a more substantive bill.

As Pat mentioned, the current joint venture design-build projects are progressing well. The I-15 CORE project in Utah is approximately 75% complete, and our 290 Manor Expressway project in Austin is approximately 25% complete. The Agoura opportunity in California, as it is a new market for Sterling. We see opportunity in northern California to the magnitude of $2.6 billion, through our partnership in Myers and Sons. Some of this increased activity in Texas is fueled by the Texas Transportation Commission, recently allocating an additional $2 billion to communities across Texas. Approximately $500 million of this allocation will be let in 2012, bringing the Texas budget for 2012 to approximately $5 billion. There are numerous opportunities, especially in design-build on large transportation projects, with joint venture partners. On the 6 to 9 month horizon, we should see details on large scale projects in Houston such as 290, 288, 249 and 2100. These are all major freeway reconstruction and expansion projects. Texas Sterling is currently on short listed teams for the Grand Parkway in Houston, I-35E in Dallas, and we are pursuing the Mopac project in Austin for the same client we are building the 290 design-uild project for the central Texas Regional Mobility Authority.

These projects are design-builds. The Grand Parkway and I-35E are each in excess of $1 billion, and the Mopac project is close to $200 million. These design-build projects typically demand higher margin than traditional design-bid-build projects. In total, we are currently tracking over $5 billion in alternative delivery bid opportunities. Now, I will turn it over to Maarten Hemsley, our Lead Director.

Good morning, ladies and gentlemen. As Lead Director and Chairman of the Company's CEO search committee, I thought I would say a few words about the search in response to questions that we have had from some investors. The qualities that we are seeking in our new CEO candidate include solid construction experience, either in our historical, heavy civil sector, although we are considering other construction sectors. And we are also looking for a strategic thinker with the leadership skills to integrate all our businesses in view of the very strong growth that Pat and Joe have achieved over recent years.

I am pleased to say that we have interviewed a number of very suitable, qualified candidates and we are now in the process of making a final decision. So, we hope to be in a position to make an announcement before the end of the second quarter about a new CEO who will continue to develop the Company and its culture of superior performance. I'll now turn this over to the operator for any questions.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. (Operator Instructions) Our first question is from the line of Tahira Afzal with KeyBanc Capital Markets. Please go ahead.

Good morning, this is [Soger] on for Tahira. Morning, quick question. Looking first at, this being a presidential year, typically, historically, what we've seen in the past is, as we get closer to November, sometimes in our municipalities and state governments, cut down spending a little bit as people get distracted. Have you guys seen that? Or you guys expecting anything? Building anything in for that going forward?

On the election, I think, our biggest anticipation is the transportation bill and how politics will play into the passage of the bill. We are seeing more momentum nationally. Locally, I think it would have less of an effect as the local municipalities already have their budget set. I don't see much affect locally.

Okay. We've just seen and heard that people can get distracted by the back-and-forth that goes on. At the second question related to cost estimation, what -- you guys had some additional estimation write-downs in the first quarter. What makes you confident that you won't get that going forward and what risk is there really in the future?

There's always risk in the construction projects. I think we have done everything we can to make sure that these problems are solved. We're sending additional management to the areas in question. As I mentioned in my script it's sometimes difficult to turn around bad projects, so we've got to get through them and make sure that they (technical difficulties) turn any worse. But we've got a 30-year history behind us of doing better than we expect. I think we'll return to that.

Sounds great. Thank you very much.

Thank you, our next question is from John Rogers, D.A. Davidson. Please go ahead.

Hi, good morning. A couple of things. First of all, the ramp in revenue that you were talking about this year to get to that 25% growth. Is it going to be every quarter substantial increases? I mean can you give us a little help there, in terms of how seasonality is going to play in that? Anything you been thinking about?

It will increase over the next nine months, the next three quarters, and those are our best three quarters in a lot of areas. I mean in Nevada, because of the weather. We're starting additional work in Utah. We've obviously brought on, and as I mentioned in my script, the California--two operations in California which are cranking up large projects, and the projects that we are beginning for the toll road here in Texas. So, I think you will see a significant ramp up, and I think Liz mentioned in her release that we anticipate doing $565 million of the backlog through the next nine months.

Yes, and less than that is going to be because of seasonality in second and third quarter, so you will see your typical drop off in the fourth quarter, barring any revisions to estimates or things of that nature.

Okay. So we will see it, including the second quarter --?

Yes.

The second and third quarter should be pretty strong given where we are in some of these projects.

Okay. And then in terms of the four problem projects that you noted in Texas, is there any commonality that you can point to between these projects? What went wrong and what would be different about the future?

