Sterling Infrastructure Inc (STRL) 2014 Q1 法說會逐字稿

Greetings. Welcome to the Sterling Construction Company first-quarter 2014 conference call. At this time, all participants are in 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 Mister Manning. You may begin.

Thank you Rob. Good morning and welcome to Sterling Construction's first-quarter 2014 earnings 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 economics 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 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.

The first quarter was characterized by significantly improved performance and subsequent to the quarter end, a new bank covenant that provides clarity for investors on the company's path forward for raising equity.

And now I will turn over the call to Tom Wright, our Chief Financial Officer, to discuss the quarter's financial results.

Thank you Brian. I'd like to discuss 2014 first-quarter financial performance. Revenues for the 2014 first quarter were $134.5 million, which was 21.2% higher than the first quarter of 2013. The increase in revenues compared to the first quarter 2013 was due to an increase in the number of projects in process largely in our Texas market.

Gross margin for the 2014 first quarter increased to 5.8% of revenue compared to 1.2% in the first quarter of 2013 due to improved overall profitability of projects. Projects in the first quarter of 2013 were impacted by downward revisions of several large projects, particularly in the Texas market.

General and administrative expenses in the 2014 first quarter decreased $1.1 million to $8.5 million, or 6.3% of revenues, from $9.6 million, or 8.7% of revenues, in the first quarter of 2013. This decrease is primarily due to a decline in employee benefit and other nonrecurring costs paid in the first quarter of 2013. These nonrecurring costs included investments made to enhance the leadership our information systems management team, consulting fees related to process improvement initiatives, and other similar investments aimed at improving our operational performance.

Operating income for the 2014 first quarter was $0.4 million compared to an operating loss of $7.9 million in the first quarter of 2013. Operating income in the first quarter of 2014 included the benefit of $1 million due to the revaluation of a receivable previously written off in the fourth quarter of 2013.

Net income attributable to Sterling common shareholders for the 2014 first quarter was $0.2 million compared to a net loss of $4.6 million in the first quarter of 2013. Net earnings per diluted share attributable to Sterling common shareholders for the 2014 first quarter was $0.01 per share compared to a loss of $0.39 per share in the first quarter of 2013.

CapEx for the 2014 first quarter was $2.3 million compared to $4.9 million in the first quarter of 2013. The decline in capital expenditures reflects the company's efforts to carefully manage CapEx, and we expect full-year 2014 expenditures to be consistent with 2013 levels.

Bookings for the first quarter of 2014 were $190 million and increased 60% from the fourth quarter of 2013. Our book-to-bill ratio in the first quarter was 1.4 to 1.

Total backlog as of March 31, 2014 reached a record $799 million, up 16.3% since December 31, 2013 and an increase of 15.3% from the backlog at March 31, 2013. Total backlog at March 31, 2014 excluded $71 million of projects where the company was the apparent local bidder but had not yet been awarded the contract. We estimate that the average gross margin of our projects in backlog is in the mid to high single-digit range.

Our 2014 first-quarter working capital totaled $25.1 million. The company had borrowings of $20.7 million, and tangible net worth of $77.6 million. The company was in compliance with all bank covenants at the end of the 2014 first quarter.

Subsequent to the end of the 2014 first quarter, the company successfully completed an equity offering of approximately $14 million in net proceeds. The company and its primary lender successfully collaborate on new amendment prior to this offering which replaced all previously required liquidity and equity raising requirements with the proceeds from this offering.

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

Thanks Tom. 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. And of course we will be available to answer your specific questions in a few minutes.

First and foremost, I want you to know how proud I am of the men and women of Sterling, not only as we implement our turnaround strategy but also we do so remaining focused on providing a safe environment for our employees. For the first quarter of 2014, Sterling and its subsidiaries had a recordable loss on interest rates significantly below industry average. Another good statistic is no substitution for having low accidents.

