Q4 2019 Earnings Call
[music] greetings and welcome to start construction company fourth quarter 2019.
That's cool and wet.
At this time all participants are in listen only mode. A question answer session will follow the formal presentation.
A reminder, discomfort with me and recorded and there are accompanying slides on the Investor Relations section of the company's website.
Before turning the call over to joke tutto, starting construction this chief Executive Officer, I read the Safe Harbor statement.
Discussions today may include forward looking statements actual results could differ materially some statements made today. Please refer to sterling's. Most recent 10-K and since you 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.
No information future events or otherwise now I'd like to turn call over to jump. The tool. Please proceed sir.
Thanks, what tidy up [laughter] and good morning, everyone.
I'd like to start thinking all of our Sterling employees for their hard work safe practices and dedication to our customers and our company.
The fourth quarter marked the final quarter of another monumental year for Sterling and its shareholders.
In addition to being the final quarter of our fiscal year. The fourth quarter was the final quarter of our original three years strategy that was put together in 2016.
I think it's important to take a minute and look back at what we've accomplished.
The company has changed and how those changes positioned the company for future growth leisure if you refer to slide Sri through five as I go through that probably.
We ended 2015 and headed into 2016 with our fifth consecutive year of losses at that time, approximately 95% of our business was in loaded heavy highway work.
Our gross margins were in the low single digits, and we consistently executed five to six points below our estimated bid margin.
With a balance sheet, there was heavy on capital assets, but skinny on cash [laughter], we were heading for the rocks and needed to change that.
In 2016, the team put together a strategy focused on growing the bottom line, reducing risk shortened up the balance sheet and building a platform for accretive future growth.
The plan consisted of three key elements solidifying our base.
Growing high margin products and expanding into adjacent markets.
Along with this plan came some very ambitious goals that most people never thought we could achieve its such a short period of time.
We set out to take the company from a loss of 40 cents per share to a gain of over a dollar share while reducing risk in three short years.
I'm proud to say with the performance of the fourth quarter and the results are the full year, we have met or exceeded all the goals. We established in our 2016 three year plan.
For the three year period, our revenue grew 63%.
Which is not bad for not focusing on revenue.
Well, what's more important is our margins grew 156% almost three times the rate of a revenue growth.
Our gross margin in backlog went from low single digits to over 11%.
Our S. Today has been reduced almost 100 basis points as a percent the sales while building out a top notch team.
And our EBITDA has grown over six times.
Our portfolio of jobs no longer consist of 95% low bid heavy highway work, but less than 45%.
We now have a platform of three sectors, serving distinctly different end markets in which to grow pot.
All this hard work is not only modestly stronger worst secure business for our employees.
But is also paid great returns to our investors.
Our stock during this period outperformed the S&P 500 by 50%.
Outperformed the Russell 3587%.
It is on part D. NASDAQ index heavily weighted with technology stocks.
Versus our peers.
Well there is no one close to the returns we have been able to achieve the don't worry.
We're not stopping here, we truly believe we're still in the early stages of this transformation and the accomplishments over the next three years are going to be even greater than the last three starting in 2020.
Before we talk about 2020, what's touched upon some of the fourth quarter highlights and activities.
In the quarter, we continued our trend of growing both backlog and margin in backlog, we reach both a record backlog and a record combined backlog of 1.1 and $1.3 billion respectively.
Gross margin in backlog improved 300 basis points, which also was a new record.
Revenue versus prior year increased 36% and our EBITDA increased 42% to $20.2 million.
In the quarter, we saw a temporary reduction to margins due to a claim resolution related to a 2014 bridge project consisting of three separate bridges in Texas has been delayed due to major customer design flaws.
The agreement enabled sterling to recover $17 million of cash for cost the day before.
To find a dispute resolution process for future design flaws and established a cost neutral rate related to any future delays.
In addition, the resolution enabled us to reduce the risk of significant future legal costs and liquidated damages.
As part of the resolution Sterling agreed to work on three bridges simultaneously versus one of the time to accelerate the final completion schedule.
This revised schedule is increased the amount of labor equipment and infrastructure required to complete the project under the new terms and will add an additional $10 million of cost to complete all three bridges by early 2022.
The fourth quarter marked the first quarter of our new acquisition.
