Q4 2020 Sterling Construction Company Inc Earnings Call
Greetings and welcome to the Sterling construction company fourth quarter and full year of 2020 earnings conference call and webcast.
As a reminder, this conference is being recorded and all participants on a listen only mode. There are accompanying slides on the Investor Relations section of the company's website.
Before turning the call over to Mr. Joe Cutillo, Sterling Construction's, Chief Executive Officer, I will read the Safe Harbor statement some.
So on discussions made today may include forward looking statements actual results could differ materially from the statements made today.
Please refer to Sterling 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 obligation to update forward looking statements as the 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 all of which are financial measures not recognized under U S. GAAP as required by S. E. C rules and regulations. These non-GAAP financial measures are reconciled to the most comparable GAAP financial measures and on.
Earnings release issued yesterday afternoon.
I will now turn the call over to Mr. Joe Cutillo. Thank you Sir Please go ahead.
Thank you Donna and good morning.
I would like to start by thanking everyone for joining today's call.
Well 2020 is over.
But we will not soon be forgotten.
All of our market studies all of our operational planning.
And all of our risks assessments were thrown out the window.
Never in our wildest dreams did we imagine a global pandemic.
And the impact it would have on all of US as we saw our everyday lives change overnight.
We were banished to our homes, we closed our offices, our schools and our stores.
The everyday things, we took for granted like stock grocery shelves restaurants, and toilet paper were gone.
No travel no sports and no entertainment.
In the Blink of an eye, we went from executing a well thought out plan.
The navigating a ship in unchartered waters.
Dealing with something completely unknown.
It is in these times it leaders find out the true strength of their business and other people.
We got the see firsthand how nimble our teams work.
How they would react of new and abnormal conditions and how they would continue to take care of our customers.
Well, we watch them go above and beyond to.
To keep their fellow employees safe as well as take care of those in need and their communities.
For all leaders 2020 was a year you either walked away proud of you.
You walked away hoping to fight another day.
I'm happy to say.
I'm walking away from 2020 prouder than ever of.
The 3000 Sterling employees and.
The ability to band together.
Keep each other safe.
Take care of our customers give back to our communities and deliver another record year.
So instead of spending any more time talking about the challenges we faced.
I would like to focus on the victories we had.
Let's start with the most important one.
The safety of our people.
In 2020, we of the safest work environment in our history.
In addition to implementing all new COVID-19 related protocols to prevent or minimize the risk of transmittal.
We reduced our recordable incident rate by over 40%.
And our lost time incident rate by over 20%, making our lost time incident rate over 75% better than the industry average.
We ranked number 15 on Forbes' America's Best small companies list, we were number 26 of our top 50 domestic heavy contractors.
And we won the American Road in Transportation Builders 2020 National Safety Award.
We continue to build out and strengthen our team by driving diversity of thought and added new members with various backgrounds genders and race at all levels.
As a result over 60% of our total workforce and our independent directors are gender or ethnically diverse.
Now, let's talk about some of our operational successes.
In the year, we're able to fully integrate our most recent acquisition plateau.
While the business exceeded its highest revenue year by over 20%.
This would normally be of great accomplishment on its own.
But is even more amazing when you take into account that most of our office employees were working from home.
And we're doing most of the integration virtually.
In our residential sector.
The 14% of our slabs are now coming from our expansion into the Houston market and our total slabs poured in 2020 were up 14%.
In our heavy civil sector less than 30% of our consolidated revenues is now coming from low bid heavy highway work.
On the financial front it was a great year for both of our employees and our shareholders. As we continued to demonstrate the value of our strategy focused on bottom line growth, while reducing the risk.
Let me first start with the fourth quarter of 2020 versus the fourth quarter prior year.
In the quarter of revenues were flat.
Our gross margins increased over 370 basis points, our operating income improved 115%.
And our EBITDA grew 60%.