As I mentioned last quarter, we are rolling out our Sterling Safe and Sound program. Safe and Sound is designed to take our safety program to the next level, and I look forward to telling you more about it in the near future.

As Tom described, our first-quarter financial performance was a significant improvement over our performance at this time last year and over the fourth quarter of 2013. Despite our significant weather-related impacts during the winter months, we were able to meet or exceed our expected project performance, especially here in Texas. And efforts have paid off.

I'm pleased to say that, by the end of this week, all three of the large legacy projects that have had such an inordinate impact on our financial performance for the last year will have achieved substantial completion and will be open to traffic. As a matter of fact, two of the projects opened to traffic yesterday.

We continue to be encouraged by our level of order bookings and the margins associated with our newer projects. As of the end of March, our year-to-date book-to-bill ratio is 1.4 to 1. And as Tom mentioned, our backlog at the end of the quarter was $799 million, but I want to emphasize this does not include $71 worth of booked pending contract execution.

We have been effectively implementing our strategies to pursue alternative delivery projects and achieve better collaboration between business units. A good example is the $65 million low bid last week to our Texas subsidiary. This project in North Texas utilizes construction techniques normally reserved for the West Coast and is a wonderful example of the value proposition of integrated project operations. Following my comments, Brian Manning, our Chief Development Officer, will briefly discuss our marketplace and the opportunities we're 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 second quarter 2014, the loss-making project in aggregate will be 99% complete. As a matter of fact, we have already begun the project closeout process on these projects.

We also anticipate the favorable order 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 augmented by leased assets (inaudible) appropriately, there was more than adequate capacity to support our operations in 2014 and beyond.

And I want to say we feel we're off to a strong start. As of the end of March, budgets and project performance continue to track as we expect. Our IT investments are paying dividends as we continue to roll out controls for use in both the tendering stage of the project and for enhanced project execution. We believe that our Texas subsidiary and all of Sterling has turned the corner from the last three very difficult years.

Lastly, I want to thank all our stakeholders who worked with us during our recent equity offering. The cooperation of our lender and the receptivity of the marketplace were especially gratifying to all of us who are hard at work driving Sterling to its potential.

I will now turn the call over to Brian Manning. Brian?

Thank you Peter. As we mentioned in the last call, the Federal Highway Bill, MAP 21, expires at the end of September and we expect a series of continuing resolutions for the bill with similar funding levels until a new bill is approved. The administration's draft bill, the Grow America Act, was released earlier this month. The four-year bill proposes a net 38% increase over current spending levels, and will be in part funded by corporate tax reform. The bill also proposes to end the ban on tolling the interstate highways, and this would allow the states to charge tolls as they choose. Both tax reform and tolling will certainly spark political debate, and will extend the passage of the bill beyond the midterm election.

The addition of 32,000 workers to the construction workforce in April brings the industry's unemployment level to a seven-year low according to the Associated General Contractors of America. Sterling continues to pick up profitable work and enjoy a healthy $799 million backlog.

As we substantially complete our large Texas project this month, our recent wins in North Texas announced last week are great new opportunities for Sterling to demonstrate rigorous controls during project execution. Our project pipeline remains strong with diverse project opportunities in most of our geographies. And overall we enjoy $6.4 billion in potential project pursuit over the remainder of 2014. We continue to collaborate among our subsidiaries for joint venture opportunities, as in the case of our recent successful LAX pursuit, to leverage the strength of our combined capabilities for more project plans.

And now we welcome your questions.

(Operator Instructions). Tahira Afzal, KeyBanc.

Thank you very much and congratulations on getting back on track. First question is generality has moved up and I know you migrate regionally to north of Texas. Can you comment on the status profile in terms of what you're seeing there versus what you've been dealing with in your more traditional areas? And I would love to learn a bit more of the integrated project execution approach. How it's being received in Texas, at least it seems to be well. Maybe you could give us a little more color on what that incorporates.

