Sterling Infrastructure Inc (STRL) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Sterling Construction fourth-quarter and full-year 2015 conference call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to Jennifer Maxwell, Director of Investor Relations. Thank you. You may begin.

Thanks, Brenda. Good morning, everybody. Participating with me on our call today is our Chief Executive Officer Paul Varello, and our Chief Financial Officer Ron Ballschmiede.

Just as a reminder, today's conference call includes certain statements that fall under the definition of forward-looking statements under the Private Securities Litigation Reform Act. Any such statements are subject to risks and uncertainties, including overall economic end-market conditions; federal, state and local government funding; competitor and customer actions; and weather conditions, which could cause actual results to differ materially from those anticipated, including those risks identified in the Company's filings with the Securities and Exchange Commission. Accordingly, such statement 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. There can be no assurance that any prediction, once made, will continue thereafter to reflect management's beliefs. The Company does not undertake to publicly update those predictions.

Now, I would like to turn the call over to our CEO, Paul Varello. Paul?

Thanks, Jennifer. 2015 was definitely a rebuilding year for Sterling. We accomplished many of the goals we have set for ourselves when we began executing this challenging turnaround. While we still have work ahead of us, we are confident that we will continue to improve performance throughout this year and beyond. We have taken a number of important steps that will allow us to maintain our earnings momentum. One of those steps was a significant strengthening of our senior management ranks. We have added six very experienced executives in key operating roles. With our team now firmly in place, we are committed to delivering positive earnings in 2016 and beyond.

A former mentor of mine once told me that safety performance was one of the best measures of management's ability to manage. I firmly believe he was right. In spite of the many operational challenges we faced in 2015, we made sure that safety remained a top priority for Sterling. And it paid off. I am pleased to report that our safety performance this past year markedly improved. Specifically, our lost-time and recordable injury rates were both down more than 13% when compared to the prior year.

We continue to focus on safety not only because it's the right thing to do for our employees, but also because it ultimately leads to a stronger, more disciplined Company and a solid financial performance.

As I said on our earlier calls, this year we focused less on top-line growth and more on improving the bottom-line profitability. We tightened our procedures and controls for project selection, estimating, project execution and contract administration. As a result, we experienced improved earnings, even with a decrease in revenue of approximately $49 million compared to the prior year.

We also are pleased with the results of our project selection and bidding efforts, which yielded average gross margins in excess of 8.8% on projects we won in the second half of the year after our tighter controls were put into effect.

Overall, our backlog at the end of 2015, plus the new awards that were won in Q3 and Q4 but not yet entered into backlog, totaled a record high of $958 million and carried a combined margin of more than 7.4%. As a result, we anticipate increased revenue and earnings improvement in 2016 and beyond.

With regard to our business environment and our industry, we are greatly encouraged by the dramatic increases in spending to be made at the federal, state and municipal levels to restore our nation's decaying infrastructure. These investments are long overdue and are critical to the economic future of our country. Of course, they also create a substantial tailwind of growth opportunities for Sterling. In order for us to take full advantage of those improving markets, we are exploring alternatives to further strengthen our financial position so that we can make the most of the many opportunities that lie ahead.

In conclusion, our turnaround efforts in 2015 have laid a solid foundation for sustained revenue and earnings and are already starting to show meaningful results. With our return to profitability, we are now confident that we can also provide guidance on forecasted earnings and revenues for this year. To be clear, we are not content that our forecasted level of earnings for this year is adequate. But, the fact that the numbers are positive is an important step in the right direction.

There is little doubt that Sterling is well-positioned to generate improved profitability and shareholder value in the years to come. Now I like to turn over to our CFO Ron Ballschmiede to provide a summary of our financial results. Ron?

Thanks, Paul, and good morning, everybody. Let me take you through our improving financial results for the fourth quarter and the year.