For the year, our revenues were up 27%, our gross margin improved over 380 basis points and our operating income grew 151%.
We generated $119 million in cash from operations and our stock price increased over 32%.
This was truly an amazing year and some very difficult times.
He is proud of as I am of 2020 accomplishments I am just as proud of what we've done to position ourselves for another record year in 2021.
In 2021 of revenues will grow to over $146 billion.
Our net income will be between 52 and $55 million.
And our EBITDA will be between 134 and $144 million.
With that I would like like to turn it over to Rod.
To give you more details on the commodity.
The full year and the 2021 outlook Brian.
Thanks, Joe and good morning I.
I am pleased to discuss our strong fourth quarter results and by almost all measures our record full year performance.
Our slide presentation, which has been posted to our website includes additional financial details to help understand our 2020 financial results.
The presentation of also provides modeling considerations, which underpin our 2021 revenue and earnings guidance.
Also as you likely recall, our fourth quarter of 2019 included several significant onetime items related to the acquisition and the significant one time income tax accounting adjustments.
Our earnings release includes several non-GAAP financial presentations to help provide a better understanding of our year over year fourth quarter and full year results.
Let me take you through our financial highlights starting with our backlog metrics on slide number six.
At December 31, 2020, our backlog totaled a year end record high of $1 billion $175 million, a 10% increase over the beginning of the year.
The gross margin of our December 31, 2020 backlog was 12%.
50% increase over 2019.
Unsigned low bid awards totaled $357 million at the end of 2020 compared to $273 million at the beginning of the year.
Importantly.
We expect the majority of the year on unsigned awards to be under contract in the first quarter of 2020.
We finished the 20, we finished 2020 with a record combined backlog of $1.532 billion, a 14% increase over the beginning of the year.
The gross margin of our combined backlog was 11, 8% and 80 per basis point increase from 11% at the beginning of the year.
Our full year 2020 book, the bird factors for backlog and combined backlog were 109% and 115% respectively.
Okay.
Note that the book to burn computations include heavy civil and specialty services revenue only.
Residential revenue was excluded from the computation as it is not the backlog driven business.
Please flip the slide seven for a summary of our consolidated results.
Revenue for the fourth quarter of 2020 were $347 million.
Up slightly over our 2019 comparable quarter.
Our full year 2020 revenues totaled $1.427 billion.
Up just over $300 million from 2019.
This increase primarily reflects the inclusion of plateaus revenues for all of 2020 compared to only the fourth quarter of 2019.
Consistent.
With our expectations fourth quarter and full year 2020, heavy civil revenues were down approximately six 7% and 1% respectively.
The decline primarily reflects lower aviation revenues in 2020.
We expect our aviation revenues rebound, reflecting our higher aviation backlog entering 2021.
Heavy highway revenues were up approximately 10% for the fourth quarter and the full year of 2020.
This increase reflects on our multiyear strategic intent to increase heavy highway alternative delivery related revenues, while significantly reducing our low bid revenue.
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Our 2020 heavy highway revenues accounted for 42% of our heavy civil and specialty services revenues compared to 50% in 2019 and 58% in 2000.
I am sorry, 50% of 2019 and 58% in 2018.
This metric reflects our significant strategic progress in reducing heavy highway revenue portion of our total of civil activities.
Residential revenues for the fourth quarter of 2020 were $42 million and $164 $7 million per the full year, reflecting increases over the comparable period of 22% and 8% respectively.
The number of residential slabs completed during 2020 increased by 14% over 2019.
The increase in the slide was primarily attributable to continued market strength in the Dallas Fort worth area.
And the expansion into the Houston.
Houston market.
Revenue operating margins declined in both the fourth quarter of 2020 and the full year.
The decrease was driven by temporary price concessions due to COVID-19 and an increase in lumber concrete and steel costs.
We were generally able to recoup the price concessions in late 2020.
And we continue to make progress of passing on the recent material cost increases in 2020.
