Sterling Infrastructure, Inc.
Q4 2021 Earnings Call Transcript

Published: 1 Mar 2022

[Operator:]

Greetings, and welcome to the Sterling Construction Company's Fourth Quarter and Year-End 2021 Earnings Conference Call and Webcast. As a reminder, this conference call is being recorded . There are company slides on the Investor Relations section of the company's website. Before turning the call over to Joe Cutillo, Sterling's Chief Executive Officer, I will read the safe harbor statement. Some discussions made today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Sterling's most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The company assumes no obligations to update forward-looking statements as a result of new information, future events or otherwise. Please also note that management may reference EBITDA, adjusted EBITDA, adjusted net income or adjusted earnings per share on this call, which are all financial measures not recognized under U.S. GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued yesterday afternoon. I'll now turn the call over to Mr. Joe Cutillo. Thank you, sir. Please go ahead.

[Joseph Cutillo:]

Thanks, Kyle. Good morning, everyone, and welcome to Sterling's Fourth Quarter and Full Year 2021 Earnings Call. Sterling reported another record fourth quarter and another record year, exceeding our expectations. Our people and our strategy continue to deliver exceptional performance time and time again, even during a year with significant challenges. This morning, I will cover the highlights for our fourth quarter and full year, then turn the call over to Ron for his financial commentary. Before I discuss our highlights, I will speak briefly about our journey and reflect on the strategic elements that transformed Sterling from a heavy highway construction company to a leading specialty infrastructure provider with expertise in e-infrastructure, building and transportation solutions. Since 2016, Sterling has been on a transformational journey, borne of a strategy and vision that levers our entrepreneurial spirit in our customer-centric culture. This blueprint for reducing our risk, improving our margins, building a platform for future growth and consistently outperforming our peers is made up of 3 fundamental elements

[Ronald Ballschmiede:]

Thanks, Joe, and good morning. I am pleased to discuss our record fourth quarter and full year performance. Our updated Investor Relations presentation ended December 31, 2021, earnings release has been posted to our website and includes additional financial details to help further understand our 2021 financial results. The presentation also provides additional modeling considerations which underpin our 2022 revenue and earnings guidance. Additionally, as you may recall, we closed on Petillo & Kimes acquisitions on December 30 and December 28, respectively. Given the proximity to the year-end, these acquisitions had minimal impact on our 2021 income statement. With these acquisitions, we realigned our operating groups into 3 reportable segments

[Joseph Cutillo:]

Thanks, Ron. It's always nice to finish with a record quarter and a record year. But what is even better is being positioned to have an even stronger year ahead. I'm proud to say we will enter 2022 in the strongest position ever, with record backlog, better margins and our highest growth coming from our lowest-risk, highest-margin businesses. Our strong markets, our diverse workforce and proven strategy continue to pay off. We remain committed to the safety and well-being of our people to increasing customer and shareholder value, while also protecting our communities and the environment. We enter 2022 a completely different business than we were just a few years ago. As our strategy and vision drive us forward, we are just the beginning of what we will become. To reiterate our 2022 guidance, our revenue will be between $1,000,825,000 and $1,000,875,000 and our net income will be between $83 million and $89 million. With that, I'd like to turn it over for questions.

[Operator:]

. Our first question is from Brent Thielman with D.A. Davidson.

[Brent Thielman:]

Maybe for Ron, just wondering what margins you've embedded into the guidance for the three business segments now that they are realigned here?

[Ronald Ballschmiede:]

Sure. I think they're -- so 1 of the things we did is to help you, did 8 quarters of history to match up with how we're going forward. And I think it helps a lot on understanding the operating income characteristics of the units by breaking out the corporate expense. So take a look at those. So I think certainly, a few things by segment here. I'll start with the heavy -- I'm sorry, with the Transportation Solutions group. We will continue to see margin leverage on that coming from the continued shift of moving to higher-margin projects and et cetera. We probably got 1 more...

[Joseph Cutillo:]

We're continuing to reduce the low-bid side of that world.