Revenues for the fourth quarter of 2015 were $153 million, essentially consistent with the fourth quarter of 2014. Our full-year revenues totaled $624 million, down $48 million from 2014. This year-over-year decline reflects one of our objectives on our turnaround progress; specifically, being selective on new opportunities by focusing on the right balance of risk and reward.

As Paul mentioned, the improving strength of the transportation infrastructure market manifested in our strong year-end backlog which, when combined with unsigned 2015 awards, totaled $958 million. This record amount of combined backlog has an average gross margin of just over 7%, positioning the Company for continued operating performance improvement in 2016.

Gross profit for the fourth quarter totaled $12.2 million, or 8%, compared to $4.6 million for the full year. Perhaps a more meaningful margin comparison looks back at our preceding quarter. The third quarter of 2015 gross margin was 8.2%. While down slightly, this was consistent with our expectations given the portion of fixed costs and the seasonality of our revenues. The seasonality impacted declines, and our revenues from the third quarter of 2015 total $24 million, or a decrease of over 13%. While the first quarter of 2016 will experience a similar seasonality impact, we expect full-year 2016 revenues to increase significantly.

Our general and administrative expense for the fourth quarter of 2015 was $9.6 million, essentially flat with the comparable quarter of 2014.

Other operating expense increased significantly in the fourth quarter of 2015 to an expense of $2.6 million, compared to net operating income in 2005 (sic - 2015) of $300,000. The increase was driven by the strong fourth-quarter earnings from our 50%-owned subsidiaries.

Fourth-quarter 2015 member interest included in the other-operating-expense category totaled $3.4 million.

Approximately $1 million of the fourth-quarter increase was offset by lower noncontrolling owners' interest reported below the loss line. More about changes in our reporting for our numbers interest in a few moments.

Operating income for the fourth quarter of 2015 was essentially breakeven at $72,000, compared to a loss of $5.6 million in the comparable period of 2014. Again, when compared to the 2015 prior sequential quarter, operating income was down $2.3 million, essentially the impact of the $24 million seasonal decline in revenues.

Net interest expense for 2015 fourth quarter was $913,000, compared to the fourth quarter of 2014 of $247,000. The increase reflects the higher interest rate of our asset-based lending facility, which was put in place in 2015, and changes in our average debt balance.

The summation of all that resulted in fourth-quarter net loss attributable to Sterling's common shareholders of $1.1 million and an adjusted net loss per share of $0.06, compared to fourth-quarter 2014 losses of $7.3 million, or $0.39 per share.

Finally, during the fourth quarter, the Company amended its Myers partnership agreement, which, among other things, obligated the Company to purchase Myers 50% interest for $20 million upon the death or permanent disability of one of its minority owners. This transaction resulted in the revaluation of Myers' noncontrolling interest and the reclassification of $18.8 million from an equity account to a long-term viability.

While this non-cash transaction did not have an effect on the Company's reported net loss attributable to Sterling's common shareholders, it did require the $18.8 million to be included as an increase in our net loss for the sole purpose of computing our fourth-quarter and full-year 2015 earnings per share. The revaluation and reclassification increased our reported loss per share by $0.95 and $0.97 in each of the aforementioned reporting periods, respectively.

On the positive note to this story only an accountant would enjoy, prospectively, all of our noncontrolling interest from both our Myers and RBH subsidiary -- RHB subsidiaries will be presented in the same place on our consolidated statement of operations specifically as a component of operating income.

Now let's move into 2016. We believe that we have a good progress with our turnaround activities. While we have more to be accomplished in 2016, we also believe that the business has progressed sufficiently to provide us with the confidence and the ability to provide 2016 guidance. As you saw on our earnings release, we expect 2016 revenue to total $700 million to $735 million, representing an increase of 15% over 2015 based upon the midpoint of our 2015 revenue guidance.

Additionally, we expect 2016 reported net income per share attributable to Sterling's common shareholders to be in the range of $0.25 to $0.40 per share on average shares outstanding for the full year of approximately 20 million shares.

With that, I will turn it back to Paul.

Thanks, Ron. Now we will be happy to take your questions.

