Q1 2021 Sterling Construction Company Inc Earnings Call
Greetings and welcome to Sterling first quarter 2021 earnings conference call and webcast. As a reminder of this conference is being recorded and all participants are in a listen only mode. There are accompanying slides on the investor relations sections of the company's website before turning the call over to Joe Cutillo.
Sterling 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 for projections and assumptions.
The company assumes no obligation to update forward looking statements as a result of new information future events or otherwise.
Please also note the management May reference EBITDA adjusted EBITDA, adjusted net income or adjusted earnings per share on the call.
Which are all financial measures not recognized under U S. GAAP.
As required by asking the 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.
Thanks, Maria and good morning.
I'd like to start by thanking everyone for joining today's call.
It's always great to start off the year with a record quarter. Despite all of the unexpected weather challenges we faced in February.
I stated during our last earnings call that I was walking away for 2020.
Prouder than ever of our 3000, plus sterling employees and their ability to band together Keith.
Each other safe take care of our customers Inc.
Get back to our communities all while delivering another record year.
I stand here today with that same feeling.
The response to the weather and inflation challenges, we faced in the quarter were once again remarkable and a further indication of our culture and our ability to service our customers and deliver record results even in challenging times.
The results of this quarter demonstrate how we have stayed focused on the strategy that we've been implementing over the past several years to diversify our revenue streams and focus on higher margin lower risk projects, while building a platform for future accretive growth.
This strategy combined with our business structure enables us to lever the entrepreneurial spirit that is alive in our businesses, our leaders and our people and.
And deliver results unparallel to others.
So let's talk about some of those results.
Our first priority is always the safety of our people.
The innovative efforts of our proactive actions and measures continue to make our worksite safer every day.
For the first quarter 2021, we worked over $1 2 million of ours and our wholly owned subsidiaries with zero incidents.
As an industry leader in safety, we will continue to do everything we can to ensure our employees go home safe every evening.
On the financial front of revenues were up six 3% versus prior year, driven by an 18% increase in our specialty service sector and of 22% increase in our residential sector.
Our gross profit was up 28% two of blended average of 14, 3%.
Our operating income was up 88%.
Our net income more than tripled.
These results are yet further proof that our strategy focus on growing the bottom line continues to pay off as our net income more than tripled with single digit revenue growth.
Also in the first quarter, we continued to strengthen our balance sheet with $39 million of cash coming from operations.
Which we use the pay down $30 million of debt and the divested $11 million in Capex.
As the year advances, we expect to further enhance our liquidity, enabling us to continue to execute on the organic growth strategy well.
While evaluating accretive acquisition opportunities that have the potential to add scale to our existing sectors or they can provide us with a new business sector altogether.
Now, let's talk about our backlog.
In the first quarter, our backlog and our specialty service sector grew 36% from year end 2020.
And we saw a 40% growth in our heavy civil sector backlog for a combined growth of 39 per se.
Our backlog is now at an all time high of over one $6 billion and positions us for a strong 2021 and is already building strength in the 2022 and 2023.
As we look at the individual sectors. Once again, our specialty service sector was a major contributor to our strong first quarter.
We continue to execute well on our robust pipeline of projects for large high profile customers as they develop new distribution centers data centers and warehouses.
As mentioned our backlog in the sector grew 36% Inc.
Bidding activity remains strong, giving us good visibility for the balance of 2021.
Our residential sector exceeded our expectations in light of the weather related issues in Dallas Fort worth and Houston.
These disruptions caused us to lose more than two weeks of work in February however, the team pulled through the complete a record number of slabs for the quarter.
We're seeing similar demand and productivity trends continuing into the second quarter.
Regarding the supply chain pressures being felt across the residential markets. Our first quarter margins did reflect the impact of the supply chain issues, specifically relating to the cost of concrete lumber and steel.
We're watching these trends closely and have managed the pass on multiple and price increases already this year.
Our heavy civil revenues were down.
Other operating profit was up and reflects the continued shift away from low bid projects to alternative delivery.
