Sterling Infrastructure Inc (STRL) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Sterling Construction Company, Inc., second 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 conference is being recorded.

It is now my pleasure to introduce your host, Elizabeth Brumley, Executive Vice President and CFO for Sterling Construction Company, Inc. Thank you. Ms. Brumley, you may begin.

Good morning, ladies and gentlemen. This is Liz Brumley. Welcome to Sterling Construction Company's second quarter 2012 conference call. I am joined this morning by Joe Harper, Sr., President and Chief Operating Officer, and Brian Manning, Executive Vice President and Chief Business Development 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 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.

We are pleased to report this morning that revenues, gross margin and operating income for the 2012 second quarter improved over both the 2011 second quarter and the 2011 first quarter. Our new California and Arizona operations contributed $35.6 million in revenues in the quarter and we also saw higher revenues in Nevada.

While we continue to see downward revisions to estimated gross profits from contracts in Texas, the impact on results was less than the previous quarter's and was offset by improvements in estimated gross profits on contracts in Utah that were nearing completion.

The increase in gross margins over the previous quarters to 9% versus the 10.6% in the second quarter of 2011 reflects the impacts of the challenges we experienced with a contract in Texas. However, 9% is a marked improvement from the 3.4% gross margin in the fourth quarter of 2011 and the 1.9% gross margin in the first quarter of 2012.

Diluted earnings per share was $0.15 for the quarter as compared to $0.25 for the 2011 second quarter. Earnings attributable to non-controlling interest centers reduced diluted EPS by $0.17 net of the related tax impact in the 2012 second quarter as compared to a reduction by $0.08 in the 2011 second quarter.

General and administrative expenses for the 2012 second quarter increased as a result of G&A associated with the newly acquired Banicki and Myers Companies and as a result of higher professional fees.

Results for the 2012 second quarter and the six months included $1.5 million and $2.7 million respectively for gains on disposal to property and equipment.

Capital expenditures were $17.9 million in the first half of 2012 and we continue to expect capital expenditures this full year to be higher than the $24 million in 2011.

The increased sales and purchases of equipment in 2012 are a result of efforts in Texas and other markets to ensure that we have [right-sized] in an efficient fleet.

Our overall effective tax rate was impacted by $4.4 million of earnings allocated to non-controlling interest holders. Excluding this impact, the overall effective tax rate was 21.3% for the second quarter and reflects the impact of nontaxable interest income.

Turning to our outlook for 2012, we continue to expect that 2012 revenues will be more than 25% higher than in 2011. This was also our expectation when we had our call to report the 2012 first quarter earnings.

Backlog at June 30, 2012, remained strong at $782 million and includes $69 million in new contract awards since March 31. We currently estimate that about half of our $780 million in quarter-end backlog will be constructed during the remaining six months of 2012. However, based on the estimated gross margins in our backlog, we expect that our gross margins for 2012, the full year, to be lower than the 8% reported for 2011 full year.

Although we've implemented changes to our internal controls to improve the process for estimating revenues and gross profits 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 reported in our 2011 annual report.

Sterling continues to be in sound financial condition. Net working capital at quarter end totaled $69 million and includes $68.8 million of cash and short-term investments.

Beginning with this quarter's report, net working capital reflects a $21.8 million obligation to the non-controlling interest centers attributable to the ROW [put] call options. This [put] call is exercisable beginning in the second quarter of 2013. Previously, it was reported as a long-term obligation.

We had no outstanding borrowings under our credit facility at the end of the quarter, and our bonding capacity is based principally on the balance sheet strength and is available to support continued revenue growth.

I will now turn the call over to our President and COO, Joe Harper, Sr. Joe?

Thanks, Liz. As Pat mentioned in our last quarterly conference call, we hoped for significantly better results in the second quarter and as Liz has just reported, we achieved good results from our operations. I'm pleased with the 9% gross margin for the second quarter and the 31% increase in revenues over the second quarter of last year. Operations in Texas have improved as a result of the changes that we have made and the net related dropdowns -- job write-downs for the second quarter have declined substantially. I believe we'll return to normalcy in Texas by the end of the year.

Operations in our other markets were never challenged as much as Texas and continue to run well.

We are quite pleased with the recently acquired businesses on which we closed last August and they continue to operate above our expectations, especially in light of the large projects, both Myers and Banicki were awarded last year. They have added both revenue and bottom line this year.