Let me start with that piece first. As we mentioned on some of the prior calls, the company deployed a lot of our West Coast and Utah assets to North Texas to finish some of these legacy jobs. And it is the offshoot of that in terms of this integrated private performance allowed us to bid these new jobs that we got last week. And you know, we can't do any of those things without having that integrated IT backbone that allows us to pretty much talk across the organization in a language we all understand. I think it's been received extremely well.

We have corporate resources in terms of directors of construction that report right to me. And we have the operating units now that are communicating much more than they ever have before. And frankly, this is the whole value proposition of doing an acquisition. You want to be able to move those extraordinary resources around the organization and take full advantage of them.

So this is a great opportunity. This is a project that we never would've bid by ourselves in Texas. It was something that really required the experience from the West Coast and from Utah and Nevada frankly as well.

In terms of the bidding profile, it's a public bid. As if I remember right, we were low by 2% to the next bidder, so that's good. And on a job like that in North Texas, I would say the quality of the competition is much better because the more complex projects of this less immature bidding, let's put it that way. And I think in general we are seeing the tide rising. I think the margins are starting to recover across the board. There are still pockets of very tight competition, particular in Utah and Nevada, but I think overall the tide is rising.

Here specifically to the Texas bid and looking at the results and the competition that bid on it, the traditional Texas bidders that we go up normally on a project of that size, we didn't see that collection of contractors. We saw more infusion from the West Coast and some of the international contractors on that, so it was a little bit different, but we also have the local advantage, so we've got that knowledge and the local advantage of being on site, so that helps as well.

(technical difficulty) possible. I guess my second question is you talked about the valid macro drivers on a couple of data points coming in September in terms of the build and some tax refunds that will be needed. You seem to be moving towards sort of shorter duration work, which is great. But I would love to get a sense if you do see some of these things expanded across the midterm elections, do you tend to see enough visibility in backlog, i.e. maybe ending the year at least back on track, slightly up, even without these data points going through?

I think we do have the visibility, especially because a lot of the projects are shorter duration. Certainly, the administration does need to respond, and we expect them to respond under continuing resolutions to get to that point. It's politically unpalatable to not fund a program as big as this. There would be too much of a public outcry. So, we expect continuing resolutions until a new bill is drafted, and that is our expectation, and we will continue to operate under that premise.

Thank you very much.

John Rogers, D.A. Davidson.

Good morning. A couple of things. I guess, first of all, Peter, the margins in your current backlog now with these low margin projects running off, is it right up in that high single-digit target that you've been looking for?

That's a fair statement. We're trying to get away from giving real detailed numbers because I think there's a commercial impact to it, but yes, that is very much a fair statement.

Okay. And then just for clarification, the $71 million in low bids that you had at the end of the quarter, does that include the work that you then subsequently announced that you were awarded?

No, any low bid that is over the threshold we will announce in the press release. But tabulating on backlog is work that has already been -- had the contracts executed. The $71 million is work that just hasn't hit the backlog number yet because we haven't had a signed contract. So I mean if we had a signed contract instantly, you'd have to look at a backlog number in the $870 million.

Okay, so the work that you announced --

It would be additive to the --

I'm sorry.

John, it would be additive to that $71 million because it's technically not under contract but you know about it because we made an announcement. Those numbers are not in our backlog number.

Okay. So, I guess I'm just trying to get to -- so, in the second quarter, you've already been low bid or booked $130 million worth of work based on these announcements?

If you add the two together.

Yes, you'd have to add those two together, sure. That wouldn't be a wrong thing to say. Of course, there are other low bids that we haven't announced into the reporting threshold.

Yes.

Okay. Good. I just wanted to make sure I got that right. And then in terms of your debt outstanding right now with those projects completed and the proceeds of the offering, where are you in cash position?

We don't disclose the current data of a cash position. The numbers that we are reporting are March 31 figures.

Okay, but Tom, there wasn't a substantial increase in debt to finish off those projects in the last 45 days?

Yes, I think I'm a little uncomfortable giving that level of detail in mid-quarter.

