Q3 2022 Sterling Infrastructure Inc Earnings Call
Okay.
Greetings and welcome to the Sterling infrastructures third 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 company's website.
Before turning the call over to Joe Cutillo, Sterling's, Chief Executive Officer, I will read the Safe Harbor statement.
So I'm discussions made today may include forward looking statements actual results could differ materially from the statements made today. Please refer to Sterling's. Most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions.
The company assumes no obligation to update forward looking statements as a result of new information future events or otherwise.
Please also note 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 regulations. These non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in their earnings release issued yesterday afternoon, I will now turn the call over to Mr. Joe Cutillo. Thank you Sir Please go ahead.
Thanks, Doug.
Everyone.
Thank you for joining Sterling's third quarter 2022 earnings call.
The third quarter marks the 19th quarter with period over period improvement since 2017.
And the eighth time, we've raised our guidance during that time threat.
This world class level of performance is a tribute to our people our culture and our strategy.
Well, what we refer to as the Sterling way.
It is an honor to be part of a team of 3000 plus colleagues they consistently deliver best in class results, while making sure. We're always taking care of our fellow employees, our customers and our communities.
The Sterling way has not only created an exciting culture for our employees to be part of what has delivered great results to our shareholders.
Before we talk about the results of another outstanding quarter I'd like to spend some time talking about our end markets and what is going on in each of our segments.
Yeah infrastructure, which remains our largest segment.
And represented 46% of our revenue and 66% of our segment operating income in the quarter saw record bookings as data Center distribution center and warehouse demand remains high.
In addition, we began seeing the first wave of onshoring and new manufacturing facility activity take place.
Our recent win of the new 500 acre plus Libyan electric vehicle plant in Georgia.
Yet. Another example of our ability to do large complex jobs and almost any end market.
This new manufacturing activity along with the continued strong demand for data centers and E. Commerce warehouses continues to give us a positive outlook for 2023.
Our transportation solutions segment, which represented 40% of our revenue and.
17% of our segment operating income in the quarter remains extremely strong as we saw activity pick up and margins improve.
Our current backlog has a record margin of over 11%.
Federal funding from the infrastructure Bill continues to flow to the states and the state matching funds remain extremely strong.
The combination of our multiyear backlog, along with improved margins and increased bid activity.
<unk> as well to finish 2022, straws and go into 2023 and <unk>.
I'll like footing.
We continue to be disciplined on the jobs, we select.
And we will continue to focus on driving margin improvements through 2023.
Our building solutions segment, which represented 14% of our revenue and 17% of our segment operating income in the quarter.
A significant softening in the quarter of new housing starts.
Combination of material inflation and interest rate increases has caused the market to become less affordable for buyers.
We believe this trend will continue through the fourth quarter.
We have begun seeing builders become more aggressive on incentive programs to help buyers overcome the affordability issue.
But do not believe we will see any significant impact of these efforts until 2023.
Despite the revenue decrease in the quarter, our operating income remained flat year over year as the revenue drop was offset by price increases.
Overall, we are still facing challenges with the supply chain as we continue to see price increases and availability issues with concrete.
<unk>.
We believe concrete available be accretive availability issue will change significantly in the fourth quarter for the better.
But are uncertain as to how long and how significant the diesel challenges will be.
Now, let's talk about the great results for the quarter.
Revenue versus prior year was up 20%.
This strong growth was driven by our <unk> infrastructure segment revenue was up 111%.
Our gross margin increased 220 basis points to 14, 7% with strong contributions from both transportation and building solutions.
Our net income increased 40%.
Our earnings per share increased 35% and our EBITDA increased 50%.
We generated over $96 million of cash from operations and finished the quarter with $146 million of cash and cash equivalents.
Our combined backlog grew to an all time high of $1 $9 billion.
This is a 25% increase over year end 2021.
This positions us very well for the future.
Our record results in the third quarter, coupled with our stronger than expected outlook for the fourth quarter has enabled us to raise our full year guidance for the second time this year.
The midpoint of our adjusted guidance improves net income 53%.
Our revenue by 21%.
And our EPS by 47% over prior year.
The new revenue guidance is $1 9 billion to $1 92 billion.
With a net income range of $94 million to $98 million.
At an EPS range of $3 eight.
The $3 21.
Now I'd like to turn it over to Ron give you more details on the quarter and our results right.
Thanks, Joe.
Morning.
I am pleased to discuss our strong third quarter results and another record quarterly performance.
