Sterling Infrastructure, Inc.

Sterling's first quarter 2021 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 sections of the company's website. Before turning the call over to Joe Cotillo, 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 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 our earnings release issued yesterday afternoon. I'll now turn the call over to Mr. Joe Cotillo. Thank you. Sir, please go ahead.

Thanks, Maria. And good morning. I'd like to start by thanking everyone for joining today's call. It's always great to start off the year with a record quarter. despite all the unexpected weather challenges we faced in February. I stated during our last earnings call that I was walking away from 2020 prouder than ever of our 3,000 plus Sterling employees and their ability to band together, keep each other safe, take care of our customers, and give back to our communities, all while delivering another record year. Well, I stand here today with that same feeling. The response to the weather and inflation challenges we faced in the quarter were once again remarkable and a further indication of our culture and our ability to service our customers and deliver record results even in challenging times. The results of this quarter demonstrate how we have stayed focused on the strategy that we have been implementing over the past several years to diversify our revenue streams and focus on higher margin, lower risk projects while building a platform for future accretive growth. This strategy, combined with our business structure, enables us to lever the entrepreneurial spirit that is alive in our businesses, our leaders, and our people, and deliver results unparalleled to others. So let's talk about some of those results. Our first priority is always the safety of our people. The innovative efforts of our proactive actions and measures continue to make our work sites safer every day. For the first quarter, 2021, we worked over 1.2 million hours in our wholly owned subsidiaries with zero incidents. As an industry leader in safety, we will continue to do everything we can to ensure our employees go home safe every evening. On the financial front, our revenues were up 6.3% versus prior year, driven by an 18% increase in our specialty service sector and a 22% increase in our residential sector. Our gross profit was up 28% to a blended average of 14.3%. Our operating income was up 88% and our net income more than tripled. These results are yet further proof that our strategy focus on growing the bottom line continues to pay off as our net income more than tripled with single digit revenue growth. Also in the first quarter, we continued to strengthen our balance sheet with $39 million of cash coming from operations. which we used to pay down $30 million of debt and invested $11 million in CapEx. As the year advances, we expect to further enhance our liquidity, enabling us to continue to execute on our organic growth strategy while evaluating accretive acquisition opportunities that have the potential to add scale to our existing sectors or they could provide us with a new business sector altogether. Now let's talk about our backlog. In the first quarter, our backlog in our specialty service sector grew 36% from year-end 2020, and we saw 40% growth in our heavy civil sector backlog for a combined growth of 39%. Our backlog is now at an all-time high of over $1.6 billion and positions us for a strong 2021 and is already building strength into 2022 and 2023. As we look at the individual sectors, once again, our specialty service sector was a major contributor to our strong first quarter. We continue to execute well on a robust pipeline of projects for large, high-profile customers as they develop new distribution centers, data centers, and warehouses. As mentioned, our backlog in this sector grew 36%. and bidding activity remains strong, giving us good visibility for the balance of 2021. Our residential sector exceeded our expectations in light of the weather-related issues in Dallas-Fort Worth and Houston. These disruptions caused us to lose more than two weeks of work in February. However, the team pulled through to complete a record number of slabs for the quarter. We are seeing similar demand and productivity trends continuing into the second quarter. Regarding the supply chain pressures being felt across the residential markets, our first quarter margins did reflect the impact of the supply chain issues, specifically relating to the cost of concrete, lumber, and steel. We are watching these trends closely and have managed to pass on multiple price increases already this year. Our heavy civil revenues were down but our operating profit was up and reflects the continued shift away from low-bid projects to alternative delivery, particularly in our Rocky Mountain region. We're extremely pleased to see the results of our multi-year effort to transform the revenue mix of this sector from low-bid projects towards jobs where we can use our extensive experience, assets, and skill set to bring more value to our customers and earn higher margins. Based on the first quarter results, we have positioned ourselves to finish the year at the high end of our guidance and have an opportunity to exceed that. With that, I would like to turn it over to Ron to give you more details on the quarter and the 2021 outlook. Ron?

