Q2 2019 Earnings Call
Greetings and welcome to the Sterling construction company's second quarter 2019 earnings conference call and webcast.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
Before turning the call over to Joe Catello Sterling constructions, Chief Executive Officer, I will read the Safe Harbor statement.
Some of the discussions today may include forward looking statements.
Actual results could differ materially from 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.
Now I would like to turn the call over to Joe Catello.
Thanks, Brad.
Good morning, everyone.
And thank you for joining our second quarter call.
I'm sure by now you've heard multiple times from our peers the weather has impacted their quarter.
And unfortunately, they were not alone.
The severe weather conditions, especially in the Texas market significantly hampered our ability to execute active heavy civil projects.
And delayed the start on multiple new ones.
In addition to the challenges on the heavy civil side.
We incurred 30 down days in our residential business in Dallas.
As much as we've tried to be conservative and plan for above normal rain days.
We would have never included losing 30% of the quarter's total days in a forecast.
As a result, we came in slightly lower than our expectations, but did not stop making significant progress in multiple areas during the quarter and still achieved a near flat year over year result.
For the quarter, our net income was $7.8 million versus the prior year of $8.2 million.
With $10 million less revving revenue.
Coming from our highest margin business.
That $10 million of revenue would have delivered approximately $1.5 million of incremental net income.
In the quarter would have gone from a slight miss to and exceed.
Versus prior year.
Our EPS DNA was down over two and a half million dollars.
And our cash grew to 71.7 million.
Our combined backlog hit an all time high of over $1.2 billion and more importantly, the margins in backlog hit a new record of 9.1%.
We continue to stay on track to achieve our 2021 goal to have 50% or less of our revenue coming from our low bid heavy highway business as 43% of our revenues for the quarter came from other heavy civil activities.
This is a critical part of our strategy focused on growing our bottom line, while reducing our overall risk.
Our markets remain strong with the potential to become even stronger.
The next transportation Bill called the America's Transportation infrastructure at was just approved by the Senate Environmental and public works Committee.
If approved by the full Senate and pet is a bill this legislation would increase the annual spend on highways and bridges by 17% and be policy through 2025, a full five year extension to the fast act that expires in October of 2020.
Now, let's move to the full year.
Even with all the continued progress in the quarter and the great effort from our employees to claw back some of the lost days.
The accumulated weather impact from both the first and second quarter.
And the delayed starts of new projects is causing us to temper our full year outlook.
We now expect revenues to be between 1.010 billion and 1.025 billion.
And our net income to be between 27 and $29 million.
Even though this is not as high as we'd like to see the midpoint of our guidance still represents a solid double digit net income growth over 2018 with record backlog at record margins going into 2020.
With that I'd like to turn it over to Ron give you more details on the quarter and the full year Ron.
Thanks, Joe and good morning, everybody.
Let me take you through our second quarter 2019 operating results.
Heavy civil construction backlog was $909 million at the end of the quarter compared to $851 million at the beginning of the year.
Combined backlog, which includes our backlog an unsigned low bid awards low bid awards totaled $1.224 billion with an overall combined backlog gross margin of 9.1%.
This reflects the highest combined backlog together with the strongest combined backlog gross margin in Sterling So history.
Our heavy civil construction backlog book to burn factor was 144% for the second quarter of 2019 and was 114% for the first six months.
Our combined backlog book to burn factor was 106% and 120% for the second quarter and the first half of 2019, respectively.
Just of the Rob just as a reminder, our backlog figures are comprised entirely of heavy civil construction projects.
Residential construction, which recognizes revenue wins concrete slabs are completed accounted for approximately 14% of our second quarter 2019 revenue.
Total revenue for the second quarter of 2019 was $264 million down $4.6 million or 2% from the prior year period.
Heavy civil construction revenues grew $4.8 million or 2% over the prior year quarter.
Residential construction revenues were $36 million, a decrease of 21% from the second quarter of 2018.
The increase in heavy civil construction revenues was driven by $26.7 million of additional revenue coming from fully controlled heavy highway work and increased aviation work.
These increases were largely offset by lower 2019 revenue from two large construction joint venture projects, which were substantially substantially complete by the end of 2018.
Additionally, our heavy civil 2019 second quarter revenues were negatively impacted by abnormal inclement weather and delayed notices to proceed of components of our backlog.