[Ronald Ballschmiede:]

So that continues to eke up a little bit. We got 20 basis points in margin increase in backlog, but look, we expect more out of that than 20 basis points for the full year. On the Building Solutions side, special note to the fourth quarter margins. We essentially recouped what we would have had, but for the pressures on supply chains and inflation for the year from -- a fourth quarter doesn't make a year, but we certainly had a great recovery on that. And probably, for the second quarter in a row, we had revenues per slab growing faster than the number of slabs done. So what that means more price per slab, obviously. So we expect year-over-year to have that fourth quarter looking results continue into 2022, maybe a little bit lumpy. The last, e-Solutions, obviously, we'll pick up Petillo in our -- in that segment. Margin characteristics are very similar to those of Plateau. So I think the challenge will be how fast can we continue to recover from the supply chain and inflation side of it. So as time goes by, that tends to run through backlog and improve, but we expect that to get better in 2022.

[Joseph Cutillo:]

The biggest shift in going from prior segments to the new one is our Commercial business comes out of what used to be the Specialty segment, which is now the e-Infrastructure and that goes into Building Solutions. So that margin is a little lower than our historical residential business, so you'll see that impact to a small degree.

[Ronald Ballschmiede:]

Yes. And that, of course, takes that lowers -- it helps operating margins for the e-Infrastructure group and reduces margins for just stand-alone residential in the old, at least.

[Brent Thielman:]

Okay. Appreciate that. Maybe just on the outlook, a question around the cash from operations expectation. Just wondering why, it couldn't be significantly higher this year just given the addition of Petillo.

[Ronald Ballschmiede:]

So we start the year with a consistent belief that our cash flow from operating activities will approximate our operating income. That bounces a little bit around quarters just due to the seasonality of our work. But that's where we start every year. And I think our goal is to see if we can continue that and strengthen all together because I don't think it's reasonable to beat that number year after year after year. It's just not -- beat that relationship year-after-year. So that's kind of where we started the year. And over the past few years, we kind of see that average out about that level. So the bandwidth we get around that in the model is really around operating income is our expectation of cash flow from ops.

[Brent Thielman:]

Okay. That's helpful, Ron. And maybe just last one for me. You seem to offer a fairly optimistic outlook on the residential side. Maybe any other feedback you're getting from your homebuilder customers just regarding plans for this year? That seems to be an area that might be a -- some worry to people out there but doesn't sound like things are slowing for you. So any help there would be great.

[Joseph Cutillo:]

Yes. We haven't -- the feedback is we haven't seen anything slowing. If they have any concerns around potential risks, it's more around land availability and developing land at faster rates. As you can imagine, they have already exceeded their 2021 expectations on builds, which eats up land at a quicker pace than their 3-year plan anticipates in a lot of cases. So I know that they're working diligently to develop that next wave of land. But as we step back and we just think of it objectively, we certainly are cognizant of the rates increase a potential rate increase on inflation. But the builders still have a lot of levers they can pull. They're making very high margins on the properties we're selling today. And they don't want that to slow down any time soon. So we think through 2022, barring something catastrophic, everything they're telling us is we're going to see, what I'll call, low double-digit growth going into this year in the 3 markets we're in, which are really the top 3 markets in the U.S. right now, Phoenix bounces back and forth, but we're number one, number two and number three.

[Ronald Ballschmiede:]

And of course, we would expect market share improvement for both our expansions in Houston and in Phoenix. .

[Operator:]

Our final question comes from Sean Eastman with KeyBanc.

[Sean Eastman:]

It would be helpful to just get a bit more of a flavor of the kind of operating conditions you've contemplated in the initial 2022 outlook here. It seems like the residential business is sort of out of the woods in a sense based on the fourth quarter results here. And then I guess the other element is sort of that equipment lead time in the e-commerce solutions business. So just sort of what did you guys see around those dynamics through kind of exiting the fourth quarter? And how have you contemplated those potential risk factors in the guidance?