Particularly in the Rocky Mountain region.
We're extremely pleased to see the results of our multi year effort. The transform the revenue mix of this sector from low bid projects towards the jobs, where we can use our extensive experience assets and skill set to bring more value to our customers and earn higher margins.
Based on the first quarter results, we have positioned ourselves for the finished the year at the high end of our guidance and have the opportunity to exceed that.
With that I would like to turn it over to Ron to give you more details on the quarter and the 2021 out right.
Thanks, Joe and good morning.
I am pleased to provide a summary of our strong 2021 first quarter results.
Our slide presentation, which has been posted to our website includes additional financial details of further understand our 2021 financial results and our expectations.
The presentation also provides additional modeling considerations, which underpin our full year 2021 revenue and earnings guidance.
Now, let me take you through our financial highlights starting with our backlog metrics on slide number five.
Our first quarter ending backlog was at an all time high one bill 1 billion of $639 million.
39% increase over the end of 2020.
The gross margin on our first quarter backlog was one point of 11, 8% down for 12% at the end of 2020.
The slight decrease reflects the change in the mix of our first quarter backlog as our heavy civil backlog growth of 40% exceeded for the higher margin specialty services growth of 36%.
Unsigned low bid awards totaled $76 million at March 31, 2021.
A decrease of $357 million at the beginning of the quarter.
Essentially all of our on large unsigned projects at December 31, 2020 are now under contract and beginning contract activities.
We finished a record for the first quarter, where the record combined backlog of $1 billion $750 million, a 12% increase over the end of 2020.
Our gross profit in combined backlog was 11, 7% compared to 11, 8% at the beginning of the quarter.
Our first quarter book to burn factors were 271% and 167% for backlog and combined backlog respectively.
Residential which accounted for 14% of our consolidated revenues does not report backlog, reflecting the short performance cycle of residential concrete slabs.
Slide six provides the summary of our consolidated and segment results.
Revenues for the first quarter were $315 million, an increase of $18 6 million or six 3% over the prior year.
The revenue increase was attributable to our specialty services and residential businesses, partially offset by lower heavy civil revenues.
Consistent with our expectations first quarter heavy civil revenues were $147 1 million, a decrease of $8 $6 million from the prior year quarter.
We expect sequential quarter over quarter heavy civil revenue growth for the balance of the year as we continued to ramp up several large design build projects in the Rocky Mountain region.
First quarter of specialty services and residential revenues increased significantly.
By 18% and 22% respectively.
I'll provide color on the individual segment results in a moment.
Consolidated gross profit was $45 million, an increase of $9 $8 million over the comparable prior year quarter.
Consolidated gross margin reached a first quarter high Mark of <unk>.
14, 3%, an increase of 240 basis points over the prior year quarter.
Each of our three business segments reported increased gross profits.
G&A expense decreased slightly in 2020, 'twenty, one compared with the prior year.
That provided the operating income for the quarter to be 22, 8% $2 8 million.
An increase from $12 1 million for the comparable period.
So essentially all driven by improved 2021 gross profit levels.
Our first quarter operating margin was seven 2% compared to four 1% in the 2020 quarter.
Both the 21 operating profit and operating margins for the strongest first quarter in our history.
Our first quarter of effective income tax rate was 29% an increase from 27% from the prior year quarter.
We continue to expect our full year effective tax rate to be approximately 30%.
Our non cash portion of our effective tax rate will continue to be approximately 24% of pretax income.
The net effect of all of these items resulted in first quarter net income of $10 6 million or diluted earnings per share of <unk> 37.
Compared to the prior year comparable quarter net income of $3 $1 million for diluted EPS of 11.
Our first quarter EBITDA totaled $29 $9 million, an increase of 48% over last year's first quarter.
Okay.
As a percent of revenues EBITDA improved to 995% of revenues for the quarter up from six 8% for the prior year comparable period.
And you'll see each of our segments reported increase operating profit.
