Sterling Infrastructure Inc (STRL) 2016 Q2 法說會逐字稿

Greetings and welcome to the Sterling Construction second-quarter 2016 conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Maxwell, Director of Investor Relations. Thank you. You may begin.

Okay, you may begin the conference.

Thanks, Christine, and good morning, everyone. Participating with me today on our call is our Chief Executive Officer, Paul Varello; our Chief Financial Officer, Ron Ballschmiede; and Joe Cutillo, our Chief Business Development Officer.

Just as a reminder, today's conference call includes certain statements that fall within 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 and market conditions; federal, state, and local government funding; contenders and customers' 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 statements should be considered in light of these risks. Any prediction by the Company is only a statement of management's beliefs at the time the prediction is made. There can be no assurance that any prediction, once made, will continue thereafter to reflect management's beliefs, and the Company does not undertake to publicly update those predictions.

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

Thanks, Jennifer, and good morning, everybody. I'm happy to report that our turnaround efforts continue to produce positive results. Our net income for this quarter was finally crossed over into the black and is the highest quarterly income in more than 13 quarters.

We believe that our turnaround is on track, and we expect our bottom line to continue to improve. Although we experienced torrential rains and flooding during the quarter in Texas, we made very good progress in our other geographic markets, and that helped to offset a majority of the shortfall.

For the quarter, Texas represented only 25% of our revenue, where normally it is closer to 33%. From a broader perspective, we continued to see sequentially greater investment in infrastructure projects at the federal, state, and local levels. Many of the projects that will be out for bid include roads, bridges, airports, and water projects in the $20 million to $80 million range, which fits very well with our capabilities and allows us to be selective in choosing the best jobs to bid.

We also have been very pleased with the way backlog and project margins have continued to increase during the first half of this year. Our total backlog at the end of the quarter, including projects where we were the apparent low bidder but the contracts had not yet been signed, totaled more than $919 million. In addition, the bid margin in projects awarded during the first half of this year was 9.4%. We see that trend continuing throughout the balance of this year and beyond.

We also completed an equity offering during the quarter which raised $19 million. We use the proceeds to pay down a large portion of our very expensive debt and to fund working capital needs as we ramped up a record number of projects during the quarter. With our stronger balance sheet and improved financial flexibility, we are well-positioned to take full advantage of the growth opportunities we see before us.

We expect that the rains and flooding experienced in Texas may result in lower revenue and net income for the year as some of this delayed work pushes out into 2017. We now expect full-year revenue to be in the range of $670 million to $690 million and net income to be in the range of $2 million to $5 million.

In conclusion, we believe that our turnaround efforts, though not complete, continue to drive significant improvement in earnings and create a firm foundation for sustained growth in the years ahead. Now I'd like to ask our CFO, Ron Ballschmiede, to offer his report. Ron?

Thanks, Paul, and good morning, everybody. Let me start with building on Paul's backlog comments by providing a few additional details around our recent backlog trends.

At June 30, 2016, our backlog stood at $810 million compared to the end of our second quarter of 2015 backlog of $243 million. Such as Paul mentioned, our total backlog at the end of 2016 second-quarter, including projects where we were the apparent low bidder but the contracts had not yet been signed, totaled $919 million, consistent with the end of the first quarter of 2016.

Even more important than the level of our backlog is a steady improvement of our embedded gross margin in that backlog. At June 30, 2015, our backlog margin was 6.3%. The backlog margin has increased each subsequent quarter, and at June 30, 2016, the margin backlog increased 150 basis points to 7.8%. We believe that this trend reflects progress made in the diligence around selecting the right projects to bid on, improvements in project execution, continued progress to complete legacy projects with little or no margin, and the significant increases in transportation and infrastructure bid opportunities.

Revenue for the second quarter of 2016 was $190 million, a bit short of our expectation, yet more than $13 million higher than Q2 of last year, which was $177 million. The second quarter of the year was not helped by the poor weather in some of our markets, particularly the very wet weather in Texas, which is normally our largest market. On the positive side, our geographic dispersion mitigated a portion of that negative revenue pressure in Texas with increasing revenues in each of Nevada, Hawaii, and the Rocky Mountain states.

Gross profit for the second quarter totaled $16.1 million or 8.5% of revenues compared to $9.1 million or 5.1% for the comparable period of 2015. The second-quarter 2016 8.5% gross margin was the highest quarterly margin since 2012.