And I'm happy to say they perform even better than planned for the quarter, excluding transaction costs, but tell was accretive by 30 cents a share and finished the year with record backlog and record activity going into 2020.
As we moved the 2020 or backlogs are at record highs with record margins.
Market activity across all three sectors remained strong we have seen a resurgence in the Dallas housing market that started late in the fourth quarter and continue through the first quarter. After a slight slowdown beginning in Q3 2019.
We continue to made great progress with our expansion into the Houston residential market as we more than doubled our year over year starts in the fourth quarter and saw no slowdown as we rounded the corner into 2020.
As it relates to our new acquisitions plateau, we continue to see great activity in growth with their ecommerce and datacenter customers and are excited about some new programs in the upcoming opportunities with companies like home depot and publish.
We are confident the plateau team will continue to exceed our expectations throughout 2020 [laughter].
In 2020 revenues will grow over 20% and de between 1.375 billion.
And 1.400 billion.
Our adjusted net income will grow approximately 61% and be between 38, and 41 million, even with a noncash tax provision of $11 million were 38 cents a share.
Our adjusted EBITDA for 2020 or more than doubled to approximately $127 million and we will reduce our debt leverage by half a turn.
It's really amazing to sit back and think after growing our EBITDA over 500% during the last three years, we would talk of be talking about more than doubling that in 2012.
With that I'd like to turn it over to Rod you give you more details on the quarter the year at our 2020 outlook Rob.
Thanks, Joe and good morning.
Im pleased to discuss our 2019 results for a truly transformational fourth quarter and year.
As you saw in yesterday's press release, the fourth quarter included a variety of onetime transactions, which certainly complicated the financial statements.
The earnings release included several additional non-GAAP financial presentations to help provide a better understanding of both the 2019 results and our prospective reporting.
I will discuss those patterns in more depth short.
I will also provide some additional 2020 financial details, which are the underpinning of our 2020 revenue earnings and cash flow related guidance.
These details are summarized on slides 13 and 14.
With the acquisition of Plateau on October two 2019, we reorganized our reporting structure with the three reporting segments.
Heavy civil specialty services and residential.
The heavy civil reporting segment includes our legacy heavy civil businesses with the exception of our commercial business.
Our commercial business combined with the plateaued business forms the specialty services reporting segment.
Another way to look at these two reporting segments is by type of customer.
Heavy civil 70, civil being predominantly serving the public sector such as the deal keys admitted municipalities.
And specialty services, serving the private sector, principally general contractors and developers.
The residential reporting segment is essentially unchanged from prior reporting.
More consistency purposes, our past segment reporting has been conformed to our new three reporting segment structure.
You'll find that could form three segments reporting in the quarterly information footnote of our 2019 form 10-K.
Now, let me talk about our 2000 results and our 2020 expectations beginning on slide six.
Our 2019 at 2000.
I'm sorry at December 30, Onest 2019, our backlog was 1 billion at $68 million compared to $850 million in 2018.
This 217 billion dollar increase backlog.
Contain $164 million related to plateau.
The gross margin in our 2019 backlog was 11.5% compared to 8.5% at the beginning of year.
What makes this 300 basis points improvement. So special is that both the plateau acquisition and Sterling's legacy business contributed to this improvement.
Approximately a third of the backlog gross margin increase what from our legacy heavy civil businesses with two thirds of the increase attributable to the plateau acquisition.
Unsigned low bid awards totaled $273 million, a slight decrease of $20 million from the end of 2018.
But don't have no unsigned awards as a generally does not do hard bid work.
We finished 2019 with a combined backlog of $1.342 billion, a 17% increase over the end 2018.
Our gross profit in combined backlog increased 11% at December 30, Onest 2019 from 8.9%.
At the 80.
8.9 for Nike.
Sorry.
Our 2019 book to burn factor was 104, and 106% for combined backlog and backlog respectively.
Residential which accounted for 14% of our consolidated revenues does not report backlog, reflecting the short term performance cycle of residential concrete slab.
Slide seven performs at all provides an overview of our fourth quarter, where I will focus my comments.
Slide eight nine provides additional details for informational purposes.
Revenues for the fourth quarter, 2019 were $347 million, an increase of $91.4 million or 36% over the comparable 2018 quarter.