Heavy civil reported an increase in operating profit of $4 7 million on lower revenues.
This improvement reflects the progress made in shifting our heavy civil revenue mix from low margin bid low bid heavy highway revenues to alternative delivery highway work and other highway higher margin from of just from a distance space opportunities.
In the quarter, our low bid heavy highway revenues declined $20 million.
This decline, which was more than offset by other more profitable alternative delivery work enhanced our gross profit to the.
For the first quarter.
Specialty services revenues increased $19 $4 million driving operating income up by $5 $1 million.
And delivering an operating margin of 13%.
Substantially all of the improvement was driven by increased land development revenue.
Our commercial revenues remained substantially flat.
The overall improvement in operating margin reflects the higher mix of land development revenues, which was 78% of the segments revenue up from 30, 73% in the prior year quarter.
Residential reported record completed slabs and revenues, reflecting continued strength in the housing markets within our Texas for footprint, despite losing half of the workdays in February due to inclement weather.
Okay.
While Q1 2021 operating profit increased by $400000 operating margins declined to 12, 4% from 14% for the prior year quarter.
The margin decline reflected the impact of supply chain change chain pressures, specifically related to the cost of key materials.
We continue to watch these trends closely and have already implemented price price increases in 2021.
Now, let's move to slide seven which summarizes our increased EBITDA cash flow and deleveraging strategy.
And the related progress.
Historically.
Early first quarter as its low slowest.
Quarter from both the cash flow and earnings standpoint.
As a result, we of historic historically had the lowest.
Cash flow and income in the first quarter.
Our cash flow typically then level off in the second quarter, and we historically generate cash in the third and fourth quarters.
The plateau acquisition and the heavy civil migration towards higher margin work has significantly changed the aforementioned seasonal trends.
Cash generated from operations, where the very strong $38 7 million compared to $10 $8 million in the comparable 2020 quarter.
All three segments contributed to this $28 million improvement.
Cash used for financing activities was $32 $5 million driven by debt reductions of $35 million.
Which included $18 million of non scheduled term loan payments.
Our first quarter Capex net of disposals totaled $11 million compared to $6 8 million in the 2020 comparable period.
The incremental investment in Capex is driven by the continued growth of our land development business.
Our full 2021 anticipated net capex continues to be in $30 million to $35 million range.
The graph presents our deleveraging expectations, beginning with the October 2019 Plateau acquisition.
And the new five year credit facility.
Our October 2019 pro forma forward looking EBITDA coverage ratio was approximately three five times.
At that time, we set the objective to bring our coverage ratio down to two five times by the end of 2021.
As you can see our EBITDA debt coverage has declined to $2 4 million to four times at March 31 2021.
This deleveraging milestone was achieved over nine months earlier than on October 2019 stretch goal of two five times by the end of 2021.
Based on our term loan scheduled payments for the balance of 2021, we now expect our yearend coverage ratio to be approximately two one times compared to our two five time original objective.
Now I'll turn the call back over to John.
Thanks, Ron.
2021 represents our six year of transforming our company and our culture.
Our strategic core elements remain the same as we continue to focus on bottom line growth, while reducing risks of building a platform for accretive future growth.
We will continue the solidify the base through price of productivity in our heavy civil sector shifting away from low bid heavy highway work to alternative delivery.
Aviation rail of court.
We're growing our high margin products through geographic expansion.
Have begun exploring bolt on acquisition opportunities as well as acquisitions that would enable us to add a fourth sector.
In addition, we will begin highlighting the things we do every day to protect our environment and improve our communities, which we refer to internally as the Sterling way.
The first quarter was a fantastic start to of new year.
Our markets remain strong and our backlog is at an all time high.
We want to reaffirm our full year of 2021 guidance and believe the first quarter results have positioned us to finish the year at the higher end of guidance.
With the good opportunity to exceed the guidance range.
With that I'd like to turn it over for questions.
Yeah.
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One moment, please while we poll for questions.
