Sterling Infrastructure Inc (STRL) 2013 Q4 法說會逐字稿

Greetings, and welcome to the Sterling Construction Company's fourth-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.

I would now like to turn the conference over to your host, Brian Manning, Executive Vice President and Chief Business Development Officer. Thank you, sir. Please go ahead.

Good morning, and welcome to Sterling Construction's fourth-quarter 2013 and year-end conference call. I'm here today with our President and CEO, Peter MacKenna; and our Executive Vice President and Chief Financial Officer, Tom Wright.

I'd 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, competitor, 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 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.

May the road rise to meet you is a fitting blessing for Sterling today on St. Patrick's Day, as we expect significantly improved performance in 2014. As of December 31, 2013, there was plenty of work for our hands to do, as we enjoy a healthy backlog of $687 million.

I will now turn over the call to Tom Wright, our Chief Financial Officer.

Thank you, Brian. I would like to discuss 2013 fourth-quarter financial performance. The fourth-quarter financial results for Sterling Construction reflect the previously announced charges primarily attributable to three large Texas projects awarded prior to 2012. Operating results for the fourth quarter are consistent with the loss range previously announced.

Revenues for the fourth quarter were $125.9 million, which were 20.4% lower than the fourth quarter 2012. The decline in revenues compared to the fourth-quarter 2012 was due largely to the write-downs on the three large projects in Texas already mentioned and also due to the impact of weather issues that negatively impacted these jobs.

Additionally, revenues in the fourth quarter of 2012 benefited from revenue attributable to a large project in Utah which was substantially completed at that time.

Gross margin for 2013 fourth quarter was negative 18.3% of revenue, compared to positive 10.3% the fourth quarter of 2012. Fourth-quarter gross margin decline was driven by the write-downs on the three large Texas projects mentioned. For the full-year 2013, margins were negatively affected by downward revision of the projects awarded prior to 2012. These pre-2012 projects accounted for 45% of total fourth-quarter 2013 revenues.

General and administrative expenses in Q4 were 10.9% of revenue compared to 5.8% in the fourth quarter 2012. The increase in G&A expense was due primarily to $2.9 million of one-time expenses in the 2013 fourth quarter attributable to investments made to enhance our management team and costs associated with the evaluation and pursuit of acquisition opportunities. For the full year 2013, G&A was 7.4% of revenue due to one-time costs, and in 2014 we expect this figure to revert back to the 6% of revenue range.

Operating loss for the quarter was $37 million compared to operating profit of $7.1 million in the fourth quarter of 2012. Net loss attributable to Sterling common shareholders, which included a $28.2 million non-cash tax valuation allowance, was $52.1 million compared to net income of $2.9 million in the fourth quarter of 2012.

Net loss per share attributable to common shareholders, including this allowance, was $3.52 compared to net income per share of $0.01 in the fourth quarter 2012. Also included in the fourth quarter was a negative impact from the revaluation of the liability to non-controlling interest owners of $0.40 per share. A new agreement was reached with this partner that will eliminate this entry in the future.

Due to the charges in the 2013 fourth quarter, the Company was in a three-year cumulative loss position; and as a result, we determined it was necessary to recognize $28.2 million tax valuation allowance. This valuation allowance does not impact the Company's cash position. As profits are realized in the future, the deferred tax asset can be adjusted upward, and we had net operating losses available to offset income that mostly do not expire for 20 years.

CapEx for the fourth quarter was $3.6 million and totaled $14.9 million for 2013. This compares to $9.5 million in the fourth quarter of 2012 and $37.4 million for the full year 2012. The declining capital expenditures reflects the Company's efforts to carefully manage capital expenditures, and we do -- and we expect 2014 expenditures to be consistent with 2013 levels.