Consolidated gross profit was 40 to $46 $6 million in the 2024th quarter and.
An increase of $13 million from the comparable 2019 quarter.
The gross margin increased three 7% to 13, 4% in the fourth quarter.
Approximately half of this improvement was driven by heavy civil project charge in the fourth quarter of 2019.
For the full year gross margin improved 13, 2% of 13, 4% from.
From nine 6% in 2019 as a result of the inclusion of plateau for all four quarters.
General and administrative expense for 2025% of revenues consistent with our expectations.
The dollar increase over the prior periods were attributable to the inclusion of plateau for the full year and higher stock based compensation expense.
Intangible asset amortization increased $6 7 million to $11 4 million in 2020 as a result of the acquisition.
Fourth quarter operating income was $29 million.
Compared to $9 7 million in the prior year quarter.
For the full year operating income totaled $94 9 million, an increase of $57 million.
The full year increase in interest expense reflects the acquisition related financing costs put in place in the fourth quarter of 2019.
Our effective income tax rate for 2024th quarter, and full year was approximately 56% and 34% respectively.
The increased tax rate in both periods reflect an incremental income tax expense of approximately $4 million in the fourth quarter.
The increase was driven driven by higher than expected federal income taxes related to non deductible compensation and other permanent tax differences.
And increased state income taxes.
Importantly of our full year of 2020 income tax expense of $22 $5 million.
The $19 3 million was non cash as it was absorbed by our operating loss carryforwards.
Cash interest expense totaled $33 $2 million.
Primarily for state income tax payments.
We expect to have approximately the same noncash.
Cash income tax relationship in 2021.
We also expect our effective tax rate in 2021 to be approximately 30 million 30%.
The net effect of all of these items resulted in full year 2020, net income of $42 3 million or an EPS of $1 50 in fourth quarter net income of $5 8 million.
Our EPS of 20.
Now, let's move to slide eight which summarizes our cash flow generation and deleveraging strategy.
The graph presents our debt deleveraging expectations, beginning with our October 2019 Plateau acquisition and the new five year credit facility.
Our September 32019 pro forma forward looking EBITDA coverage was approximately three five times.
At that time, we said on objected bring covered bring the coverage ratio down to two five times by the end of 2021.
As you can see our consolidated coverage ratio declined to $2 7 million I'm, sorry of two seven times EBITDA.
At December 31, 2020.
Given our more than expected positive cash flow since the acquisition and our 2021 financial plan. We believe our leverage ratio will continue to improve throughout 2021 and will be less than our $2 five targets at the beginning of the year.
During the fourth quarter, we repaid $25 million of term loan borrowings.
The repayments included scheduled debt payments of $10 million and the voluntary early payment of $15 million.
At the end of 2020, we had no borrowings under our revolver credit facility and accordingly, we have full availability of the $75 million line.
Our 2020, adjusted EBITDA totaled $128 $1 million more than double our 2019, adjusted EBITDA of $62 million.
In addition, our cash flow from operating activities totaled $119 3 million an improvement of almost threefold over the $41 $1 million of cash flow from operations in 2019.
The strong operating cash flow provided us the opportunity to make debt repayments of $77 $7 million, while investing $35 million in.
The net capital expenditures.
Moving to our balance sheet, our December 31, 2020, cash and cash equivalents totaled $66 2 million.
Compared to $45 $7 million of.
Sure.
Additionally, our net our year end.
2020, total debt net of cash was $302 million down from $387 million at the beginning of the year.
Yes.
Now I'll turn the call back to Josh.
Thanks Rod.
As much as I would like to continue to talk about our 2020 results. It's time to move on to 2021.
As we enter 2021.
We are now in our sixth year of transforming our company and our culture.
Our overall strategy and the three core elements remain exactly the same as.
As we continue to focus on bottom line growth, while reducing risk and building a platform for accretive future growth.