The decrease in residential construction revenues was due to severe weather conditions in Texas with 30, and workable days in the second quarter.
These adverse weather conditions decreased slabs completed in the quarter by 23%.
As you likely saw in our earnings release, we completed an all time record for slabs completed in July once the weather returned to normal.
Gross profit was $25.5 million in the quarter, a decrease of $5.6 million from the 2018 second quarter.
Gross margin declined by 190 basis points to 9.7%.
The decrease margin was driven by lower revenues from our highest margin residential construction segment.
And our lower margin any lower margin mix of our heavy civil construction projects.
DNA expense for the second quarter of 2019 was $10.8 million compared to $13.2 million in the prior quarter.
Prior year quarter.
The quarter over quarter decrease was primarily attributable to higher 2018 pre bid activities for design build and other alternative heavy civil projects.
As a percent of our revenues second quarter 2019, DNA expense decreased to 4.1% or 80 basis points down from our comparable 2018 period.
Other operating expense for the second quarter of 2019 was $3.5 million a decrease of $2.2 million.
From the comparable 2018 quarter.
The decrease was primarily the result of lower member's interest and earn out expenses.
Our operating income for the second quarter of 2019 was $11.2 million a decrease of $1 million from the comparable 2018 quarter.
From an operating segment standpoint residential construction accounted for approximately $700000 of a quarter over quarter operating income decline with the balance attributable to heavy civil construction.
Net interest expense for the second quarter of 2019 was $2.6 million down from $2 million to $2.9 million in the prior year period.
Our second quarter of 2019 income tax expense increased $700000.
Compared to $100000 in the prior years prior year period.
The increase reflects additional non cash.
Tax expense.
Finally.
The second quarter 2019, non controlling owners interest declined by $900000, reflecting the completion of the large construction joint venture projects in late 2018, which I mentioned earlier.
But the net effect of all these resulted in second quarter 2019, net income of $7.8 million and a net income per share of 29 cents.
Compared to the prior year period, net income of $8.2 million or 30 cents per diluted share.
EBITDA for the trailing 12 months ended June Thirtyth 2019 totaled $54.3 million.
An increase of $50 billion 0.3 for the 12 months ended June Thirtyth 2018.
Moving to our balance sheet.
We ended the quarter with cash of 700, I'm, sorry $71.7 million.
Compared to $56.8 million at the end of the first quarter.
Our debt net of cash was $6.8 million at June Thirtyth 2019.
The components of our June Thirtyth 19 cash balance includes generally available cash of $52 million.
The highest in recent years.
The remaining $19.7 million of cash is attributable to our construction.
Goods consolidated 50% owned subsidiaries in construction joint ventures.
Consistent with our historical seasonal trends, we expect our consolidated cash balance to grow throughout the balance of the year and our cash flow from operating income operating activities to approximate our full year operating income.
Finally, as Joe mentioned earlier did format inclement weather.
We experienced in the second quarter and delayed start of several heavy civil projects has caused us to temper our full year expectations.
To reiterate our revised full year 2000 guidance, we expect revenues to be between 1 billion.
$10 million in $1 billion $25 million.
The lower revenue guidance represents a $68 million midpoint to midpoint reduction from our previous guidance.
Additionally, we expect our 2019 net income to be $27 million to $29 million.
Compared to our prior net income the guidance of $29 million to $32 million.
Our diluted weighted average common shares outstanding.
It was expected to be approximately $26.7 million I'm, sorry, clean some 26.7 million shares.
For 2019.
Now I will turn the call back to Joel.
Thanks Rod.
Even though the adverse weather in the quarter caused us to come in lower than our expectation.
We come away very optimistic about the progress we've made as well as the outlook for the future.
Our backlog remains at an all time high with a record with record average margins.
Our free cash continues to grow as we diligently look for ways to lever.
Our residential business started the third quarter with a new record for a number of slabs completed in a month.
And we continued to make progress diversifying our business into adjacent markets outside the heavy highway space.
When you take all of these factors into account you see a sterling that is stronger more resilient and position for many years of success to come.
With that we'd be happy to take your questions.
Thank you.
At this time, we'll be conducting a question and answer session.
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One moment, please while we pull for questions.
Our first question today comes from Brent Thielman of D.A. Davidson. Please go ahead.
Great. Thanks, good morning.
Good morning, Brian .