Bookings for the fourth quarter were $119 million, and for the full year 2013 were $635 million. Total backlog as of December 31 was $687 million, which is 4.7% higher than the end of 2012 and approximately the same as the September 30, 2013 levels. Approximately 18%, or $123 million, of our backlog reflects projects awarded prior to 2012 which are scheduled to be substantially completed by the second quarter 2014.

Our year-end 2013 working capital was $8.7 million, year-end borrowings under our credit facility were $7.8 million, and 2013 year-end tangible net worth was $78 million.

Due to the write-down taken in the fourth quarter 2013, as of December 31 the Company was not in compliance with certain covenants of its credit facility that had since successfully negotiated waiver with its primary lender.

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

Thanks, Tom, and good morning. In these sort prepared remarks, I'd like to take a few minutes to address some of the issues and trends that we're seeing in our business. And, of course, we'll be available to answer your specific questions in a couple of minutes.

First and foremost, I want you to know how extremely proud I am of the men and women in Sterling, especially as we remain focused on providing a safe working environment for our employees during these difficult times.

At the year ending on December 31, Sterling and its subsidiaries delivered best-in-class safety performance. For the year, Sterling had a lost-time injury rate of 0.17, but a best-in-class safety statistic is no substitution for having no accidents. We will be rolling out our Sterling Safe and Sound program during the first quarter, and it is designed to take our safety program to the next level. I look forward to telling you about it in more detail in the near future.

As Tom described, our fourth-quarter financial performance was unacceptable, as we continue to be plagued by several large projects in our Texas subsidiary. During the fourth quarter, a series of events including chronic raw material shortages, subcontractor failures, and other operational issues pushed our paving operations into the winter months, the result of which was our work being impacted by some of the harshest winter weather in recent memory. This, combined with other less impactful but nonetheless negative items, caused us to incur a record loss in the quarter. While we were dealing with these issues throughout the fall of 2013, the full impact, including the impact of the harsh winter weather, did not become clear until January.

We continue to be encouraged by our level of order bookings in the margins associated with our new projects. As Tom described, at the end of December our year-to-date low bid-to-build ratio was 1.14 to 1. As Tom also said, our backlog at the end of the year was $687 million, but I want to mention that does not include more than $123 million worth of work pending contract execution. We have been effectively implementing our strategies to pursue alternative delivery projects and achieve better collaboration between our business units.

A good example of this is the $80 million contract awarded in January to Myers and J. Banicki Construction for work at LAX airport. And just last week we announced a successful $52 million effort between Myers & Sons and Ralph Wadsworth on a project in Mariposa County, California.

Following my comments, Brian Manning, our Chief Development Officer, will briefly discuss our marketplace and the opportunities we are tracking.

Looking forward to 2014, we expect revenues to be higher than 2013. But more importantly, the loss-making pre-2012 projects will be completed. At the end of the first quarter 2014, the loss-making projects in aggregate will be 96% complete. We also anticipate the favorable booking trend to continue both in terms of revenue and gross margin. And, as Tom noted earlier, we expect our capital expenditures to be consistent with 2013 as we continue to believe that our current fleet, while [vented] by leased assets as appropriate, will give us more than adequate capacity to support our operations in 2014 and beyond.

And I want to say we're off to a strong start. As of the end of January, budgets and project performance are tracking as we expected. And at the end of February, we have been low bidder on approximately $139 million worth of new work. Our IT investments are beginning to pay dividends as we continue to roll out controls for use both at the tendering stage for projects and also for enhanced project execution. We believe that our Texas subsidiary and all of Sterling has turned the corner from the last three and very difficult years.

I'll now turn the call over to Brian Manning. Brian?

Thank you, Peter. According to the American general contractors association, the overall industry has seen total construction spending in January experience the steepest year-over-year increase since 2006 despite adverse weather conditions. Most of this growth was attributed to home building, a leading indicator for the heavy civil construction industry.