Our updated Investor Relations Slide presentation has been posted to our website and includes additional financial details to further understand our third quarter results.
The presentation also provides additional modeling considerations, which underpin our 2022 revenue and earnings guidance.
As you May recall, we closed the <unk> acquisition on December 30, <unk> 2021, resulting with the inclusion of <unk> financial results for all of 2022.
Let me take you through our financial highlights starting with our record backlog metrics.
At September 32022, our backlog totaled $1.665 billion up $172 million over the beginning of the year.
The gross margin of this backlog was 13, 1% a 90 basis point.
Increase over at the beginning of the year.
A higher proportion of <unk> infrastructure backlog and improved transportation backlog drove this margin improvement.
Unsigned low bid awards at the end of the third quarter totaled $235 million, an increase from $23 million at the end of 2021.
Okay.
We finished the current quarter with a record combined backlog of $1.900 billion.
25% increase over the end of 2021.
Our gross profit in combined backlog was 12, 9% compared to 12, 2% at the beginning of the year.
Our current quarter book to burn ratios were 124 times at one point.
For backlog and combined backlog respectively.
Our year to date book to burn ratio for 113 times for backlog and $1 two nine times for combined backlog.
Revenues for the current quarter were $557 million up $93 million or 20% over the prior year quarter.
The current quarter revenues were $256 million an increase.
<unk> over the prior year quarter.
The current quarter increase includes revenues of $84 million from the late 2021 acquisition of the pillow and organic growth coming from plateau up $50 million.
Including the plateau acquisition on a pro forma basis, <unk> infrastructure organic revenue growth was 40% and 36% for the three and nine months ended September 32022, respectively.
The infrastructure organic growth reflects the continuing strong demand for distribution centers data centers.
And warehouses across our expanding footprint.
Building solutions revenues declined by $12 million.
Well period.
This was primarily driven by a decline in housing demand has the ownership became less affordable due to increasing interest rates and inflation.
Transportation revenues were 222000 $21 billion.
Current quarter.
A decrease of $28 8 million or 12% from the prior year comparable quarter.
This decrease was primarily driven by lower heavy highway in aviation revenues due to the timing of backlog execution, and partially offset by increases in water related projects.
Consistent with our strategic intent low bid heavy highway work declined by approximately $10 million in the quarter.
Compared to the prior year.
As a result of this.
Third quarter results, we have increased our 2022 revenue guidance to a range of one nine to $1 9 billion.
Current quarter gross profit was $82 million, an increase of $24 million over the 21 quarter.
Gross margin increased to a record 14, 7% or 220 basis points over the comparable 'twenty one quarter.
This margin increase resulted from an increased mix of revenues from our higher margin infrastructure segment and increased margins from both our transportation.
Segments.
Our gross margin improvements were negatively impacted by the continuing supply challenges and inflationary pressures, which primarily impacts our <unk> infrastructure and building solutions segments.
These challenges principally began in the second quarter of 2021 and have continued to date.
General and administrative expenses increased $6 8 million in the current quarter to $26 5 million.
Over a third of this increase is attributable to the pillow acquisition with the balance driven by inflation and higher revenue related incremental costs.
We continue to expect our full year G&A guidance to be approximately 5% of revenues.
Operating income for the quarter was $47 $7 million, an increase from $32 million for the 2021 quarter.
Our current quarter operating margin increased eight 6% compared to six 9% in the prior year.
Our current quarter effective income tax rate was 29%.
We do continue to expect our full year effective income tax rate to approximate 28%.
The net effect of all these items resulted in a record third quarter net income of $29 5 million or <unk> 97 per share.
The prior year net income and EPS were $21 1 million and 72 cents per share respectively.
Our increased 2022 net income guidance is now $94 million to $98 million and our earnings per share guidance is $3 eight to $3 21.
Our third quarter EBITDA totaled $60 2 million, an increase of 50% over the prior year quarter of $40 million.
As a percent of revenues EBITDA improved to 10, 8% of revenues for the quarter up from eight 6% in the prior year quarter.
We have increased our 'twenty two EBITDA guidance to a range of 197.
205.
So from operating activities in the first nine months of 2022 was $136 million compared to 137 $735 $7 million in the comparable <unk> period.
Our current quarter 2022 cash flow from operations was $96 1 million.
This strong third quarter cash flow significantly recovered from the slow cash generation in the first half of 2022.