Backlog, while down from the second quarter, was still up from year-end, finishing at a healthy $782 million.

We continue to be selective on those projects on which we submit and are trying to move our margins back up. We're a low bidder on $69 million this quarter and we are selectively pursuing new work in all our markets with the opportunity to be involved in large project ventures, especially here in Texas and in California, has never been greater. Because of our operations in a number of states, our 1,500-plus full-time employees, our reputation for quality work, our financial and bonding position, we have numerous possibilities for proposing on work with many of the larger national companies.

The recently enacted MAP-21 legislation fund for state DOTs at previous levels for the next two years and while we had hoped for an increase, this will at least give states a two-year outlook that they can count on.

In Texas, we will submit on the Grand Parkway being built in Houston in a joint venture on August 22 and we'll find out if we are successful in this project on September 27. Texas DOT estimate is $1.1 billion. We're also involved in joint ventures in Dallas on our DART Rail project and another on I-35. We're in the process of forming a JV on the PPP project for Highway 288 in Houston for which early estimates are in the range of $1.8 billion.

The first contract for Highway 290 in the Houston metropolitan area [west] in September. This is a $100 million piece of a $900 million project that will be hard bid in sections ranging from $80 million to $120 million. We're also bidding on an estimated $128 million project in Dallas in September. This amounts to over $5 billion worth of work which we will be involved in pursuits with varying percentage ownership interest between 15% and 30%.

Brian Manning, our EVP of Business Development, is joining us from California today where he's visiting with a large general contractor to propose on the bridges in the first section of a high-speed rail project between Madeira and Fresno, California. There are 32 bridges on this first section.

We work long and hard to position ourselves to take advantage of these design-build opportunities and hopefully, we will have some success in these efforts.

One last note on our CEO search -- we have made significant progress on hiring a new CEO and hope to make an announcement very soon.

We certainly will have challenge s for the remainder of the year, finishing some of our unprofitable work here in Texas, but we also have significant opportunities to procure work at higher margins and add good backlog for 2013 and beyond.

With that, we'll welcome any questions.

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Thank you. Our first question is from the line of Nick Coppola of Thompson Research. Please state your question.

Yes. Just looking for some further clarity on the revisions -- how many new revisions were there this quarter and how much were they?

I don't know that we did -- well, we have given some specifics. There was -- in terms of number, we did see a number of new revisions. It wasn't of the tune that what we saw at year-end that there were a similar number. I think the positive is that probably five projects, we saw some very favorable provisions in Utah and these are projects that were nearing completion, and then in Texas, we probably had about 10 to 12 projects where we had some revisions downward. There was only one of those projects where the revision was fairly significant. The rest were -- had an impact of maybe $200,000 to $300,000, $400,000 per project. So we're encouraged. I mean, although that's not what we want to see in the future, it has improved quite a bit from what we've seen in the fourth quarter of last year.

Were the projects that we talked about over the last couple of quarters continuing to be a drag? Were the same ones for the revised or was it kind of new, different projects?

They were basically the same projects that we saw. San Antonio is one of our culprits where we've had some issues and we made a -- we brought on a new Vice President of Operations in the San Antonio Division, so we've got some new leadership there and I think that'll make a big difference. And then we did see some (inaudible) on the Baton Rouge project which I think we've mentioned on previous calls. So it was some of the same culprits.

So (inaudible) the new leadership, I mean, the new leadership across the Company that's they're announcing it, I guess that's been in place for a couple of quarter s now. Is there any kind of things that you can point to, or any kind of tangible improvements that you can speak of, whether it's in the kind of -- specifically about the bidding process or continuous feedback or anything like that?

Yes, Nick, this is Joe. The biggest changes in my view have been a renewed emphasis on the bidding effort. The review process for all proposals going in has been enhanced rather dramatically. There's been a much improved emphasis on safety and the safety, along with the meetings that go along with the safety program, seem to be having a really positive impact on morale across the Company. So I'm very pleased with what that team has been able to do in this short period.

Joe, I might mention as well the reporting systems, where we're getting information on a more timely basis.

Okay. And then just one last question from me -- you were talking about the new Highway Bill in your opening remarks, but is there really enough visibility for states to plan long-term projects here? Does it really move the needle for you guys?

