Sterling Infrastructure, Inc.
Q3 2014 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Greetings, and welcome to the Sterling Construction's Third Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Brian Manning, Executive Vice President and Chief Development Officer of Sterling Construction. Thank you, sir. Please go ahead. Brian Manning Thank you, Melissa. Good morning. On behalf of Sterling Construction, I welcome you to our third quarter 2014 investors' call. We'd like to thank those who have served honorably in our military, and as we celebrate Veterans Day this week, please remember and appreciate their sacrifices for our freedom. I'm joined today with our CEO, Peter MacKenna; and our CFO, Tom Wright. Today's conference call includes statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act. Such statements are subject to risks and uncertainties, including overall economic and market conditions, competitors' and customers' actions, or weather condition, and other risks identified in the company's filings with the Securities and Exchange Commission, which could cause actual results to differ materially from those anticipated. Such statements should be considered in light of these risks. Any prediction about the company is only a statement of management's beliefs at the time the prediction is made. Management's belief may change over time, and the company does not undertake to publicly update the prediction. Now, I'll turn over the call to Tom Wright, our Chief Financial Officer. Tom Wright Thank you, Brian. I'd like to discuss our 2014 third quarter financial performance. Revenues for the 2014 third quarter were 189.3 million, which was 1.8% higher than the third quarter of 2013. The increase in revenues compared to the third quarter 2013 was due to an increase in the number of projects and process particularly in our California market. Gross margin for the 2014 third quarter declined slightly to 4.4% of revenue compared to 4.5% in the third quarter of 2013. Gross margin in the 2014 third quarter was suppressed by the downward revision of two problem projects in Texas and one problem project in California. Excluding the margin erosion on these three projects, gross margins for the 2014 third quarter would have been 6.2%. General and administrative expenses in the 2014 third quarter were 9.3 million, compared to 8.2 million in the 2013 third quarter. This increase was the result of slightly higher headcount and employee benefit cost in 2014, combined with the one-time decreases in employee benefit cost in the prior year's third quarter. As a percent of revenue, G&A was 4.9% as compared to 4.4% in the third quarter of 2013, and 4.9% reported in the second quarter of 2014. The operating loss for 2014 third quarter was 1.6 million, compared to operating income of 1.7 million in the third quarter of 2013. Operating income in the third quarter of 2014 included charges of 3.5 million related to three large projects awarded prior to 2012. Net loss attributable to Sterling common shareholders for the 2014 third quarter was $3.9 million, compared to a net loss of $0.2 million in the third quarter of 2013. Net loss per diluted shares attributable to Sterling common shareholders for the 2014 third quarter was $0.21, compared to a net loss of $0.06 in the third quarter of 2013. Capital expenditures for the 2014 third quarter were 6.7 million, compared to 4.6 million in the third quarter of 2013. Capital expenditures for the full year of 2014 are expected to be slightly higher than the 2013 levels of approximately $15 million. Bookings for the 2014 third quarter were $176 million, representing a book-to-bill ratio of 0.93

[Brian Manning:]

Thank you, Peter. Our backlog has increased from 694 million as of September 30, 2013, to 759 million as of September 30, 2014. We reported in the Q, an additional 82 million for our current low, but not yet awarded the contract. And on Friday, we announced the project win in California that will contribute to this backlog, once the negotiations with top ten are concluded. Over the next six months, we will continue to pursue over 3.1 billion in traditional bid-build work and alternative delivery projects. According to the ADC of America, 500,000 constructions have been added over the past four years, indicating a sign of recovery from the $2.1 million jobs loss in the construction industry from 2007 through 2010. Even with this positive movement in construction employment, we're currently experiencing a lack of qualified labor in many of our markets. This lack of labor is manifesting itself, also in supply chain shortages as there are not enough truckers to deliver products. According to the American Road & Transportation Builders Association, ARTBA, the first item of business for congress is to pass another continuing resolution for fiscal year 2015 appropriations bill which will expire on December 11, 2014. This important appropriations bill sets funding levels for the U.S. Department of Transportation, which represents about 52% of states highway and bridge funding. The army corporations bill, the highway bill extension expires in May of 2015, and is one of the best opportunities for Democrats and Republicans demonstrate that they can work together. According to the American Society of Civil Engineers, President Obama at his first press conference following the election, mentioned infrastructure repeatedly as an issue where he felt he could reach common ground with the new GOP majority. Voters in the November 4th election continue to support state and local infrastructure measures. In fact, Alpha reports that over the last ten years borders have approved transportation initiative at a 72% rate. This year's election was no exception worth over 21 billion approved for infrastructure. Most notably, in fact this Proposition 1 was supported by voters, and they overwhelmingly approved approximately 1.4 billion annually for transportation infrastructure out of the safe oil and gas production path. (Indiscernible) in California, Proposition 1 was approved at a 69% rate for water infrastructure. This Proposition authorizes 7 billion in general obligation bonds for state water supply infrastructure projects. Now, we welcome your questions.

