Q2 2022 Sterling Infrastructure Inc Earnings Call
Greetings and welcome to the Sterling infrastructure second 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 the Companys website before turning the call over to Joe Cutillo, Sterling's Chief Executive Officer, I will read the Safe Harbor statement.
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 risks risk factors that could affect these projections and assumptions.
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 as required by SEC rules and.
These non-GAAP financial measures are reconciled to their most comparable GAAP measures financial measures in our earnings release issued yesterday afternoon, I will now turn the call over to Mr. Joe Cutillo. Thank you Sir Please go ahead.
Thanks Donna.
Good morning, everyone and thank you for joining Sterling's second quarter 2022 earnings call.
I would like to start off by thanking all of our employees for delivering another record quarter the Sterling way.
And enabling us to increase our full year earnings forecast in some very challenging times.
The Sterling way is what defines our culture. It is in understanding the great results to our shareholders are critical let alone not enough.
It is our responsibility to continuously look for better ways to protect our people our environments and give back to our communities.
It is this culture. These values that have enabled us to deliver multiple quarters of record results.
This morning, I will cover the highlights of our second quarter and the strategic progress we have made.
Then I will turn it over to Ron for his financial commentary and.
And I will finish with our market and full year outlook.
Let's start off with our more most important asset our people.
In the quarter, we had zero lost time incidents our continued focus on the wellbeing of our employees helps us ensure our colleagues go home safe every evening and makes us an industry leader in safety.
Shifting to the strategic fronts in each one of our segments.
This strategy and objectives, we established six years ago remain the same and are focused on improving margins and reducing risk while building a platform for future accretive growth.
This strategy continues to pay off as we have transformed the company into three different segments and it will continue to pay off long into the future.
Our infrastructure segment has become both our highest revenue and highest margin segment.
In the quarter revenues were up 89% versus Q2 prior year and now represent 46% of our total revenue and 69% of our total segment operating income.
The recent acquisition of Petillo has only made this segment's stronger and added to our opportunities.
Our second highest margin segment building solutions continue to see strong growth as its revenue grew 15% versus prior year second quarter and its segment operating income grew 44%.
Building solutions now represent 70 per 17% of our total revenue and 20% of our operating income.
We saw significant growth in our expansion markets and combined now represent 18% of our residential revenue up from 6% in the second quarter 2021.
Our transportation solutions business reduced in size in the quarter versus prior year by approximately 6%, but delivered more earnings as our segment operating income improved six 5%.
Our continued shift away from low bid to alternative delivery Highway aviation and rail projects continues to pay off.
Our transportation segment now represents 37% of our revenues.
And 11% of our segment operating income.
All three segments delivered improved year over year operating income along with various other great results.
For the quarter versus prior year, our revenue was up 27% or.
Our segment operating income was up 31% and our net income was up 29%.
We grew our combined backlog to $1 73 billion up 14% versus year end 2021.
And delivered <unk> 86 per share to our shareholders.
The continued strong performance in the quarter and the year to date has enabled us to increase our full year net income guidance from a range of 83 million to $89 million.
To a range of $90 million to $96 million.
With that I'll turn it over to Ron.
Talk about our financials in more detail Rob.
Thank you Joe and good morning.
I am pleased to discuss our strong 2022 second quarter results and record quarterly performance.
Our updated Investor Relations Slide presentation has been posted to our website and includes additional financial detail details to help further understand our second quarter results.
The presentation also provides additional modeling considerations, which underpin our 2022 revenue and earnings guidance.
As you May recall, we closed <unk> acquisition on December 30, <unk> 2021, resulting in the inclusion of <unk>.
<unk> financial results for all of 2022.
Let me take you through our financial highlights starting with our backlog metrics.
At June 32022, our backlog totaled 1 billion $544000.
$51 million or at the beginning of the year.
Our gross margin of this backlog was 12, 6% a 40 basis point increase over the <unk>.
A higher proportion of our Eas.
Structure solutions backlog drove this margin.
Unsigned low bid awards at the end of the second quarter totaled $184 million, an increase from $23 million at the end of 2021.