(Operator Instructions) William Bremer, Maxim.

Let's first start out with the Myers transaction here. Does this transaction potentially defer a new credit facility, knowing that you are -- sort of needed a nice run rate of positive EBITDA?

I don't think it does. I think with the changes that we've had over time with both of our 50% subsidiaries, we essentially pay out the portion of earnings to our partners that they earned during the year. Slight delay, but essentially paid out.

So in the reality, our cash earnings are not going to change. As a matter of fact, they will be a little bit more predictable through a relatively steady distribution process, rather than a bit lumpy in the past.

So, I would suggest that if you start with your EBITDA calculation using operating income, it probably matches the cash flow much better than when it was a bit more complicated with some of the information above the line, above the operating income line and some below the operating income line.

Let me just add one other thing. When I use the term a transaction only an accountant would love, that is a perfect (multiple speakers). Because in this new agreement, it mirrors the agreement we have with our other JV partner, in that there is a buyout provision for a specified amount: $20 million in both cases. Both of those, in the event of they are either death or permanent disability, are covered by insurance policies.

So, in terms of the real exposure to the Company, it is nil. It is zero. But, from accounting standpoint, again, beyond my pay grade, sadly, it has to be treated this way. So, I just want to assure shareholders and investors in the market that we have not taken on the liability that we have not insured against.

Let me add one more thing that probably will be helpful for everybody on the phone to understand 2016's information and guidance. With all of our member interest now reported as a component of other operating income or expense, there will be essentially nil of noncontrolling interest below net loss. And we expect that the component and other expense next year will be somewhere in the range of $6 million to $7 million for both of our 50% subsidiaries combined.

So, that should help people understand our overall results as opposed to a bit above and a bit below in all one spot in 2016 forward. And of course, we will help you with that as we progress throughout the year.

Perfect, Ron. I was getting tired of using the Force.

My second question is on your legacy backlog. Can you give us a sense of where it stands? And are you guys on track for really and truly getting a nice bulk of it done in the first half of 2016?

Great question, Bill, and, yes, we are. So, we had -- as we racked up our -- this of course is all in backlog since our unsigned where it is all profitable, obviously. We have, for backlog at the end of the year, about $86 million of backlog on some of those legacy projects. We have kind of used the same nine names you do every now and then. They are essentially nil on the gross profit side. And, we would expect a substantial portion of that to be burned off in the first half.

Okay, gentlemen. Thank you.

Tahira Afzal, KeyBanc.

A first question is really in regards to what your quality to be talked about, Paul, really the momentum you are seeing in the market. Given that you expect a pretty heavy revenue increase this year, I would love to get a sense of whether you think you can still grow backlog while you're planning so much.

Yes, we have been looking at -- the good news, of course, is that the backlog and the revenue forecasted is up substantially. And that is always a wonderful opportunity. But with that comes the need for working capital and liquidity, because we don't want that to be any sort of a governor on our ability to continue to grow.

We have room in our bonding capacity; plenty of headroom there. But we want to make sure, because of this record increase, that as these jobs start up later in the second quarter -- the first and second quarter is where you see these ramp-ups. And where we are focusing very hard at making sure that we have the liquidity and that it doesn't limit us from continuing to grow the Company carefully and profitably, I might add. Because if you grow just top line without regard to bottom line, as you said before, you get into trouble.

I would tell you that we are looking at things to make sure we can continue to take advantage of what looks like a very strong market for the next five years. We are very And we met with our Board last week and had a strategy session looking at those investments. And we are very bullish, not only at the federal investments, but what we are overseeing coming out of the states through their own gas taxes and what is happening in the municipalities. It is all directionally very strong for us.

I will add one other thing. As you probably can derive from our new award level last year when you include the unsigned -- most of which is now signed, the duration of our backlog is starting to extend. That's a good thing; gives us a little bit more predictability. Obviously, even with the 15% increase in revenues, we are going to burn reported revenues somewhere in the average between guidance of [$715 million]. That is a really great fact.