We will continue to solidify the base through price and productivity in our heavy civil sector. While we continue to shift away from low bid heavy highway work to alternative delivery.
Asian rail and port.
We will further grow our high margin products through the expansion of appeal stone into Houston and.
And began exploring the next logical expansion market.
Lastly, we will continue our expansion into adjacent markets through the growth of plateau and the exploration of strategic acquisitions.
We entered the year with a very with very strong end markets and our residential and specialty sectors.
We believe we will see a slowdown in bid activity in the first half of 2021, and our heavy civil sector as we await the next transportation or infrastructure Bill.
Our confidence that our all time record high combined backlog at year end of.
Along with some sizable first quarter wins will sufficiently get us through 2021, even with the early low in bid activity.
We believe 2021 revenues will be between 146, and one of four 9 billion.
Our net income will be between 52% and $55 million.
And our EBITDA will be between 134 and of 144 balance.
In the end we of the right strategy the right people the.
Right and customers and the right end markets to have another record year in 2021 and solid early interest earnings growth for many years to follow.
With that I'd like to turn it over to questions.
Ladies and gentlemen, the floor is now open for questions.
To ask the question. Please press star one on your telephone keypad at this time.
Information total indicate your line is on the question queue.
The press Star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Once again that is star one to register of questions at this time.
Our first question is coming from Zane Karimi of D. A Davidson. Please go ahead.
Hey, good morning, gentlemen.
Good morning.
I guess first off.
Just how disruptive has the weather been in one Q and Texas in particular, what are you guys able to work through any of that or.
How is that impact looking.
So.
January was relatively normal.
February was a disaster the chip.
The honest.
In March we filed a couple of beautiful day as it's back in the Seventy's and Eighty's, a little bit of range, but March is off to a great start.
I think the important thing is February will hit both our teal stone.
And our plateau of businesses in the month of February because of weather. It continues in the southeast however.
Those are the two best areas for us to get hit with temporary weather issues because both of them have.
A combination of more makeup capacity, but more importantly, their customer base is going to require them to get back on schedule and back on time, So they will run full out and.
If we have a really good March should make up the majority of any of any hiccups in February if not all of them.
And certainly we'll be we'll be there as we get into April worst case scenario. So.
That's the February was tough, but I will tell you. These guys are running the 150 miles an hour when the weather is good and that will catch up.
Great There and then I.
I guess when we're thinking then about specialty services on Thats looking like through 2021, how are those growth expectations really developing and how much of work is the out there and like data centers and distribution centers.
Visibility at this stage yes.
<unk> market continues to be very strong on.
I will call on all three levels.
Smaller local warehousing and distribution of the larger ecommerce warehouse and distribution.
And data centers.
Frankly, the market is bigger today than we can.
And the growth rates as we said as we're exiting 2020 of the Great News is.
Plateau out of.
The top barnburner year in 2021.
We bought the business.
Took a look at kind of of the growth rates over the next three years, and we anticipated what I'll call it 6% to 8% growth of that business.
They grew over 20% top line last year versus their best year ever and ate up a lot of the human capital capacity They had in project management.
We very rapidly put in place.
Program, not only the recruit but the train new project managers.
They're going to be adding a fair number of project managers in 2021 and as those project managers come on think of it is somewhat of the program to bring them in and work under the best project managers, so that they learn firsthand how to execute on the plateau of way.
Is that capacity continues to increase.
They will be able to increase but we think we're going to see kind of mid single digit growth in that business. This year the market would allow us to grow faster than that our biggest challenge is how our SaaS can we ramp up human capital to go after more of that market. So no no concerns on the market right now more of an internal.
The.
What I'll call resource capability issue and we're working diligently on that.
Great. Thank you I guess last one from me then thinking about cash flow can it be of strongest in 2020 year near the same levels.
One of the one of the problems. We have is that we're going to have to use of capital this year for brakes trucks.
