Q2 2021 Sterling Construction Company Inc Earnings Call
[music], we shifted and display the star Spangled banner.
Greeting and welcome to the Sterling second quarter, 2021 earnings conference call and webcast.
As a reminder, this conference is being recorded and all participants are in a listen only mode.
There are accompanying slides on the Investor Relations section of the company's website.
And for turning the call over to Mr. Joe Pezzullo, 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.
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 objections and abstentions.
Company assumes no obligation to update forward looking statements as a result of new information future events or otherwise.
Please also note that management may reference EBITDA adjusted EBITDA, adjusted net income or adjusted earnings per share on this call, which are all financial measures not recognized under U S. GAAP as required by the S. E C rules and regulations. These non-GAAP financial measures are reconciled to the most.
<unk> GAAP financial measures and our earnings release issued yesterday afternoon, I'll now turn the call over to Mr. Joe Cutillo. Thank you Sir Please go ahead.
Thanks, Laura.
Good morning, everyone and thank you for joining today's call.
I would like to start by thanking all of our Sterling employees for delivering another outstanding quarter and the wake up some very harsh conditions.
And the quarter, we saw almost 1 full month of nonstop rain in Texas.
Tropical storm roll through the southeast.
Material availability issues and material inflation, but just would not stop.
And the labor pool, but it seems to have them.
Even with all that our team has battled through the challenges to deliver a quarter the beat all of our expectations.
These results are yet another example of our culture and our ability to take care of our customers our people and our communities, while delivering fantastic results and challenging times.
Let's start by talking about our people and their safety.
In the quarter, we had zero lost time incidents.
We have now worked over 4 million hours for 11 months without a lost time incident.
On average our recordable rate and lost time incident rates are almost 10 times better than our industry average and are on par with the oil and gas industry.
Our people are our most important asset and making sure. They go home safe every evening is always our first priority.
Now, let's talk about some of the financial results and the quarter.
Our strategy focused on higher margin lower risk projects, while building a platform for future growth continues to pay off.
Overall for the quarter, our revenues versus prior year were flat.
This may seem unimpressive.
But when you take into account and that in 2020, we had significant tailwind helping us as we carried over almost an entire month of residential and specialty service work from Q1 into Q2.
And yet this year, we had nothing but headwinds.
Between losing several weeks of production in Texas, and the southeast due to weather and.
Battling material and labor availability issues it's.
It is amazing we're able to match last year's revenue and income and these conditions.
In the quarter, our gross margin declined slightly to 14%.
Our operating income was flat and our net income was up 10%.
Our earnings per share increased 6% to <unk> 69 per share.
Combined backlog ended the quarter at 165 billion.
And our margin and combined backlog reached a new high of 12, 2%.
We continue to generate significant cash and rapidly by down that.
Year to date, we have generated over $90 million of cash and brought down over $40 million of debt.
This consistent strong performance allowed us to amend our credit agreement in the quarter and reduce our interest rates and enhance our loan requirements.
And the quarter, our heavy civil sector saw nice improvements as our operating income was up 13% with lower revenues as we continue to shift our mix away from hard bid to alternative delivery delivery highway.
Aviation and rail projects.
We have built a very strong multiyear backlog in this sector and should continue to see positive progression and the margins as we go forward.
And our residential sector.
We saw a nice improvement in revenue and a record number of slabs poured.
But a decline and gross margin and operating income.
This was driven by labor and material inflation as well as some negative productivity related to the unseasonably wet weather in May and June.
We continue to pass on price increases to our customers, but are still feeling the impact of the 30% to 40 day lag until they take effect.
We will continue to see a drag on margins until material prices stabilize and our increases catch up.
Our specialty service sector also saw nice gains in revenue, but a decline and operating income.
This was driven by similar issues to our residential sector and a slight mix shift compared to prior year and the quarter.
This mix is driven by the number of active large versus small projects as well as the amount of active commercial projects at any given time and will fluctuate quarter to quarter and year to year.
As we look for let's talk about our end markets by sector.
Our specialty service sector remains extremely strong.
We continue to see significant activity and both E e-commerce warehousing and data centers.
As we continue to expand our footprint into new geographies with our core customers.
We are seeing and winning new opportunities with new customers.