Our first question is from Sean Eastman with Keybanc capital markets. Please proceed with your question.
Good morning, gentlemen, nice nice strong start to the year.
Thanks, Scott I appreciate it.
So so you're keeping the guidance range is intact, but kind of effectively raising by saying do you expect to be at the high end now and just looking through the presentation. It looks like now you're expecting gross margins to be at the high end of that 13% 14%.
Range, you had outlined last quarter it looks like the non controlling interest in JV number went up a little bit just kind of hoping you could bridge us.
To this sort of fine tuned outlook for 'twenty, one maybe just what segments are driving us to the to the upside to the upper end of the previous range.
Yes, but.
So let me tell you first how we how do we get to the to the upper end.
Our first quarter exceeded our expectations.
Yes.
So what we've done is re forecast of that in for the remainder of the year.
Candidly the second quarter looks very strong in the second quarter comes in where we anticipate I would see us formally raising that guidance for the rest of the year as we get through the quarters, but one quarter doesn't make a year, there's a lot of the dynamics happening out there on the marketplace.
The good news is what's causing us to get there as all three segments, great growth and especially.
On the sector great growth in our residential a little bit of headwinds on some of the inflation stuff, but we're passing through price increases for kind of chasing that breakdown, we will catch up to it when it levels off.
I don't want to underestimate the the great margin improvement that we're seeing in the heavy civil sector and really that transformation for low bid, which is now much less than 20% of our revenue to these alternative deliveries or continue to move that needle up on.
On the margins there so we've got.
If you remember at the end of our last call I said, we've got the best tailwind, we've had coming into a year of we.
Really half of very good tailwind for each one of the sectors are clicking and.
Our biggest challenge of the first quarter was a little bit of inflation, which we continue to see more so on the residential business and then obviously.
For our for our residential team that just shows the makeup of powder. They have to have two weeks plus down in February and come through with an all time record quarter of slabs towards is really really impressive.
Yes, the six.
Okay sector in the short terms of these numbers you on at the end of the early early March we talked last and that was after a horrendous.
Weather pattern in Texas, and while we while we had great confidence that our specialty services and residential business would catch up because they have the ability to do that.
Think of it all happened in the first quarter. They essentially delivered what we thought they would in the first quarter, which.
Absent that would of had our margin, obviously lower and so thats the largest individual component. This quick in the year that switched from you.
You really are March 3rd or whatever day, our call was last time through the reported period. So it was a heck of a of March.
Got it that's helpful. On the other thing that stands out to me is just the we've got the full year gross margin expectations set at 14% you guys did 14, 3% in the first quarter I mean, typically the first quarter would be that low watermark.
Of the year.
So.
Yes, the model the model just looks a lot of a funny. So maybe there's a nuance there that.
It'd be helpful to flesh out.
No no real nuance.
As we get into the rest of the year that we would.
We anticipate those margins continue to improve because we get a little leverage of volume our volume picks up in that second and third quarter, we see a dip back down in the fourth quarter, but if anything.
Again the performance in the.
The mix in the first quarter, along with the improvement on the heavy civil side is we've really put that together.
It was a little higher than we anticipated which is a good day.
The other one.
In the quarter as last year's second third and fourth quarter.
Our land development business was running $100 million plus or minus of.
The revenue.
It ramped pretty significantly in the second quarter of last year.
This year, you'll see the debt.
Land development revenues in the nineties.
Yeah.
That is.
That was expected to be.
Up over last year's comp. So I think that's the other thing that makes the first quarter. When you look at the first quarter for the operating income side and these are going forward are.
The likelihood sue the first quarter will no longer.
We are by far of voice.
Margin business losses.
Because you do the math on where the margin comes from its not.
We get decent returns on our heavy civil side, but the.
The real returns that are driving the numbers are bulk the specialty services and residential yes. The only thing I would add to it is.
We've got the especially for the heavy civil sector, making money in the first quarter, where historically shot we've always lost money in that side, yes. The first.
And.
That swing really makes a difference.