Our actual gross margin performance against estimated margins continues to be solid. For the six months of 2016, with $316 million of revenue driven by over $800 million of backlog, our changes in estimated revenue and gross margin resulted in a net charge of only $500,000. Importantly, and as we discussed in our first-quarter call, that small charge for the full half-year of the year included a first-quarter charge of approximately $1 million related to a subcontractor dispute on a previously completed legacy project in California. While never able to declare project execution victory, our progress over the past 1.5 years has been significant.

Our general and administrative expenses for the second quarter were $9.1 million, down from $9.6 million in the comparable quarter of 2015. The year-over-year decline was largely the result of lower employee- and benefit-related costs.

Other operating expense was $3.6 million compared to other operating income of $300,000 in the first quarter of 2015. The increase was primarily due to increased non-controlling interest expense, driven by the combined increased income from Company's two partially owned subsidiaries. Additionally, one of the subsidiaries' 2015 non-controlling interest was classified below net income and included in noncontrolling owners' interest in earnings of subsidiaries and joint ventures. As a result of amendments to that subsidiary's agreement, both subsidiaries' 2016 non-controlling interest are now included and will be going forward in other operating expense net.

You'll note that during the quarter we also reported a $520,000 expense of non-controlling owners' interest in earnings of subsidiary and joint ventures, the line just below net income on our income statement. In 2016, this line item represents only our partner's share of our construction joint venture income.

Interest expense for 2016 second-quarter was $812,000 compared to the second quarter of 2015 of $634,000. The increase reflects the higher interest rate of our asset-based lending facility and changes in our average debt balance. The summation of all these items results in a second-quarter net income attributable to Sterling common share stockholders of $2 million and net income per share of $0.09 per share compared with a second-quarter 2015 loss of $2.5 million or a loss of $0.13 per share.

Turning to our balance sheet, we ended the quarter with a cash balance of $42.6 million compared to a cash balance of $14.9 million at the end of the 2016 first quarter. Our June 30, 2016, balance sheet includes approximately $23.6 million of cash held by our California variable interest entity and our consolidated construction joint venture, which is reserved for use in those entities.

The comparable cash reserve balance at the end of the second quarter of -- at the beginning of the second quarter of 2016 was $5.9 million. Our debt totaled $17.9 million at June 30, 2016, compared to $32.1 million at March 31, 2016. Taken together, our cash net of debt position at June 30, 2016, was $24.7 million -- improved by almost $42 million from the beginning of the second quarter.

Significant cash generation activities during the quarter primarily included the net proceeds of $19.1 million from our common stock secondary offering, which I'll discuss further in a moment; an improvement in our investment in contrast capital of $15.4 million; and our cash flow from operating earnings. We believe that the level and changes in our contract capital are good measures as to manage our investment in project activities. Our contract capital, reflecting the combined balances of our contracts in process, receivables, inventories, and accounts payables improved during the quarter -- second quarter of 2016 by $16.3 million.

As we discussed in our year-end 2015 and our first-quarter 2016 earning calls, we are exploring different capital raising alternatives to further strengthen our financial position and provide us with the additional financial flexibility to take advantage of the improving market. Our capital raising alternatives included a potential sale of real estate, equipment, businesses, and equity; a favorable resolution of outstanding contract claims; refinancing our equipment-based facilities; or a combination thereof.

Many of these alternatives remain available to us to strategically transform and improve the profitability of our Company. However, to provide the much-needed incremental working capital necessary to ramp up our recent significant new awards and restart our seasonal projects, we initiated and completed a secondary common stock offering in early May. We issued 5,175,000 shares of common stock and received net proceeds of $19.1 million on May 9. Approximately a third of those proceeds were immediately necessary to bring our payables back to normal terms.

The balance of the proceeds went to improving our financial condition and financial flexibility, allowing us to continue the turnaround and position us to return to a more traditional credit facility towards the end of 2016 or early 2017. As expected, and as evidenced by our significant improvement in liquidity at the end of the second quarter, these early spring working capital demands are now behind us, and we are beginning our generally strongest seasonal cash flow quarters.

With that, I'll turn it back to Paul.

Thanks, Ron. Now I'd like to open it up to questions.