That are also expanding their e-commerce strategies.
As a result, we booked over $150 million and the quarter of new business.
And residential we're seeing annual growth rates, and the Dallas and Houston markets of over 20%.
And do not see any near term changes and these rates.
In addition, our core customers continue to put more and more pressure on us to expand into additional geographies.
As a result, we began pouring our first slabs in the Phoenix market in July.
Year earlier than we had planned.
Even though we are and the very early innings, we believe Phoenix could be a significant addition to our future growth and 2022 and beyond.
And our heavy civil sector bid activity has slowed slightly as states wait to hear the outcome of either and infrastructure build or a surface act to replace the existing fast Act.
We believe the bid activity will pick up significantly and the for fourth quarter.
As 1 of the 2 infrastructure bills has passed or the states start utilizing all the stimulus funds. They have received for roads bridges and airports.
Now, let's shift to the full year.
Based on the first 6 months of performance and the positive impact of our amended loan agreement.
And we are raising our full year net income guidance from a range of $53 million to $55 million.
To a range of $55 million to $58 million.
With that I'll turn it over to Rob to discuss the quarter and the year outlook and more details rod.
Thanks, Joe and good morning, everyone.
I am pleased to provide a summary of our strong second quarter results.
Today's conference call together with our earnings release form 10-Q, and the Investor deck posted to our website should provide insight into our strategic progress and delivering stronger earnings cash flow as well as improving liquidity.
Now let me take you through the financial highlights starting with our back backlog metrics on slide number 5.
At June 32021, our backlog totaled $1 billion $571 million.
34% increase over the beginning of 2021.
Approximately 72% of that backlog increase related to growth and the heavy civil segment with a balance of 28% driven by the specialty services segment, which includes our land development and commercial businesses.
Yes.
The gross margin and our second quarter backlog.
Was 12, 4% compared to 12% at the beginning of the year.
The higher backlog gross margin reflects an increase and specialty services backlog, which generally has higher margin characteristics than for heavy civil projects.
Unsigned low bid awards totaled $75 million at the end of June.
We finished the second quarter with combined backlog of $1 billion $646 million.
7% increase over the beginning of the year.
The gross margin of our combined backlog increased to 12, 2% up from 11, 8% at the beginning of the year.
Our June 32021, combined backlog margin of 12, 2% is the highest and our recent history.
Our first half 2020, 1 book to burn factors were 163% and 118% for backlog and comp.
Combined backlog respectively.
Residential which accounts for 13% of our year over year consolidated revenues year to date consolidated revenues does not report backlog and recognizes revenue was individual concrete slabs are complete.
Completely.
Okay.
Please flip to slide 6 for a summary of our consolidated results.
For simplicity I'll refer to the 2020, 1 quarter as the current quarter and the comparable 2021 second quarter as the prior year quarter.
Our current quarter current quarter revenues totaled $401.7 million.
A slight increase over the prior year quarter.
As you may recall, both specialty services and residential.
He had exceptionally strong prior year quarters, due to a shift and productivity and revenues from from the Q1.2020 into 2020 and into Q2 due to severe inclement weather.
Consistent with our expectations heavy civil current quarter revenue as reported a net decrease of $17 million.
This expected revenue decline reflects the continuing progress reducing our low bid heavy highway revenues.
And $43 million and the current quarter, while increased revenues from alternative delivery heavy highway and other non heavy highway projects by $30 million.
The current quarter and quarter to date improvements.
And heavy civil operating margin reflect this improved revenue mix.
Yeah.
The balance of the current quarter revenue growth was attributable to specialty services and residential revenue increases of 12% and 6% respectively.
The current quarter consolidated gross profit declined by $3.4 million for $56.2 million, while gross margin declined 14% from 14, 9% and the prior year quarter.
As I mentioned earlier, both specialty services and residential.
And on favorable 2021 and comparisons to the prior year quarter results driven by the recovery from the first quarter of 2020 inclement weather.
Additionally, both for specialty services and residential segment.
Experienced current quarter negative impacts from weather.
Inflation and material supply issues.
While a good portion of these headwinds were recovered by the continuation of the respected strong markets. We did experience reductions and the current quarter gross margins, which Joe spoke to earlier.
