Q4 2021 Sterling Construction Company Inc Earnings Call

We look forward to 2022.

Our infrastructure solutions segment enters 2022 with robust markets throughout the east coast.

The recent pandemic has accelerated demand and increased the size and scope of projects for e-commerce distribution and data centers.

This aligns well with our strategy and competitive advantages.

During the quarter, we book, new business, including Plateau, and patillo, bringing our total infrastructure solutions backlog.

$433 million.

And in addition to the strong markets. We believe we will begin recovering some of the lost margin related to inflation back in 2022.

For our building solutions segment, we expect the demand in our markets from our top customers to grow at double digit rates in 2022.

In addition, we believe we have the opportunity to double our growth in Phoenix in 2022 versus 2021.

Our transportation solutions segment will remain disciplined and focus on margin growth and the continued shift of our portfolio towards alternative delivery highway and aviation projects.

Our diverse portfolio continues to position Sterling in the right markets with the right solutions for our customers at the right time.

Our strategic actions in 2021, along with the strong end markets and our infrastructure and building solutions segments have positioned us for yet another record year in 2022 .

In 2022, our revenues will be between $1 billion 825000.

And $1 billion 875000.

And our net income will be between $83 million and $89 million.

With that I'd like to turn it over to Ron to give you more details on the quarter and the full year.

Thanks, Joe and good morning.

I am pleased to discuss our record fourth quarter and full year performance.

Our updated Investor relation presentation ended December 31, 2021 earnings release has been posted to our website and includes additional financial details to help further understand our 2021 financial results.

The presentation also provides additional modeling considerations, which underpin our 2022 revenue and earnings guidance.

Additionally, as you may recall, we closed on <unk> and <unk> acquisitions on December 30th in December 28, respectively.

Given the proximity to the year and these acquisitions had minimal impact on our 2021 income statement.

With these acquisitions, we realigned our operating groups into three reportable segments transportation infrastructure and building solutions.

Our new segment presentation also breaks out corporate related costs.

For a better understanding of our realigned segment reporting we have included the historical quarterly segment information for both 2 2020 21 in the updated Investor Relations presentation and in our 2021 earnings release.

Both of which are available on our website.

Let me take you through our financial highlights starting with our backlog metrics.

At December 31, 2021, our backlog totaled a year end record high of $1 billion $493 million.

Up $318 million over the beginning of the year.

Okay.

At the end of the year 2020 backlog includes $211 million relating to the December two.

2021 acquisitions.

The gross margin of our December 2020 backlog was 12, 2% a 20 basis point increase over 2020.

Unsigned low bid awards at the end of 2021 were <unk> 40.

$23 million.

And our full year 2021 book to burn factor for backlog was 123%.

Note that residential slab revenue is excluded from this computation as it is not a backlog driven business.

Revenues for the quarter were $401 million up $54 million or 16% over our 2020 comparable quarter.

Each of our three reporting segments reported increased revenues and segment operating income for both the current year and the full year third quarter and the full year.

Consolidated segment operating income increased by 21% in the current quarter, reflecting the continued revenue mix improvements driven by our higher growth rates from our highest return segments.

Our full year of 2021 revenues totaled $1 billion $582 million up $154 million or 11% over 2020.

Transportation solutions revenues increased $19 million in the current quarter.

And $42 million or five 5% for the year.

The increases were primarily due to the ramp up of large design build contracts.

And offset by an $80 million strategic reduction of our low bid heavy highway revenues in 2021.

This revenue shift was the principal driver of the improved current year operating margins.

Okay.

Infrastructure solutions revenues increased $27 million in the current quarter and $72 million or 18% for the year.

The increases were driven by the continued high demand for large scale site development opportunities within the southeast and mid Atlantic region.

Bulky both E infrastructure solutions current quarter and full year operating margins declined by 210 basis points.

These reductions were driven by continued headwinds from supply chain issues and related impact on productivity and efficiencies as well as a lower project mix in the periods.

Billing solution revenues increased $19 million in the current quarter and $42 million or 14, 9% for the year.

Residential revenues increased 27%, while commercial revenues declined by 3%.

The number of residential slabs completed during 2021 increased 24% over 2020.

The increase in slabs with primary primarily attributable to the continued market strength in the Dallas Fort worth area and continued expansion into the Houston and Arizona markets.