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

Paul or Ron, I guess the first thing -- congratulations on the turn in -- solved profitability. In terms of the outlook for the rest of the year, the impact on net income from the deferred revenue seems a little more extreme, where it's lingering into the second half of the year, whereas I would've expected weather-related delays -- some of that be made up in the second half of the year. But it sounds like you are seeing some or expecting some continuing margin pressure? Or am I reading this wrong?

No, I don't think it was so much margin pressure as really three factors. The rain in Texas was one of the big contributors. It's our biggest market in terms of revenue. Ron, when I get done, please go over the math of how that impacted net income.

But if we just think about the revenue shortfall this year, or the recast revenue, John, it is the delay due to the flooding in Texas. We had really what they call around here Biblical flooding in really all of March, three-quarters of April. We lost almost all that time in Texas. After that it dried out, and it seemed to be fine. That was contributor one.

Contributor two was we didn't have enough -- you remember, the equity raise really generated the additional money in or around May 9. We were really spoon-feeding the projects that had to ramp up as early as March. We had won a bunch of jobs in December and January -- frankly, more than we thought we would -- and those jobs, which sometimes take a while to ramp up, all were relatively quick starters, which we realized then was going to drain our working capital coffers pretty quickly.

So we had to slow-play that until we could get that capital raise in hand. We did that. I feel very good about how we were able to hit as many jobs as we could. And that was the larger -- at least 50% of the impact was from that. The second one being the weather. I guess the -- just two really big drivers. Ron, could you explain how the revenue shortfall impacted the net earnings?

Sure. I think a couple of just add-ons to what Paul just said would be -- you know, we will make up some of that revenue shortfall, but most of it just rolls out in subsequent quarters. And in addition to that, we have seen somewhat of a slowdown in bringing the new awards -- the progress on the new awards to fruition. Just timing of being released to do more work. So a combination of those things essentially just slid almost $40 million of revenue, if you go midpoint to midpoint from 2016 to 2017.

Top-down easy math, easy in quotes, math -- at 8% to 9% margin, that moves -- that number works. It's a $38 million delta times 8% or 9% margin. And that's about what we're seeing from an income standpoint being shoved into 2017.

And as I think we all know, there is hardly any upside to being terribly optimistic on these forecasts. And so we believe that had the second quarter not been as difficult weather wise, we had a chance of certainly staying within our guidance. But when the second quarter turned out to have these kind of challenges, we decided everything else was going so well, we would just be wiser to set a target we felt more comfortable with.

Okay. And then my other question was just in terms of the margins that you saw in the quarter -- and you touched on this a little bit in your comments, but they are above or they were above the margins that are estimated within your backlog. Were there some notable project closeouts there? And is that a repeatable scenario?

Joe Cutillo, our Chief Business Development Officer, has joined us. Joe, can you handle that one?

Yes. What's really driving that margin is mix. So if you take a look at -- one of the comments Paul brought up is Texas represented a lower percentage of our total revenue than it normally does, you know, much higher revenue out in the West, in the Rocky Mountain states and Hawaii. In addition, some of the 0% margin jobs then got pushed into Q3 and Q4. So they didn't hit the quarter as much as we anticipated out of Texas.

And the Western jobs had better margins than the Texas job did, close to zero. So the net impact of all of that was something I think will continue but to a lesser degree as Texas snaps back.

And John, that's one of the reasons I thought it necessary to tell you story only accountants can love, which is the geography on our income statement related to our 6% owned ventures. Our charge in the quarter for that was $3.8 million, give or take.

So it's pretty easy, nice math. It's all in the Q. You double that, so those two ventures made almost $8 million. And of course that's some great work in those geographies. So that certainly was the biggest factor in the mix that Joe described. That's a very significant event. And to give -- I'll take more expense in the non- controlling interest than less every time, because what that means is those entities made more money, which is a good thing.

Sure. Okay. And, sorry, last thing, if I could: bidding prospects in the second -- anything of note there? How does the pipeline work look in terms of opportunities?

Joe, do you want to handle that?

Yes, I mean, we are in the busy season of bidding. We're not seeing any slowdowns in any of our general markets. We're still waiting for the pickup in Nevada. Nevada is probably the lowest -- or the slowest state that we have growing right now.

But we see some great job opportunities coming out in Utah, Colorado; and as we get toward the back half of the year, there's a big job in Hawaii that could be coming out late this year or early next year.

Great. I'll get back in queue.