We finished the current quarter with record combined backlog of $1 billion $727 million.
A 14% increase over the end of 2021.
Our gross profit in combined backlog was 12, 5% compared to 12, 2% at the beginning of the year.
Our current quarter book to Bill ratios were 1.06 times for backlog and $1 two six times for combined backlog.
Revenue for the current quarter of 2022.
Totalled $511 million up $109 million or 27% over the prior year quarter.
Yeah.
Importantly, at this 0.7% second quarter revenue growth $76 million or 19% of the revenue growth was driven by the late 2021 acquisition of the Tullow.
With a balanced up 8% organically organic revenue growth coming from Sterling.
Including the <unk> results on a pro forma consolidated basis Sterling as organic revenue growth in the second quarter was 12% and it was 15% in the first half of 2022.
The current quarter <unk> infrastructure solutions organic growth of $34 million over the prior year quarter reflects the continued strong demand for distribution centers data centers and warehouses across our east coast footprint.
Okay.
Building solutions revenue grew 15% over the comparable 21 quarter, reflecting continued residential revenue growth in our core Dallas Fort worth market.
And in our expanding footprints in Phoenix and Houston.
In the current quarter, Phoenix, and Houston accounted for 18% of our residential revenues compared to 6% in the comparable 21 quarter.
Transportation solutions revenue was $191 million in the current quarter, a decrease of $11 million or 6% over the comparable year period.
The decrease was primarily driven by lower aviation and consistent with our strategic intent declining low bid heavy highway work.
These declines were partially offset by increased water projects and higher alternative delivery revenues.
We have increased our 2022 revenue guidance range to 1865 to $1 $85 billion from our previous range of $1 825 to 175 billion.
Additionally, we increased our EPS guidance to a range of $2 95 to $3 15.
From our initial 'twenty two guidance range of $2 69 to.
$2 88.
Our current gross profit was $68 million, a decrease of $12 million over the 21 quarter.
Second quarter 2022, gross margin declined 60 basis points to 13, 4% from the prior year quarter.
This margin decline resulted from continuing supply chain challenges and inflationary pressures.
Primarily impacts our infrastructure and building solutions segments.
These challenges principally began again in the second quarter of 2021 and have continued to date.
Yes.
General and administrative expenses increased $7 $6 million in the current quarter to $23 4 million.
Over a third of this increase is attributable to the Zillow acquisition.
We continue to expect our full year G&A expense to be approximately 5% of revenues.
Operating income for the current quarter was $41 million, an increase of $32 7 million for the 'twenty one quarter.
Yes.
Our current quarter operating margin was 8% compared to eight 1% in the prior year quarter.
Klein is primarily as a result of the aforementioned supply chain and inflationary challenges, which continues to put pressure on our margins.
Our current quarter effective income tax rate was 28%, which is consistent with our expectations for the full year.
Okay.
The net of all these items resulted in record second quarter net income of $26 million or <unk> 86 per share.
The prior year quarter, net income and EPS were $21 million 69 per share respectively.
Our second quarter EBITDA totaled $54 3 million, an increase of 33% over the prior year quarter of $41 million.
As a percent of revenues EBITDA improved 10 six.
To 10, 6% of revenues for the quarter up from 10, 2% in the prior year quarter and up from nine 7% in the first quarter of 2022.
We've increased our 2022 EBITDA guidance to a range of $192 million to $202 million from our prior guidance range of $185 million to $200 million.
Yes.
Okay.
Cash generated from operations for the first half of 2022 was $34 6 million compared to 91 $6 million in the comparable period.
The fluctuation principally reflects the very strong 2021 cash flow driven by the ramp up of several new large alternative delivery projects, which will be awarded.
Began working in the first half of 2021.
And the significant 2022 organic revenue growth from our two fastest growing segments infrastructure.
<unk>.
These two segments combined pro forma 2022 organic revenue growth growth was 26% in the second quarter and 27% for the first half of 2020.