Building solutions operating margins increased in the fourth quarter by 260 basis points, reflecting progress and recouping. The 2021 cost increases experienced in the first three quarters of 2021.

Full year operating margins declined by 70 basis points to 10, 3%.

The full year operating margin decrease was driven by temporary price concessions due to COVID-19 and an increase in lumber concrete and steel costs earlier in the year.

General and administrative expenses for 2021, and 'twenty, two where 5% of revenues consistent with our expectations.

The dollar increase over the prior year was attributable to higher employee insurance related costs.

We also incurred acquisition related costs of $3 $9 million or <unk> <unk> per share relating to the <unk> and <unk> transactions.

For comparative purposes, we have added back expense in our quote unquote as adjusted results.

Our current quarter operating income was $19 8 million down slightly from 2020 operating income of $29 million.

As adjusted operating income.

It was $23 7 million.

Compared to $28 9 million in the prior year.

For the year ended December 31, 2021, operating income was $107 million compared to $90 5 million in the prior year.

Adjusted operating income was $111 million or an increase of 16% for the year ended December 31, 2021 compared to $96 million in 2020.

Interest expense for 2021 was $19 3 million compared to $29 4 million in 2020.

The 2021 $10 million decline in interest expense reflects lower average debt balances during 2021 and the reduced interest provided by the June 2021 debt Amendment.

We expect our full year of 2022 interest expense to be in the 19% to $21 billion range.

Our effective income tax rate for 2021 and 2020.

We're 27, 7% and 34, 4% respectively.

The net decline was driven by more was driven.

By more favorable 2021 permanent tax differences.

Of our full year 2021 income tax expense of $24 9 million $21 5 million was noncash as taxable income was absorbed by our net operating loss carryforwards.

Cash income tax expense totaled $3 $4 million in the current quarter principally for state income tax payments.

We expect to have approximately the same noncash cash income tax expense relationship in 2022.

The net effect of all of these items resulted in current year net income of $62 $6 million or an EPS of $2 15.

In the fourth quarter net income of $10 9 million with earnings per share of <unk> 37.

Adjusted net income and adjusted EPS in the current year were $65 6 million and $2 25 per share.

Moving to our balance sheet liquidity, our year end cash totaled $82 million compared to $66 million at the beginning of the year.

Our debt at the end of 2021 totaled $462 million compared to $375 million at the end of 2020.

Or an increase of $87 million.

During 2021, we repaid $40 million $48 million of debt and borrowed $140 million through a new term loan to fund part of our December 2021 acquisitions.

At the end of 2021 are forward looking coverage ratio was two seven I'm sorry at the end of 'twenty are forward looking coverage ratio was two seven times EBITDA compared to two four times.

At the beginning of 2022.

We remain comfortable with our target ratio range of plus or minus two five times EBITDA.

At the end of 2021, we had no borrowings on our revolver credit facility and accordingly, we have full availability of the $75 million line.

Our current year adjusted EBITDA was $143 million, an increase of 12% over 2000 2020.

2020, adjusted EBITDA of $128 million.

In addition, our 2021 cash flow from operating activities totaled a record $157 million, an improvement of $31 million or 25% for the current year.

This strong operating cash flow provided us with the opportunity to make debt repayments of $48 million, while investing $43 million and net capital expenditures investing $45 million of cash for acquisitions and finally.

Grow up.

With us to grow our cash balance by $16 million.

With that I'll turn it back over to Joe.

Thanks Rod.

It's always nice to finish with a record quarter and a record year.

But what is even better.

Is being positioned to have an even stronger year ahead.

I'm proud to say, we will enter 2022.

In the strongest position ever with record.

Backlog better margins.

And our highest growth coming from our lowest risk highest margin businesses.

Our strong markets are diverse workforce.

Our proven strategy continue to pay off.

We remain committed to the safety and wellbeing of our people to increasing customer and shareholder value.

While also protecting our communities and the environment.

We enter 2020 to a completely different business that we were just a few years ago.

As our strategy and vision and drive US forward. We are just the beginning of what we will become.

To reiterate.

Our 2022 guidance.

Our revenue will be between $1 825000, and $1 billion $875000 and our net income will be between 83 million and $89 million.

With that I'd like to turn it over for questions.

At this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd 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, one moment, please while we poll for questions.

Our first question is from Brent Thielman with D. A Davidson. Please proceed with your question.