Our full year 2019 revenues totaled $1.126 billion, an increase of $89 million or 9% over 2018.
For both periods substantially all of the revenue increase was attributable to the plateau acquisition, which had revenues in the fourth quarter of $84.6 million.
But still got off to a fast start with strong fourth quarter revenues and earnings and was accretive by 30 cents per share in the first quarter of our ownership.
Lactose, New award book and burn ratio in the quarter was 106% and included sizable we were awards from an ecommerce market and a large retail commercial and multifamily land development project.
Going into 2020 additional proposal activity continues to be strong.
Consolidated adjusted EBITDA was $20.2 million in the quarter and included the $10.2 billion charge related to the claim settlement, which Joe spoke to earlier.
Finally, we recognize a noncash income tax benefit of $25.8 million or 92 cents per share in the fourth quarter.
$27.4 million or dollar one per share for the full year.
This tax benefit reflects the reversal of our net operating loss tax reserve.
Driven by sustained taxable income over the past several years going according in accordance with the accounting requirements.
[noise] prospecting going into 2020, our results will now included tax provision at an effective rate on income before income taxes of approximately 26%.
Approximately 80% of that tax expense will be down cash.
Let's look to our segment results on slide 10.
Consistent with our expectation the heavy civil and residential revenue variations for both the fourth quarter and the year were essentially flat over the comparable periods.
Within our heavy civil revenue heavy highway revenues were down $30.2 million, primarily from our two large design build construction joint venture projects, which were subsets substantially completed in 2018.
Year over year revenue from these projects decreased by $80.6 million.
These declines were offset by $75.3 billion incremental revenues from fully consolidated heavy highway work and increases in aviation work.
Also impacted negatively affecting operating income was the aforementioned temporary mix change from alternative delivery too hard bid projects.
We expect this trend to reverse in 2020.
Two of our three new large alternative delivery projects are in backlog today.
These projects together with a large alternatively alternative delivery projects in our unsigned awards will all begin generating revenues in the first half of 2020.
Residential revenues for the fourth quarter of 2019 were $34.5 million up slightly from port $34.3 million in the fourth quarter of 2018.
The number of residential slabs completed during the year increased by 4% over 2018.
This increase in completed slabs in excess of revenue growth was primarily attributable to the market shift of smaller homes, which generate less revenues per slab.
Approximately 8% of the residential 2019 revenue was derived from the continued expansion into the Houston market.
As we ramp up operations and continue to build scale in Houston, we expect margins to continue to improve in 2020.
Finally, the increase in revenues in our and operating income get our search specialty services group reflects the addition of Bhuttos results for the fourth quarter of 2019.
Now, let's move to slide 11, and talk about our 2020 expectations.
We expect our 2020 revenues to be between 1.375 billion and 1.4 billion, a midpoint revenue growth up $261 million for 23%.
Approximately 80% of this growth comes from including the full year a plateau revenues.
The largest variation effective where we wind up with.
Once range is the pace of our ramp up of these three large.
Design build joint venture projects.
Oh.
Our 2014 guidance for adjusted net income is between 38 and $41 million or a midpoint guidance increase or mid of sucks up 61%.
The income growth comes from a full year plateaus income plus the higher margin heavy civil gross profit derived from unfavorable design build projects mix any healthy residential market.
In Dallas Fort worth in Houston.
Our adjusted net income guidance excludes plateau acquisition and integrated related costs of $2 million to $3 million pretax or $1.5 million to $2.2 million after tax.
Importantly, this 61 growth includes an estimated income tax charge of 26% a pre tax income.
Of which approximately $11 million or 21% of pre tax income is non cash taxes.
Without this change in accounting for our at all else. The adjusted net income growth would have more than doubled our 2019 adjustment adjusted net income.
Finally, we expect our midpoint adjusted EBITDA to be $127.5 million also more than double the comparable 2019 EBITDA.
Slide 12 presents a summary of our December 30, Onest 2019 balance sheet and are expected de levered de leveraging in 2020, driven by our strong cash flow.
We ended 2019 with the cash balance of $45.7 million.
Which $29.7 million will generally available for corporate views.