[Operator:]

Thank you. (Operator instructions) Our first question comes from the line of Tahira Afzal from KeyBanc Capital Markets. Please proceed with your question.

[Unidentified Analyst:]

Good morning, gentlemen. This is [Sean] (ph) on for Tahira today. My first question is just -- in the current oil price environment, if we see the Shale work start to slow down, would that alleviate some of your labor cost concerns?

[Brian Manning:]

Absolutely. Not just in craft labor, but in the supply chain as I mentioned, particularly in trucking. There's an enormous shortage of truck drivers in Texas right now. And I think that would definitely improve if the Shale gas started going down a little bit.

[Unidentified Analyst:]

Okay, that's helpful, thank you. And my next question is just -- can you tell us about the mix of your prospects, your project prospects in terms of complex ones versus the more simple ones?

[Peter MacKenna:]

Well, [Sean] (ph), it runs again within the portfolio from relatively simple milling and repaving projects and (indiscernible) too far more complex design build projects in the Intermountain states, and here in Texas in concluding water distribution and transportation. That mix change is literally day-to-day as we decided on whether we're going to attend the particular projects or not, but as Brian mentioned, we're tracking more than 3 billion just in the next relatively shorter period of time, and we also track what we refer to as the steps to take transportation improvement projects, and there's more than 10,000 projects out there in our particular region that we pay attention to. It's really a matter of deciding what is the best use of our fund capacity and our working capital in terms of pursuing the project.

[Unidentified Analyst:]

And does the competitive dynamic differ between the more complex ones versus the smaller ones?

[Peter MacKenna:]

It absolutely does, as does the margin profile associated with the project, and that's kind of the calculus that goes into our selection process.

[Unidentified Analyst:]

All right, gentlemen. I appreciate the insight. Thanks very much.

[Peter MacKenna:]

Thank you.

[Brian Manning:]

Thank you.

[Operator:]

Thank you. (Operator instructions) Our next question comes from the line of Allie Hemmings with D.A. Davidson. Please proceed with your question.

[Allie Hemmings:]

Hi, good morning.

[Peter MacKenna:]

Good morning, Allie.

[Allie Hemmings:]

Two quick questions for you guys; I was wondering when we can expect to see revenues starting to turnaround as we're going forward here.

[Peter MacKenna:]

I think we're running at a record revenue pace. Sorry, record revenue pace right now, and year-over-year were up about 20%. And I think that trend will continue for a while. If you look at our backlog, we're at $760 million in backlog right now, another 82 million that we can't move into the backlog yet because we don't have the contract signed. There is another project we noted on Friday, and there are couple others that haven't been declared yet. So we do have record backlog. We did say that we're chasing smaller projects with short duration. So we'll see that backlog burn much quicker than the past. So I think you'll see the revenue rates that we have now be fairly consistent going forward.

[Allie Hemmings:]

Okay. And a quick follow-up on that; what kind of margin that you're expecting for backlogs as you go forward?

[Peter MacKenna:]

In terms of the gross margin associated with our bid, we're seeing that those margins are fairly accretive to our current backlog, and that trend seems to be continuing. And I certainly hope that the market continues to allow that to exist. As these troubled jobs completely burn off, and as the 2012 projects which have a lower margin than the 2013 and 2014 projects, I think we'll see the backlog margin continue to rise. But as I mentioned, there are some constraints that are troubling, even though we put in wage inflation to our bids, and frankly reach to levels that in 30 years of doing this, I've never seen before; there is some concern of us going forward. So we've bid with some healthy margins and we hope to deliver those, but there are market forces that are some concern to us.

[Allie Hemmings:]

Okay. Thank you very much.

[Peter MacKenna:]

Thank you, Allie.

[Operator:]

Thank you. Mr. McKenna, there are no further questions at this time. I'd like to turn the floor back to you for any closing and final remarks.

[Peter McKenna:]

Thank you, Melissa. We'd like to encourage anyone of you if you have any further follow-on questions, please feel free to contact us directly or our investor relations from the equity group. Their contact information is on the bottom of the press release as is ours. And we'd be very happy to speak one-on-one with any follow-on question. With that, I'd like to thank you for joining us on our third quarter call, and we look forward to reporting to you in the fourth quarter. Thank you.

[Operator:]

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