Okay.

But it's safe to say that the proceeds of the equity offering went against the line. That is quite clear. We had these three large projects which had to be driven towards conclusion, but that was not the majority of the work executed in the quarter.

Okay. I just wasn't -- based on your plan, debt levels should be then -- and cash flow should be positive from here on out through the year?

I think, historically, the first half of the year is a time of using cash. In the second half of the year, the cash gets released because in the first quarter we are collecting from the fourth quarter. So in the first and second quarter, we are collecting during the winter operations, and in the fall we are collecting during spring and summer. Yes, I think it's safe to say that the first half of the year is a draw cash, second half of the year, the cash gets released.

Okay. Great. Thank you and congratulations on getting those projects behind you.

Thanks, we appreciate it.

(Operator Instructions). Matthew Paul, Sidoti and Company.

Good morning. Thanks for taking my questions. Just a couple of questions here. Given the absence of the breakdown in the gross margin, I was wondering if you could just address the most recent work won during the quarter and how the gross margin compares to the backlog we discussed in the fourth-quarter call.

The gross margin on the first quarter was 5.8% of revenue. The new work where -- here's what they meant. The pursuit -- the strategy of pursuing some of this alternative delivery work, in particular these CMAR jobs, creates a backlog that does not necessarily reflect what we're ultimately going to deliver. So, we are a little reluctant to share the details of that, and also we kind of understand there's some competitive issues with giving some of that information out.

I think it's fair to say that it is accretive. It's not dilutive. It compares very favorably. The hard did jobs, the core business, I think is getting very good margins. We are happy with that. We're starting to be able to carry the contingencies with them as well. As I mentioned I think earlier, I do think the tide is rising. I think the marketplace is recovering. We are seeing bids that are a little more rational, and we are getting paid commensurate with the risks we are taking. I think we're going to see margins go up even further. And hopefully that trajectory that we're seeing continues. So long-winded answer, and I hope I answered your question.

That was great. Thank you. Also, with the substantial completion of the Texas projects, could we address maybe the metric to measure duration of projects in the backlog if there is an average or something and how that compares from this time last year?

I don't think I want to get into the burn off rate, but our strategy has been to pursue smaller projects between $10 million and $20 million which have a 12 month to 18 month duration. And the vast majority of the work in the backlog is work like that. So I think if you wanted to go back and try to extrapolate out our order book, it would give you a better sense.

The $65 million job that we got last week has, if I remember, like a 40 month duration, which is more typical of large projects. So as we pursue larger projects, you'll see the durations of the backlog extend. It's ultimately where we're trying to go. But our strategy in the near term is continuing to do small projects with short durations.

Okay. And last question, given the growth in the backlog and the expected revenue increase in 2014, is it fair to still expect a 6% general and administrative, or could we expect a little bit of leverage to be gained on that line item?

It's possible we could see leverage. I think as the 6% figure was a general target based on the revenues we had been experiencing. I think, as we grow in revenue, that we will get leverage on the SG&A.

All right. Great guys. Thank you.

George Walsh, Gilford Securities.

Your working capital improved during the quarter from the $8.6 million to the $25 million. Could you just describe some of that improvement there? I guess there are a couple of line items that contributed a fair amount.

I think the first quarter reflects improvement in all aspects of our business. We had improved revenues over the first quarter last year, improved profitability. I think all of the metrics show an improvement. Is there a specific line item that you want to ask about?

I guess the things on the current asset side where the costs and estimated earnings in excess of billings and there were the receivables from the equity in the joint ventures.

I'd say those reflect increased activity, the receivables and equity from joint ventures. There was a specific job that was a very good job for us. We didn't give the details on it. It was under the threshold but it increased in activity, so there's -- we now have the receivables from that, from that job, which we've subsequently collected. This is at the end of the first quarter. So, I think, on the current asset side, what you see is an increase in business activity which has helped our position.

And what's the outlook on the working capital going forward during the year?