Thanks, Joe, and good morning. I am pleased to provide a summary of our strong 2021 first quarter results. Our slide presentation, which has been posted to our website, includes additional financial details to help further understand our 2021 financial results and our expectations. The presentation also provides additional modeling considerations which underpin our full year 2021 revenue and earnings guidance. Now let me take you through our financial highlights, starting with our backlog metrics on slide number five. Our first quarter ending backlog was at an all-time high, $1,639,000,000, a 39% increase over the end of 2020. The gross margin in our first quarter backlog was 11.8%, down from 12% at the end of 2020. This slight decrease reflects a change in the mix of our first quarter backlog, as our heavy civil backlog growth of 40%, exceeded the higher margin specialty services growth of 36%. Unsigned low bid awards totaled $76 million at March 31st, 2021, a decrease of $357 million at the beginning of the quarter. Essentially all of our large unsigned projects at December 31st, 2020 are now under contract and beginning contract activities. We finished the first quarter with a record combined backlog of $1,750,000, a 12% increase over the end of 2020. Our gross profit and combined backlog was 11.7% compared to 11.8% at the beginning of the quarter. Our first quarter book to burn factors were 271% and 167% for backlog and combined backlog, respectively. Residential, which accounted for 14% of our consolidated revenues, does not report backlog, reflecting the short performance cycle of residential concrete slabs. Slide six provides a summary of our consolidated and segment results. Revenues for the first quarter were $315 million, an increase of $18.6 million, or 6.3% over the prior year. The revenue increase was attributable to our specialty services and residential businesses, partially offset by lower heavy civil revenues. Consistent with our expectations, first quarter heavy civil revenues were $147.1 million, a decrease of $8.6 million from the prior year quarter. We expect sequential quarter over quarter heavy civil revenue growth for the balance of the year as we continue to ramp up several large design-build projects in the Rocky Mountain region. First quarter specialty services and residential revenues increased significantly by 18% and 22%, respectively. I'll provide color on individual segment results in a moment. Consolidated gross profit was $45 million, an increase of $9.8 million over the comparable prior year quarter. Consolidated gross margin reached a first quarter high mark of 14.3%, an increase of 240 basis points over the prior year report. Each of our three business segments reported increased gross profits. G&A expense decreased slightly in 2020-21 compared with the prior year. That provided operating income for the quarter to be $22.8 million, an increase from $12.1 million for the comparable period, substantially all driven by improved 2021 gross profit levels. Our first quarter operating margin was 7.2% compared to 4.1% in the 2020 quarter. Both the 21 operating profit and operating margins were the strongest first quarter in our history. Our first quarter effective income tax rate was 29%, an increase from 27% from the prior year quarter. We continue to expect our full year effective tax rate to be approximately 30%. Our non-cash portion of our effective tax rate will continue to be approximately 24% of pre-tax income. The net effect of all these items resulted in first quarter net income of $10.6 million or diluted earnings per share of 37 cents compared to the prior year comparable quarter net income of $3.1 million or diluted EPS of 11 cents. Our first quarter EBITDA totaled $29.9 million, an increase of 48% over last year's first quarter. As a percent of revenues, EBITDA improved to 9.5% of revenues for the quarter, up from 6.8% for the prior year comparable period. As you'll see, each of our segments reported increased operating profits. Heavy Civil reported an increase in operating profit of $4.7 million on lower revenues. This improvement reflects the progress made in shifting our heavy civil revenue mix from low-margin, low-bid heavy highway revenues to alternative delivery highway work and other higher margin from adjacent space opportunities. In the quarter, our low bid heavy highway revenues declined $20 million. This decline, which was more than offset by other more profitable alternative delivery work, enhanced our gross profit for the first quarter. Specialty services revenues increased $19.4 million, driving operating income up by $5.1 million, and delivering an operating margin of 13%. Substantially, all the improvement was driven by increased land development revenue, while our commercial revenues remained substantially flat. The overall improvement in operating margin reflects the higher mix of land development revenues, which was 78% of the segment's revenue. up from 73% in the prior year quarter. Residential reported record-completed slabs and revenues reflecting continued strength in the housing markets within our Texas footprint, despite losing half of the workdays in February due to inclement weather. While Q1 2021 operating profit increased by $400,000, operating margins declined to 12.4% from 14% for the prior year quarter. The margin decline reflected the impact of supply chain pressures, specifically related to the cost of key materials. We continue to watch these trends closely and have already implemented price increases in 2021. Now let's move to slide seven, which summarizes our increased EBITDA cash flow and deleveraging strategy, and the related progress. Historically, Sterling's first quarter is its slowest quarter from both a cash flow and earnings standpoint. As a result, we have historically had the lowest cash flow and income in the first quarter. Our cash flow typically then is level off in the second quarter, and we historically generate cash in the third and fourth quarters. The plateau acquisition and the heavy civil migration towards higher margin work has significantly changed the aforementioned seasonal trends. Cash generated from operations was a very strong $38.7 million compared to $10.8 million in the comparable 2020 quarter. All three segments contributed to this $28 million improvement. Cash used for finance activities was $32.5 million, driven by debt reductions of $30.5 million, which included $18 million of non-scheduled term loan payments. Our first quarter CapEx net of disposals totaled $11 million, compared to $6.8 million in the 2020 comparable period. The incremental investment in capex is driven by the continued growth of our land development business our full 2021 anticipated net capex continues to be in the 30 to 35 million dollar range the graph presents our deleveraging expectations beginning with the october 2019 plateau acquisition and the new five-year credit facility Our October 2019 pro forma forward-looking EBITDA coverage ratio was approximately 3.5 times. At that time, we set the objective to bring our coverage ratio down to 2.5 times by the end of 2021. As you can see, our EBITDA debt coverage has declined to 2.4 times at March 31st, 2021. This deleveraging milestone was achieved over nine months earlier than our October 2019 stretch goal of 2.5 times by the end of 2021. Based on our term loan scheduled payments for the balance of 2021, we now expect our year-end coverage ratio to be approximately 2.1 times compared to our 2.5 time original objective. Now I'll turn the call back over to Joe.