We're going to have a very strong cash flow. This year Rod you can speak more about it but no reason to think that it wouldn't be any.
Significantly different from prior year, Yes, I think thats the bottom line I think the <unk>.
Certainly the cash flow from operations in the EBITDA are on.
Our app.
Certainly starting with EBITDA up about almost in the mid single digits.
A little bit higher than that so that obviously will help.
As as we increase the activities of our of our land development business.
From the continuing need to always refresh of our fleet.
So the.
Just over $30 million, we spent in 2020.
Well of that to be in the probably close from the $35 million range, which is fine.
Over half of that well over half of that is driven by our by our land development side of our rise of specialty.
Specialty services group, but also we have of boy.
The.
The duration of our backlog is longer than it's ever been on what that means is we have us at least for probably five.
The projects still with the north of $100 million each.
With backlog and the nice thing is that sets us up nicely for not only revenue certainty of achieving our plan.
Patients.
The other plants.
But also puts us in good shape of entering 2022.
So all of that all.
When it cut all through that we have a bit of capital to meet demand and the startup of these projects.
<unk> $35 million of sort of environment.
Kevin.
Great.
Thank you very much from ill jump back into the queue.
Thank you once again, ladies and gentlemen that of star one if you'd like to register a question. Our next question is coming from Sean Eastman of Keybanc. Please go ahead.
Hi, guys. This is Alex on for Sean Congrats on congrats on the great year.
Thanks.
So the heavy civil margins came in as the nice surprise relative to our model.
I just wanted to get a sense on how you see these.
Of these margins in 2021 and the segment shaping up.
Maybe compared back to the levels. We saw a couple of years ago, and then maybe what is the overall margin expansion potential within the segment as it stands today.
Yes, I'll start at a high level of let Brian give you some more details but.
We anticipate the margins will continue to tick up and get better as we go into 2021 on the heavy civil.
The combination of the multitude of reasons.
Is that low bid shift.
Sean that we've been working on diligently continues to shrink.
The lion's share of our projects and backlog not only our multiyear, but our alternative delivery and the margins on those are usually three to four points higher in general. So we will see those start to kick in we will continue to shrink of the low bid and you get the I'll call. It.
The product mix impact of that that will continue to grow.
As we go into 2021, Brian you want to give any more detail on the other yes I think it's.
Like Joe said pretty much.
And mix, which is consistent with the trying to do and I think too.
To head off questions on on growth on that side.
As we continue to shrink the low revenues.
So.
Give or take.
About 5%.
Of our $30 million 30 million income change lower low bid revenue as expected in 2021 and 2020, obviously that.
Reduces our lowest margin returns type of work and then with the.
With the startup and continued ramp of these large jobs are all alternative delivery type of delivery.
So that by itself will continue to help that mix improve and I think the other thing the one.
One last thing I'll say is we saw a little bit of low in.
In the back half of last year on some of the aviation and we've got some nice projects that we've won.
And thats picking up as we go into 2021 and that margin is obviously much better than the heavy highway across the board. So we've got some good tailwind in <unk>.
In multiple areas to continue that trend into into 2021 true.
Great.
And then I just I wanted to ask about the how sustainable the specialty services margins are on this was 14% operating income level that you guys posted in 2020, and then asks where do you see this trending over the next couple of years and what are the biggest challenges would be.
Yes, I don't think that were going to see them spike up or go up in any way shape or form obviously, it's always challenging its more challenging the hold your margin then.
To lose it right.
But I think we're going to stay relatively consistent from what we've seen in both bid activities projects and where they are where they are executing them at.
So I would say kind of I would say status quo right, but I don't think we're going to see a big increase.
I think we're going to see of big decrease.
And one last one from me.
I'm, taking a look at the EBITDA and EPS guidance ranges.
Is there anything to point out that could swing the results from the high end of the range of the low end of the range.
Understanding the major swing factors would be a helpful discussion.