There are different issues, John. And that's always the case, based mostly around productivity. One of the jobs, there's a lot of additional rock that we didn't anticipate that we're responsible for. So, it's the typical production issues that we have that weren't handled very well, so that's why we're sending more management there.

And Pat, were these projects outside of what I think of as your core, Houston market?

Not really. There the stuff we do all the time.

Okay.

Except for, we're a little, I would say, unfamiliar with the rock excavation that we had in San Antonio. It's not our general line of work.

Okay. And then, in terms of the big projects, Brian, that you refer to, the I 35 and the Grand Parkway, who are you partnering with on those? And, what's your share in those partnerships?

John, for competitive reasons right now, I probably won't reveal that. Just to say that they are significant partners and we share 20% in -- approximately 20% in each of the JVs.

Okay. That's helpful. I just wanted to understand the opportunity there. And given these projects, and I guess there's another big one in Houston as well, I mean is that a lot of -- is that going to distort the market, especially in Texas, in terms of tightening it up this year? And over the next couple of years? Or, is it going to bring in more capacity into the market, too? And I'm just -- how do you think about that?

We're viewing it as a positive, because we're well-positioned here and have great capabilities. So, we are sought after as a partner so, for Sterling, we view it as a good thing. There are -- the projects are very large so it does tend to draw large players in, but having that local advantage in being able to pick our teams is certainly a nice position to be in.

Okay. And, lastly, in terms of a backlog ramp that you're already seeing, can you give us any comment or confidence that the margins on that work? What they look like relative to what we've seen recently? Obviously, you don't have the project revisions, but still margins are below where they been historically --?

I do think taking out those revisions helps you get a better idea as to what the margins would have been if we had not had the write-downs. I think that can be helpful, John.

Okay.

Write-downs, which hurt us very badly and I don't -- I'm hopeful you won't see those going forward.

But, is there -- I mean, given the mix of business that you have now, is there any possibility in the near term or even the long term that we could get back over the 10% project margin levels?

In the long term, I would certainly hope so, especially on these large joint venture projects. The market is still compressed, you won't see 10% tomorrow morning, but, obviously, we want to get back there.

Okay. Thank you very much.

John, following up on your question and I am looking at something that is published on I 35, I can tell you that our partners are Ferrovial, Weber, and Texas Sterling rounds out that team.

Okay, thank you.

Thank you, our next question is from the line of Avi Fisher with BMO Capital Markets. Please go ahead.

Good morning. Liz, on the minority interest with RLW, I guess I'm curious to what change from the end of year to now, is this a function of fairness? Trying to be fair with the subsidiary not charging them, the sins of the parents? What's going on there?

Yes, I think is a pretty fair assessment, the it's looking at--as you may recall we talked about how the goodwill impairment was driven based on an evaluation that's done on the Company as a whole because we have one reporting unit that for accounting purposes, you have got to allocate that write-down to your subsidiaries, and it was done simply pro rata. It was not a reflection of the performance at those subsidiaries at all. And so, when we looked at how distributions of net income were going to be made, it just didn't seem appropriate to tag RLW with the $6.7 million of write-downs for purposes of making those distributions.

It's a cash distribution? Does the balance sheet reflect that distribution already?

Actually, because we were talking about it, subsequent to filing the 10-K, the distributions for the first quarter that you normally would hit, didn't hit until April, so you'll see those coming through in the second quarter queue, but yes, to the non controlling interest holders it's a cash distribution.

It's reflected in our March 31 numbers.

The obligation is, yes.

The obligation is-- but the cash-out hasn't been?

The cash will go out the door in April. Normally, it would go out right after the filing of the 10-K.

Right, but you have this change.

We had this change. And, it was something that we thought about long and hard.

Kind of what pushed you over the edge?

The fact that the allocation was simply because-- you know RLW's performance has been very good. I mean we've been very pleased with the results from those operations, and they got tagged with some of the goodwill write-down and it just didn't seem appropriate.

It's basically a fairness issue.

Okay. Regarding the CEO search and Maarten, I appreciate the update, I don't know if you'd be able to see this but have you put out offers that have been rejected?

I wouldn't normally comment on that, but were still in the process of coming up with a shortlist, so we haven't made offers at this stage.

Okay, appreciate the color there. On the backlog number, it may be a small thing but if you could just kind of add in the, I think the 194 you disclosed the press release, or whatever the number you disclose in the press release, take out the revenues, if there's --.

The piece that you're missing is the backlog we picked up in connection with the aggregate industries transaction, so there is a subsequent footnote--event footnote in the10-Q that talks about that. It's on page 18 of the 10-Q.

Okay.

In January we assumed $25 million of revenues related to seven contracts.

Got you. So, it's acquired backlog?