Great. Thanks, Good morning, Joe.

Good morning, Brett.

Maybe maybe for Ron just wondering what margins you have embedded into the guidance for the three business segments now that they are re aligned here.

Sure I think they are.

So what are the things we did is.

To help you did eight quarters of history to match up with how we are going forward and I think it helps a lot on understanding the operating income characteristics of the units by breaking out the corporate expense. So.

Take a look at those so I think.

Certainly a few things.

By segment here I'll start with.

The heavy I'm, sorry would be transportation solutions group.

We will continue to see margin leverage on that coming from the continued shift.

Of.

Phil.

Moving to higher margin projects.

Et cetera, we probably got one more.

Continuing to reduce the low bid side of that and that will.

Sure.

So that continues to pick up a little bit we got 20 basis points in margin.

Increase in backlog, but we expect more and more out of that in 2020 basis points for the full year.

The.

Building solutions side.

A special note to this to the fourth quarter margins.

We essentially recouped.

While we while we would have had but for the pressures on supply change in inflation for the year.

From a Ford credit and not make a year, but we certainly had a great recovery on that.

And probably for the second quarter in a row had revenues per slab growing <unk>.

Faster than.

<unk>.

Then.

Number of slabs gotten so what that means is more price per slab obviously so.

So we expect year over year to have that.

Fourth quarter booking results continue into.

2022, 2020, 2022 maybe a little bit lumpy.

And that's E solutions.

Obviously, we will pick up patillo in our in that segment.

Margin characteristics are very similar to.

To those of <unk>.

Bye.

So.

Thank the challenge will be.

How fast can we continue to recover from the supply chain and.

Hidden inflation side of it.

So as time goes by that tends to run through backlog and improve but we.

We expect that to get better in 2022.

The biggest shift in.

Joining from.

Our segments to the new level.

Our commercial business comes out of what used to be the specialty segment, which is now the infrastructure and that goes into building solution. So that margin is a little lower than our historical.

Natural business.

So youll see that.

That too to a small degree.

And that of course takes that lower.

It helps operating margins for the.

The infrastructure and infrastructure group.

Reduces margins for just Standalone.

Residential.

All of these.

Okay I appreciate that.

Maybe just on the the outlook question around the cash from operations expectation just wondering why it couldnt be significantly higher this year just given the addition of tableau.

So we start the year with consistent belief.

Leave that our cash.

Cash flow from operating activities will approximate our operating income.

That bounces a little bit around quarters, just due to the six.

The seasonality of our work, but that's where we start every year and I think our goal is to see if we can continue that and stream altogether because I don't think it is reasonable to beat that number a year after year after year.

Not.

Beat that relationship year after year, so that's kind of where we start the year and.

Over over the past few years, we kind of see that average out at about that level.

So the bandwidth we put around that.

And the model is.

Really around operating and governance, our expectation of cash flow from ops.

Okay. That's helpful. Ron.

Maybe just last one for me.

You seem to offer.

Clearly optimistic outlook on the residential side, maybe any other feedback youre getting from your homebuilder customers just regarding plans for this year.

And to be an area that might be in some worry that people out there but.

Things are slow employees, so any help there would be great.

Yes, we haven't.

The feedback.

We haven't seen anything slowing.

Any concerns around potential risks, it's more around the land availability and developing plans.

Faster rates as you can imagine.

If our team did their 2021 expectations on builds.

Builds which eats up the land at a quicker pace than.

There are three year plan.

Dissipates and a lot of cases.

So I know that they're working diligently to develop that next wave of land.

As we step back and we just think of it objectively.

We certainly are cognizant of the.

Rates increased potential rate increase on inflation.

The builders still have a lot of levers they can pull they're making very high margins on the properties are selling today.

They don't want that to slow down anytime soon so we think through 2022 barring something catastrophic.

Everything they are telling US is we're going to see what I'll call low double digit growth.

Going into this year in the three markets, we're in which are really the top three markets in the U S. Right now Phoenix bounces back and forth, but we're number one number two or number three.

And of course, we would expect market share improvements for both our expansions in Houston and Phoenix.

Yes.

Thanks, guys I appreciate it.

Our final question comes from Sean Eastman with Keybanc. Please proceed with your question.

Joe Ron Good morning, Thanks for taking my questions.

It would be helpful to just get a bit more of a flavor.