No, I don't think it does really, Nick. I mean, I wish I could say, yes, that'll break the banks with us and all that, but I don't think that's what's going to happen. The projects from the time they're conceptualized to the time they start to build is a good year or longer, and then the average duration on the larger highway projects is two years-plus. So I don't think a two-year bill does very much good at all. It does solidify that there will be funding at least at that level and I think that's a real plus.

I would agree with you there, Joe, as well. A longer bill would be more beneficial, but we do have some visibility and we are not operating under continuing resolutions, so we've got $39.7 billion in 2013 and $40.3 billion in '14 that we know, and then the states can plan around that based on what they know that they have, and then look for alternative means for funding other projects.

Okay. That's helpful. Thank you.

Thank you. Our next question is from the line of [Sagar Shah] of -- [Sagar Akrit] with KeyBanc Capital Markets. Please state your question.

Good morning. This is Sagar on for Tahira.

Good morning.

Good morning.

Good morning.

So my first question was really on -- it was going to be a little bit on MAAP-21 also where I know your commentary in the press release and in the Q was qualitatively positive that 2013 is going to be a better year than 2012. Then I know you went through a little bit in your commentary about California and other markets that are stronger. Could you kind of just walk us through if MAP-21 is net neutral to net slightly positive? What really makes you incrementally comfortable that 2013 is going to be a much better year for the Company?

2013, we're projecting that that's going to be better, but it's going to be largely driven by revolving kind of issues that we've had on some of our projects in Texas. So we've seen so many write-downs over the last few quarters and we would expect 2013 not to be impacted the way that 2012 and the last half of 2011 were impacted with our better bidding process.

This is Pat Manning. What I think the other answer to that is that with the volume of work that's coming out, especially here in Texas, I think it'll start using up capacity for contractors, whether we're fortunate enough to be low bidder or not, and that will allow us to get -- should allow us to get better margins.

Okay, perfect. And then one follow-up on the project revisions downwards and upwards -- and I'm doing some quick math here, but Liz, you mentioned 10 to 12 projects potentially in Texas where you guys had downward revisions, that -- and you said $300,000 to $400,000 per project for the revision. Wouldn't that put the revisions for the quarter much higher than what they were last the quarter because I think last quarter, it was $2.4 million after tax. And then with that, we haven't -- we didn't really talk too much about what the positive revision on the Utah projects were. I just wanted to get more color on -- if you can provide anything more on that.

Some of those revisions are going to be a little bit lower, but in Utah, one project in particular had fairly significant revision and so it substantially offset -- I mean, net-net, we ended up basically at zero from the impact on the quarter. So we were very encouraged by that. We also had some positive revisions in some of the other regions, as well as a downward revision here and there. The [most] part is in Texas and Utah that was kind of offsetting each other.

We had positive revisions here in Texas too, though.

Yes, we did.

I mean, when we talk about revisions, realize that with 60-plus (inaudible) in operation pretty much all the time, there are revisions to virtually every project every quarter certainly, and likely every month. So revisions that don't hit the scope and radar may be included in the number that Liz has given you, but what I saw in the second quarter was pretty large mitigation on the total dollar impact of write-downs and some very positive impacts from write-offs netting out to the number s that you saw.

So pretty much in 2011 or 2010, pretty much of any other quarter in a normal environment, you guys always have these sort of revisions, but they're just part of the normal business?

Yes.

Okay, perfect.

And, say, since they're lower, typically, I mean, the downward revisions, we would typically expect those to be lower than what we see.

Yes, that definitely makes sense. And then one final question and I'll get back in queue -- related to pricing that's flowing into backlog now versus what was flowing into backlog last year and the past few years, any improvement there? And then if not, what makes you comfortable or what are you seeing out there that can really help pricing improvement in the marketplace?

Thank you.

I think on hard-bid projects, we have not seen any significant margin availability change, I don't think, in the last nine months or a year. The volume of work is increasing and I think the opportunities come from the large projects. Where we had one or two in the pipeline a year ago, today, there are four to six projects that we expect to be participating in in the very near future.

Perfect, thank you.

Thank you. (Operator Instructions) Our next question is from the line of Rich Wesolowski of Sidoti & Company. Please proceed with your question.

Thank you. Good morning.

Good morning.

Good morning, Rich.

Good morning, Rich.

It looked like I-15 contributed a lot more profit, but not a lot higher margin than would be reported recently. Was that a big factor in the gains from Utah?