The federal highway bill, MAP-21, will expire on October 1, 2014. We expect a series of continuing resolutions for the bill with similar funding levels until a new one is approved by Congress and signed by the President. President Barack Obama's budget proposal for fiscal year 2015 allocates $302 billion for transportation projects over the next four years. A highway trust fund, the source of approximately 52% of all highway funds, is almost insolvent, and the lack of funding for the projects may be realized as early as this summer.

Sterling's backlog is more diversified than ever, which is in line with our strategies and objectives to position our business for future infrastructure spending and is currently away from traditionally federally funded work.

One example where we have had recent successes is in water infrastructure. This infrastructure relies on user fees for funding, and each year over 5000 miles of water line are replaced, with the biggest opportunities for water infrastructure growth being in the South and West. Today, our backlog has the highest dollar amount of water infrastructure projects and privately funded projects than in the past five years.

Peter mentioned our coordinated subsidiary JVs. And as of 2014, we have a unified customer relationship management system where we share information about customers and potential projects across all subsidiaries. Today, within this system, we are tracking and pursuing over $9.5 billion in opportunity and bid-build and alternative-delivery projects.

And now, we welcome your questions.

(Operator Instructions) Saagar Parikh, KeyBanc.

So first question on your backlog numbers you provided in the press release. Just looking at it this quarter versus the prior quarter, it seems like your gross margin profile for the work that was booked in 2013 has decreased, going from 8.3% last quarter to 7.3% this quarter. So can you just give us some color on maybe what's happening with pricing in the market, and/or did you guys book a project that just was at lower margins and the reasons why?

Saagar, it's Peter. The project mix is changing around a little bit, and some of the higher-margin work in the prior quarter revolved around some of the water work that Brian talked about. But also we've been pursuing some alternative delivery projects; in particular, projects that are referred to as CMAR, which is construction manager at risk, and also CMGC, which is construction manager general contractor. They have different risk profiles and different margins associated with them. They also allow for a certain amount of negotiated work in addition to the margin that we post when we book it.

So I wouldn't read too much into that dropping down a little bit. I think initially they come in a little bit lower and they wind up having a fair amount of negotiated work following on. But I think that's probably the best explanation that I could offer.

Okay. Thank you. And then another question on backlog real quick. Looking at your pre-2012 backlog that you guys announced last quarter to your pre-2012 backlog that you announced this quarter in both the press releases, seems like the number was flat to even slightly up a little bit this quarter. Can you give us some color on what's going on there? And then what's the confidence that that pre-2012 backlog will start to decrease substantially over the next six months?

Saagar, this is Tom. When we took our charges and adjusted the revenue on these jobs, it resulted in pushing out some of the work into 2014. So that's why you saw that the backlog associated with these projects is actually a little bit higher than it was at the end of last quarter.

As far as the confidence that they'll actually be done, I think Peter mentioned this in his comments that we'll be 96% complete by second quarter, and we have job schedules to support those. So we will be substantially complete on all those pre-2012 jobs by the end of the second quarter.

As a matter of fact, one of them will be finished -- substantially complete within the next few weeks. So that they are burning off (technical difficulty).

And you mentioned the uptick in the fourth quarter because of higher G&A expenses, specifically mentioning management team enhancements. Can you just give us additional clarity on what maybe you guys did in the fourth quarter and what specifically you added? Thank you.

We are adding new positions within the Texas Sterling group to enhance the controls within that business. That business has been the source of the write-downs that we've had taken. So we've identified some new positions that are needed to enhance the controls so that we make sure we never get into this situation again.

Just so you know, there is now a dedicated project control function within Texas Sterling that has very high profile and very competent people within it. And of course, the object here is to make sure this never happens again but more importantly make sure that information is getting back to the people that can affect change when projects encounter challenges.

All right. Perfect. Thank you very much.

Jack Kasprzak, BB&T.

The waiver on the -- that you got from your lending group, did that occur within the last day or two? Just wondering why they -- if it were a different time frame than your earnings release why you wouldn't have put out a separate press release. Or was it just kind of concurrent with today?

