Sterling Infrastructure Inc (STRL) 2013 Q3 法說會逐字稿

Greetings and welcome to the Sterling Construction Company third-quarter 2013 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, Brian Manning, Executive Vice President and Chief Development Officer for Sterling Construction Company. Please go ahead sir.

Good morning. On behalf of Sterling Construction on this Veterans Day, we thank those who have served our country honorably so that we may have the opportunities and freedoms we enjoy today.

Sterling released its quarterly financial results on Friday because of today's holiday. Also, our thoughts and prayers go out to those affected by the typhoon in the Philippines.

I'm joined today by our CEO, Peter MacKenna, and our CFO, Tom Wright. Tom joined us in September and has taken the reins from Kevan Blair, who served as interim CFO and continues to provide continuity to Sterling in the role of Senior Vice President Corporate Finance. I encourage you to ask questions about Tom's background in his initial assessment of Sterling Construction later in the call.

Today's conference call includes statements within the definition of forward-looking statements under the Private Securities Litigation Reform Act. Such statements are subject to risks and uncertainties, including overall economic and market conditions, competitors' and customers' actions, or weather conditions and other risks identified in the company's filings with the Securities and Exchange Commission which could cause actual results to differ materially from those anticipated. Such statements should be considered in light of these risks. Any prediction by the company is only a statement of management's beliefs at the time the prediction is made. Management's beliefs may change over time and the company does not undertake to update its predictions.

And now I'll turn over the call to Tom Wright, our Chief Financial Officer.

Thank you Brian. I'm excited to be part of the Sterling Construction team and delighted to discuss our third-quarter financial performance.

The third-quarter financial results for Sterling Construction reflect a significant improvement sequentially from the second quarter of this year. Revenues for the third quarter were $185.9 million, which were 9.4% lower than the third quarter of 2012 but 39.4% higher than the second quarter of 2013. Revenue declines from 2012 are attributable to the completion of a few very large projects, and an increase of revenues from the second quarter reflect improvements both from an increased backlog and also from normal seasonality in the construction business.

Gross margins for this year's third quarter were 4.5% of revenue compared to 6.9% in the third quarter last year. The third-quarter gross margin results continue to be negatively impacted by projects awarded prior to 2012, but represent a significant improvement sequentially from the last two quarters when we reported gross margins of negative 12.5% in the second quarter and positive 1.2% in the first quarter.

General and administrative expenses in the third quarter were 4.4% of revenue compared to 5.0% in the third quarter of 2012. This decrease is primarily due to one-time expenses in the 2012 third quarter.

For the nine months ended September 30, 2013, G&A was $27.3 million, representing an increase of 3.4% from 2012. This increase is due primarily to the additions to the IT team in 2012 to upgrade the company's IT infrastructure as well as certain nonrecurring costs related to the implementation of process improvements aimed at improving operational control and efficiency and an increase in certain employee benefit and termination costs.

Operating income for the quarter was $1.5 million compared to $4.2 million in the third quarter of 2012 and a negative $26.1 million in the second quarter of this year.

Net loss attributable to Sterling common shareholders was $0.2 million compared to net income of $1 million in the third quarter of 2012. Net loss per share attributable to common shareholders was $0.06 per share compared to net income of $0.01 in the third quarter of 2012. Excluding the revaluation of a liability related to noncontrolling interest owners, the net loss per diluted share attributable to common shareholders was $0.01 compared to net income of $0.06 in the 2012 third quarter.

Capital expenditures for the third quarter were $4.6 million in total, $11.3 million year-to-date. This compares to $10 million in the third quarter of 2012 and $27.8 million 2012 through September. The company continues to carefully analyze all capital expenditures and expects the CapEx for the remainder of 2013 will remain significantly below 2012 levels.

Bookings for the third quarter were $165 million, representing a 4.4% increase from the third quarter 2012 and a 7.1% increase from the second quarter this year. Total backlog as of September 30 was $694 million, compared to $714 million at the end of the second quarter. Current backlog contains $261 million of projects awarded in 2012 at an average margin of 6.3% and $314 million in projects awarded in 2013 at an average gross margin of 8.3%. Approximately 17% or $118 million of our backlog is attributable to awards prior to 2012 and carries an average gross margin of 1.8%. This backlog is scheduled to be substantially completed in early 2014.

Our financial condition remains sound and the company ended the third quarter with $54 million in working capital, including cash and short-term investments of $26 million, and borrowings under our credit facility of $20.4 million.

I will now turn the call over to our CEO, Peter MacKenna.

