Q1 2022 Sterling Construction Company Inc Earnings Call
Greetings and welcome to the Sterling construction company's first quarter 2022 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 this company's website.
Before turning the call over to Joe Cutillo, Sterling's, 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.
It could affect these projections and assumptions the.
The company assumes no obligations 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 that's required by 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. Joseph Thank you Sir Please go ahead.
Thanks Maria.
Good morning, everyone and welcome to Sterling's first quarter 2022 earnings call.
I am proud to report another record quarter during an unprecedented time of hyper inflation and supply chain challenges are.
Our teams are working harder than ever to overcome these challenges and ensure we continue to service our customers and our investors.
I'd like to take a second to thank them for their efforts and let them know it does not go unnoticed.
This morning, I will cover the highlights of our first quarter and the strategic progress we have made.
Then I'll turn it over to Ron for his financial commentary and I will finish with the market and full year outlook.
Yes.
Let's start with the most important highlight of the quarter.
And that is we had zero lost time incidents in the quarter and our teams went home to their families safe every evening.
We continue to be an industry leader in safety driven by our culture that cares as much about their fellow colleagues as they do about themselves.
Our diverse workforce understands the financial results alone are not enough.
We're constantly looking for better ways to protect our people protect our environment and give back to our communities. This is what we call the Sterling way.
Shifting to the strategic front, our strategic transformation focused on improving margins, reducing risk and diversification into value added services continues to pay off.
In the quarter, our highest margin segment.
Infrastructure surpassed our transportation segment and revenue for the first time in our history.
With the addition of the pivotal acquisition, which we completed at year end.
Our infrastructure segment represented 41% of our total revenue.
62% of our segment operating income in the quarter.
We continue to be very excited about the incremental opportunities and synergies we have with the addition of petillo into the segment.
Combined with plateau, we believe we now have the largest most capable infrastructure site development company in the country.
Our building solutions segment, our second highest margin segment continued its organic expansion in both Houston and Phoenix.
In the quarter versus prior year operating income increased 27%.
Our Phoenix market has now grown to over 10% of our revenue in this segment in less than nine months.
When combined with our infrastructure and building solutions segments contributed 89% of our segment operating income in the quarter.
In transportation solutions, our focus on bottom line improvements versus top line growth and migration away from low bid heavy highway projects continues to pay off.
In the quarter versus prior year, our operating income was up 38% while revenue was up 9%.
These improvements in all three segments combined.
<unk> delivered another outstanding quarter.
For the quarter versus prior year, our revenue was up 30%.
Net income was up 24%.
And I'm sorry, our operating income was up 24% and our net income was up 82%.
Versus year end 2021, our combined backlog grew to over $1 $6 billion and our cash balance ended at just over $80 million.
These great results are a direct tribute to the power of linking a customer centric entrepreneurial culture with our strategic focus on improving margins, reducing risk and building a platform for future growth with that I'd like to turn it over to Ron to give you more details on the financing.
Right.
Thanks, Joe and good morning.
I am pleased to discuss our strong financial start of 2022 and another record first quarter performance.
Our updated Investor Relations Slide presentation has been posted to our website and includes additional financial details to help further understand our first quarter 2022 financial results.
The presentation also provides additional modern modeling considerations, which underpin our 2022 revenue and earnings guidance.
As you May recall, we closed on a pillow acquisition on December 30, <unk> 2021, resulting with the full inclusion of the <unk> financial results in the first quarter.
Let me take you through our financial highlights starting with our backlog metrics.
At March 31, 2022, our backlog totaled $1 billion $527000 up $34 million from the beginning of the year.
The gross margin in this backlog was 12, 8% a 60 basis point increase over the beginning of the year.
A higher proportion of infrastructure solutions backlog drove this margin improvement.
Unsigned low bid awards at the end of the first quarter of 2022 or $142 million, an increase from 100 from approximately $20 million at the end of last year.