First half cash flow from investing activities included $28 million of net capex and a $3 million payment of the final working capital adjustment for the <unk> acquisition.
The Capex increase reflects the increased infrastructure solutions activities, including the impact of the pillow acquisition.
Our full year 2022 anticipated net capex continues to be in the 50 to 50 million $55 million range.
Finally, we repaid debt of $11 $8 million in the first half of 2022.
Now I'll turn the call back over to Joe.
Thanks Raj.
Now I'd like to take a few minutes and talk about our markets and the outlook for the rest of the year.
Like most businesses, we continue to battle additional inflation.
Supply chain shortages and now interest rate hikes.
Our teams are doing an outstanding job combating these challenges but.
But we believe they will continue through the rest of 2022.
The one blemish, we had in the quarter was a decline in our gross margin by 60 basis points.
This was directly driven by material inflation and material availability.
As an example.
Our infrastructure segment alone saw an impact of over $5 million related to diesel price increases in the quarter.
Fortunately.
Were able to overcome these challenges by levering, our strong markets and increasing our revenue.
As we look at each segment.
Our infrastructure segment continues to see strong demand in ecommerce and data center activity.
In addition, we continue to see more industrial and manufacturing opportunities in the design phase they could produce very nice future opportunities for us.
These activities coupled with our current backlog gives us a high level of confidence in what this segment will deliver in the second half of 2022.
Our building solutions segment saw strong demand in all of its markets in the quarter. However, we.
We did begin to see some lumpiness in starts late in the quarter in Dallas.
For the back half of the year, we have planned for a slowdown in our Dallas market, yet anticipates continued growth in both our Houston and Phoenix areas.
Through our core Cup, though our core customers remain cautious.
We have not seen the major builders make any significant concessions to entice new sales yet.
I believe the latest round of interest rate hikes may cause some of this to happen in the back half of the year.
In our transportation segment, we saw bid activity pick up significantly in the back half of the quarter and have begun to see some of the benefits of the federal infrastructure Bill.
A record multiyear backlog combined with the recent bid activity positions us very well for the rest of this year and the foreseeable future.
In light of our first half performance, our increased backlog levels and the outstanding execution of our teams.
Our raise in full year guidance represents a 48% improvement in net income.
A 42% improvement in EPS.
In the 19% increase in revenue over last year's performance.
This is truly an amazing accomplishment and these turbulent times with that I'd like to turn it over for questions.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to move your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star.
Keith.
Once again that is star one to register a question at this time.
Our first question today is coming from Brent Thielman of D. A Davidson. Please go ahead.
Great. Thank you excuse me good morning.
Thank you Greg.
Julia Ryan.
The residential portion that building solutions.
Maybe a more conservative view.
The Dallas market, but you've got.
It sounds like pretty good growth in some of the other markets. Maybe you could just refine but sort of growth expectations you have in the second half for that piece of the business.
And again, well, let me, let me talk high level about the market and then Rod can give you more specifics on the numbers.
Yes, a couple a couple of drivers to our logic, Brad first of all if you take the Dallas market.
<unk> got a relatively high market share certainly compared to the Houston and Phoenix market.
So we have the.
This level of border ability, if a slowdown occurs will hit us more in the Dallas market and.
In the Houston, and Phoenix markets, because we have those.
Growing rapidly in both of them.
Because we have such a low market share.
Any decrease in the overall market is highly unlikely to significantly impact us and hopefully will bring some labor and material availability.
Make it better for us so that we can actually pick up incremental revenue from our existing builders that would like us to do more today. So that small market share gives us a heck of a lot of room to continue to grow those.
And not only in the second half, but as we go into next year as well do you want to add any color to the number.
I think the.
Each of those regions experienced some strong growth in the quarter.
It's hard to predict.
It's become a little bit.
Bumpy.
In the Dallas Fort worth area, we will have.
A lot of action and then a little bit slow down in a lot of action. So we still expect it to have some growth in the back half and certainly continue to growth.
Accelerated growth.
Smaller markets, however, getting to 18% of revenue coming from from those tripled in the year.