Operating income and the current quarter was $32.7 million for 8% of revenues essentially flat with the prior year operating income of $33 million or 8.3% of revenues.
Net interest declined by $1.8 million for 5.7 million.
And the current quarter reflected and continued reduction and our debt levels.
Additionally, as we announced in late June 2021, we completed the amendment of our credit facility, which among other things reduced our prospective interest rates by 2 percentage points.
We expect and slower rate will reduce our interest expense for each of the second each of the third and fourth quarters by approximately $1.6 million.
During the quarter, the small business administration for Gabe, our partially owned affiliates PPP loans.
And $1.5 million gain as included a net gain on extinguishment debt and the current quarter income statement.
Our current quarter net income totaled $20.1 million for 69 per share compared to $18.2 million or <unk> 65.
<unk> per share and the prior year quarter.
The current quarter EBITDA was $41 million essentially flat with the prior year quarter of $41.2 million.
For the 6 months ended June 32021, EBITDA totaled $70.9 million and increase of 9.4 or 15% over the comparable 2020 period.
Now, let's move to slide 7 which summarizes our cash flow generation and deleveraging strategy.
The draft graph presents our deleveraging expectations and progress to date.
Beginning with our October 2019 Plateau acquisition and the new 5 year credit facility. Our September 32019 pro forma EBITDA coverage ratio was approximately 3.5 times.
We set the objected to bring the coverage ratio down to 2.5 times by the end of 2021.
The graph reflects where we are to date, we achieved our 2.5% target 2.5 times turns.
Target coverage and the first quarter of 2021, essentially 9 months earlier than anticipated and our strategic plan.
Our coverage ratio was 2.3 times at the end of the current quarter.
For $75 million revolving credit facility remains fully available.
Finally, a few more cash flow statistics for the first quarter of fiscal 'twenty.
Sorry, the first half of 2021 our.
Our cash and cash equivalents totaled $93.6 million.
Cash flow from operations totaled $91.5 million for the period compared to $52.3 for the comparable 2020 period.
We invested $21.5 million and net capital expenditures and lastly, we reduced total debt by $43 million.
We expect to continue to explore additional revenue growth and capital alternatives to improve leverage and strength of our financial position and to take advantage of the trends and opportunities and the infrastructure and markets going forward.
Please note that we have included modeling consideration slides to the current investor deck to assist our stakeholders and understood and key components of our 2021 and financial expectations.
Now I'll turn it back over to Joe.
Thanks Rod.
As we look at the revenue.
We're entering the second half cautiously optimistic as.
As markets remained very strong with the supply chain remains very fragile and schizophrenic.
We do not believe we will see material prices stabilize until late fourth quarter 2021 for first quarter 2022.
And the second half we will stay focused on delivering our improved net income forecast of 55% to $58 million.
Buying down debt and.
And continuing to look for tuck in for new sector acquisitions.
We continue to see a greater deal flow than normal, but we will remain disciplined to make sure we find the right fit.
Now, let's talk about the company longer term.
We're now halfway through our 6 year of transforming our company and our culture.
6 years ago, we were a construction company with low growth low margins and high risk.
Today, we're and infrastructure service provider with a much broader portfolio of and customers.
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We have a compounded annual revenue growth rate of over 15%.
Our compounded annual EBITDA growth rate of 66%.
And a solid platform for future growth.
We have a diverse culture that continues to demonstrate its ability to deliver results to our shareholders under the toughest conditions, yet understand our responsibilities go beyond just that.
They are committed to each other to ensure everyone goes home safe.
They are committed to our customers to ensure we meet or exceed their expectations.
They are committed to their communities and helping those in need.
And are committed to their environment to ensure it's a clean and safe.
Area for future generations.
This is what we call the Sterling way.
As we go forward the key elements of our strategy remains exactly the same.
We will continue to solidify our base for our core by maximizing price and driving productivity.
We will continue to focus on growing our highest margin products.
And we will continue to expand into adjacent markets through accretive bolt on acquisitions that fit and 1 of our existing sectors for add on a fourth sector.
Our combined margins will continue to increase.
Our further diversification of businesses services and end markets will further reduce risk and volatility.
We will ultimately become and infrastructure solutions provider.
April to build or service our customers greatest needs.
Whether it's building something new.