(inaudible) I haven't (inaudible).

Okay. And I guess jumping on the sort of last question, but we've had several quarters in a row where we thought the worst was behind us in terms of the Texas projects. You've been investing in the IT and oversight and supervision functions as well along the way. What's sort of the confidence level that we really are toward the -- at the end, toward the end of these problem projects, just given the elongation of them over the last year? I think people are probably rightly skeptical that the end may not be as close as you think it is, even now.

That's a fair question, Jack, and I certainly understand it. We've deployed a lot of resources from all around the organization to these troubled Texas jobs to make sure that we're deploying every resource this Company has got to get them done. One of them, as I mentioned (technical difficulty) a few minutes ago, we're within a couple of weeks of substantial completion. The second one essentially is substantially complete right now, and the last one looks like it will finish up in June -- early July.

And frankly, I mean, the jobs are just finished. They'll be opening to traffic shortly. So in terms of how much more can we go, we're finishing the projects physically. So I don't think they can go on much further.

You know, just looking at our backlog split, in 2012, projects -- sort of this post legacy issue -- there's about $175 million worth of backlog. And that's performing in north of 7% range, so -- and it's holding; it's performing as we expected. So I don't know whether that gives you any comfort, but it does for us as we see this as all (inaudible) and see the quality of stuff behind it. And more importantly, the post-2012 projects are holding their margins and are being executed as we expected. And our focus on smaller projects now, where we have much better visibility while we get these controls in place, it's kind of like changing the engines mid-flight. So we focus on smaller jobs until we can get the controls in place to go after big jobs.

Okay, that's fair. I mean, with regard to the three problem projects is there any thought that once they are complete you might be able to recoup or claw back any of the problems, any of the write-downs on those jobs, or will it just be time to move on?

It is certainly something we'll be looking at closely.

Okay. Some other companies in the construction industry, just in the last quarter earnings season, talked about some stability and the number of bidders; maybe even a reduction in the number of bidders versus one or two years ago that's not necessarily pushing pricing up but certainly has stabilized pricing. What are you guys seeing in terms of competition for jobs?

I think there are pockets of intense competition still out there, particularly Nevada and Utah as well. But frankly, those are those highly commoditized projects that are no longer the focus of our efforts. We really want to get into things that are more alternative delivery that have more margin potential. It doesn't make a lot of sense to pursue these highly competitive jobs.

Looking at in Phoenix to a lesser degree, which is why you're seeing our Phoenix subsidiary working in California with the California subsidiary. And same thing with Utah working a California as well. Until the margins improve, we're not going to chase low-margin work. Texas is continuing to be strong.

Okay. Thanks very much. That's all I had. I appreciate it.

Cory Mitchell, D.A. Davidson.

Tom, I have a couple of housekeeping questions just as far as the model. Can you talk a little bit more on seasonality; not only weather impacts but also just the progress of the gross margin improvement? Is it more of a back-half event? And also if you could talk about the tax rate we're expected to see this year.

Sure, sure. I think the seasonality of the business has had kind of a summer busy season, and then the winter is slower. You know, the gross margins I think had to do with the jobs, just because it's slower. It could be better or worse than the busy season. I'm not sure that that's the seasonal trend. On the tax valuation allowance, what's your specific question on that, Cory?

I mean, like, are you guys not going to have to pay taxes this year?

Well, that's right. We -- essentially I have $77 million of net operating losses that carry out through the next 20 years. Some of that is federal, some state. We have just over $18 million in tax benefit associated with that, so I would not anticipate that we'd pay any taxes for a while.

Okay, great. Thanks. And then with HDOT, with spending on transportation expecting to double, have you seen this yet as far as projects out to bid? And then also if you could give us an indication as far as the capacity you guys have out there. I'm really just looking for an indication on how much of that growth Sterling can participate in.