Yeah. Good question on some of the larger civil jobs, where it sounds like startup it shifted a bit to the right. I guess is the cause of the delay simply whether are there any other kind of factors involved there.
Yes.
There is no factors that worry us about the jobs, not getting released or anything like that but that's part of the question really related to weather delays you can imagine before we can get started on jobs.
There's things like utilities that have to be moved the right of ways. There's a whole bunch of activities. It generally take place. So the days that were not working.
Generally those activities are taking place as well.
So we saw a couple job said get pushed out for that we did have a job in Hawaii that is push for some design change issues that they're working on and is it Hawaii and the design changes pause the job does that get pushed into the bird mating season, which then pushes it out another three months right. So it is what it is and will continue to to progress with it.
But those are they kind of things that we saw in the quarter.
Okay. Thanks, Joe and then at the gross margin improvement in backlog.
How much do you attribute to that I guess the shift in the type of work you're bidding.
Yeah, maybe versus.
It just looks like.
Is your environment in general.
Terms of bid activity.
Yes, I'll, let Ron help out of this but I'll give you a couple of different categories. We certainly see a lift as we continue to migrate the backlog to less heavy highway low bid projects and the heavy civil other the other thing thats, helping us is even within heavy highway part of our strategic initiative and predominately in the Rocky Mountain areas is we're going to alternative delivery projects. So CMG see design build those tend to provide better margins than the traditional eight people at the bid table and the lowest bid dates at home that day.
We can add a lot more value to the to the end customer and as a result management projects more effectively and efficiently and make higher margins. So those two things are what's really really driving it yeah, we've seen a slight upticks in what I'll call market driven pricing.
But the dominant share of whats driving it would fall under those two categories. Ron do you have anything to add to that no. I think those are the two key and I think the alternative delivery work that.
One of those jobs and slipping a bit is still in our combined backlog. Its two thirds of our combined are unsigned.
That is still in the design side and when it ramps up it will be either late this year secondly in the back orders or maybe pushing that 99 or 20, when it really starts going in.
But it's making good progress across the finish line and we're also making pretty good project progress on the $100 million project, we announced that started later in the second quarter, but then earlier than we thought but its going and going full bore at this point in time, yeah, Brett just to add to that.
A little bit broader than that one of the one of the things that we.
It really took away as a positive for the quarter is a deal. So it had a rough quarter with all the rain in Dallas nothing they can do about it they caught back some of that they had a great recovery output. The really important part of that message is their margins remained fundamentally the same so as we continue to broaden the mix of our portfolio of products. We're trying to not only raise the margin, but also take out some of this vulnerability or variation.
From month to month quarter to quarter in it and.
That helps just smooth that out.
And I would add you won't do we tend to associate tools go just with the residential business, but they have a nice commercial business predominantly in Texas had who had the same weather day challenges as our as our residential business had so that certainly didnt help the heavy civil side.
Grow by what we thought it would grow in the quarter.
Okay. That's helpful. I guess my other question would just be.
Could you talk about the progress on that day, Houston rollout, how additive do you think that could be this year and you are starting to gain some visibility yet into 2020 or is it a bit too soon.
Yeah, it's a little hard on 2020.
It's kind of we're in the.
The Vicki to chicken in the egg get work add crews and grooves getting worked in and going on but.
I would tell you that you signed in the quarter had to say fundamental issues in Dallas said, we had a lot of rate. However in the month of July part of that record. We poured 60 slabs in Houston in that one month, which is I believe the most we've done in a particular month. So we're continuing to see that ramp up we're still very optimistic on the Houston market consistent with everything we've said, it's just it's getting that ramp up in that consistency to continue to add crews.
Okay, Great I'll pass it on thank you.
Right.
The next question is from Tahira Afzal of Keybanc. Please go ahead.
Hi, Jim This is Sean on for Tahira today.
First question for me is just just hoping to get an update on the prospect pipeline outside of Texas heavy Civil and then also maybe specifically outside of heavy highway just kind of what you're seeing over the next couple of quarters and.
And maybe just tied together.
How you're expecting backlog to trend.
Through the end of 19.
Yeah, well welcome back shot up we don't see any any significant changes one way or the other the markets have been very stable very consistent the highway market remains robust.
Well, we think that.
I've got a good Unfortunately I've got a call later this afternoon on this on this.
This new.