At 12 months, so thats, a pretty big boost for us and we think that will continue for that yes. We think the trends will continue like they are.
If you remember back Bret our strategy all along has not only been for growth, but to position ourselves and some of these top markets with our top customers that want a slowdown occurred.
Whether the market share growth and opportunity in those markets to offset the decline that we knew inevitably happen with our market share.
Got it I appreciate that.
On infrastructure, maybe you guys could just address kind of the concerns out there that maybe Amazon is slowing the pace of build out.
What youre seeing in there.
Those concerns really for the business.
So I think look Amazon had a tremendous amount of build in the pandemic.
There's a couple elements so that I think maybe a little confusing to people.
<unk>.
First of all Amazon leased bought a combination of things almost every speculative warehouse that was on the market certainly through the southeast where we're located at the time and we saw similar things after purchasing the pillow.
So one of the things we're doing is everybody talks about them.
Leasing <unk>.
<unk> their intention all along was to move out of those properties into their Mega centers are the more efficient centers and we continue to see that as those centers that build out.
In the northeast.
Continue to run hard and we really haven't seen.
Much of an issue.
We have seen some projects in the southeast that were on the drawing board.
Or.
Next year that looked like they are getting delayed or pushed and we don't have.
Call it great details on whats going to happen with that.
But on the opposite end of that we continue to see other retailers.
That are behind the Amazons of the world.
<unk> to build out their infrastructure strategies.
And.
We may have said this in the past, but our biggest project.
This year.
Is not going to be in Amazon.
And our biggest project last year wasn't been Amazon It was a wide distribution center.
There is other there is a lot of other e-commerce activity. That's going on in addition, we are definitely seeing more and more activity in the early phases and some of it actually in the later phases in the manufacturing and industrial World, whether that's just basic warehousing for working process goods.
Finished goods, but there are several new manufacturing facilities.
That are being built in the U S that are very sizable.
And up in the northeast I.
I'll tell you, we if anything that market.
Especially on the industrial side continues to ramp up real time, where the southeast we're seeing those projects in the design stage and coming out later this year.
Really helpful. Joe.
And maybe just lastly, some of the big challenges around inflation.
Material availability I assume that compensated sort of concrete.
<unk> yeah there.
Got it great.
Yes.
Concrete is probably the.
One of the biggest ones.
Impacts all of our all of our businesses. Each one of those segments has some unique nuances for particular products in particular markets, but right now concrete is on allocation across the U S not only to us too to everybody.
And it's on.
On top of it.
Part of another increase.
In September end of August beginning of September .
So it continues to hamper impact.
And put tremendous pressure not only on the pricing.
Associated with it.
But the productivity that you'll lose and Thats really when you look at the quarter, a 600 basis for at 60 basis points that we lost.
We went back and we started looking at it more detail.
We were pleasantly surprised that our teams were able to hold on and only lose 60 basis points with some of the huge inflation that we saw and we saw fuel go through the roof in the quarter.
East Coast.
Not only will repay in Boston, two bucks a gallon more than that.
What we thought was going to be the peak.
We had availability issues for for several weeks, where we were struggling to even get fuel and were actually transporting it multiple states.
With our own trucks sure with that with higher trucks, just to get fuel to our job site. So it was it was impactful that's the bad news. The good news is it's in our numbers.
And we had a we had a great quarter and without it we would have had I mean, just a monumental quarter frankly.
Yes, Joe I guess the question I had is those issues become more pronounced.
This quarter, where you're just trying to factor in.
Conservatism around the guidance with respect to <unk>.
Off the body these issues could get worse.
No I think.
They certainly got worse for us in the second quarter I think concrete we will continue to get worse in the third quarter.
There's conversations that multiple furnaces for the issue on concrete cement powder.
There's multiple furnaces that are supposed to come back online around September if they come back online that could start to alleviate a little bit of the pressure on the total concrete.
But I think it will continue in the third quarter, hopefully the fourth quarter, what I call levels out I don't think we're going to go backwards.
We will still have that in things like pike, whether its PVC or ductile.