Yes. It was actually a project (inaudible) project and then there were about three or four other projects that went along with it.

How is I-15 performing?

I think Pat --

Yes. This is moving along very well. We anticipate it likely being finished sometime in November or December and everything is playing to the fact that margins will be at what we estimated or better than that.

Great. You mentioned -- I think it was Liz -- that 2013 would be better because you wouldn't have the write-downs, but I'm curious if you view today's backlog and revenue as running at temporarily high rates driven by the Company's strategy of making profit in part through volume or rather, do you expect to increase sales and backlog in 2013 and beyond?

Well, that's a good question, Rich. I mean, we have what I consider to be a little bit of out-performance coming out of California right now that's going to be hard for them to match next year is my view, but I really think we're going to see upticks in the Nevada operation and Texas. So I think '13 is going to be flat to up and I think margin expectations, with my fingers crossed a little bit, similar to what you're looking at right now, may be up okay.

Right. Which will put your earnings up substantially from where they are in 2012.

I didn't say that.

Well, I will.

Okay.

What have your competitors suggested that (inaudible) was going to spend a lot more money next year than they are this year. Is that your outlook as well?

Well, they are, but that's in part because of all these large projects they're doing. They're doing the Grand Parkway that Joe mentioned, which is $1.1 billion. We've got $900 million on 290, plus they're bidding various and sundry other projects that will add to that price.

Okay. Would you elaborate a little bit, anyone -- if Maarten is on the call, perhaps -- on the pending CEO change? It sounded from your comments -- and this is my interpretation -- that you would have expected this to be completed by now.

I don't think Maarten's on the call. I'll answer just saying that I think we're very close. It's a process that we wanted to be 100% sure of and then when you get the candidate picked, you have to negotiate a number of things. So while we're a little behind, I think you'll be pleased with the choice.

Very good. And lastly, Liz, would you remind us why the revaluation of the non-controlling interest for the call bypasses net income but is included in EPS?

I'm just laughing because we've got to have --

It's (inaudible) it.

The reason -- it's a charge directly to retained earnings. It has to do with the fact that it's a revaluation of an equity-type instrument that's impacting your ownership interest, and so it's just one of those anomalies in the accounting rules that --

Even if it's something analogous to (inaudible) put in comprehensive income where they bypassed that income and they charge against equity and they don't hit EPS?

No.

It's kind of screwy.

It is kind of screwy, but no, it's more to the -- analogous to where if you have a subsidiary that issues additional stock or something like that, the gain or loss typically is going through [ATEC]. So to me, it's like that, where you've got changes in equity at your subsidiary level and that (inaudible) or other companies that's it's either a direct hit to equity, but they are supposed to be in your EPS calculations.

Yes. (Inaudible) there. You kind of shrug your shoulders and wonder why. Thanks a lot, appreciate it.

Okay. I know it's something that hard (inaudible) to forecast that, so it's just one of those things.

Yes.

Our next question is from the line of John Rogers of D.A. Davidson. Please proceed with your question.

A couple of things -- just back to the margin comments, Liz, you indicated margins, gross margins would be below 2011 levels, but it sounds like lower than what we saw in this current quarter. And I'm just trying to sort of reconcile that with improving margin conditions and presumably higher volume levels in this (inaudible).

Yes. I mean, John, we're basing that on where we stand in terms of our backlog margins at this point. I think obviously, you have other upward revisions for projects or downward if they could cause that number to be different, and so it's really a function of where are the backlogs today? And this quarter was very heavily impacted by what was going on in Utah and we're not factoring into that forecast (inaudible) upticks and gross margins on projects in the future.

Okay.

Now, remember, a lot of the volume in Q2 and continuing into 3 and a lesser extent in 4, are projects that turned out to be lost jobs where we are building work with zero margin.

Sure, okay. So it's just diluting some of what's there. Okay. And then just on the sale of excess equipment, are you through that or is there more to be sold? It seemed like a lot of equipment has been sold over the last six months or (inaudible).

I think [buybacks] continues through the next two quarters, maybe not quite at that pace, but particularly in Texas, but also some in Nevada, we have excess equipment given current backlog expectations and the decision has been made to not carry that. So I think you'll see us continuing the next two quarters' disposals.