[Joseph Cutillo:]

Yes. What Ron talked about, how we factored in some of the inflation coming back. But the good news is we saw -- and we had said all through, if you remember, 2021, if we can get, I'll call it a slowdown in rate increases, we could start catching up to recoup some of that in the price increases that we're passing through. And in the fourth quarter, we saw that. Now we're going to continue to see some increases throughout 2022. They've already announced some concrete increases, et cetera. But we've done a much better job. So we've got some visibility into recouping that in 2022. And we also hope to start recouping on the settled specialty services or now e-infrastructure solutions, some of that, as we get into 2022 and the new bid projects begin. So we've done that. On the equipment side and capacity side, we have factored in the equipment capacity we have with the equipment capacity that we know we're going to get or added in the quarter. But I'll be honest, for the first time, we're actually turning away work in the e-infrastructure segment just because we're making sure we take care of our core customers, we're making sure we've got capacity for the projects they've got on the books for the year, and we're not getting over our skis. But frankly, if we had more equipment, we would be taking up more work now than we have. But we factored that into the 2022 forecast.

[Ronald Ballschmiede:]

I would add that for the combined backlog of the e-infrastructure group other $470 million. That's a backlog of about 2/3 our revenue expectations. There are run rates that we have, including Petillo. That's pretty strong compared to history, that relationship. What that means is we have the backlog. And of course, as we roll through that backlog, we did roll through it in 2021 into 2022. We've learned a lot about contingency planning around pricing and productivity and things like that. So it's pretty simple that, as we've rolled off the old backlog, we have better insights over what we think it will be in 2022. So that's going to help us. And certainly, the backlog is going to provide us 2/3 of the year, give or take. So I think we're looking forward to that performance.

[Sean Eastman:]

Got it. Okay. Good stuff. And then how much revenue growth and EPS accretion is in this outlook from Petillo?

[Joseph Cutillo:]

I don't have that number exactly in front of me. I want to say it's between $0.15 and $0.20.

[Sean Eastman:]

$0.15 to $0.20. Got it.

[Ronald Ballschmiede:]

I'll have a better -- I didn't bring my pro formas and have better ones when...

[Joseph Cutillo:]

We can give you more detail information on that, Sean.

[Sean Eastman:]

Yes, I just wanted to work out the organic growth, the underlying organic growth. And then if I look at the backlog in the fourth quarter, pull out Petillo, it looks like book-to-bill was below 1x. But obviously, commentary -- demand outlook commentary from you guys is pretty robust here. So just curious how we should anticipate the backlog trajectory over the next couple of quarters here, whether there's some stuff that's getting ready to load in, whether chunky awards on the transportation side or some e-infra stuff coming in. Just curious how to think about that.

[Joseph Cutillo:]

So what we'll see is, I think we could continue to see backlog decline. If you go back -- and we said this last year and coming into this year, and it's playing out pretty accurately...

[Ronald Ballschmiede:]

Yes, and make sure you break out backlog.

[Joseph Cutillo:]

Yes. And backlog for transportation is declining, backlog for e-infrastructure is improving. But if you remember, Sean, at the beginning of last year, we booked several really large design-build jobs in the quarter. They had been sitting in won but not signed for a long period of time. So that skews the spike up to some degree, and we're burning that off. And there's not those mega-projects to replace that. So we're still hitting singles and doubles and making sure we're focusing on the small quick-turn projects and higher margin. So I think on the transportation side, we'll see that continue to decline as we get through the first half of this year. And frankly, the results of the new infrastructure bill, bid activity has not -- we have not seen a significant increase in bid activity. And there's yet another factor that is taking place. We've won probably a half a dozen or more jobs in the last couple of months, of which, none of them are being awarded because our EOTs did their engineering estimates pre-inflation have not adjusted the engineers' estimates. So we're seeing all the jobs that are being won, coming in anywhere from 30% to 60% higher than the original engineers' estimates. So they go back into the cycle and reestimate those, and then they'll bring them out for rebid versus what you would normally do, is just course-correct the material prices because that's where all the issues are. So we think that will continue to decline. On the e-infrastructure space, again, one of the nice things that's happening as a result of COVID and some of the inflation. Where we have seen, if you remember us talking about some of the big data centers and some of the big e-commerce distribution build outs, a lot of the times, they would buy 100, 200, 300 acres and develop that over phases. So we come do the rough cut of the entire thing. We finish Phase I, they build a data center. A year or 2 later, we come back, we finished Phase II. They build a data center, year 3. What we're seeing them do is ask us, on the projects we've recently won, to do all phases at 1 time. So they're bigger, they're more complex, which is great for us. Reduces the playing field out there on the competition, but also keeps us there on location longer and bigger. So those are beneficial. And that's why, candidly, we're turning away some of the mid-range and smaller work to make sure we got the capacity for the line of sight of the jobs we see coming out in 2022. That help?