And I think the power is in the margin of that backlog, particularly reflecting the earlier answer that I gave to Bill on burning off that low-margin or nil-margin of $80 million-some.

But a couple other interesting statistics -- at March 31, 2015, we had about 79 -- just under $800 million of backlog and our embedded margin of 6%. Obviously we ended 2015 with just short of -- right around $958 million at 7.4% and a second-half load of 8.8%. And that second-half load is what we are continuing to look at and expect to experience here in 2016 forward.

So, the margin of this, when you come back and combine all those factors, should drive some nice earnings. And I think the revenue will come with that big backlog number.

Okay, that sounds great, Ron. Ron, and I guess the second question is to you in a sense. With the new guidance, any color on assumptions around some fairly notable claims you think you might collect somewhat on?

We haven't factored any -- I should say our guidance does not include any upside coming out of a settlement of any claims. That those things take time, and we hope to get them done and report to you after that.

But let me give you a few other pieces of underpinning of our 2016 guidance that I am sure you would all be interested in as you try and make sure that your model is consistent with the top line and the bottom line we gave you, and see if we can fill in some of the middle. These are all plus or minus ranges, but we would expect our gross profit to be somewhere in the 7.5% margin range for the full year. That, of course, includes some of that $86 million or all -- put all that $86 million being burned off at 0%. And when you do the math, it is between 10% and 15% of our revenue. So, it's really -- the rest of the business really performing nicely.

From a general and administrative costs category, we are looking at around 5.5% of revenues. Again, there is a bit of a range around that. And then moving down the income statement, we already chatted a little bit about the $6 million to $7 million of expectation of our other -- of essentially our minority interest, now reported above the operating income line.

Our interest expense, give or take $3 million, essentially no income tax for the year. And finally, CapEx in the magnitude of $10 million to $11 million.

So, went through those fast, but hopefully that will help everybody understand where our metrics are forecasted to run through in 2016.

Ron, if only all my companies would be this helpful as well. Thank you for that. I've got a couple of more questions, but I will hop in the queue. Pretty solid guidance. Thanks.

(Operator Instructions) Hamed Khorsand, BWS.

First off, this is pretty incredible where you were last year and where you are now. So, great job. If you could just provide a little bit more color on the $2.6 million on other expense. So, you're saying that was essentially from your noncontrolling interest is now going to be above the line included in that going forward, right?

That's correct. That is the $6.7 million total next year. Let me give you a little frame of reference around that. Even though the geography is different in our income statement for 2015, for the full year we had a charge to other operating income of just over $4 million and noncontrolling interest of $3.2 million. So in total, about $7.5 million. Both entities just had a great year and a fantastic fourth quarter that made a big portion of that in the fourth quarter.

Okay. And then next question, you had like a $2.7 million in land sold and receivable collected. Do you have any inclination on what else in the first half of the year could be possibly sold to bring in extra cash?

Yes, let me answer part of that, and maybe you could weigh in as well. We certainly still have some land that is non-strategic and non-core, and we'll be looking at that. You really have to match the market. We don't have a fire sale on those assets, but we think that there's a few more pieces, but not a lot.

I think the bigger opportunity continues to be in our fleet of construction equipment. We have gone through and looked at our fleet. We are now looking at the right balance of what you should own versus what you should lease or rent. And this year is the year in which we expect to shift that balance more toward leasing or renting equipment. That will monetize more of those assets and allow us to really gain on that.

The difficulty, at least in the near term, is that they also represent the collateral on our lending. So you can't be overly aggressive in selling that stuff. But I would tell you that since we are only allowed to borrow about [65%] of the value of that equipment, it is always a good -- and you're paying 12% of money, it is always a good idea to liquidate it where you can and use those proceeds to pay down that debt. That is sort of one of our key objectives this year.

Although you did not quite ask the question, I want to make sure it is clear, too, that neither Ron nor I are thrilled with paying 12% interest, particularly in a market like this. And Ron has some plans. Would you mind sharing with everybody what your thoughts are regarding how we eventually get away from this debt arrangement or at least the interest rate?