Highway Bill so, although a lot more tomorrow than they know today.
So we're very optimistic with this year going into 2020, we are starting to see budgets of deal teams going into next year at least glimpses Adam dessert remember their fiscal year ends in September .
Everything looks very strong going into next year.
Highway side.
D'aviation side is is continues to grow and expand the aviation Bill that was passed at the end of last year is continue to drive more and more aviation project. So that part of the pilots were very robust for us. The residential side is just very consistent right now.
We're down to just plugging away whether is our biggest issue there there's all kinds of buzz in the news and in the markets on.
You know housing slowing down and and all that we saw the interest rates dropped last week.
With that kind of status quo I'll call. It steady as we go with it.
And we're hoping to see a boost from some of the recent activity. So I think our backlog should continue to grow slightly through through the back half of the year.
The thing they could.
Change that to some degree is if a big project kicked off a little earlier, we heard it before we filled up with some other projects, but we don't see any any significant change from what I'll call the historical tracking and run rates through the rest of this year.
Okay, Great and then on the residential side. It looks like you guys were able to maintain a pretty good margin in the second quarter. Despite the weather dislocation. So I'm just kind of wondering how you guys manage that and then based on how Houston building out.
Im just wondering how we should be thinking about the residential margin progression from this kind of high 13% level, we've been seeing.
Yes, well first I hope that I don't know that a lot of people believed us well, we said well we really liked about the fuel. Some model was the sub subcontract element of it and the ability to maintain margins when you see a little bit of a downturn, we had a quarter downturn not because the market with because of weather and I think we showed first add to that that is in fact true. It goes back to the model Shaun where the labor piece. The majority of the labor piece of the deal stone business is subcontracted. So if we're not boring were not bank AG, we pay that five a square foot. So when they get back to work they're going to work.
Increased hours to get stuff out it doesn't cost us as a premium we really like that subcontract model and this is exactly exactly what the margins.
As we go into Houston, you, certainly have some startup costs and a little bit of ER.
Any efficiencies and effectiveness in a new market those margins are a little lower than the Dallas market still continue to inch up but I say over time.
The margins are going to be relatively consistent with where they are plus or minus a couple of the half a point or something like that I don't see any any major movements in there now someday. We all know the housing market will slow down I'm sure, we'll see some pressure on pricing and Thats, where stuff, but we also got to see that for a prolonged period of time.
And I would add even in the <unk>.
Subcontractors are pretty easy to describe a good portion of our salaried workforce that are out in the field are performance based pay unfortunately, its hard for them to get a lot of performance when it's raining and that's what you're seeing in some of the variable margin, saying.
Very small fixed costs. It just puts long right at that consistent operating income of 30, plus or minus so.
Point by less than a point to actually and we like that we.
I really drives great behavior bread, both our internal people and our subcontractors to be as efficient as we can bolt on the material side and on the labor side.
Very helpful. I guess lastly is this kind of deal stone labor flex, where we use what we saw on the SGN a line this quarter guys.
Relative to our model on that kind of as DNA leverage saved the day in the quarter to an extent so I just wanted to understand what we saw there.
No most of that cost. So we talk about until stone is up in the gross profit in this falls down the the Big factor was last year, we were working on three pretty significant.
Large projects one of them did backlog would have been combined and one is still.
Out there, we're hoping to be added to our backlog.
We still have some some work going on but not peaking out actually there was one more that we're working on getting that done outside of the Rocky Mountains.
So the job.
Those tend to be lumpy and we tend to spend a fair amount of money on I'm getting those cross the finish line. So we just didn't have a whole lot of that we saw one out there that we're working on to get across the finish line but.
Last year was sort of a perfect storm good news when youre going on for at once.
To get across finish line as both the right now we have a couple in there yes generally we would see if we solve what a quarter that would be a lot for us. It was just timing of several of them hitting at the same time last year.
Got it really helpful. Thanks, so much for the time.
Thanks, Sean.
There are no additional questions at this time I would like to turn the call back to Joe Catello for closing remarks.
Thanks Brock.
Thanks again, everyone for joining our call today, if you have any follow up questions or wish to schedule a call. Please refer to the contact information provided in the press release associated with our Investor Relations group at Sterling or partners at the equity group.
Thank you everybody and have a great day.
This concludes today's conference you may disconnect your lines at this time.
Thank you for your participation.
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