Additionally, as we expected our 2019 cash flow from operating activities was $41 billion, which exceeded our income from operations of 38 point $37.8 million.
Well, we will see our typical seasonal working capital variations throughout 2020.
Quarters.
We do not expect a significant change in working capital out of calendar year over year basis.
As you can see we expect our adjusted EBITDA that coverage ratio to be reduce a full half turn from 3.5 times at the other 2019 to two three times if you had a 21.
Turning to slide 13 and 14.
With all the unusual a onetime items that are 2019 results. We thought would be helpful to provide a summary of key modeling assumptions, which we have embedded in the determination of our 2020 revenue and adjusted net income guidance.
Hopefully, you'll tightening more granular assumptions helpful.
With that I'd like to turn the call back over to John.
Thanks, Rob.
2019 was another significant step forward and our journey to transform Sterling.
Over the last three years, we've seen revenue compounded annual growth rates of 14.3%.
Gross profit compounded annual growth rate of over 36% than we've grown our EBITDA over 500%.
As we go into 2020.
Our markets in all three sectors remains strong our combined backlog is up 17%.
Our margin and combined backlog is up 210 basis points.
Our revenue projections for 2020 are up over 20% our average gross margin will range between 13 and 14%.
Our net income will be up over 60% and our EBITDA, which has grown over 500% in the last three years will more than doubled to approximately $130 million.
This was the incredible for any year.
Lets stacks that on top of the performance over the last three years did you have a company that continues to outperform its peers and the general market.
With that I'd like to turn it over for any questions.
Thank you at this time, we will conduct a question answer session.
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One moment why people for first question.
Our first question comes from Sean Eastman with Keybanc. Please proceed with your question.
Hi, gentlemen, thanks for taking my question.
John furniture.
Morning morning, first one for me is in the release, we have won 25 to 135 million. Adjusted EBITDA range presentation has won 25 to 130, just curious what the difference between those two ranges are and then also if you could maybe just round out the bridge from that.
Two.
Operating cash flow for 2020, just around cash interest share based comp any working capital consideration would be very helpful.
Sure.
So first apologies the range of $10 million went 25 to 135 Didnt got it on that got it.
That's where it is so let me help you out with a couple of club bridges. So.
I guess ebix, good 0.1 thirds I want to 27, five but either way that's what our guidance is our capex as you see it some of the details is $25 million to $30 million.
So mid 0.75, so that gives us about $100 million for interest expense to be covered interest expense. We believe the midpoint of our guidance number includes about a $33 million interest expense for the year and after that about $70 million and what we would call.
Free cash flow available for debt service.
Sorry, but not interest but scheduled payments.
And other other needs that we might have.
As mentioned in my prepared remarks, we don't expect a significant change in working capital.
Certainly with our large projects.
Legacy business, they tend to fund themselves and plateaued does an excellent job with their working capital to do the same thing. So we wouldn't expect a big change other than our normal we tend to grow working capital in the first half of the year and harvested in the back half of the or just the way our our projects ramp up in ramp down with.
Seasonality primarily.
Okay got it to be clear at the midpoint 70 million free cash flow.
Operating cash flow minus capex.
That's correct, Okay. Okay, great and then I think you guys. That's all right.
Minus Capex and interest expense is 77 yeah.
Like operating cash flow minus capex.
Equal sorry, Yes, you got got it okay. Okay, great Thats helpful. And then and then just you guys called out the big swing factor I think as.
The ramp up and phasing of these.
Three large JV heavy civil jobs.
Im just kind of curious what point in the year well you have.
More clarity in line of sight on.
The upper and lower end around those that ramp up just kind of curious are some some background there I got it.
We've got two pieces of it two of them a ramping up in the in the first half we've already seen some activities in the first quarter. So depending on whether is that sort of thing will be the rate in the first quarter. They ramp up they should be running very strong in the second quarter.
The third one we anticipate starting late in the second quarter for the rest of year. So we'll have good visibility on two of those three as we get into the second quarter.
We ended the second quarter for sure and by that point in time, I think we should have a pretty good handle on the ramp up rate of the third one as well.
And I would add generally on these.
Welcome to an after three and half your projects called three years. It takes about three quarters to ramp all the way off to get Flatlined could come down about the same pace with three quarters left so in the middle there is about 18 months to your steady steady flow.