[Sean Eastman:]

Interesting. Yes, definitely, it helps massively. And then last one for me. I think you guys are exiting the year here around 2.4x leverage. Not crazy there. So I'm just curious, what's next here? Do we just focus on organic, funding organic growth and delever? Or do you stay on the offensive? What's the message there?

[Joseph Cutillo:]

Yes. I think both. Right now, we'll continue to buy down debt, right? I won't to tell you that we're not out looking for tuck-ins that fit for strategic adds in the 3 segments that we have. And at some point in time, I mean, we're looking -- we just haven't found that right fourth leg to broaden it. So today, as we sit here, we're buying down the debt. But I will tell you, we are constantly and actively beating the bushes. The other nice thing that is starting to happen is we are, in a lot of cases, the first or earliest look in a lot of deals. So that gives us kind of a first chance of some deals that we may not have had a few years ago. So that's a nice position to be in.

[Ronald Ballschmiede:]

Yes. And in my comments, I meant -- I hopefully -- it was helpful from the standpoint of we've been very clear now on -- we are very comfortable with a 2.5x kind of plus or minus future EBITDA kind of calculation. And I think in our -- 1 of the reasons we are is because the cash flow that we've enjoyed since transforming the business has been consistent and strong. So the other interesting point is, with the Petillo acquisition being funded a little -- $20 million worth of our stock, but majority of it by some debt and almost $50 million of cash we had on our balance sheet, it's immediately accretive and it reduced our leverage ratio. So we can find more transactions like that. We won't be slow at taking advantage of premier economics, if you will.

[Joseph Cutillo:]

I think the one thing, Sean, that -- and I'm sure you get it and Brent gets it that we've spent a lot of time on. The cash flow that we are throwing off from this business, the fact that we're able to take kind of -- I call it 1/3, 1/3, 1/3, bite on debt, buy capital and buy businesses last year and bring down the total debt leverage, is really, really an impressive part of what we've been able to do. And it's something we're going to continue to do as part of the acquisition strategy looking for those businesses that either continue that trend or help it even more.

[Sean Eastman:]

Okay. Again, very helpful. I'm going to sneak one more in here. Just in the spirit of kind of setting up appropriate numbers early in the year. Is there anything you'd point out from an EPS cadence perspective within this full year outlook? I mean, particularly, I don't know, maybe first half, back half weighting or any strange comp nuances early in the year, you'd point out here?

[Joseph Cutillo:]

Not really. I mean, our first quarter is always our slowest quarter, right? If you look through history, our fourth quarters as we've kind of transformed the company, it becomes stronger than they were early on. So the first -- but we don't see any significant changes in seasonality. To me, as I look at it, as we get to the back half, if we continue to pick up pricing and continue to see normalization of inflation, that's where we kind of have, I think, some potential upside through the year as we go forward. But nothing of significance from a quarter or back-half loaded. It's loaded just like our other plans.

[Ronald Ballschmiede:]

Yes. I think the shift that we saw in 2021 becomes a new norm by quarter of how that lays out because it's changed pretty significantly from the risk of the Transportation Solutions business being lumpy and weather and things like that. I think with the mix of operating earnings, it will probably look similar to what we had in 2021. Shouldn't theoretically improve a little bit smoother because Petillo and Plateau, we expect the same kind of more or less seasonality in the business, but still feel some in that first quarter.

[Operator:]

We have reached the end of the question-and-answer session, and I will now turn the call over to Mr. Joe Cutillo for closing remarks.

[Joseph Cutillo:]

Thanks, Kyle. I'd like to thank everyone again for joining today's call. If you have any follow-up questions, please refer to the information provided in the press release related to our Investor Relations group at Sterling or our partners at The Equity Group. I hope everyone has a great day and thanks again for joining in the call.

[Operator:]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.