You know, we -- As I mentioned in the past, Hawaii is a very unique place and a place that we pay sort of a heavy tuition to get into. And we're now the second largest paver in Hawaii.

Yes, the work is coming. The first big job is at the airport. It was actually supposed to be bid last week; it's been postponed I think to the 20th, if I remember right. And that's a $60 million, $70 million project.

There is a lot of work there, and as I mentioned before, there's really very limited opportunity right now in Nevada and Utah, and we been redeploying those resources to Hawaii to take advantage of that market while we can. So we can certainly take advantage of a fair amount of it.

Hawaii's most limiting issue is its access to labor. And the union environment -- it is the same union that we have in Nevada and California, which is great; we can deploy people out there, but there's still a local requirement. So I think probably the limiting factor would be how successful we are in recruiting new crews -- local crews.

Cory, back to your question about seasonality. We did, as the country did, experience unprecedented weather. Especially in Texas, we had a number of ice days, and that certainly had an effect on the overall year especially towards the end of the year. We experienced more days of ice and snow especially in Dallas than we have in recent years.

Okay. Thanks, Brian.

(Operator Instructions) Matthew Paul, Sidoti.

In regards to execution, could you address the additional benefits the Company plans to realize or has realized in relation to being able to utilize the project management team on a more companywide basis?

Sure, and it's twofold -- actually threefold. There's an HR component to this as well. We have taken probably the best constructor in our organization and moved him to the corporate stack. He reports directly to me. And we deploy him to troubled jobs with the full authority of my office to deploy assets as he sees fit. We currently have, gee, about 40 folks from outside of the Texas operating unit in Texas right now supplementing and enhancing the group here.

In addition to that, I mentioned earlier about some of the IT investments we've made. We're now on the verge of deploying earned value management tools, which tie the schedule into a full resource load. So you now have not just the budget and what we've spent but make that time dependent on a resource-loaded schedule. And we really got a full complete picture now of the project's health. Because we do have areas of tremendous expertise within the organization, particularly in Utah, and we need to take that and deploy those best practices across the Company.

And we've been successful doing that. And while it certainly doesn't reflect in the numbers in December, they are making a very positive impact.

One additional area is in estimating, where we're working together with the different subsidiaries. They're sharing resources back and forth to step up and bid those projects and offer expertise where necessary.

Great. Thank you. And just one follow-up to that question. If you could provide a little light on the attrition rate within that project management team in the quarter or the year or maybe how it's compared to historical results.

I'm not sure I want to get into those details. I can tell you that our voluntary turnover rate is about 4%, which is pretty strong. You know, we did in the fall an engagement survey with our organization and was very pleased to see that the work forces were incredibly engaged. And the people that are departing the organization are those that we have either asked to depart or are self-selecting out. I think we've got a very strong, very competent team in place now. It took a while to get here, but I feel very comfortable with the folks we have.

All right. Great, guys. Thank you.

(Operator Instructions) Bill Nasgovitz, Heartland Funds.

Good morning. Thank you. As we move along this turnaround, the end game here -- in terms of profitability, what are we shooting for? What return on equity do think is possible from this business when we're hitting on all cylinders? What are we shooting for?

Well, I think in the long run, Bill, we are kind of -- we'd like to put together a plan that gets us to the $1.00 to $1.50 earnings-per-share range. The return on equity question is a little bit more difficult to figure out what goes with that. But from an operating standpoint, that's kind of where we think we should be.

Okay. Thank you.

(Operator Instructions) It seems we have no additional questions at this time. I'd like to turn the floor back over to management for closing remarks.

Thanks, Brenda. It's been a challenging year for Sterling and that goes without saying. But we are very encouraged that we have rounded the corner, and we look towards a much more profitable 2014. Management is excited, the people here -- working here are excited, and we're quite confident that we will be able to deliver the results that this Company should be delivering. We look forward to talking to you in May. Thanks.

This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.