Tahira Afzal, KeyBanc.

Hey, Paul and team. Congratulations on a fantastic quarter.

Good morning, Tahira. Thank you very much.

I don't know this is a question for Paul, yourself, or Ron. But does the fact we had some pushback revenues into the third and fourth quarter cause some of the typical seasonality to change? So I know typically your third quarter is very pronounced, and then the fourth quarter is lighter. Is there a chance we see more of a rollout and a gradual buildout into the fourth quarter this time?

Tahira, first of all, the third quarter will again be a substantially -- will be our best quarter. It always is. And we are already essentially a third of the way through it. And it's certainly a little early, but it's certainly on track to do that again.

In terms of margins, we think margins will be slightly less. But I'll remind you that with fixed G&A and a very high revenue, more of it flows to the bottom line. So we are still bleeding at the net income line. We'll have a strong third quarter. Ron, what would you add to that?

Yes, I think that's right. And certainly gross profit will be assisted also by some of that fixed cost. But I think in the Q -- and I'll give you the numbers now -- we entered the quarter with $70 million of legacy projects margin. Sorry, $70 million of backlog on margins that had nil profit in it.

We burned about $30 million of that number. So 30 divided by the quarterly revenue is what I would call a pretty big, significant number -- offset, as Joe mentioned, by mix. The $40 million that's remaining will be burned third and fourth quarter, most of it in third. But mathematically it becomes a much smaller percentage of the total. So it has less impact in the third quarter and almost -- you know, less impact in the fourth quarter on a mathematical basis than it did in the second.

Got it. Okay, Ron, that's actually pretty helpful. And Paul, do you know the last time we talked, there was a chance you might have some sort of margin making as well some close-outs or something that could have helped you close the GAAP and meet net income or operating income, even with those sort of changes.

Any change that's happened over the last couple of weeks? Have you decided to be a little more conservative as we look at how this slope ramps up?

Yes, what we were speaking of is there's a part of the business that I would just say is the normal business. And those opportunities for additional margin comes from change orders, primarily, as well as continuing to execute against the base project.

Beyond change orders, and we had several -- we always have several in every quarter, but they generally are not big, significant numbers. The larger, more significant numbers are claims. And claims, unfortunately, are one-off things. And so in our forecast, we are not anticipating in any of the forecast guidance we've given you any claims, which we hope do happen; but because they are one-off, we tend to say that's not our -- we like to look at our business as a normal run rate kind of earnings stream.

So what I would say is there's only upside if we are fortunate enough to execute and collect on claims, different from change orders during the balance of this year. We did execute several change orders this quarter, but it's pretty much mundane, several million dollars of -- on the total revenue for $190 million was not moving the needle a lot. We always get some of those every quarter.

Yes, and that's a revenue number. So, you know, I talked a little bit on my opening comments around our changes in estimated gross profit. The way we do that, that's all changes in our backlog. So in the first quarter we had that project in California that essentially was $1 million, and that was a change in all of our backlog. It wasn't the only one, but it netted out. And that's really the objective. In the second quarter, that same computation netted out to $500,000 up of GP.

Got it.

Again, that's our objective. We want the negatives and the positives, which you always have, to offset -- and [impossible with small credits]. So the quarter, the second quarter, only had about $500,000 benefit. So 200 or 300 basis points on our margin.

But I would call that just normal noise of settling change orders, updating estimates, appreciating the rain effect, and everything else. So I think normal quarter is nothing extraordinary, closeouts or margin coming out of the change orders that we just talked about.

Got it, okay. And last question for you folks before I hop back into the queue: you know, if I do the math correctly, based on what you all are saying, I sense there is a chance, if you could unload this, et cetera, you could be exiting this year with backlog up potentially, let's say, in the low midteens, maybe a little higher than that. Do you folks feel, capacity wise -- and maybe this is a question for Joe -- you can actually translate that into a revenue growth of the same [phase]? So in other words, do you feel you have the capacity to really generate revenue growth of the midteens level?

Yes, I think if we look at it in two ways. If you start with kind of the back-office SG&A that support the growth, we still feel very comfortable we have got enough capacity to get us close to that $1 billion mark in total. Down in the operations, flexing up that capacity as we grow should not be an issue; and, frankly, we have excess capacity now. Hence we've sold off a fair amount of equipment. We still have some assets that we could either get rid of or maintain to support that capacity, Tahira.