Those things are still 8% to 12 months out and depending on the market and the type.
We don't see that changing but our teams have adapted better.
To to predict that a little better in the projects still a productivity hit for us, but they've gotten better at it accommodating that as we go forward. We've seen lumber we don't use a lot of lumber come down a little bit which is nice.
And I think as we get into the third and fourth quarter.
I think we should see a little bit of.
Give back or positive on the field as we've seen just even over the last couple of weeks. So we will pick up a little bit of benefit from that.
Okay.
Okay I appreciate it Joe I'll I'll pass it on.
Thanks Brent.
Thank you. The next question is coming from Sean Eastman of Keybanc. Please go ahead.
Good morning. This is Alex on for Sean Thanks for taking my questions.
Yes.
Hey.
Can you talk about your infrastructure margins into the second half I guess the margin compression in the first half makes sense given <unk> in the mix and supply chain wasn't as challenging back then.
But the comps in the second half get easier. So is there any reason, we shouldnt expect margin improvement into the back half of the year.
Yeah.
Yes, I'll, let we've got a combination of inflation and a little bit of seasonality in the first half of the year, Ron you want to give.
Some color and details on the on the margin, yes, I think as we talked about in the first quarter.
Comparing the addition of per kilo.
When you Peel, the onion, a little bit you'll see that the the.
The margins for doing like work between until OEM plateau are very similar.
But until there's a little bit more work that has lower margin type work, primarily as a result of request from their customers to do that so the underlying that's a couple a couple of percentage points impact if you will of IP and compare it to.
The 'twenty one period.
And that will continue.
What just the way that business works up there and I think likely the union workforce.
Results in some of that work being pulled in by our clients requesting of Stifel.
I think the rest of it.
Really productivity in the Big number of addition to the fuel side. The second one just the productivity of these long lead times shortages, where we have to go.
So the company has to go back and redo if you will some work at retrench or otherwise and that requires it splits sufficient it takes time to leave equipment.
We are required to be there longer et cetera. So.
I don't know that that will improve in the back half dramatically until the supply chain.
Pressures ease off a little bit and we really haven't seen those in that business yet this year.
Thanks for that and it's interesting to see the activity pick up around the infrastructure package.
Can you talk a little bit about when we could start to see new awards at the backlog and maybe revenues and secondly can you just refresh us on how you plan to balance the revenue growth in the transportation solutions segments against margin improvement.
Yes strategy would be yes.
Yes sure so.
The good news is you know.
<unk> saw a combination of things are starting to see some money flow and we also see the states running up against there.
Their annual.
They go into their new fiscal year shortly.
So bid activity has picked up.
The reality is we will see virtually none of that hit this.
This particular year it might be a little bit, but it's not going to be measurable shot.
Revenues from a revenue standpoint, well see its backlog.
All of that is really where.
We're booking for next year.
Lynn.
The vast majority of this stuff will start first or second quarter next year, depending on the particular project.
And activity as we go forward.
Our strategy remains exactly the same which is we.
We would anticipate.
Slow growth in the transportation.
And continue to drive higher margins.
I will tell you it if the market.
Becomes.
Yeah.
Has better pricing and we see a 12% or better margins than projects.
We would be willing to grow that at a faster rate than the 3% to 5% we have in the past, but our plan right. Now is that that still grows is that 3% to 5% and I'd rather try to pick up another point or two of margin before we would start going aggressively after any further growth outside of those ranges.
Got it and then the last question from me is on the operating cash flow.
It seems like you guys will come in lower than the operating profit target. This year and then the normalized target.
Can you just talk about why this is coming in softer than expected and do you think you guys can return to a more normalized conversion rate next year.
Okay.
Sure I think it's.
It's a story of 2021 really.
Our cash flow from operations exceeded our operating income and you can do that once you've probably do it twice, but you can't do it every year just doesn't work that way and that was primarily driven if you recall, we booked almost right around $700 million.
Large projects in the first quarter of 2021.
And we have been working on all those and some of them been.