Okay excellent.
And then last one from me.
Would you mind sort of walking us through the revenue growth and margin assumption.
Built into the 2020 outlook by the new segments you guys are reporting now.
Yes, we have that one slide you want to go through the details from I can add some color to sure I think it's pretty consistent with what we what we've said in the third and fourth quarter last year coming into the year on the growth side and the margins.
I think thats right. So obviously the largest impact of the revenue comes from the plateau side.
There are run rate historically, it's been it's right around $300 million for a full year.
Obviously, we got about.
We have three incremental quarters.
Add to our guidance, so thats, probably bring did give or take $225 million of incremental growth.
Balance is coming off the large projects that are going to ramp up so and then the the growth expectations that we have in the slides are sort of.
Three your view, so obviously when we ramp up.
The big three joint ventures will have something more than that however, it's not all incremental right. Because you only have so many capabilities in service and people. So we are going to finish some of the smaller jobs and support the big jobs. So we'll certainly have pretty good growth on revenues overall, but.
Not not all incremental long trying to say from a business and I think shot going back to the earlier questions. The big variable is the ramp up of each of these large projects. We think we've got a factor than it did a normal ramp up rate if they ramp up faster.
That's a good thing for us.
And as they ramp up a little slower I think we've got relatively decent room in the range that we should be pretty pretty darn close.
And then.
On the margin side.
We continue to see hard bid activity in the high single digits call, it 9% plus or minus.
Our alternative delivery work tends to bring in low double digit margins.
10 to 12, and then our residential will stay the same with gross margins up close to 20 and did that returns you see yet operating and combined and then plateau is.
Good to hide.
25 to.
25 to 30, depending on the mix of work, they're doing at any particular quarter, yes, I think on that just a little bit of residential Fred.
We've seen some nice improvements on the margins in Houston as it continues to ramp up grow it's right in line, what we what we anticipated and I think the other thing that was kind of a nice I'll call proof of concept, we talked about the expansion.
Ended the Houston market. So if the day comps were Dallas does slow down we can we can offset that it would that little bit a slowdown in the starting at third quarter going into the fourth quarter that change and at the back really saw firsthand the ramp up rate Houston offset that from a slap out in a revenue standpoint.
To keep it pretty pretty balanced so as we continue to grow that improved margins I think thats going to play out very very well for us.
In the future, though right now I would say, we don't we don't see any slowdown in Dallas has gone Crazy again, so that's a that's a good thanks.
We can keep the the weather rate up in Dallas.
Well, what we sell.
Excellent really helpful responses, Congrats again on getting all this stuff closed and then the numbers seemed like it was a lot of work so.
Thanks again.
It was there was a lot more gymnastics and this quarter the normal but all good things for us going forward than that.
Feeling pretty pretty positive about 24 Chuck.
Hi, Thanks for the time.
Once again to ask a question. Please press star one on your telephone keypad. Our next question comes from Brent Thielman with D.A. Davidson. Please proceed with your question.
Great. Thanks, good morning.
Good morning, Brian how are you good.
Joe Ron when you guys acquired plateau I think they did something around 70 million EBITDA on in 18, and if I just assume that going forward and back it out from the midpoint of your guidance that implies something around call. It 60 million EBITDA for the core business, which is basically very little growth off 19, So I guess.
My question is something change or the business, where we shouldnt assume plateau can do yes, 70 million EBITDA in 20, or you're just trying to bake in some conservatism.
No. If you if you recall when we did the transaction from the very beginning we knew we were going to spend some money to bring back.
Bring the company up into the public company.
World, If you will have reporting and controls and systems. So from the from the get go we had an incremental.
5 million plus Gionee spend as a result of.
The acquisition.
And.
On top of that Youre kind of that normal and further increase and just what we will have where where long term incentive plans are because we're putting them their leadership on our plan. So between it took two of them from an EBITDA standpoint, which we we use EBITDA outside of straight up additional.
We don't add back stock based comp but.
Those two things probably back down $5 million to $10 million.
Okay.
And then the 25 million in free cash flow in the fourth quarter anything outstanding within that to be called out or is that pretty clean.
I think the there's a big number in there was the collection of the cash for the project the Joe talked about $17 million down some of that was just normal pace, but most of that cash was.