Got it. Okay. Well, good quarter, guys, and I'll hop back in the queue.

Thank you.

William Bremer, Maxim.

So, Ron, I want to go to your legacy backlog. You voiced that this quarter you realized approximately $30 million. So year to date -- and I just want to correct if there's any issues here -- approximately $56 million, or I should say $46 million has been worked off. Is that correct?

Yes. I think we started the year with $86 million, and we ended the second half with $40 million left.

Correct. Okay. So are we on target at the conclusion of 2016 to be, say, below $10 million? Is that slated? Do you see those other $40 million projects sort of ready to go as the shovel sort of in there -- that you guys are finally going to be able to complete this?

Yes, I think those will be gone. And you know, in our world, you always have some projects that are zero or lower-margin. But that's just noise at this -- or will be just noise. So I'd expect that entire $40 million to be burnt third quarter or fourth quarter, give or take two-thirds/one-third for lack of -- you know, there's -- I didn't do a scientific rollout for that. But that's -- order of magnitude, that's about right.

Okay. And then I want to go into your labor. Very impressive in this quarter. Your other peers are sort of voicing some inflation. How are you able to keep your labor in check at this point without potentially losing some of your top cats, your top managers?

You know, it is competitive for supervision, Bill, project managers, project superintendents. It has certainly continued to ramp up. And we think our profitability and our execution is really attracting very good people. So while I think we still have to continue to create opportunities for people for growth, it's there.

On the labor -- the labor front, we haven't experienced substantial inflationary effect that we didn't have built up into our estimates. Numbers down here in Texas is still running modestly low, and we had that built into our bids.

We're also thankful that the average life of our jobs, less than two years -- we can recycle the estimate every time. So you reprogram the rate you are going to use based on any inflationary impact. And we also always put an inflationary assumption in our estimates, and so far, Bill, we've been spot on. There hasn't been much impact from that.

Ron, this last one is for you: can you give us a sense -- in your bookings, what's the breakdown between the private commercial as well as the public domain of the projects you are bidding on at this time or that's in your backlog at this time, I should say?

I'm going to turn that one over to Joe. He's the man that studies that very hard.

Yes, when you look at what I'll call the highway side, which would be state or federal, 80% of our total work is in that space. However, when you get into airports and some of those activities as well, they fall under the same guidelines. So about 92% to 94% of our work today falls under that piece, and the rest would fall under private.

Okay, thank you.

Hamed Khorsand, BWS.

First question: if you could just talk a little bit about how confident you are in the new guidance you're providing?

Yes, I think we feel considerably more comfortable with this new guidance. And again, I want to remind you, it excludes the one-off opportunities that are inherent in our business. So the actual number, with any amount of luck at all, will be probably higher once claims are settled and other one-off things are in there. So I would tell you my confidence in the number, Hamed, is north of 80%.

Okay. The reason why I ask is you were talking about the rain in Texas, and that kind of hit the revenue mark for the year. And then you noted that was in April and March. And I'm just wondering why you didn't -- why you stuck by your guidance in May if that was the case.

Yes, I think it was still raining. What was the number of work that went --?

It depends on the geographic area of Texas, but we had monstrous rains in May and well after we released the quarter. So I think the number was somewhere between lost days of 15 to 20 days. When you divide that by 60 or so workdays, normal workdays, that's a very big percentage.

And we unfortunately don't get those numbers right on the spot. So if you're talking about early May, even then, with the torrential rains continuing down there, the impact of the April numbers was not fully known until later. We knew we had lost the days; we didn't understand the impact until later, after those announcements were done.

Okay. And then --.

The other thing that's a challenge, you have to realize, is we lost somewhere -- roughly 10 to 12 days in May. And you still have the rest of May and June to get those projects kicked back off, depending on the level of rain and the level of activities from the customer. So until you're through, you just don't know how fast you're going to ramp back up.

One last thing is that -- I hope this habit breaks in Texas, but we are naming floods now after certain holidays. We had the Tax Day flood, which happened on April 15, and it was a torrential, terrible flooding situation, followed by the Memorial Day floods. And so we are naming them based on holidays. The next big holiday is Labor Day, and we're hoping that the rain pattern has changed by then.

We survived July 4.

We did.

Hot and dry.

Hot and dry.