We don't provide specific working capital guidance for the year, but I think all of the metrics that you see are in the process of improving. As Peter mentioned the problem jobs that have been weighing us down are now substantially complete, so that's actually a big contributor to where we are at. And I think the outlook is positive. We haven't put specific working capital guidance out.

Okay. How important the is your working cap in terms of bidding on projects? Is that probably what's affecting the duration, you're just signing shorter duration projects versus longer?

The decision to look at shorter duration projects is really driven by what we are seeing in the marketplace in terms of both availability and quality of labor. Brian mentioned that the construction unemployment number is at a seven year low. And particularly in Texas, it's acute because we're competing in the same labor pool as the oil and gas guys are competing.

And secondly, as we roll out new controls to make sure that project execution is being properly managed, we need to look at smaller projects that are slightly easier to manage, sort of changing the engine in mid flight. And as that comes into fruition and those things are fine-tuned and deployed fully and (inaudible) by the organization, that's your chased market project. So, it wasn't driven so much by working capital or balance sheet strategy. It was business strategy in terms what we wanted to pursue.

Okay, great. Thank you.

John Rogers, D.A. Davidson.

Just one follow-up. I know Peter, in the past, you'd talked about maybe some excess assets that you might be able to sell off. Where are you in that program? Are you still looking at it and other significant opportunities this year?

The answer is yes. We sold off about $2 million worth of excess equipment that is redundant. That is actually part of the program we had in place in the fall and this is all going to be auctioned at Carmax, which was always our plan. We are also selling off some of the aggregate inventory that we had here in Texas we've accumulated for projects that we were not successful in getting, and now we are selling it off and actually it's a nice little business that we have.

There was some real estate that was acquired for strategic purposes, particularly here in Houston, that we are looking to divest ourselves of, and Brian is handling that. That's probably it in terms of the significant liquidity raising items that we are looking at. We are looking at them also in terms of the P&L impact. We don't want to dispose of something that might have a negative P&L impact as well. So, that continues, particularly the real estate is significant and we're hanging on to it, but we'll certainly shed that stuff off. I think there might be one or two more equipment disposals as the year goes on as well.

Okay. And just two other quick things from a modeling perspective. I guess taxes, do you have the sufficient credit to offset any expense this year? Is that a fair statement?

Yes, that's fair.

Okay. And can you give us a sense at all of how much of a contribution proportionally you expect out of the -- or the partially consolidated JVs this year? I'm being a bit naughty here.

I don't think we want to give that type, level of detail again.

Okay. Fair enough. Thank you.

[John Gibbons], [Oden] Equity.

This is a question for Tom. I just want to make sure I heard correctly that included in operating income was $1 million of recovery of a (inaudible) written off was actually -- did I hear that correctly?

Yes, the revaluation is.

And was that a 2013 write off?

Right. It was written off within the 2013 fourth-quarter charges.

Okay. Is that it? That's kind of a nice surprise. Are there any more surprises in there because this is sort of new?

There's no other surprises in the first quarter. And this was unusual. That's why we called it out separate.

Okay. So you actually didn't have some operating income (technical difficulty) is that correct?

We always have some operating income. There's -- we always have some other operating income. There's asphalt sales that we do, and we have other things that kind of go in and out of that line. But the material number in that line is the $1 million revaluation of the receivable.

Got it. Thank you very much.

George Walsh.

Just the property and equipment line in the balance sheet decreased about $4.2 million during the quarter. Was that the sale that you mentioned of some assets?

Yes, yes. Yes, effectively the depreciation is around $4 million, and we sold equipment that Peter talked about and then we had $2 million of CapEx, so that resulted in a net decline.

Okay. All right, thanks.

At this time, for closing comments, I will turn the floor back over to Mr. Peter MacKenna.

Thank you all for joining us on our first-quarter conference call. We look forward to reporting to you next. It will be a little bit longer gap. I guess it's the beginning of August when we will report second quarter. Until then, thank you very much.

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