Unsigned for about a year, but we have been working on all of those so they were ready to go by the time, we got them into backlog. So we ramped up those four big jobs in the first half and continued through the year to kind of get to the <unk> by the end of the year.
The cash flow cycle favors those new new startups.
Whether its mobilization or just.
Getting funds to Florida material brand subcontractor et cetera, So that was the largest factor.
The other one has been.
And impact the cash cycle for our E. Commerce business is our infrastructure business sorry is longer.
And with 20% to 30% organic growth year over year.
That has a working capital impact so the majority of the Delta if you if you are.
Crystal ball and our guidance or at least our modeling would say, we're expecting cash flow from operations of around $100 million. This year.
And when you cut through the Delta between two years to two years about half of that Delta is a little over half or 60% is that the impact of those new projects ramping up throughout 2021 and the other half is just.
The higher growth in working capital demands of.
Infrastructure segment with the.
20% to 30% growth each quarter.
Makes complete sense. Thanks, so much.
Hi, Chuck.
Thank you. The next question is coming from Brian Russo with Sidoti. Please go ahead.
Yes, hi, good morning, guys. Thanks for taking my questions just a follow up on the transportation segment and your comments earlier that you're starting to see activity pick up around the infrastructure build.
Could you share with us maybe what regions of the country you are seeing that activity or the types of projects you think will get funded first.
And then so.
Your expectations for the competitive bidding for those projects.
Yes, so the.
The three areas, we saw the largest pickup in activities at our Rocky Mountain region.
So through the through the Rocky Mountains, we saw a big pickup in Nevada.
Also saw a big pickup in Texas now the competitive landscape on each one of those is very different in.
In Texas, we will take less advantage of that as we continue to move.
Away from the low bid heavy highway segment, the majority of Texas fits our low bid at this point in time, So we'll see less impact.
The Rocky Mountain states that tends to be more of alternative delivery, which is what we like to do.
These are board design build or value added projects and the competitive landscape of those because it starts with qualifications.
<unk> is different.
And that is broad, whereas in Texas, it's not uncommon for us to see 10 or 12 people bidding a job.
And in alternative delivery, you will usually have two or three teams.
The job so a much different dynamic and then in Nevada.
We have.
The thing we don't talk about is we own our own pits.
And do more billing and paving type operations and <unk> worked through the Nevada market.
So we get a competitive advantage on a lot of those jobs, just with the material availability and the logistics of us having those states of material available very closely so.
That's a competitive landscape, but we tend to have for the for the jobs, we're going after a competitive advantage.
Okay, great. Thank you and one more question are you seeing any early signs of.
Manufacturing reassuring.
<unk>.
And what.
End markets might that be occurring and then do you see any impact to your businesses from the chips Act.
Expansion of chip manufacturing.
I would imagine mostly in the Pacific northwest.
Yes.
Harder for us to do stuff in the Pacific Northwest and that really set up there, but we have seen for certainly.
The northeast in the South East.
Multiple manufacturing sites on the drawing boards.
There's a couple of very large projects in the mid Atlantic and southeast.
We are in the early phases.
For onshoring.
And we're also seeing.
Not only manufacturing itself, but.
<unk>.
With the leaning out of the supply chain over the last 20 years.
News as it ran highly effective and highly efficient the bad news is when you have a major hiccup like a pandemic or an entire country taken out of the supply chain cycle shut.
<unk> the whole thing down so we're seeing.
Companies.
Looking at building and putting in more and more warehousing for either work in process inventory.
<unk> finished goods that are keeping that buffer in place.
Great. Thank you very much.
Thank you ladies and gentlemen, this brings us to the end of the question and answer session I would like to turn the floor back over to Mr. Cataldo for closing comments.
Thanks Donna.
I would once again like to thank all our employees for their commitment and dedication without their hard work and perseverance.
Would not be able to continue to deliver the record quarter after quarter results we've delivered.
If after this call you have any follow up questions for wishes schedule a call. Please contact Mary and our Investor Relations group or our partners at the equity group their contact information can be found in the press release.
Thanks, everybody I appreciate it and have a great day. Thank you.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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