The 2022 cash flow fluctuations were primarily driven by the ramp up of several new large alternatively alternative delivery projects awarded in the first half of 2021 and.
And the significant 2022 organic revenue growth of our <unk> infrastructure segment.
Cash flows from investing activities included 48, $44 $8 million of net debt capex with a $3 million final.
Okay.
Acquisition related pain.
Payment of 43.
<unk> 3 million relating to the final working capital adjustment.
The Capex increase reflects the increased infrastructure solution activities, including the impact of the <unk> acquisition.
Our cash flows from financing activities was $17 $7 million outflow, reflecting our scheduled debt payments for the first three quarters of 2022.
Finally.
And strength of our portfolio of businesses and our strong liquidity consisting of a record cash balance of $146 million and are comfortable debt levels at approximately two times forward looking EBITDA.
Although we have not seen a significant economic downturn across our segments. We are prepared if conditions worsen to deal with these uncertainties and to take advantage of additional opportunities for the balance of 2022 and 'twenty into 2023 and beyond.
Now I'll turn it over back to John .
Thanks Rod.
Our strategy to transform the company from a heartbeat heavy highway business to an infrastructure solutions provider.
Then customers end markets and product solutions has and will continue to prove its ability to deliver exceptional results even with the adverse conditions in one of our segments.
There remains tremendous uncertainty and what the 2023 U S economy will bring.
But I feel confident that sterling is positioned better than ever to.
To weather any storm that strong data.
And I expect us to continue our positive growth trends.
To reiterate.
Our increased year end guidance range for revenue is one nine to $1 $19 billion.
With a net income range of $94 million to $98 million and.
And an EPS range of $3 eight to.
The $3 and 21 sites.
I'd like to turn it over for any questions.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session.
If you'd like to ask a question you May 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 would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Our first question comes from the line of Sean Eastman with Keybanc. Please proceed with your question.
Good morning, Gents, Thanks for taking my questions.
I wanted to start on building solutions.
You see in the top line pressure in the third quarter. So it sounds like the message is that.
The underlying run rate kind of continued decline to decline through the quarter.
I guess two things first.
Any kind of preliminary thoughts on where revenues trend in 2023 from here and second.
Im curious whats going on under the Hood I know there was a thought that perhaps Houston and Phoenix could.
So it could help cushion the softening in Dallas, So any update on.
Kind of the underlying moving pieces, there would be helpful as well.
Yes, So I think we still believe that Houston, and Phoenix will cushion that actually Houston was up in the quarter and I believe it is.
And then as well.
So, yes, but what will happen chart as youre going to see we believe.
Youll see a dip.
And then we're beginning to see builders.
Put incentives in different programs in place and they are changing some of the plans for the next set of houses to be built so there'll be a little less expensive.
And they are actively moving to bring buyers yet and we're not seeing what I'll call. It just.
A steady decline it is still very lumpy there'll be good weeks and there'll be bad weeks.
It's a little more volatile than it is but we just believe the reality is it will take a little time.
These incentives to get it for buyers to get back interested in understanding that they can afford the homes.
And so we think for the fourth quarter, we will continue to see a decline.
Then as we get into 2023.
We think that will level off.
And we will start to see an increase from the bottom and start to come out probably late first quarter or second quarter of 2003.
Okay. That's helpful. Joe and then.
On the infrastructure margins can you just refresh us on where we should be running.
With the <unk> and the.
The mix.
Kind of ex the supply chain noise.
Operator environment stabilizing should we expect some margin expansion in this segment and 23.
Yes, So let me touch at a high level I'll, let rob get into the details.
Got two dynamics going on maybe infrastructure. The first in a significant one is exactly what you touched upon the mix differentiation up until those margins versus plateaus.
Remember that the Tullow has plateaued.
Side margins are pretty much steady.
But the Tullow has to do other activities or it's driven by the customer base to do other activities, which tend to be lower margin like some sidewalk work inside walls et cetera. So we have that dynamic.
In addition, we have definitely seen some erosion overall in margin related to inflationary and supply chain issues. So we have two dynamics that are taking place. If you remember we use about 700000 gallons of diesel a month.
We saw a $2 increase it started out lower but by the end of the quarter was up $2.
Rob our earlier remarks in the year so.
Brian you want to get into the kind of the I'll call. It a normalized number would be.
What we see going forward yes.
So thats the first point of just the different.
Scopes of work that each of our.
Excuse me each of our key infrastructure folks work on.
It's about overall it reduces our operating income from the.