Thanks, Tom, and good morning. In these short prepared remarks, I'd like to take a few minutes to address some of the issues and trends we are seeing in our business. Of course, we will be available to answer your specific questions in a few moments.

[Asking about] the quarters, many of the trends highlight the positive impact of the steps management has taken over the past few quarters to approach to stabilize our troubled projects and, second, prepare the organization for growth and sustainable earnings.

I'd also like to take this opportunity to welcome Tom to his first conference call. While Tom has only been here a few short weeks, I'd like you all to know that he has already had a significant positive impact and has proven to be a valuable business partner not only to me but also to the company's entire management team.

First and foremost, I want you to know how extremely proud I am of the nearly 1800 men and women of Sterling. In the third quarter, they worked more than 915,000 man-hours and did so without a single lost time accident. In fact, so far this year, the employees of our operating, Texas Sterling, have worked more than 1.6 million man-hours without a lost time accident. This is a remarkable achievement for any construction company, but even more powerful in this case as it is an accomplishment from what has been our most challenged operating unit.

As I have said in prior calls, I believe improving safety performance is a leading indicator of improving project performance. A robust safety program such as ours requires pretax planning and hazard analysis. When you are planning to work safely, you are also planning to work efficiently and deliberately.

With respect our third-quarter reported results, once again the positive trends in our business were somewhat obscured by the margin drag from our remaining pre-2012 contracts. However, we have seen evidence that these headwinds are finally near an end. As Tom noted earlier, we continue to burn off low margin work acquired prior to 2012. This low margin backlog now accounts for only 17% of the total and is scheduled to be substantially burned off in early 2014.

Our projects acquired during 2012 and 2013 are performing as expected. While there is always a possibility of project volatility, especially with projects in a loss position, we are cautiously optimistic that the worst may be behind us.

We continue to be encouraged by our level of order bookings and the margins associated with our newer projects. As of the end of September, our year-to-date low bid to bill margin was 1.11-to-1 with an average margin in excess of 10%. That's nearly $480 million in new orders.

As Tom said, our backlog at the end of the quarter was $694 million, but I want to mention that does not include more than $120 million worth of work pending contract execution. We continue to pursue new opportunities with careful deliberation and rigor in an effort to mitigate as many of the risks in the marketplace as possible.

Looking to the balance of 2013, we expect revenues to be flat or slightly down relative to 2012. More importantly, however, we anticipate the favorable bookings trend to continue both in terms of revenue and gross margin.

General and administrative expense for the balance of the year will remain higher than in 2012 mostly as the result of the cost of improving our leadership team and the process improvement investments we are making to position the company for integration and future growth. And as Tom noted earlier, we expect our capital expenditures for the year to be significantly lower than prior periods as we continue to believe that our current fleet augmented by leased assets as appropriate will give us more than adequate capacity to support our growth in 2014 and beyond.

I will now turn the call over to Brian Manning, our Executive VP and Chief Development Officer.

Thanks Peter. We are pleased that we have a healthy backlog and we recently announced a $38 million win in Collin County, Texas, which is additive to the $120 million that Peter spoke of as of September 30 where we are current low bidder. We continue to pursue over $4 billion in traditional bid build work and $3.5 billion in alternative delivery projects. In addition to these potential projects, we are currently actively pursuing $598 million that is in the RFQ stage and $432 million where we have been selected to compete in the RFP stage.

Construction employment is picking up. According to the Associated General Contractors of America, employers added 11,000 jobs in October, which marks the 50-month high with construction employment. The government shutdown did not significantly affect this growth as construction projects were ongoing. Voters in the November 5 election continued to support state, local infrastructure measures. What most notably impacted Proposition 6 was supported by the voters, establishing a state water implementation fund, SWIFT, for Texas. The ballot initiative will utilize $2 billion from the rainy day fund to provide low interest rate loans for Texas governmental agencies across Texas. This initiative could fund over $25 billion worth of projects in the foreseeable future. The account will be managed by the Texas Water Development Board.

We continue to explore new markets for growth and diversity. Recent examples of this geographic diversity are ongoing in new work in Colorado and Hawaii. We continue to explore favorable M&A deal opportunities that meet our strategy and objectives to expand into new geography and new service lines, and that give us the opportunity to apply all of our operational competencies across our platform.

Now we welcome your questions.

(Operator Instructions). Saagar Parikh, KeyBanc.

Good morning. Congratulations on the good quarter. So, first off, you guys mentioned Proposition 6 passing in Texas last week. Can you give us a better idea of what percentage of your business right now is related to water infrastructure, and what really the upside is and when we could really see a flow-through of Proposition 6 related work coming in? Is that more of a 2014 impact or a 2015 impact?