Yes, and maybe I will step back and kind of take it in total, if that makes sense. And let me just add one thing on the CapEx and related question you had. You know, our 2014 and 2013 CapEx was sort of that $13 million, $14 million category. So, even with our 15% anticipated increase in revenues, our CapEx spend is going to be down from that kind of level in 2013 and 2014, which I think is good and a reflection of what Paul talked about. It just makes more sense and is more financially attractive, no matter what interest rate you have, to rent or lease the right equipment and own those that are strategically important.

I think on a -- (technical difficulty) I think from a bigger capital perspective, we certainly see a strong market for transportation infrastructure projects over the next several years. And to take advantage of that improving market, we are exploring alternatives to strengthen our financial position and capture some of these opportunities that Paul spoke to.

As we look forward to take advantage of this, we are talking about both tactical as well as strategic approach to ensuring that our balance sheet is positioned and is able to support the continued backlog that we appreciably have and the growth that we expect.

So, from a technical standpoint, we are going to continue to go after and improve our management of contract capital, specifically our contract revenues, including retainage and billing processes, and the timing of those billings to accelerate and reduce our cost to bill and collect. But we are also going to continue to commit to review and, where appropriate, monetize some of the assets that was asked earlier.

But strategically, it is important that we increase our financial flexibility. Our performance over the past several years has limited our borrowing capacity and somewhat our bonded -- bonding levels, which, of course, limits our financial flexibility. And while these constraints are certainly workable, to continue a sustained, longer-term recovery plan, we want to take advantage of this market that we are seeing and have the capital available.

So, we are able to continue to invest in these opportunities. So, we are investing in additional opportunities to accelerate our liquidity position. Some of those will be coming out of the pure cost of capital, driven by both the capital opportunities and debt opportunities. The real -- the reality is, given our sustained losses in the last three or four years, the turnaround is in good shape. But it is still a bit of a show-me, right, for -- so we expect certainly in the second and third quarters to be pretty significant.

So, about that late fall -- late summer or early fall time would be when I would expect to have that demonstrated performance and, more importantly, to have the awards continue at the pace that we have been looking at lately. And all that says you've got to have the right capital position to not only -- we are not happy in just sustaining. We need to be able to take advantage. So, we are going to be doing a lot of looking and strategy around how we go about that, so we are not worrying about topping out on liquidity or bonding activities or all those related things. But we are going to be more aggressive at looking at how to reduce our cost of capital. Certainly interest is one of those items with a 12%-plus cost.

I was actually going to ask you about your capital structure going forward. That was going to be my next question. But -- so I am going to ask you about a macro question. Being significantly operated in Texas, and with everything that has gone on with the shale industry and the oil industry down there, are you seeing any benefits to cost of labor and possibly cost of equipment or material?

I would say, first of all, cost of labor rarely was part of a contributing factor back a few years ago with our losses. Our estimates did not foretell or foresee the sort of labor escalation we unfortunately were hit with when the shale play was really in its boom cycle. And folks that we would have normally hired to do our work were leaving the state for the big shale plays. That has completely reversed itself. Our labor rates have stabilized; in fact, in a couple of cases, gone down slightly.

So, yes, labor situation is both plentiful broadly. There are still unique categories of people where we don't quite have the skill sets in large numbers we would like. But generally, the labor situation is much better.

The other benefits, though, are things like rental equipment, with both the mining and drilling business somewhat slower. The amount of equipment that is available for lease is considerably larger and fits our needs much better. In addition, fuel costs, which are a large part of our operating costs, continue to be low. And vendors are willing to cut very attractive deals for prolonged commitments on fuel, which we are able to predict with the work we have gotten in backlog.

And so, it's -- generally speaking, in Texas -- which, by the way, this year, because of the way our other businesses have grown, Texas is about 33% of our revenue, which it used to be north of 40%. And there is nothing wrong with Texas. It's just the other guys have done so well that Texas is now about a third of our revenue and is going to be an important -- continued important factor going forward.