It's acquired backlog.

Okay.

As opposed to awarded backlog, which we -- I think the awarded is more of an indicator as to what is truly happening in the markets. That's why we focused on that number as opposed to the acquired backlog.

I appreciate that. Just need to make the calculation to get the awards. A few other very quick questions and John kind of touched on these. On the projects, the four projects, when do they complete? When are they expected to complete?

Those projects, as well as the other projects that we had challenges on in the fourth quarter, most of that is going to roll off in the second and the third quarter this year. There will be some impact later on, but substantially all of it. I mean, as you would expect, because you've got such a large piece of our backlog rolling off this year.

Right. That's great. When we back out the charges we end up with a gross profit of about 6%. That's kind of, obviously, below the 8%, is some of that due to weather? Because you did callout bad weather in the quarter --?

Certainly, due to weather. I don't know that, Liz cautions me that it might not be worse weather than it was year-over-year but, we still had some significant rain. I was talking to our Vice President this morning in Dallas, and he said all the lake levels in Dallas are back up to normal after being significantly low over the course of last year. So.

I mean, January was an extremely wet month, but as you may recall last year with the Super Bowl, we had a horrible freezes and snow in Dallas, so first quarter last year was a challenge with weather.

Okay. Is the 6% margin outside of these, excluding these projects, is that at the very least in a normal rate of base? A bottom? I mean, would you be bidding below that?

We are -- I would rather I guess not going to exactly what we are bidding at, but we are trying to raise margins and certainly we're trying to get them back up into the 10 range. I mean, there could be a project that we might bid the below six, depending on where it was and what the timing was and a lot of factors that go into it. Potential upside for change orders and things like that.

And thinking about that is there an award for when the Utah project complete with floor?

Is there what, now?

Is there some sort of contingency harvesting when that project completes?

Oh, there is the potential for completing it ahead of the schedule that we gave them. There is certainly contingencies built into that work, that we don't know if we have to use yet. So, that may be a plus.

Two other quick questions. The tax rate--you said was 34% in the quarter, is that we should model in for the year?

I would model somewhere between 30% and 34%. Kind of the red herring is the relative amount of non taxable interest income versus the rest of the earnings. I think we break the non taxable interest income out separately in the footnote. In the rate reconciliation in the footnote. So, just caution on that.

Okay. I will flip through that. And finally, I'm curious about what you are seeing with material cost. You mentioned an asphalt project, it seems like asphalt prices are growing fairly rapidly. Curious across the board, asphalt labor, concrete, diesel?

Obviously, the diesel and the gasoline prices have been up in the short run, but they are trending down right now, and what we're seeing for the futures market is they will continue to trend that way. Obviously, that's very volatile with what we have going on in the Mid-east. Other products are becoming a little in short supply. In Texas, due to all of the Eagle Ford shale and the work we have in the oil patches in the different parts of the State, so, aggregates are becoming a little bit short. Not so much because of the price of the aggregates, but because of the price of the trucking. Labor, so far, has stayed relatively steady.

I appreciate the color, I look forward to hearing from you guys as the CEO search evolves. Thank you.

Thank you.

Thank you. Our next question is from the line of Nick Coppola with Thompson Research.

Hey, guys. So, I will ask a little bit more about the competitive environment. Are there any signals you could talk to us about in terms of, are bid lists getting any shorter? Are you seeing any less irrational bidders out there?

Yes, I would say bid lists are getting some shorter. So on any given project you could still see the 10 to 12 bidders, but a lot of the projects are getting less bidders. The volume of work coming out of different spots seems to be a little bigger. We're spread across the country, so it's different for different markets.

I'm most familiar here in Houston because I live here, and for the first time in three years I'm starting to see various building projects going on, strip centers, a couple office buildings, a FedEx building, things like that so, seems to me the economy is picking up. We are seeing pickup on the private side, which is relieving some of the pressure on the public projects that we bid.

Okay. And for triple P's in Texas what kind of opportunities are you tracking? And is there an ability to move the needle with alternative funding mechanisms in lieu of, I guess, a long-term highway bill?

The way triple P has gone so far in Texas is they've run as dual procurements. So they've had a public-private partnership option and a design-build option, and on recent short lists, they've been going design build. So, Texas has been able to find the funds to build the projects or enter into a cooperative agreement with counties in order to build projects. On a go forward basis, for some of these projects, and were talking about projects in excess of $1 billion, there will certainly be some more activity on PPP.

Okay Pat, well thank you.

Thank you.

Thank you. (Operator Instructions) We have no further questions in queue at this time.

Thank you, everybody we all look forward to speaking to you in the next quarter call.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, thank you are your participation.