We finished the current quarter with combined backlog of $1 billion $669000, a 10% increase over the end of 2021.
Our gross profit in combined backlog was a record 12, 6% compared to 12, 2% at the beginning of the quarter.
Our current quarter book to burn ratios were 1.0 times for backlog and 1.43 times combined backlog.
Revenue for the current quarter of 2000 $20 million to $410 million up $95 million or 30% over the first quarter of 2021.
Importantly.
Of this 30% first quarter revenue growth half of the revenue growth was driven by the late 2021 acquisition.
Hello.
Half from organic Sterling.
And it's a mix right.
Our segments reported strong first quarter.
Organic revenue growth.
26% from the infrastructure.
13% from building solutions, and 9% organic growth from transportation.
Bush.
The current quarter, he infrastructure organic growth of $25 million over the prior year quarter reflects the continuing strong demand for distribution centers data centers and warehouse within our east coast footprint.
Billing solutions revenues grew 13% over 2021 compared to compared.
Compared to 'twenty, one financial quarter.
Reflecting continued residential growth in our core Dallas Fort market Fort worth market.
Our expanding footprints in Phoenix and Houston.
In the current quarter, Phoenix, and Houston accounted for 18% of our residential revenues compared to 7% in the prior year quarter.
Transportation solutions revenue was $160 million in the current quarter, an increase of nine 1% over the prior period.
The increased transportation revenues were primarily driven by higher heavy highway and water containment and treatment work, partially offset by lower aviation revenues.
The heavy highway revenue growth was primarily due to increased construction activities on our large design build projects.
Consolidated gross profit was $56 million, an increase of $11 $1 billion over the prior year quarter.
Consolidated gross margin declined from the comparable 21 quarter by 40 basis points to 13, 9% in the current quarter.
This decline resulted from continuing supply chain and inflationary pressures, primarily impacting our infrastructure and building solutions segments.
These challenges make our year over year margin comparisons difficult as ever.
There was minimal impact of the supply chain and inflationary challenges in the first quarter of 2021.
General and administrative expenses increased $6 million in the current quarter to $23 $1 million.
Over half of this increase is attributable to the pillow acquisition.
We continue to expect our full year G&A expense to be approximately 5% of revenues.
Yeah.
Operating income for the third for the first quarter was $28 $3 million, an increase from $22 $8 million in prior year quarter.
Current quarter operating margin was six 9% compared to seven 2% in prior year quarter.
The decline was primarily the results of my aforementioned supply chain chain and inflation aerie challenges.
We can put pressure on our margins since Q2 of 2021.
And in the current quarter, one of our 50% owned entities received final notice that its PPG had been forgiven.
So a portion of the separate <unk> debt forgiveness was $2 4 million and this gain is included in income in the first quarter.
The current quarter effective income tax rate was 25, 3% a decline from 29% in the prior year quarter.
This effective tax rate declined principally reflects the benefit of the $2 4 million non taxable gain from the forgiveness of our last outstanding PPP well.
Okay.
We continue to expect our full year effective tax rate to be 28% to 29% are.
Our full year non cash portion of our effective tax rate will continue to be approximately 24% of pretax income.
Okay.
The net effect of all these items resulted in a first quarter record net income.
$19 3 million or <unk> 64 per share.
The prior year quarter, net income and EPS were $10 6 million.
And 37 per share respectively.
Our first quarter EBITDA totaled $39 8 million, an increase of 33% over the prior year quarter of $29 $9 million.
As a percent of revenues EBITDA improved to nine 7% of revenues for the quarter.
Up from nine 5% for the prior year period.
Cash flow generation from operating activity in the quarter was $19 $2 million compared to $38 1 million can the comparable 2021 quarter.
The fluctuation principally reflects our first quarter seasonality and mix.
And the mix in our contracts included in backlog.
Additionally, the current quarter included approximately $4 million of cash outflows relating to the payment of the pillow acquisition related costs in 2022.