Rehabilitating something Ole.
Our servicing infrastructure throughout its useful life.
We will be there and the critical time of need.
We've come a long way.
And we're positioned to have another record year.
But what is even more exciting than that is we're just at the beginning of what we will become.
With that I'd like to turn it over for questions.
At this time, we'll be conducting a question and answer session.
I would like to ask a question please press <unk>.
Star 1 on your telephone keypad.
A confirmation tone will indicate your line is and the question queue.
POS start <unk> share move your questions from the queue for participants using speaker equipment and may be necessary for you to pick up your handset for for question with Starkey, 1 moment, while we poll for questions.
Our first question comes from the line of Bryan Spillane with D. A Davidson you May proceed with your question.
Yes. Thank you.
I guess, Joe and Ron first question, if I take the midpoint of the revenue guidance that sort of implied yield growth, 3% to 4% and the second half.
Or should we expect to see some of the slowness.
And I guess implied flow does come from is it heavy civil for the.
Specialty and residential growth rates start to ease off of what we've seen here so far.
Yes, it's really heavy highway where we will see what we've been seeing continued.
Minimum growth probably negative revenue is actually.
Because of the strategic direction to continue to reduce our backlog on that heavy and hard bid work and replacement with the alternative delivery. So.
That was a big big headwind follow on the revenue reduction and first half that won't go away, we are not done yet shifting that.
File, although we've come a long ways, we will see a little bit net and particularly the fourth quarter as our typically slow down a bit and.
And.
We start reaching the.
Unfortunately, the snow snow season, and narrowed the back for the background and fourth quarter. So we'll be back to the usual.
Low slowest quarter and that business will be the fourth quarter.
Balance of residential and specialty we don't see that slowing down.
Okay and does the outlook imply in the residential segment is going to see the same sort of margin that you saw in the first half.
Could they get worse from here and so we're trying to play catch up with pricing.
Yes.
And that they're not going to go up and this and the second half we continue to fight increases and I'll give you an example.
Pass on and increased 2 weeks ago for rebar and post destiny cables and and literally just 2 days ago got another 8% increase on the materials right.
And we're passing things on as fast as we can and we're hoping that things stabilize on a positive front lumber looks like it's coming down and kind of September October timeframe.
So we should see some stabilization there and thats been a little bit of relief on that price, but concrete and steel have not slowed down.
By any stretch of imagination. So I think it will be close we may see a little bit of a further decline if inflation keeps getting crazy and we see multi.
Multi increases and a month.
But as we get into the fourth quarter, we really think that starts to begin to stabilize from sprint.
Okay, and then on residential and can we.
Just sort of explore the Phoenix market decision that obviously came a little sooner than anticipated.
I anticipated I guess beyond.
And beyond the fact, we know it's a great housing market I assume there are some different labor and and other dynamics to the markets. How do we get comfortable you can you can execute as well there and you have and Dallas and Houston.
Yes, the frozen and the kinds of the Phoenix market.
And the Phoenix market is generally the fourth or fifth largest market and the U S. I haven't seen the latest statistics, but.
They're doing about half as many new home starts a year is is Houston and by the way isn't just past Dallas and housing starts. So it's the number 1 market right now.
Thats good.
The other good is in the Phoenix market 1 of the reasons, we got pulled their harder faster quicker.
And is because there aren't any really big players 1 of the and other things we've continued to battle with and it's taken us a little bit longer and the Houston market as a true large players and the Houston market.
There does not appear to be any large players in the Phoenix market, which helps us get in and get a foothold easier the biggest challenge is labor.
We have done is <unk>.
We've taken our to start out and we've taken some of our traveling commercial crews and put them in Phoenix and they seem to be doing very well.
The.
And the nice thing about those folks as they spend all their time on the road doing commercial work for us and that commercial market is not only declined and demand, but we've seen a significant pricing decrease and the commercial market. So we're reallocating those resources to get a foothold and Phoenix.
We can grow.
Say as fast as we want and Phoenix right now tremendous demand is going to be how fast we can bring crews up to speed and bring them on.
And pricing appears to be.
<unk>.
Good in the market and relative terms.
So we should see.
It won't be up to Dallas margins right away, but we think we can get very close to those Dallas margins over a period of time.