And my final question, Paul -- you are in year two of your three-year initial contract. Any plans to continue that, or any changes?

My wife reminds me, I celebrate it -- we will be celebrating my 73rd birthday in a few months. And she says, old man, how long are you going to do this? And I say until God says no.

So, yes, I am having a good time. Nothing beats success. Nothing beats seeing the fruits of your effort pay off. And with the good Lord keeping me healthy, I intend to stick around for a while.

In addition, I would tell you I have surrounded myself with gigantic talent. Of the six executives that I put in yesterday or last Friday, we announced a new Chief Operating Officer. His name is Con Wadsworth. Con has been with our Company for a very long time as President of our most successful subsidiary, RL Wadsworth. Con is now taking over as COO. That is an important strategic move for us, and it gives us depth at the executive level.

We also have added Ron with just impeccable track record and great experience. And we have added Joe [Catello], who is a Senior Vice President over strategy business development. So the depth of this organization is such that I hope that if my wife is right about the old man, and he runs out of gas, there is enough continuity here where I feel good about that. The other three executives are all in line operating positions, and the bench is stronger than I think it has ever been. So, I am comfortable, but that is not mean I am bailing. Thank you.

John Rogers, DA Davidson.

Couple of things just to follow up. First of all, I guess maybe for Ron, what is your assumption for interest expense and this year in 2016?

Well, right now, it is -- for the first majority of the first three quarters of the year, it is sort of status quo. We are running -- ran at $900,000 in the fourth quarter. It will be a bit less as we go up and down with our line for the first part of it. And then hopefully by -- expectedly by sometime in Q3, we will come up with a better solution. We would like to do it sooner. Maybe we will have chances to parcel some out, but that is sort of what is embedded in our assumptions at this point.

Okay. And then, the other -- if you look at 2016, I mean, based on our revenue guidance, something -- 15% top-line growth, it sounds as if, though, that is heavily weighted into the third and fourth quarters. Could we be seeing 20%, 25% growth at that point? Is that what the backlog would suggest?

Yes, pretty much. I have not done that exact math, but the Q1 should look like Q4, essentially. And then, of course, you the benefits of having all this new work start. So, we would expect a very good Q2 and Q3. And right now the view is a profitable Q4.

But wait a minute, John. Let me add a little bit to it. Our work in backlog is the biggest driver of those earnings. So it is predictable as opposed to betting on the come. We don't -- if you can't book work by the end of the second quarter, there is very little chance you can burn most of it or generate any revenue in the third and fourth quarter.

So, typically, what you see in earnings doesn't have much exposure. Revenue and earnings doesn't have much of a bet on what we have got to land to make that happen. Our jobs are over two years long on average, and so a lot of it is sitting there in the backlog. I think the bigger challenge, John, is to make darn sure we execute appropriately to the margins we have got and then maybe do a little better. Which I think we have got the team now to do better, which is something that I am looking forward to.

But I don't want you left with the idea that we have got to go find a lot of stuff that is going to do much for us in terms of revenue earnings this year. It is pretty much in the house; not all of it, but pretty much in the house.

Okay, that is -- yes, that is what I was trying to get to, so that is very helpful.

And then, just in terms of the working capital, you have done a great job in driving some of the cash out of that. And I am wondering how much is left there. Because this sort of earnings level that you're talking about, it sounds like you'll be about maybe slightly less than what you're looking at in terms of CapEx. Is that right? Or is there more to -- is there other ways that you can generate cash?

Well, I think we are still -- have some opportunities in our contract capital. And for those that don't know my definition, as I look at our investment contracts, it includes all of our receivables, including retainage; our inventory, which is not very significant, but it is in that calculation; our positions in the contracts and payables.

As I look at that today, we have some subsidiaries that do extraordinarily well. We have some of our larger subsidiaries that have some catch-up work to do, and certainly those legacy projects effect that calculation.