My next question was on your backlog. It's down from the end of Q1, and my question is: are you focusing on keeping that at a lower level than it was in Q1? Or are you focusing on trying to get it above that level? And if you trying to get it above that level, any sense of where you imagine the backlog will be at the end of the year?

Let me make a first cut at that, Joe, and maybe you could offer color commentary. What I tried to do last year was to concentrate on the bottom line and not the top. And this year, the opportunities coming up with the federal highway bill and other things, and the way it's generating better opportunities for better margins, means we must participate.

And, indeed, we now feel good enough about project execution where we will willingly participate with a much greater focus on the things we know we make money on based on history, which taught us not only where we made money, but where we did not make money. And part of the strategy is to avoid those things where we inherently now there's too much risk, and we don't make money.

I would tell you that our tendency for the balance of this year and into next year is to continue to carefully grow revenue but, more importantly, continue to grow bottom line. I am less fixated on top line; I remain focused on the bottom line. What would you add, Joe?

Yes, I think two things. It's relatively flat. We are focused on selecting the right bids. I will tell you in general we are running right at about the same percentage in total, but we are being much more selective on the bids that we are going after. The total bid activity is up, and we're trying to make sure that we're not leaving too much money on the table, that we're chasing the right bids and getting every penny we can out of it.

Okay, thank you.

Tahira Afzal, KeyBanc.

Paul, given all the weather nuances you're seeing, and who knows, maybe there's sort of permanent climate change. So, you know, we are seeing flash floods across the country and droughts in others. Are you seeing water infrastructure opportunities becoming more visible for you all?

Yes, you know, in Texas, where these torrential rains and floods have really impacted the entire economy down here, compounded with the oil price impact, I will tell you that there's an awful lot of conversation about new water projects, particularly flood control projects, coming up. Unfortunately, they are right now in the conceptual stage. That will be followed by the budgeting and design phase, followed by the bidding and construction phase. So I think it's a year out before we'll see meaningful numbers of projects.

But in the water area, particularly flood control, we're going to see more and more of those projects. And particularly here in Texas, which is -- we're very thankful for that, aside from the fact that we need it, is the fact that that really does hit our sweet spot very well. Large-diameter pipe flood control projects are really one of our strongest projects with one of our best margins.

Okay. And Paul, in that regard, can you sort of hash out how much of your revenue is roughly on water infrastructure right now?

Joe?

And let's say if these opportunities do materialize, let's say, two, three years out, how much that could grow by?

Joe?

If you take a look at our water, Tahira, it's -- depending on the year, it varies between 3% to 5%. And a lot of that is in the Texas market, predominantly. We're starting to grow some of that out on the West Coast, but predominantly in Texas.

And in terms of the second half of the question about how much it would grow, I would say it will grow to as much as 10% to 15% but never be the dominant player, just because of the sheer size of the market.

Got it. Last question on that, Paul: you know, I know that crazy pipeline project in California, on the water side. It seems like it's strangely gaining some momentum. To the extent it actually goes through, is that something you guys could potentially play on?

We looked at that. And the project size -- there's only the subcontractor. The project sizes are considerably outside of what we'd call our sweet spot. And some of the bigger contractors will not want to bite it off entirely.

So we could be part of either a joint venture or certainly a subcontractor in a part of it. We think that's a long way off. And we think that we'll be invited in to play with some of the bigger players, but I don't believe that we will be on point for that kind of work.

Thanks, Paul and Joe.

William Bremer, Maxim.

This is a question -- maybe it's for Paul, maybe it's for Ron, or even Joe. I guess what I am trying to understand is your public projects are well north of 93%. Surely the better margins are on the private side. Have you been gearing up, maybe, your P3 activity to go after the higher-margin projects? I'm just trying to grasp why you're in so much of the lower-margin versus the higher-margin projects that are on the docket right now?

It's actually a great question, Bill, because I have said for quite a while the observation that I'd make is this is a business that is very competitive -- on a good day, it's very competitive, and it drives margins lower. So I agree that our mix of public work, publicly bid work, to private work is going to change.

Directionally, we're going to blend in more private work. And we're going to -- and our observation comes from simple things, like right now our best margin work is with our private customers like the railroads. And it has everything to do with the fact that a railroad, a private business, understands the time value of money. And so if you say to a railroad company, we can replace your bridge in a month for X, or in three weeks or 2X -- or maybe not 2X, but X plus something. They almost always jump on it, because they understand the time value of money.