If I had to guess, it's probably more of a 2015 impact. Although I have always been surprised at how rapidly things move in Texas. To answer your question, about 20% of our work is in that municipal sector, which includes water and wastewater. I think that the Proposition 6 is potentially a very long-term program, and I've seen numbers that say it's as high as decades in terms of being available for funding. But $25 billion goes a long way in providing water resources.

And one of the things I found fascinating was that about 0.5 million people a year move to Texas. And that creates huge water demand, so I think as Texas continues to increase in population and develop, these water demands are going to increase as well. I am pretty bullish on water opportunities for us going forward in the Texas business.

How do the markets compare on the water business versus the pure civil infrastructure transportation business?

Favorably. How's that?

That works. And then a second question, $118 million in legacy projects you guys mentioned in your remarks. How much of that has 0% gross margin already, and so pretty much how much of that $118 million legacy project is still coming in at normal gross margins?

That's a good question. I'm not sure I'm prepared to state that. There are three large projects in loss position in that group, and then the balance are more and more typical margin. But overall it is substantially less. Even the typical projects are substantially less than what we are seeing in the post-2011 backlog. I think you can safely say there three significant projects in a loss position.

I remember where is really trying to go there was to see the risk and how much work do you have in (inaudible) legacy that hasn't maybe been taken down already. Outside of that, last question from me, you mentioned $120 million in lower ward work. How much of that is related to CalTrans?

That's a good question. I don't have that at my fingertips, but if I had to guess, it's about a third of it.

A third of it. Okay. That's perfect. Thank you very much.

Matthew Paul, Sidoti.

Hi guys. Good morning. Congratulations on the quarter. Thanks for taking my questions. The previous caller knocked out a bunch of them regarding Proposition 6. But can you touch upon the competitive landscape you see in the next few years for the pipeline that just opened up with new funding?

The new funding is just a piece of the puzzle, and it's really just here in Texas which accounts for a portion of our business, but not the majority of our business.

What I find fascinating is that there's a lot of conflicting information in the marketplace right now about the opportunities coming in the non-building sector over the next year. And some forecasts have it growing; some forecasts have it relatively flat. But with that said, our pipeline is at a record level right now in terms of opportunity. I think part of that is looking at more nontraditional work and expanding our geography. And another part is I think just in general that the areas we focused on tend to be a little more robust and maybe not as dependent on the Highway trust fund and some of our traditional funding sources. So, with that said, the pipeline is, as I said, at record levels. It's very strong. Again, fairly optimistic with the opportunities ahead of us. You never know in a competitive bidding environment how successful we will be, but the opportunities are there at least right now.

Okay, thank you. Moving forward to the labor increases you've seen in the quarter, can you comment or if there's any metric to show on the quality of labor coming into your company versus the previous two years or so?

I mentioned on the call that the employment is at higher levels. What we are seeing is the influx of a new group into the construction market. In the areas where we work union, the consistency in the quality is much, much greater. And where we are working on non-union, there are significant challenges in getting these employees on boarded, making sure that they are working safe. But we've got a robust program in place in order to do so and protect their safety and productivity.

I should mention also part of the process is to make sure that we get very good craft labor. That is as Brian said the very best quality craft labor we can get. To that end, HR has been charged with improving their recruiting program and their onboarding program again to make sure that we are working safe, but that we are getting the right folks on board.

We're still, in the Texas market anyway, still competing with the oil and gas sector, and it is a challenge when they are paying substantially more than the construction trades are.

And in terms of the union environment that Brian mentioned, it is more stable, although we do see some challenges in Hawaii, where even though we work union, the availability of labor is somewhat constrained.

Okay, last question, guys. I just wanted to -- I don't think I heard anything on the call but I wanted to see if you could touch upon any progress you've made in the Hawaiian market. If there's any larger projects in the pipeline coming through?

We've been focusing more on the smaller projects, to be honest. Part of our strategy is to go after smaller work, not hundreds of millions, but smaller projects where we have better visibility in terms of duration and that allows us to look at the quality of our labor, both in availability and in competency. So, we are not pursuing any very large projects in Hawaii, but with that said, we are pursuing a fair number of smaller projects. And the programs tend to be smaller in Hawaii anyway.

Okay. Thank you for answering my questions.

John Kasprzak, BB&T.

Thanks. Good morning, everyone. My first question is just on the comments in the press release around G&A to approximate current run rate. I just want to be clear. Does that refer to the dollar amount of run rate, or is there a run rate as a percent of sales that we should be thinking about?