We continue to expect our full year cash flow from operations to approximate our income from operations for the year.
Yeah.
Our first quarter capital expenditures net of disposal proceeds totaled 100, coupled totaled $14 6 million compared to $11 million in 2021.
This increase reflects our strong infrastructure solutions activities, including the impact of the <unk> acquisition.
Our full year 2022 anticipated net capex continues to be in the $50 million to $55 million range.
Now I'll turn it back to Joe.
Thanks Rod.
Now I'd like to take a few minutes to talk about our markets and our full year outlook.
Starting with the infrastructure.
Demand throughout the east coast remains extremely strong.
We continue to be very selective on the projects. We are taking to ensure we can continue to service our core customers and their demand for.
Our ability to increase capacity significantly still remains limited due to equipment and material availability.
At this time, we do not see either of these getting better in 2022.
As an example, the current lead times for new equipment is now averaging nine to 12 months.
And our building solutions segment.
Our three markets, which are currently top three markets in the U S remain extremely strong. However, this strength is leading to even further supply chain issues and inflation.
In the quarter, we began seeing companies put on allocation in several markets for concrete visa.
These allocations are driven by a lack of cement powder availability.
And are projected to remain an issue through the second quarter.
In addition, we continue to see price increases on all of our materials, but have been successful passing those on more quickly than in the past.
We saw the benefit of this in the first quarter as our operating income increased over 100 basis points from last year's first quarter.
Our transportation segment is our only segment seeing slight headwinds from the market.
At this time only a small amount of funding from the new infrastructure Bill has made it through to the bid phase of new projects.
Historically it has taken 24 to 30 months for us to see any significant impact of new funded.
This is not a surprise and is how we planned and forecasted this piece of our business.
What is more challenging is the disconnect between our customers estimates of project cost or what we call engineers estimates and actual cost.
Because of our customers estimates were developed several months or sometimes several quarters before the bid process.
They are outdated material and labor costs.
As a result, we won but were not awarded almost $300 million of revenue in the first quarter that was 30% to 60% over the engineers estimates these.
These jobs will now go back to be re estimated using current material and labor prices and then re bid.
Even with the significant challenges each of our businesses is facing.
Our strong backlog position, coupled with the great start to the new year enables us to remain confident in our ability to maintain our full year guidance, our full year revenue guidance of $1 eight to five the one $875 billion.
And an EPS range of $2 69.
To do dollars 88.
With that I'd like to turn it over for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment, please while we poll for questions.
Our first question comes from Sean Eastman with Keybanc capital markets. Please proceed with your question.
Hi, Joe and Ron Thanks for taking my question.
Great great start to the year here guys.
Joe I, just wanted to expand on the supply chain.
<unk> update here I think the original guidance framework sort of contemplated a status quo type of.
Supply chain backdrop over the course of the year.
I'm just wondering.
Has that gotten worse and you've been able to overcome it.
In some way how would you frame how would you frame that there Joe.
So if I look at the supply chain itself.
It continues to get worse, it's not getting better between availability and pricing.
The good news is when we looked at kind of third quarter fourth quarter trends in fourth quarter coming into first quarter. We're not seeing further margin erosion that theres, a little bit of confusion because the first quarter last year, we didn't see inflation, but what we've been watching is are we seeing any further erosion as a matter of fact in our residential business.
We've actually clawed back a nice amount of some of the inflation.
Part of that is.
Once they started hitting us we got caught in that cycle, where we had projects that were already bid we didn't have enough inflation built into them, we always put some sort of.
Hedge for material to go up but we never expected some of the increases we saw last year. So we've corrected that process.
In addition in our infrastructure business, we've done things with that with fuel indexing and our contract. So we give a price at the beginning of the contract that goes up the customer pays us if it goes down we'll give money back to the customer.
To offset those so.
Well I'd say, it's still very volatile still going up but our guys have done an outstanding job of sending it off and we feel good about the margins and if it continues at this pace.