In the public sector, our customers like TxDOT are obligated to be very transparent in the bid to as many contractors who can get bonded and are willing to spend the money to bid. There is no limit on how many people bid the work. And as a result, between mistakes made by others and just pure competitiveness, margins will never get to be gigantically high. They will always get -- if we're lucky, they'll crawl up into the double digits, but it'll be low double digits.

What would you add to that, Joe?

Yes, I think, Bill, you're right on. If you go and read our strategy, part of what we have gone back and evaluated and looked at as we're going forward is we do see some very nice margin opportunities in the adjacent markets, which -- a lot of that is private space, which could be commercial customers, could be even touching in some of the residential space, airports, rail. The margins are significantly higher.

You go upstream in the activity, so there's less competition at the bid table at the day of the bid, or maybe no competition if you're part of the design team. And that's really what we're trying to drive the longer-term growth.

And the only thing I would add is concrete is concrete, whether it's placed on a road for a public company, whether it's on a P3 project -- something that I know you have asked about several times, and we certainly are looking more at that -- or whether it's other industrial customers. Concrete is concrete, and we are convinced that there are opportunities to help improve. We will never abandon our core business, but to blend in higher-margin stuff is certainly the direction we're going in. Thank you, Bill.

Ron, this is a follow-up for you based on that. Based on the mix, your other income line, what are you forecasting there for the year, given the mix of backlog and your JV activity?

We don't really give guidance at that level, but I think the second quarter was very, very strong. And the balance of the year will be as strong. I'm hesitant to say it's times two -- the second quarter times two -- but they continue to have some good backlog that they will burn off in the back half of the year.

Okay, so back half similar to the first half?

I didn't say that. (laughter) I just think it's going to be continued strong.

John Rogers, D.A. Davidson.

Thanks. Just a couple of quick things. Which your average project size now in backlog, and how does that compare to 12 months ago?

I think if you looked at our average project size, we're in the $20 million to $25 million -- actually, it would be a little lower than $20 million. And I don't -- off the top of my head, I don't have exactly where that compares to 12 months ago, to be honest. It's probably -- let me just step back and answer it maybe a little differently.

If I look at the size of bids that we are winning year to date, it is slightly smaller than the jobs we won last year year to date. So even though we had won as a percentage is very flat, the number of jobs we're bidding are higher. That's where we're getting the increase in the backlog. So they are slightly smaller, John.

Okay, thank you for that. And then, secondly, in terms of the refinancing that you're now hoping for in the first half of 2017, what's your assessment of the cost save opportunity there?

It's a great question, and it's pretty significant from a -- if you start with the stated interest rates that we are paying today and borrow at -- our line requires us to pay a 12% coupon rate, if you will, for interest expense. But in addition, for any asset-based-type loan or type program, there's other costs that are incurred. Everything from appraisal costs, periodically, to cost of increased and decreased collateral as you move equipment around or sell it to buy new. So I think in total, that number's between 13% and 14%.

Certainly, the key of achieving our late 2016/early 2017 will be continued performance, because most financial institutions like that. Second key is one we can check off, which is the equity market, the equity raise that allowed us to have a balance sheet and liquidity picture that is much stronger than it was prior to that.

So I'm going to go with half -- half the interest rate cost. Maybe a little bit less, depending on when we structure and how we structure it. I would suggest it will still be sort of a combination of revolver and otherwise. But that's sort of what we're looking at.

Unfortunately, right now the only thing we have outstanding is our term balance of -- at June 30 of about $15 million. We were unborrowed under the revolver. So while the interest rates are high, our borrowing is low at this point in time. So you're talking about percentages and dollars.

Yes. So, Ron, as you are looking at it right now, for calendar 2016, how much are you actually going to be paying relative to that 13% to 14%? I mean, will you go into the line at all? I mean, I understand that it'll be structured --.

If we are in the line, if we go in -- yes, probably go in and out of the line, just, you know, days or weeks. But I wouldn't expect to end quarters with a balance in the lines. So I would suggest that $15 million at the end of the quarter times 12%, plus a little rounding up for the other costs is probably the high end of what I would expect for the balance of the year -- balances following two quarters.

Okay. That's helpful. Thank you.

Thank you. Mr. Varello, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

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