Okay, and then last on the specialty services Youre heading into the second half with considerable level of bookings, but I guess I'm curious with.
With the market like a competitive fields like for kind of a small ari faster.
Kind of book and burn work you participate in and that segment is it as robust as you've seen.
Yes.
Surprisingly I would have I would have really thought when we went into COVID-19.
The I'll call it the private tiers, the smaller warehouses that are speculative.
And would have really slowed down and dried up would actually happen is.
The Amazons of the World and several others went in and bought up everything that was on the market lease through the southeast because they didn't have time to put in additional distribution centers.
So we're seeing the private tears working as quickly as they can to rebuild that inventory.
Of spec.
Type warehouses.
And as you can imagine it's not that easy to go out and buy a whole bunch of land and get it permitted today right.
So it takes a little bit longer but that market activity is still very strong.
Okay, great. Thank you.
Our final question comes from the line of Sean Eastman with Keybanc capital markets. You May proceed with your question.
Hi, nice quarter complements.
Thanks, John.
Just touching on the guidance as well and if we look at the EBITDA guidance. It implies lower at the midpoint implies lower EBITDA and the second half than the first half, yes, we kind of have this.
Residential catch up dynamic.
Just curious why that makes sense I guess, what I'm getting at here is it seems like there might be some conservatism.
And the outlook and.
I'm just curious what in particular warrants caution here is it really just residential supply chain labor constraints or maybe something else, we should be kind of vigilant.
As we go into the second half.
Well I think theres, a little bit of caution on our front and the sense that.
And this material I got to tell you. It is hand to hand combat out there. It's it's been a long time since you have your biggest suppliers, calling you and say and I know I gave you and increase 2 weeks ago by the way here's another 1.
Take it or leave it and.
Got 2 minutes to make a decision and we're going to sell it for somebody else.
It's just it's a unique environment and when that stabilizes I don't know.
Everything we see looks towards the end of this year as you start hitting and the weather the winter months and some construction starts slowing down and all that stuff, but now and I would have never imagined the number of increases that we've seen already this year.
And and.
And being able to pass those on and there is always that lag and then that issue labor pricing is going up it is going up and incredibly fast. So when we talk about the labor pool and the good news is we've been very fortunate and have worked very hard to maintain the pool that we have.
It is costing us more.
And it's extremely.
Difficult if you want to add people to replace people right now. So we're we're trying not to get over our skis and we see some slowdown and inflation.
And some timing of a couple of projects hit and then start off a little earlier than that we would anticipate those are all good things for us, but thats kind of where Brian do you have anything to add to that no I think thats right actually the good news is we're tracking from it from operation operating income on.
Pretty much as we can.
Planned and we didn't know how to sell.
Supply chain and at that point in time, so those are big things to overcome so staying with our.
Original kind of revenue and operating ranges.
And we're out there that's I think a pretty good accomplishment, given and what we've seen and the first half year.
Yes indeed.
Okay, and then we seem to talk about the supply chain and labor constraints and the concept and the context of the residential business mostly.
I Wonder does this bleed over into the specialty or heavy civil segment at all is there any risk there and.
I'm curious in particular around the specialty.
Equipment fleet, whether there is any risk about not being able to support growth.
And access the yellow iron et cetera.
Yes, I think.
Let's start it certainly the labor issue goes across all sectors.
It's not unique to residential and the uniqueness of residential as those markets are up 20% and we're not up 20% because we don't have enough labor and material to go do all of that right. So we are we are literally turning down work every day.
And the.
The heavy civil side, because they're bigger slower projects. We have planned you can plan ahead longer term, we've got people capital match sets.
For that.
And we've seen less of an impact on material, though we're seeing availability issues are material less of a pricing impact as we generally lock into those or enable and some instances where there have been significant impacts pass those on to the end customer theres clauses that we can do that.
The specialty side.
I think similar to the residential their staff crude.
And have the equipment to do the work I will tell you getting new equipment has taken us a lot longer than originally anticipated.
But we are 1.
On a cash bigger customers for sure and in general they've taken very good care of us and replaced our weighting equipment with rental equipment. So we haven't lost the capacity its just more of a little bit of a pricing issue, where we're having to ramp where we would have normally owned that product type thing.