This is Tom. Our current G&A run rate is probably around 6% of revenue on an annualized basis. The quarter was lower due to some one-time factors, but a lot of the G&A that we've added is very scalable. We needed to add IT infrastructure and backlog, and that's very scalable as we grow going forward. So I would say our current revenue level is just around 6%. As we grow, we should be able to reduce that as a percent of revenue.

Okay. Great, thanks. Second question, kind of back to the conversation around funding sources and what are you seeing out there, another funding source the various companies have talked about is TIFIA. Are you seeing any impact from TIFIA? Do you expect it? What kind of opportunity do you think that might provide you? I think Texas is one of the areas where there's some projects that are being supported with TIFIA funding.

We are seeing it, and it is supporting our program. Typically, on some of these alternative delivery projects wherein the projects can go back to the federal government and apply for these loans based on the merits of the projects that they are working on. So a current pursuit that we are working on, 288 under a PPP, public-private partnership, a percentage of that funding will come from TIFIA loans or private activity bonds.

I want to just mention the vast majority of the work that is in the pipeline right now and that we are pursuing probably will not be looking at TIFIA financing. That really is sort of exclusive to the very large projects or the unique alternative delivery projects. We are still attracting billions of dollars worth of traditional, more attractive work.

Okay, great. Thanks for that. The last question would be maybe how long a similar line in terms of what you're seeing. We know the decline in private construction in recent years, severe decline in pressured bid margins on public work, bid lists have gotten longer. Has that changed, in your view, recently? What are you seeing kind of in the big picture?

We are seeing an uptick in private construction, so some of the players, the smaller players that have entered our markets, have gone back to subdivision development and paving. And we all have seen another trend in some of the larger players, in particular international players, entering the market on dollar values over $100 million, large highway projects over $100 million. So there's a couple of different dynamics going on in the industry, but in the areas where we typically play, we've seen a lightening of competition.

Just to add to that, while we still see some projects with six and seven bidders, we're also seeing project with three and four bidders. And in the year and a couple of months that I have been here, it does seem to be a trend that we are seeing fewer bidders. I think Brian is right on with that, that some of the smaller guys are moving back to their traditional markets.

Okay, great. Thank you very much. Appreciate it.

(Operator Instructions). John Rogers, D.A. Davidson.

Hi, good morning. First of all, I guess, Peter, the last couple of quarters, you had given us your average or total margin within the backlog. What is that in aggregate at the end of the third quarter?

is going to dig it up quick. We've been breaking it apart because it actually helps if you take it apart.

It fell into three pieces. There's $261 million at 6.3%, $314 million at 8.3%, and then the rest is just the legacy backlog at 1.8%.

We'll leave it to you to do the (inaudible).

That's what I was trying to get to is the (multiple speakers). Yes, perfect, thank you.

And then the other question I had, can you give us a sense of what your revenue mix is? And I know you've got seasonal factors in here, but Texas versus Utah versus Nevada versus California?

I'd rather not break that out. We don't report quite like that.

What we are saying is that about 80% of our revenue is in the heavy highway sector, and the balance is in the project development for the utilities. And we are doing more private development work, especially the Utah operation, in terms of parking structures. It's something they've been really good at and have been exported it both to Arizona and Colorado, as well as in Utah and Idaho, sorry. And also working with some of the heavy (technical difficulty)

(technical difficulty) -- up along the coast of California. That's where the major -- we are seeing some of the major, specifically alternative delivery in excess of $100 million projects. In California in particular, we are seeing it but not necessarily, we are not necessarily playing in every phase as a JV partner. We're strategic (technical difficulty) to some of the teams that are pursuing the project. In Texas in particular, we are pursuing -- there are several rather large jobs that are being put out by the Texas Department of Transportation. And those projects are relatively large. So we are evaluating each of them for our participation on them, whether that's a JV partner or a dedicated subcontractor.

Okay. And Brian, are these toll roads, or large freeway projects, light rail? Color there?

It's a mix of all of those things. But tolling is a key factor in helping with the financing of the projects. So tolling is an aspect of it. It may be managed lanes or toll lanes because, in a lot of areas, you have the three lanes that need to be maintained and then you're adding toll lanes to that alignment.

Okay. All right. Thanks, gentlemen. Appreciate the color.

Thank you. It seems we have no further questions at this time. I'd like to turn the floor back over for any closing comments.

Thank you Brenda. Again, welcome to Tom who joined the team in his first conference call. I encourage you, if you have questions, to reach out for management in the future, and we will try to accommodate your questions as best we can. I wish you all a wonderful Veterans Day and look forward to our next conference call. Thank you very much.

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