Well I think.
A couple of things that will drive the range.
Is what we come into the year, we put the guidance together, we don't have 100% of our year locked and loaded.
Now the nice thing is we just announced a very nice job.
Couple of days ago, I will tell you we're working diligently on.
The two or three other really really nice.
Jobs for us.
In multiple sectors and if those pops hit and we don't see any big pushes of projects or any major weather as we get into the back half of the year that swings us up to that does that top of that.
If a couple of those but don't hit and we got some risk of the back half of the year that could swing us down towards that bottom end.
And I would I mentioned.
Net.
Great.
Signed work entering into 2021.
And well over 70% of that is going to be or already is under contract at the meeting that we're in of turning dirt.
Alrighty.
Faster than we thought weighted.
A month ago, when we finish up our planning process so that that.
That helps us feel good about the ranges that we have.
And then we'll have to wait and see what this.
Everything from the economy to the infrastructure builds of everything else what it does for the balance of two.
2021, but I think theyre, probably upsides there is both the downsides, just because youll well over in the mid sixties, almost 70% of our revenue start coming out of backlog in the heavy civil side of that debt.
As Joe mentioned the.
The backlog or the business with the plateau continues to be strong.
I would say this sean.
After a year of of pandemic, which I would have never thought of new of.
Even heard of.
You're a little bit cautious but.
I feel by far the best at this point in time of year.
I've ever felt since being here.
On our abilities.
And outlook for the for the entire year.
Okay.
Thank you really appreciate the help.
Okay.
Thank you. Our next question is a follow up coming from the Zane Karimi of D. A Davidson. Please go ahead.
Hey, Jon wrote Ron one more time.
Can we talk a little bit more about M&A and how focused are you right now pursuing acquisitions and do you see more opportunity expanding your existing businesses organically and to new territories.
Couple of couple of we are actively getting back into the M&A business right on what I mean by that is we've been looking at the tremendous amount of books on deals.
Unfortunately, I mean here is the reality and hopefully you guys understand this we're very picky.
We may look at hundreds of deals before we even get to the point, where we can go to the next level.
And we're going to remain really picky I would love for the REIT.
We have positioned ourselves from a balance sheet the debt.
The perspective.
That we would be ready to do.
A nice either several tuck ins or a very nice add on.
It's about timing and it's about finding a deal it's got to be accretive to us it's got to be strategic to us it's got to have great people.
Perhaps we're not we're not interested in it but we are working okay.
And it always seems to take longer than you what but the.
We are actively.
Actively looking on the expansion side.
As we look.
<unk> continues to kind of move what I'll call one incremental state so theyre now in Tennessee.
Looking at going into.
North of Virginia, and the Baltimore, let's sort of looking at some projects there. So theyre on the one state move they'll continue to expand geographically and then till stone, we still have tons of runway within the Houston market, but this year, we're really looking at and evaluating.
Two other markets.
And discussing when do we start entering those markets the farmer.
Betting person I think thats, a 2022 exercise.
But we're trying to do the leg work and homework in 2021.
On the Austin market is really really strong right now.
Which is.
Probably an easier move for us because it's still in the state of Texas.
A couple of hundred miles from Dallas in the couple of hundred miles from from Houston.
But we're also looking at some other markets that are out of state that of rapidly growing that we've had some key customers ask us to look at.
And.
Tell them, what it would take to expand into those markets.
Thank you.
Thank you at this time I'd like to turn the floor back over to Mr. Cutillo for closing comments.
Thank you Donna.
Thanks again, everyone for joining our call today, if you of any follow up questions or wish to schedule a call. Please refer to the contact information provided in the press release associated with our Investor Relations group at Sterling or our partners at the equity group.
Thanks, again, everybody and have a great day.
Ladies and gentlemen, thank you for your participation and interest in Sterling construction you may now disconnect your lines or log off the webcast and have a wonderful day.
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