The olden days, where we only had one to inclusion of Tullow, it's about somewhere between 150 to 200 basis points.
And that will bounce around a little bit because of mix, but that's part of a going forward run rate, it's still great margins and.
Great.
Opportunities, but it just has a lower margin mix of work.
And I think it's hard to measure the inflation and supply chain out, but it's probably about an equal number that's the one that will recover when if when.
<unk>.
We see an improvement in the supply chain side, and obviously inflation, particularly in this year diesel more than anything else bouncing around and then back up again of late.
So those are the kind of two things one sort of a permanent.
Prospective with the current mix of business is the other one is opportunity to claw that back in the next.
Several quarters, and we hope to see some improvement.
Okay got it and then last one from me on the cash flows.
I recall, you guys took down the guidance in the second quarter now it looks like we're trending to the top end of the original guidance. So just curious what happened.
Between those two updates.
Yes.
Well I've never wrong, but I was wrong.
I think the yes.
I think the first six months with the.
Significant organic growth and inclusion of <unk> in just a slow start.
<unk>.
The year and probably underestimated the recovery that we would have in the balance of the year, particularly on both the infrastructure and on.
These transportation side with those large jobs perking up.
As you recall those though we started five significant job in the first six months of last year.
And they all usually come with very nice front end cash flow and then of course balances out over the year.
<unk> faster than we thought and I think certainly our most of the.
Change in revenue guidance.
Earnings. So, it's just a fantastic quarter coming out of <unk> infrastructure and of course that.
The profitability there, it's our largest gross profit we have in generating some profit so we move the.
Our recommendation or a guidance number certainly are trying to help people number of $250 million about statements last year tell you. The truth I never thought we would be next year, but we got a chance of being right on top of it.
Flattish plus or minus yes, right half of last year is $151 million.
Fish.
So it was great news and puts us in a fabulous position going forward, whether it's managing I think.
The other thing that's.
<unk> in the quarter as we saw very nice margins and margin improvements continued margin transportation and cutback that favorable to hold our operating income.
In our building solutions with 13% or so less revenue.
Was very nice.
More of that need our thesis.
Okay.
Sorry, I lost you guys for a second there.
Appreciate it and I'll turn it over there thanks guys.
Thanks Chuck.
Our next question comes from the line of Brent Thielman from D. A Davidson. Please proceed with your question.
Yes. Thanks.
Hey, Joe how far does that <unk> infrastructure backlog provide visibility for you at this point are you still filling in for the first half or you are starting to look more and more into the second half of 'twenty three at this point.
Yes, generally we have an.
The difference between transportation any infrastructure transportation, we have multiyear backlog any infrastructure. We look at it is we generally have six months or so six or seven months of backlog there.
So we're starting to.
Feel pretty full for the first half and we still have some capacity in the first half that we can bring in.
And we're assuming all the project startup dive at all of that stuff obviously.
So we're starting to fill up that first half and the software hunting for now is stuff that would start late in the first half or going into the second part of next year.
Okay, Great and then the continuing uptick in transportation margins is great to see yes, just wanted to get your thoughts as we move into 'twenty three if thats still your expectation that you can continue to improve up levels yes.
<unk>.
We're still pretty bullish we have.
Room to go.
We think a fair amount of room right.
Every point of margin improvement, there is seven or $8 million to us so.
That's our that's our focus is.
He is continuing to be selective on the jobs that we.
Get that margin up another point or so over the next.
18 to 24 months and.
Recent rewards of that study going crazy.
And as I've said, if for some reason the market gets extremely tight.
And we see margins up north of 12%, 13% will get a little more aggressive.
Taking on more work at those margins, we won't go down and larger.
But we want to keep eating it up.
At that level.
Sure Brett.
You've been around this for a long time.
Our margins compared to the rest of the world in this business our World class right now and the fact that we think we got another point or two that we can get out of a base that's pretty impressive.
Yeah, Okay. That's all I have thanks guys.
Correct.
Our next question comes from the line of Brian Russo with Sidoti <unk> Company. Please proceed with your question.
Hi, good morning.
Hey, Brian .
Okay. So just to follow up on the transportation segment, you announced that.
Large $34 million contract you mentioned.
Better than peers.
Average margins.
Gives you.
The competitive advantage.
In.
The bidding process to not only win these contracts but.
Higher margin stand what your peers are realizing.
Well I think the first most important thing.
We believe one of our first job responsibilities and the trade.
Job selection.