You'd see no or very little.
Incremental erosion, Yeah, let me help you a couple of oregon's than apples.
So from our operating return on our segments.
Patillo together with all of our billing solutions group.
Flat from the fourth quarter.
In other words, we didn't see further decline in the margins.
B B.
<unk> the story is the acquisition.
Which performed a little bit better than we thought they would.
Out of the gate.
But you have to remember that the two things with Tullow is in the far northeast It snows and it's got nasty weather up there in the first quarter. So from a revenue pacing side approximately 20% of the revenue falls in the first quarter.
25, or so in the second quarter, and then 30% in the balance of the year.
Good luck.
Back half of the year.
So that's pretty important.
Or is that lower volume impacts margins and the other one just direct refresh your memory as a pillow margin characteristics are different than plateau.
Because of the type of work they add on to some other large.
Moving.
Okay.
Largely 40 basis points.
Oh, Im sorry, four percentage points.
Difference between full run rate by Covid full run rate.
Hello.
That was that's already been out in the public entity would audited financial statements and pro forma so we built that we built it in all the plants. So I think that's one of the challenges that we had.
<unk> been there.
Because we got basically minimal impact in the first quarter of last year and we're doing those comparisons.
It's salary inflation.
But also.
The addition of the total.
Which we're still very excited.
Yes, yes.
It starts to come into my next question you know it looks like the 14, 5% gross margin guidance is maintained.
And so you guys are still confident you can get that 70 basis points of expansion, even though you started the year down 60 basis points in <unk>.
And that's largely a comps thing it sounds like.
Yeah, I think there is.
Yes. The two main elements of that are you had a little bit of a comp.
Differential in the first quarter you got the seasonality.
<unk>.
All of business in the first quarter.
But they come back strong and their margins really improve over the next three.
And.
Between their backlog activity in their run activity, we we don't have any concerns.
Even without the turo don't forget our seasonally slowest quarter is the first always is the first quarter.
Same store sales across the board so yes.
We are commenting on.
Having confidence that will remain in that four to five or 14, 5% bandwidth.
Yep.
Okay, and then last one from me is it fair to say that you guys are tracking ahead of budget on revenue here in the first quarter. This this run rate seems to leave some room for upside on the on the full year range is my sense.
I'm I'm missing something there.
Here's what I would say.
We're we're kind of sticking with the guidance that kind of we are sticking with the guidance today.
Yeah.
We're still early in the year Sean.
You know there's still so many moving parts out there with the supply chain piece of it that way.
Everybody wants to understand is there a margin erosion I feel pretty good about that is is availability and knock on wood, we fought our way through but availability does not seem to be getting any better on these materials in and as you can imagine if projects later in the year.
Can't get raw materials do they continue to startup or did they delay them a month or a quarter.
Still the wildcard we got out there frankly, so we feel good with the backlog we have we feel good with the tailwind of the markets.
We just have that one variable of the headwind on the supply chain side.
We just we can't control and we don't know at this point in time, so we've been getting over our skis. If we are weathering any further than the guidance I think.
Yes, I think that's totally fair and and insightful. Thanks, a lot guys I'll turn it over.
Sure. Thanks, John I appreciate it.
Okay.
Our next question comes from Brent Thielman with D. A Davidson. Please proceed with your question.
Hey, Thanks, Good morning, Joe Ron Congrats great quarter.
Thanks Catherine.
I guess first question just on building solutions, Joe you talked about some of these allocation issues.
For concrete does that cause some near term deceleration on the top line in this segment.
No no.
The good news is we saw they started hitting in the in the quarter were fight through them.
If anything it's a I think our growth in the Phoenix market.
Would be even bigger than that it has been we've been really happy with the team and their performance and now that's up you know.
10% or so over our total volume.
I think it would be even higher.
If we didn't see some of the allocations and shortages on the materials side. So we've got it all baked in.