Overall margin so a combination of some of the cost reductions in cash.
And the mix shift that we've done in that sector really really are paying dividends.
Okay got it and then and then in terms of the Red the residential segment.
Inflationary pressure have those price increases.
Stuck.
Are there any instances, where you do you can't sort of pass through that inflation in the.
Are there any other considerations in.
Several of our specialty around the supply chain pressure dynamic.
Yes, so, let's let's start with residential.
The first one on one was the boat is probably the hardest for the team to get through but they were successful with that got another one through.
I think the builders or we're not the only ones with the lumber increases as you can imagine the framework for US a lot of more than we do so the increases of real the other thing that we begin.
<unk> began to see and this is actually in the strange way helped us to some degree is some allocations and a couple of the markets on concrete. The good news is we have continued to get our supply of kind of create some of the smaller players of then have been cut off which is also helps us get the price increases through our bigger challenge right.
Now is we're kind of 30% to 45 days behind the price increase to get it through where normally in a normal year, we would see one abnormal year, we would see too concrete increases we've seen three or four already this year. So it's hard for us just to keep up and keep with them.
So we're probably lagging in I'll call it 30% to 45 days from the time, we get an increase for the type of it we're able to get that through.
Once it stabilizes that should give us of the ability to catch up.
But these guys still did did a phenomenal job on the highway side.
Most of our pricing and supplies are locked in the time of bid.
And we hedge that with the supplier they give us a multiyear price on it.
We haven't seen significant pushback on that as of this time, but if we do we also have clauses in our contracts that we can we can pass that on to the end customer.
On the on this.
Heavy around the specialty service sector.
The biggest the biggest inflationary issue is in two areas. One is around the pipe that we run sort of the storm water some of that stuff around the sites and they've had some delays in the availability on that so it's just pushed out some time.
But the probably the biggest impact in the quarter was on fuel.
You can imagine fuel is up.
As the dollar or so of gallon.
But as you can see with their margins they were able to absorb that they build in some of that price into there.
The bid process and expectations.
But they burn they burn a lot of fuel on.
Just one project alone.
We will burn of about 600000 gallons of fuel in the year.
Just one project. So you can see it would normally be sizable on a positive news you can see how well they've done it hedging that with their bid process and stuff because we didn't see a significant impact in the first quarter.
Okay really helpful I'm going to ask one more.
The the.
The forward looking EBITDA coverage ratio now expected to exit the year at two one times versus the prior two five times.
Wanted to make sure I understand the arithmetic there I assume one part of it is maybe EBITDA now looking like it's going to hit the high end of the range So higher EBITDA in the denominator, but also.
Maybe a lower.
Net debt number as well higher cash flow I just wanted to make.
To make sure I have the two pieces there because thats a pretty notable update.
Yes, we continue to use the midpoint guidance for EBITDA, obviously, we drop off the first quarter and add on another quarter, but our our assumed growth for them, obviously doesn't debt. Our first quarter of 2022 plan, yet, we simply add 2% to 3% growth in the quarter on some some kind of inflationary number against the responses.
The responses.
The by far the the lion's share of that is lower leverage.
So over $100 million got paid last year, we've already paid $30 million. This year, we have scheduled payments for the balance of the year.
Let's see 37 and a half on our term loan and then some other debt.
So if we just make scheduled payments that gets into the for one with the midpoint delivery of.
EBITDA together with debt low single.
Digit anticipation for increased EBITDA in 2022, yes, so Sean the way I look at it is the good news is.
We get there the old fashion way, we generate a whole bunch of cash when we buy down debt the <unk>.
<unk> news is you're exactly on it.
As our EBITDA target continues to increase that ratio of only gets better.
Got it alright, great. Thanks for the responses guys I'll turn it over.
Thanks Chuck.
Our next question is with Brent Thielman with D. A Davidson. Please proceed with your question.
Good morning, Joe.
Hey, Brian how are you.
Doing well thanks.
Hey, Joe I wanted to follow up on.