So, we have some room in contract capital to make it better. And I think with Con reviewing contracts and our team continuing to press on the asset side, and we get those bills out and we can collect those bills and be a little bit more aggressive in doing that, we will have some money to put on the balance sheet.

I would also add that, John, nothing beats a focus on cash more than 12% interest. Up until now, we have coasted, thinking that interest was an incidental, and maybe it was. It is not an incidental when it costs us almost $4 million a year in charges. So, it has got a gigantic amount of focus, and the awareness is there today that wasn't there a year ago when I got this job.

And maybe an important reminder on the other part of seasonality, which is the cash side of seasonality. While our fourth quarter and first quarter are significantly our weakest revenue quarters, our fourth quarter is our best cash generation quarter. It was this year. Because all the jobs are -- those that have some weather issues, and we've had a lot of that in the fourth quarter -- Texas, Hawaii, and then of course getting the mountains -- you have a pretty much slowdown, which means you are not spending money, you are collecting it.

Of course, the flipside of that is come to the back half of the first quarter, you start ramping up projects. So if you look across the year, our most challenging -- maybe it's a bad word, but it's the outflow of capital for projects is end of Q1. And as we ramp up in the early part of Q2, then it flattens out. Then it comes back the other way in the fourth quarter.

So, with that, we were happy with ending the year with essentially only the term loan, having borrowed under -- that is different today, as we would expect. But there is that seasonality side of the cash flow, that never forget about -- that is different than our revenue side.

Okay. And then last thing, if I could. Paul, you mentioned 35% of your revenue was -- or 33% of your revenue was in Texas. What portion of the $958 million in your book of business is Texas?

It's about that same amount; it's about a third. I don't have the numbers in front of me, but I remember looking at it. When we added that back in, it didn't move the needle very much in either direction. So I would say about a third.

Okay. And so -- I mean, if you look at the business over the next couple of years, do you expect it to -- I mean, the rough distribution that you have now between Texas, the West and --?

Yes, but on the somewhat different metric, Texas is growing. In spite of everything that people read about the shale play being a real deflator, Texas is growing still very strong compared to a lot of places. And population growth drives a lot of this investment in infrastructure. And we are confident that Texas will continue to be a critical part of our business going forward.

And a lot of spend in Texas not only -- maybe in spite of the federal -- lack of money at the federal level, the state has really more than compensated for it, as have the municipalities who need the infrastructure if they are going to allow people to grow. They need more roads. They need drainage systems. They need all the things that come with population growth.

So, I think an important driver is looking at where is the population likely to grow. And we think we are in many, many respects exactly in the right geographic footprint, not only in Texas, but throughout the Southwest.

Okay, great. Thank you very much. Congratulations on the year.

Tahira Afzal, KeyBanc.

First question is, Ron, you had said that the duration of backlog is stretching a bit, which I agree is great. But I guess if I look at 2015 backlog of around roughly [$760 million], it kind of compares to the same level of 2014. Last year, you are able to generate $622 million or so in revenues. So, with backlog now more stretched, how do we get comfortable around your revenue run rate?

I think, as Paul mentioned, the majority of our revenue comes from our backlog. I think the -- while the other element of it is -- as we have gotten these new awards, these unsigned awards now mostly signed in the first quarter, that does not automatically translate into revenues. It ramps up relatively slowly, at a quarter plus. Because some of these projects there is some design element to it and other things like that.

So, I think as we plot all these out, you're always susceptible to seasonality and rain and all the delays by customers, by our clients. But I think with this amount of backlog and the distribution of it, much more sweet spot projects around in the double-digit millions, it does become more predictable, simply by the law of a bunch of smaller numbers. So we are pretty comfortable with that burn rate.

Got it. Thank you, Ron. And I guess second question is in regards to strategy. I know you have kind of laid out exploring alternative financing options or what have you. Can you talk a bit strategically about as you have settled in, Ron, and as Paul and you have worked together, can you comment a bit on what strategy you are looking at, what speed are you looking at doing more design build, more partnerships?