It's just it's kind of get the reins on us a little bit here.
As we speak.
Okay and it sounds like the Phoenix market is now bigger than the Houston market for you.
Maybe that's just a function of the demand environment, but maybe maybe you could talk a little bit about bad things to grow the business in Houston.
So the Houston market is still obviously, a great market and sponsored between wanted to seemed one quarter Houston's one next quarter Dallas is one.
The fundamental difference between the two markets as you do have two fairly sizable players in the Houston market.
So we're doing business for one or two builders in the top one or two small builders.
Very limited.
Very hard to get labor, Okay. So we're able to grow in Houston as labor is more of a limiting factor in the Houston market.
Phoenix.
Small players not a lot of large players.
And.
A combination of the market the pricing in the market our.
Labor is are still the significant issue down there as well, but that market seems to be.
<unk>.
An easier opportunity for us to get faster traction.
With not only our core customers with the potential customers as we go forward. So we from a strategic standpoint.
We're spending more and more time on what we might be able to do to even enhance the growth rates in the Phoenix market.
And certainly the youth usage revenue increase.
Pretty steadily in 2022 here, but.
But not at the pace that obviously.
Going from nothing to something in Arizona.
A lot.
As part of that math.
I'd say thats, probably the right way to look at it as Houston's on.
Par with what we anticipated Phoenix is greatly exceeding our expectations on how fast and how rapidly.
Yeah.
Okay, and then on the cash flow side in the first quarter of last year was really really good obviously not as strong in this first quarter of this year, maybe Ron just the moving pieces the cash flow side here in the first quarter is that.
Functions in the supply chain issues or maybe just talk to that.
No I think it's consistent with what we thought it would be.
So the difference year over year as several.
Of our large.
Design build projects were getting off the ground and.
And ramping up to first quarter of last year generally that's good for cash flow.
We're getting.
Money into.
T mobile is an early payment payments theyre not huge but at the same time, we're not spending a lot of money.
Getting there so that levels off and we're seeing it level off so we've always thought that even through the bidding in the last year that our best metric around cash flow from ops.
Challenging one.
Various variables in there would be a product would approximate our operating cash I'm sorry operating income from operations for the year, which is give or take $150 million. So.
We're continuing to kind of stay in that bandwidth.
Expectations.
Okay.
And then just coming back to sean's questions on the infrastructure segment, I guess I just wanted to kind of recap what I think you've said in that.
It sounds like first quarter sort of a low point for margins you should get some benefit of leverage as you get into seasonally stronger quarters here kind of Q2 Q3, such that we should see.
And some decent improvement in margins in that segment over the next couple of quarters is that is that fair.
Yeah, we.
The margins in the first quarter are not eroded because there's a margin issue or a pricing issue or anything like that its seasonality driven.
Yes.
Gotcha, Okay. Thanks, Pat.
We will continue with a flat.
Impact of.
I'd like to go away, but our challenges.
Our pricing net of inflation and supply chain. So we haven't built in not to recover too.
Two quickly.
Because we just don't see any recovery in 2022, and our short range Crystal ball.
One of the challenges that Sean you, Bryan and Sean both have as that.
And everybody is going to have as we haven't gone through a full year with the pillow and the in the mix yet so.
Challenging we know kind of that ramp up rates and the quarterly rates and everything and I think that will become very apparent because we get through the year for everybody and it'll be very consistent as we go into next year as well.
Okay very good thanks for taking the questions guys.
Sure.
Ladies and gentlemen, we have reached the end of our question and answer session and I would now like to turn the call.
Mr Tetlow for closing remarks.
Thanks Maria.
And thank you everyone.
I'd like to take a minute.
Two.
Reflect back on the quarter and wasn't outstanding job all the teams have done some very very challenging times.
If you have 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.
Our partners at the equity group I Hope everyone's had a great day has a great day and I. Thank you again for your for your time this morning.
Thanks, everybody.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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