The.

Kind of operating conditions.

Contemplated in the initial 2022 outlook here.

It seems like.

The residential business.

Out of the woods in a sense based on the fourth quarter results here.

And then I guess the other element is sort of that equipment lead time, and the E Commerce solutions business. So.

Sort of what did you guys see around those dynamics through.

Exiting the fourth quarter and have you contemplated those potential risk factors in the guidance.

Yes.

Brian talked about how we've factored in some of the inflation coming back but the good news is we saw.

And we've said all through if you remember 2021, if we can get.

I'll call it a slowdown and rate increases we could start catching up to.

To recoup some of that in the price increases that we're passing through and in the fourth quarter. We saw that that we're going to continue to see some increases throughout 2022.

<unk> already announced.

Rate increases et cetera.

What.

We've got a much better job. So we've got some some visibility to recouping that in 2022, and we also hope to start recouping.

On the subtle specialty services are now the infrastructure solutions.

Some of that as we get into 2022 and the new bid projects.

So we've done that.

On the on the equipment side and.

And capacity side.

We have factored in the equipment capacity, we have with equipment capacity that we know we're going to get or added.

In the quarter.

But I'll be honest.

For the first five we're actually turning away work.

In the infrastructure.

Segment, just because we're making sure we take care of our core customers, we're making sure we've got capacity for the projects they've got on the books for the year.

And we're not getting over our skis, but frankly, if we had more equipment, we would be taking up more work now that we have but we factored that into the 2022 forecast.

I'd add that.

Okay.

For the combined backlog of the infrastructure group.

Just under $470 million.

Our backlog of about two thirds are youll revenue expectations or our run rates that we have including pillow.

That's pretty strong compared to history.

That relationship would.

What that means is we have the backlog and of course as we roll through that backlog, we did roll through into 2021 into 2022, we've learned a lot about.

<unk> planning around pricing and productivity and things like that.

It's pretty simple that as we've rolled off the old backlog, we have better.

Insights over what we think it will be in 2022, so that's going to help us and certainly the backlog is.

Is going to provide us two thirds of the year give or take.

So I think we're looking forward to that performance.

Got it okay, good stuff and then.

How much revenue.

Revenue growth and EPS accretion is in this outlook from Paciello.

I don't have that number exactly front of me.

I want to say, it's between 15 and 20.

15 to 20 cents got it yes.

Thank you.

I'll have a better I didn't bring my pro forma is in a better ones when.

We can give you a more detailed explanation on that Sean Yep.

Yes, I just wanted to work out.

Organic growth the underlying organic growth.

And then if I look at the backlog in the fourth quarter pull out pretty low.

Looks like book to Bill was below one times, but obviously commentary.

<unk> outlook commentary from you guys is pretty robust here. So I'm just curious how we should.

Anticipate.

The backlog trajectory over the next couple of quarters here.

Whether there is some stuff that is getting ready to load and weather chunky.

Hunky awards on the transportation side or some some stuff coming Im just curious how to think about that.

So we'll see as I think we could continue to see backlog decline. If you go back and we said this last year and coming into this year and it's it's.

Playing out pretty pretty active and make sure you breakout back in backlog for transportation is declining backlog for infrastructure is improving.

If you remember Sean at the beginning of last year, we booked several really large design build jobs in the quarter that had been sitting in.

Won but not signed for a long period of time, so that skews the spike up to that to some degree and we're burning that off and there is not those mega projects to replace that so we're still hitting singles and doubles and making sure. We're we're focusing on the small quick turn projects and higher margin.

So I think on the transportation side, we'll see that continue to decline as we get through the first half of this year and frankly.

The results of the new infrastructure Bill.

Bid activity is not we have not seen.

A significant increase in bid activity and there is yet another factor that is taking place.

We've won probably a half dozen or more jobs in the last couple of months of which none of them are being awarded because our Ts.

Their engineering estimates pre inflation have not adjusted the engineers estimates so were seeing all the jobs that are being one coming in anywhere from 30% to 60% higher than the original engineers estimate so they go back into the cycle and re estimate those and then they'll bring them out for <unk>.

<unk> versus what you would normally do is just of course correct.

The material prices, because that's where that's where all the issues are so we think that will continue to decline.

Infrastructure.

Space again, one of the nice things that is happening.

As a result of Covid and some of the inflation.