There's billions of dollars being bid.
Not all of that one billions of dollars is good job. So one of the things. We spent a lot of time on is understanding what are our core competencies. What are we really good at and let's find those jobs and bid them appropriately. We also continued to move towards more alternative delivery and continue to shrink our low bid heavy.
So where we have much more control and much more line of sight of our destiny, which brings down our risk profile finally as jobs. So the other thing that people tend not to understand is not only reflective of the jobs.
Only as our initial margin that we're winning is that better.
But one of the next most important things is in general and on average we finished slightly above our bid margins of these jobs. So that says that we have both risk mitigated and we also are executing at or better that are anticipated.
Activities.
Okay, Great and just.
Another follow on the IHA funding are you actually seeing those funds being deployed.
Hi.
Department of transportation customers in Europe .
Footprint or is your sense I'm, just going to be a ramp up.
And 'twenty four.
It will continue to ramp up but we started we started to see the activity kick off towards the end of the second quarter continued to ramp up in the third quarter.
Stay very strong.
Our crystal ball of looking at what jobs are coming out in the first half of next year right now looks even stronger.
So.
As the money flows to the states the states that determined the projects.
And so we think it will continue to grow.
And through 2023.
Okay, Great and then just any infrastructure, obviously Arabian awards.
Was very positive.
The way to look at that is that kind of the first phase of what could be multi year kind of recurring work.
Sure.
Sterling infrastructure.
Yes, both.
<unk> facility in.
The vast majority of the data centers, while we announce those jobs such generally just the first phase of multiple phases.
The roofing plants will be a multi year multi phase activity now we still have to win those next phases.
But we have a very high percentage of win rates when we get in there and we view the first phase.
Great.
The follow on phases, obviously, it would be upside to your combined backlog.
That is correct.
Just make sure I'm right on this Ron the roofing in jobs is not in the third quarter backlog or in the third quarter announcements for infrastructure of that $300 million right.
<unk> was ultimately signed in early October so that'll be a fourth quarter.
Okay.
Okay got it and then also you mentioned reassuring.
Obviously, we've seen a lot of high tech industrial expansion, maybe accelerated by by the chips Act, specifically micron up at Syracuse in Europe , and I'm, just wondering is that within <unk> footprint and if you're not directly involved with micron.
Or are you or are you planning to be involved in what's going to be quite a bit of regional expansion to support.
That that new facility complex.
Yes that one is in the very early stages.
They have no idea.
Who ultimately get that or where it's going.
Still very very early.
But certainly that is within our footprint.
We are watching the chip that and all of that manufacturing or several through.
Through that region that theyre looking at very closely.
Where we have seen activities.
A lot of cases, we're not we're not allowed to announce and in some cases, we don't even know who the customer is.
It is around the battery activity associated with electric vehicles. So.
We have our second project that we're doing.
That.
In the East coast, we're seeing a tremendous amount of activity around that area as well.
Okay, Great and then one more if I can strong operating cash flow year to date.
Growing cash balance and you mentioned positioning yourselves for opportunities in 2023, maybe if you could just elaborate on.
Kind of.
How do you prioritize prioritize capital allocation.
Yeah.
The fact that we have built a very nice war chest.
Thanks, Ross in 2023 right.
Right now with our backlog and everything we're seeing.
We're still very optimistic up 23.
We will continue to look for the right tuck ins.
We certainly need more capacity in some.
Our capabilities and our building solutions segment.
We will look for added tuck ins in our infrastructure segment that could add.
Either services or goods to our existing footprint.
But I think most of our focus as we go into 2023 are going to be what I'll call small tuck in acquisitions.
We're not we haven't stopped looking at bigger opportunities in the fourth leg.
We're being a little cautious at this point in time as we go into 'twenty, three and we really like.
The really low debt ratio in the high cash that we have right now, but we will continue to look for those right tuck ins, which they could be call it $5 million to $40 million $50 million deals that we can sit right and take advantage of quickly.
Can you give us either a competitive advantage of our product offering to our existing customer base.
Okay, great. Thank you very much.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Thanks, Doug.
I'd like to thank everyone again for joining today's call.
After this call you have any follow up questions or wish to set up a follow up call with US. Please feel free to contact Mary and our Investor Relations group or our partners at the equity group.
Their contact information can be found in the earnings release.
Posted earlier this week.
With that thanks, again, everybody and.
Hope you have a great day.
Ladies and gentlemen.
This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
Yes.