I would say we have recently -- in anticipation of our strategic planning session, which we had with the Board just last week, we did a gigantic amount of drill down on where have we been making our And what are the kinds of work we do? What are our sweet And how do we maximize those kind of returns? And I, for one, having been here now just a little over a year, was pleasantly surprised by how much we had discovered in that about where we make our money. And doing -- silly as this may sound, doing more of that and less of the things where we don't do well or lose money is sort of a -- one of our fundamental strategies. Do more of the good stuff and less of the bad stuff; none of the bad stuff.

But I would tell you that the design/build projects tend to be better margins. They are a little slower ramping up because you have to design before you can really do it through the field. But they always hold better margins. They allow us to influence the design to meet the unit costs.

So, in many, many respects, we like those kind of jobs. We have great relationships with some of the design houses in the various areas where we work and in the various places we work. We like the airport work, the port work. It has always got good margins.

And then, we still believe within roads and highways, particularly bridges, we do well if we can be disciplined in where we select the projects we want to bid instead of simply chase everything that moves. We have also set for ourselves minimum margins. We will not allow ourselves to get caught up in desperation bidding. So are setting margins that are quite high in order to drive the market where we want it to go.

Yes, we may lose a few more jobs, but so be it. Give me jobs with better returns and fewer of them. As long as I make it at the bottom line, I am comfortable with that.

So, directionally, we know where we have to go. We know the kind of businesses we have to get and the geographies, and we are going to be pursuing those with great vigor this year.

Thank you, Paul and Ron.

William Bremer, Maxim.

Just adding on to that last question, I wanted to go into your bridgework as well, as if you can give us an update on your water infrastructure projects, what you're seeing out there. And maybe what is your capacity on that front?

First of all, the bridgework is, as I said earlier -- our Wadsworth business unit is probably the strongest preeminent bridge builders maybe -- I will say in the country, because I am the CEO of this Company. But certainly the strongest within our Company. And with Con Wadsworth now as our COO, he is moving that skill set across all of our subsidiaries so that we actually keep bridges, which are good margins, effectively using our know-how that we mostly have developed in Wadsworth, not exclusively, but mostly.

Second, on the waterworks, the kind of projects we are seeing are really flood control here in Texas. Texas, as many of you know, particularly this part of Texas here in Houston, is as flat as a billiard table. So, if you get about more than 4 inches of rain, you can count on local flooding.

And part of that is the infrastructure has not kept up flood controlling. Infrastructure has not kept up with the population growth, which has paved over a lot of the natural areas that used to absorb the rainfall. So, 50 years ago, we had a lot more forest and open spaces. Today, it is paved over with shopping malls and housing. And as a result, there is considerably more runoff.

That is one of our sweet spots. And it is, frankly, the way we grew our business here in Texas 27 years ago was on that very work. It's probably our strongest capability, and we are exactly in the spot we want to be.

Knowing what our topside is, Bill, on capacity, I think the limiting factors might be bonding. Although today, we are -- we still have several hundred-million dollars of capacity, we have a great partner in Travelers as a bonding surety Company. And they had been tremendously supportive as we have grown and come back to profitability.

So, it is one of the limiting factors. The other one Ron has already addressed is making darn sure that we have the balance sheet and the working capital to take advantage of that. But I am very comfortable that the opportunities for what we do well are really coming at us in big measure.

Okay, Paul. Thank you.

Thank you. And it seems that we have no further questions at this time. I would like to turn the call back to Paul Varello for closing remarks.

Linda, thank you very much. And everybody on the phone, thank you very much. I would like to again remind you that if you have follow-on questions, you can reach out to Jennifer Maxwell, our Director of Investor Relations here at Sterling, or our partners at the Equity Group to schedule a follow-on call with us. Their contact information can be found at the bottom of our press release.

I would also like to thank you for joining us on our call today, and we do look forward to reporting our progress in the future. Thanks a lot.