2019.
Deferred for three quarters than cleared in the fourth quarter. So.
If you look at the full year with sort of normal pace, but it was heavily influenced by this by the ultimate settlement in the fourth quarter, where that element was agreed to and in addition board in addition to the acceleration.
Okay and on the Texas jobs have you guys satisfied all your obligations on those now is there anything that bleeds over into 2020.
Well, we still have a we've got you want to give me a little perspective, we've got all the other foundations basis of the bridges fleet. There there are working out the decade of those bridges simultaneously. So we'll continue.
Two of those bridges should be almost 100% complete by the end of this year. We've done early first quarter next year is on the third bridge.
Finishes in the late part of a of next year.
So we're still actively working on it but the important thing is we've got resolution. These were designed to more grossly flawed could it be built a text that worked with us and realize the same thing.
We've got resolution on how to how did not pay and turn in these claims as we go forward of any design related.
Issues and it's a much cleaner point from where we are today to the finish line is that makes any sense.
Okay, and then on the larger civil jobs in the Mountain region I wasn't clear to me do you actually have clearance to move forward on these now and it's just a function the weather gotten better or so we've done that yes to have a more we're going full bore the third one we're working on designed stopped and other parts of it we're just not NBC.
The construction phase, but yes, it's just the thing that's hard for people who understand the design build process at the when it could take a year so to get the design and all that put together. So it's a slow burden so few million dollars and stuff, but the big dollars that third one is is to.
Hopefully quickly to the end to that stays here. The other two are active and moving them and you said it well well they are in the bones, where it snows so naturally.
To start tends to be in the second quarter because the reality is it's hard to start in an uncertain snow weather.
Okay and then my last question I guess is just again on civil and maybe you could talk about what near term bookings per se prospects look like you've obviously got a big book of business today, but can you continue to kind of sustain that level.
Yeah, we haven't seen any slowdown in bid activity.
We're in the in the final year the fast that the states is all got the budgets and were larger the prior year equal to or larger I should say the feds up there a up their amount of money in the point again.
Got three different parallel path to the upcoming renewal of the fast that you have the Senate Bill you have a bill going to Congress and then you have the presidential budget.
We'll see how that all plays out in election years. The good news is the Senate Bill is probably the furthest along.
And is looking at.
It's been through I'll call. It the majority of the approval process, they're looking at the funding source and trying to determine how to do that.
When you look at the other bills proposed the one in in trumps budget and the one that is going through Congress.
Today, just put in perspective, we spend about $65 billion affects put in about $65 billion a year in spending the congressional fill calls for $86 billion at year end spending.
Dan the.
Budget through the Trump administration with a onetime your one would get a 19 billion dollar I'm, sorry, $119 billion boost with average $100 billion a year. So are you take the the range there and all of them look extremely positive from a market outlook.
Our either five years 10 years or permanent funding sources, it's just a matter of what does it take two to get it through that in an election year.
I would add as we talked about earlier, we are not done.
Shifting heavy highway from hard bid to alternative delivery work, we've made great progress ending the year with up 43%.
Heavy highway compared to the total revenues, but we're going to continue to manage that down and be selective on the right projects with the right margins. So youre bye bye intact, we're going to keep that business at a two or 3% growth rate I think that's that's a good point, Brad and if the market where to go up.
10%.
We will stay very disciplined guys.
To accretive margin, if we can grow through accretive margin in the in the highway space. That's fantastic that's that alternative delivery and if the margins continue to creep up on the.
Low bid side will grow, but we're not going to our objective is not to grow at the pace of the market is to grow at the pace of how to get our heavy highway business, where its 12 plus percent gross margins in total and it continues to add value to us versus the risk profile versus.
Adding more risk at a lower margin.
Okay. Thank you.
Thank you at this time I would like to turn the call back over to Mr. Tullow for closing comments.
Great. Thank you.
Thanks again, everyone for joining our call today.
If you have any follow up questions wishes scheduled call. Please refer to the contact information provided in the press release associate with our Investor Relations group at Sterling for our partners with the equity group I appreciate everybody taking the time. This morning, the jump on the call pretty excited about 2020 and a pool.
Talk soon thank you.
This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.