Some of the commentary around the residential segment of the inflationary pressures I mean, the first quarter margin still look pretty good considering all of that went on.
I guess question is could there be some further erosion in the margins in the near term as these inflationary pressures worked through and that the price increase the step up or do you think we sort of head of baseline here on the first quarter.
I think.
You never know.
We've never seen crazy inflation like this but the.
Based on talking to the team based on everything I would say, we've kind of hit that point. It may move a little bit, but I would be shocked to see any significant.
The movement in margin again, we've been successful at passing on the prices. It's more of a delay then people coming back and saying how low they always say how low the first time than any other.
Day on it.
But.
It's become part of the the norm for this point in time.
Certainly a challenge in our guys are fighting that Battle every day, but I don't I don't anticipate seeing a big Inc.
The incremental movement for from where we are yes. The challenge has been the volatility right. So it still continues to be extraordinarily volatile volatile.
The good luck.
So by the time, you demonstrate that the prices narrowed the stay and then put together the price increase and Joe mentioned early of 45 days goes by the if it comes down you probably don't get anything if it goes up you probably got what you asked for in the afternoon the cycle again.
It is not something that just goes away one time or do times at least in.
For sure.
Jordan the early Bob.
Paul.
Sure Okay.
I apologize the <unk> said this but did you say what proportion with Houston versus Dallas Fort worth in terms of slabs of this quarter our range.
Is that what was the.
Usage kind of debt.
Continuing on its run rates kind of between.
30% to 50% of slabs.
In Houston.
On the pump up but a lot of the growth side in the quarter was up in the downhole.
The other thing the thing we Didnt talk about.
We're at the early stages.
Too much about it but.
We are getting pulled very very hard.
A couple of our biggest customers to.
Get into Apple Phoenix, and the cost of market. So.
We're running hard to see our original intention was to do that next year.
We're working diligently to see if we could possibly pull awesome further expansion in the current gallon.
Yes.
Joe what would be the hesitation around those markets.
It's really us making sure we can get the manpower and the teams in place to deliver that the reason, they're pulling us there isn't because the.
The color of our trucks or are there a price or anything it's the fact that we can deliver more faster than anybody else.
And the numbers are staggering what were doing compared to the competitors in those markets.
So we want to make sure we've got the right people on the right crews in place building of the way we build so that we can deliver that same quality of service.
Therefore, we think over the next three to five years, we become the market leader versus just making a splash of getting it out.
Okay.
On the on the cash flow appreciate the color around the composition of the businesses contributing this quarter at I seem to remember talking about first quarter last year being pretty good for free cash flow. So I just wanted to ask whether there are any other extraordinary things going on in the first quarter that.
My of pop that's not the above your expectations.
No it was really.
<unk>.
It was a meat and potatoes first quarter from the operations just doing their job and the business is doing well on buyten, putting out the fires of had in overcoming the challenges so yeah nothing nothing crazy.
On the positive side that we got a big payment on the claim or anything like that.
Right.
And then the on the specialty business debt.
Great growth this quarter and solid bookings you guys.
Came out with I guess the question is is the pipeline is good to continue the sport.
That sort of level of bookings ahead or is anything extraordinary in that.
$170 million, you talked about a few days ago.
Right right now the pipeline looks looks phenomenal it's really.
All of them all of the whether it's e-commerce or of the data centers. These guys are all force full steam ahead right now.
Yes.
Okay great.
Great. Thanks for taking the time.
Yeah.
Yes.
Ladies and gentlemen, we have reached end of our question and answer session and I would like to turn the call back over to Mr. Joe.
For closing remarks, thanks Barry.
I'd like to thank everyone again for joining today's call. If you of any follow up questions or wish to schedule a call. Please refer to the information provided in the press release associated with our Investor Relations group at Sterling or.
For our partners at the equity group.
I hope everybody is of Great day, and I. Thank you again for participating.
This concludes tonight's today's conference you may disconnect. Your lines at this time. Thank you for your participation.