Okay. And then in terms of the big project opportunities that you talked about, I mean, out in California and as well as in Texas, your role in those projects, I mean, I'm guessing from what I'm reading about some of the very large contractors coming into those markets, that it would be similar to the type role that you had on the I-15.

I think that's correct. We -- with the projects being in excess of $1 billion, you typically have a larger contractor. In the case of the Grand Parkway, that would be Hewitt and Granite who are our partners on that particular project, so they're accustomed to the risks involved in these larger projects and our percentage of those projects are lower, but higher than you may have seen on the I-15 core project.

Okay. I mean, just given -- I mean, you've got the entire (inaudible) involved. And how should we think about both the risk and kind of the margin opportunities on the large projects versus particularly what Sterling has done historically? I mean, I know your margins are below where they have been and it sounds like, Joe, from your comments, it's going to take a little while to get them back up, but as you pursue the larger projects, it's obviously a lot more dollars, but do you expect margins to be potentially back up above that 10% level, low-teens level, that you've strived for in the past?

Yes. In our hard-bid markets, I would not expect to see margins above 10%, John, but probably a few points below that, but as you -- as the mix changes of the volumes being generated through larger projects -- I mean, larger projects, they're substantial double-digit numbers and we've heard this from virtually every partner we have discussed -- potential partners that we've had discussions with. So what that blend looks like makes it a little tougher for us and you guys, I guess, on the one hand. On the other hand, I think on a combined basis, I'm pretty optimistic.

Those larger projects would include those alternative delivery and, yes, there's typically a higher risk profile on there, so you get more into the higher reward.

Okay. And lastly, there's some very large water projects planned and starting to be built in Texas. Are you chasing those opportunities or --

We are looking at all water opportunities and there are several, as you mentioned, in Texas that are right along the lines of our business. Some of the lines that are cross-country lines, if you will, we are typically not as competitive in those, but they do have our attention.

And is, Brian, is there a significant water business in your backlog now?

There is not -- as a percentage, there is not a significant percentage of water, but we do still maintain those utility crews that would be able to react to some of the larger projects, so it is not a stretch for us to have a large project come along and then we still get the superintendents and the expertise project management to pursue them.

Okay. And just lastly (inaudible) -- outside of the markets that you've mentioned -- Utah, California, Arizona, Texas -- any other regions or states that you've got your eye on or project opportunities?

I think with the geographic footprint that we have right now, and some of the smaller acquisitions that we've done, we are taking an approach of participating with local firms in order to grow that business, so to say that we're looking at billion-dollar opportunities in other states, other than the ones that we mentioned, is probably not realistic, but certainly possible with these subsidiaries that are recent acquisitions. So we will participate with these relationships that we've developed and if there's opportunities in other states, we'll certainly look at them, but none other than the ones mentioned, or the states mentioned, where we've got fairly large opportunities.

Okay, great. Thank you all very much.

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

Just a couple of follow-ups -- as you look at your states, are you seeing any improvement in private construction, any res and non-res?

Repeat that question.

Are you seeing any improvement in private markets? I guess the idea being that it would, I guess, improving the kind of environment for the public work that you do?

Oh, yes. I think we're starting to see a lot of that in Texas. I remarked to somebody the other day that I'd drive 15 miles from my house into work and for the last three years, I haven't seen anything going on, and now I'm seeing strip centers going up, a little office building here and there's starting to be activity.

The developers are also concerned that they're running out of backlog of new homes, so we're starting to see new development, which is the first step in recovery.

Do you think that's true across the states where you have a presence or are there any in Texas (inaudible)?

I think Texas is definitely better than others, Pat (sic). I think Arizona is still significantly challenged. Nevada is challenged for new home building and for that recovery to start, but I mean, typically it starts in one place and then spreads across the country. So we're bringing a lot of positive activity out in Utah right now, right?

Yes.

Okay. And then just my last question -- do you think looking at the Highway Bill, is [TIPIA] going to have any significant impact? Do you have any read whether or not DOTs will utilize that piece of legislation?

I think they typically do look at the [TIPIA] loans and utilize that in some of the larger projects where they'll apply for those grants, if you will, and have that as a tool. We're also seeing bonding -- positive reaction to bonds and selling bonds for certain toll projects in particular.

All right. Thank you.

Thank you. There are no further questions at this time.

We appreciate all your time and look forward to talking to you next quarter. Thank you, (inaudible).

Thanks, guys.

That concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.