Where we have seen if you remember us talking about some of the big data centers and some of the Big E Commerce distribution build outs a lot of times they would buy.

100, 200, 300 acres and develop that over phases. So we'd come do the rough cut of the entire thing we finish phase one they build the data center a year or two later, we come back we finished phase II. They build a data center year three what we're seeing them do is ask us on the projects. We have recently won.

To do all phases at one time.

So they are bigger they're more complex, which is great for us.

Reduces the playing field out there on the competition, but also it keeps us there one location longer and bigger. So those are those are beneficial and thats why candidly, we're turning away.

Some of the mid range and smaller work to make sure. We got the capacity for the line of sight of jobs, we see coming up in 2022.

Interesting.

Yes, definitely it helps massively.

And then last one from me.

You guys are exiting the year here around two four times leverage.

Yes, not crazy there. So I'm just curious what's next here do we just focus on organic funding organic growth and delever or just stay on the offensive.

Oh.

What's the message there.

Yes, I think both.

Right now.

Okay.

To buy down debt right.

I want to tell you that we're not outlook for.

Tuck ins that fit for strategic adds in the three segments that we have.

And at some point in time I mean, we're looking we just haven't found that right fourth leg.

Broaden it.

Today as we sit here.

Buying down buying down the debt, but I will tell you we are constantly and actively beating the bushes.

The other nice thing that is starting to happen is.

We are in a lot of cases.

The earliest look at a lot of deals.

So that gives us kind of a first first chance at some deals.

We may not have had a few years ago.

So that's a nice position to be in.

In my comments.

Hopefully that was helpful from the standpoint of we've.

We've been very clear now.

We're very comfortable with the two five kind of plus or minus.

Future EBITDA kind of calculation and I think in our business.

One of the reasons, we are because the cash flow that we've enjoyed since transferring transforming the business.

It's been consistent and strong.

The other interesting.

Point is with the <unk> acquisition being funded a little thing on $20 million worth of our stock, but majority of it by some.

Some debt and almost $50 million of cash we had on our balance sheet, it's immediately accretive and it reduced our leverage ratio.

So we can find more transactions like that we won't be slow at.

Taking advantage of our Premier Economics, if you will I think the one thing John .

I'm sure, we'll get it from Brexit.

Spent a lot of time on the cash flow that we're throwing off from this business. The fact that we're able to take.

I'd call. It a third a third a third bite on that yes by capital and buy businesses last year, bringing the total debt leverage is really really impressive part of what we've been able to do and.

It is something we're going to continue to do as part of the acquisition strategy looking for those businesses that either continuing to that trend or help it even more.

Okay very helpful I'm going to sneak one more in here just in the spirit of.

Kind of setting up.

Appropriate numbers early in the year is there anything you'd point out from.

From an EPS cadence perspective within this full year outlook.

Particularly I don't know, maybe first half back half weighting or or any.

Strange comp nuances early in the year, you would point out here.

Not really I mean, our first quarter is always our slowest quarter right. If you look at look through history.

Our fourth quarter.

As we've kind of transformed the company to become stronger than they were early on.

So the first but we don't see any significant changes in seasonality.

To me as I look at it.

As we get to the back half if we continue to pick up pricing.

Continue to see normalization of inflation.

That's where we tend to have I think some potential upside through the year.

As we go forward, but nothing.

Nothing of significance from a quarter or back half loaded.

It's loaded just like our other plants.

I think the shift that we saw in 2021 becomes a new norm by quarter of how that lays out because its exchange pretty significantly from the the risk of the.

Of the transportation solutions business.

Being lumpy and weather and things like that I think with the mix of operating earnings. It will probably look similar to what we had in 2021 should theoretically improve a little bit smoother because.

In total we expect the same kind of more or less seasonality in the.

In the business, but still feel something that first quarter.

Alright, I'll really solid responses.

I'll, let you guys get back to business, thanks, very very much.

Thanks, Scott I appreciate it.

We have reached the end of the question and answer session and I will now turn the call over to Mr. Joe Cutillo for closing remarks.

Thanks Kyle.

I'd like to thank everyone again for joining today's call.

If you have any follow up questions. Please refer to the information provided in the press release related to our Investor Relations group at Sterling or.

Our partners at the equity group.

I hope everyone has a great day and thanks again for joining the call.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Okay.

Yes.

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