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But yellow iron pickup trucks takes 6 months to get a pickup truck standard.
Put it in perspective standard water pipe that you would call up and the morning, and I used to make this stuff you can call up and the morning Abbott truckload there that afternoon or the next morning right now the lead times for 16 weeks and your price is.
Whatever it is the day to day shift, they're not going to tell you until they ship it.
And that's just 1 of our 1000 examples that are that are going on out there. It's just a different world than we've seen the good news is the.
And the markets are very strong. So you were able to offset some of this with volume.
And the thing that would be worse as if our markets were all down 10, or 15% and we're seeing supply chain issues and inflation on top of it we've really be scrambling. So we feel good about the market.
The supply chain will eventually sort itself out and just hasn't rebounded yet.
And so we're focused on making sure that market continues to be strong and we'll fight through that the day to day battles and the inflation, we have and catch that up as we get down the road.
Okay, that's really helpful and.
And then specialty that the geographic expansion can you give us a little more color on kind of where I'm going and.
And should we anticipate a similar dynamic to residential where there could be a bit of a margin drag as you enter those new geographies or does it work differently now it's different different than residential where growth with our core customers and we're pricing and we're using our same crews and we're pricing in.
And that that cost to be further away.
No that does.
Isn't it doesn't impact that obviously, we've expanded into Tennessee, we've got several jobs, now and Tennessee, where and Mississippi get a couple of jobs and Mississippi.
And looking at Alabama.
And with some others. So we just we call it.
The 1 step we want to step 1 state further away.
We're starting to look at some work up and Maryland, so to get over that Virginia border into the Maryland and staff, we're bidding on some projects up there. So it is kind of 1 step at a time.
How do you go 50 to 100 miles further than you are today that takes you into a new state with your core customers, but what's really nice is it's opened up other opportunities. While we're there we're seeing other projects.
From the general contractor community that we're working with.
They are working with other customers and we would generally even look at those because we're not and that that footprint or geography. So we're seeing nice nice pickups from that.
Okay excellent last 1 for me.
When we when we think about new platform acquisitions being potentially on the table here.
Based on what Youre seeing Joe would you have to pay a multiple higher than where sterling is trading today to consummate.
Those types of true yes.
That's a good question I don't know if the.
Legalized marijuana laws are transferring stuff further and further across the country or some of the equity deals and if.
<unk> made some of these some of these sellers think their businesses are worth a lot more than they are.
And we're certainly seeing higher prices.
And in some areas and the marketplace, but we're also seeing a lot of deals right. So.
What's very interesting is a lot of deals that came out early and the year with the attention intention of selling either and the equity world or a very high multiples have failed and theyre coming back out.
And getting realistic about valuations right.
So that's just kind of a general term.
1 of the things that we've looked at a couple of different areas.
For that for sector and 1 of the limiting factors for US and then some of the multiples today I don't think we want to pay a significantly higher multiple than where we are today.
And we will keep we will keep plugging away, but theres been a couple out there that would have fit.
And would have fit from a strategic profile and from a multiple profile for other reasons just weren't the right for sector for us at this point in time, So I won't say never as we get into things like brought talked about things like broadband and some of that stuff those multiples are much higher.
And.
And I think that we would probably start out smaller and try to build something there if we can get.
Something.
<unk> multiple range, if we were to go that route but.
But we're also looking at.
Several nice tuck ins to our.
Existing sectors.
That would be.
Necessarily huge businesses, but accretive nice incremental service potential.
And could help us grow organically a little faster.
Got it thanks very helpful. Paul and congrats again nice job this quarter. Thanks, Yeah, Thanks, Sean and I don't think.
I'm sure my peers will feel it out there, but it's.
Yes.
It looks like a.
And a slightly above par quarter, but it was a phenomenal quarter with all the challenges faced out there and.
And the Sterling team just knocked it out of the park for what we're we're challenge for them.
Okay great.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn the call back over to Mr. Joe Cutillo for closing remarks.
Thanks, Laura.
I'd like to thank everyone again for joining today's call. If you have any follow up questions or wishes schedule a call. Please refer to the information provided in the press release associated with our Investor Relations group at Sterling.
And our partners at the equity group.
Everyone has a great day and thanks again.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
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