Sterling Infrastructure, Inc.

Greetings and welcome to the Sterling Second 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 section of the company's website. Before turning the call over to Mr. 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 objections 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 the SEC rules and regulations. These non-GAAP financial measures are reconciled to the 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, Laura. Good morning, everyone, and thank you for joining today's call. I would like to start by thanking all of our Sterling employees for delivering another outstanding quarter in the wake of some very harsh conditions. In the quarter, we saw almost one full month of nonstop rain in Texas. A tropical storm rolled through the southeast. Material availability issues and material inflation that just would not stop, and a labor pool that seems to have vanished. Even with all that, our teams battled through the challenges to deliver a quarter that beat all of our expectations. These results are yet another example of our culture and our ability to take care of our customers, our people, and our communities while delivering fantastic results in challenging times. Let's start by talking about our people and their safety. In the quarter, we had zero lost time incidents. We have now worked over 4 million hours for 11 months without a lost time incident. On average, our recordable rates and lost time incident rates are almost 10 times better than our industry average and are on par with the oil and gas industry. Our people are our most important asset and making sure they go home safe every evening is always our first priority. Now let's talk about some of the financial results in the quarter. Our strategy focused on higher margin, lower risk projects while building a platform for future growth continues to pay off. Overall for the quarter, our revenues versus prior year were flat. This may seem unimpressive, but when you take into account that in 2020, we had significant tailwinds helping us as we carried over almost an entire month of residential and specialty service work from Q1 into Q2. Yet this year, we had nothing but headwinds. Between losing several weeks of production in Texas and the southeast due to weather, and battling material and labor availability issues, It's amazing we're able to match last year's revenue and income in these conditions. In the quarter, our gross margin declined slightly to 14%. Our operating income was flat, and our net income was up 10%. Our earnings per share increased 6% to 69 cents per share. Combined backlog ended the quarter at 1.65 billion, and our margin and combined backlog reached a new high of 12.2%. We continue to generate significant cash and rapidly buy down debt. Year to date, we have generated over $90 million of cash and brought down over $40 million of debt. This consistent, strong performance allowed us to amend our credit agreement in the quarter and reduce our interest rates and enhance our loan requirements. In the quarter, our heavy civil sector saw nice improvements as our operating income was up 13% with lower revenues as we continue to shift our mix away from hard bid to alternative delivery highway, aviation, and rail projects. We have built a very strong multi-year backlog in this sector and should continue to see positive progression in the margins as we go forward. In our residential sector, we saw a nice improvement in revenue and a record number of slabs poured, but a decline in gross margin and operating income. This was driven by labor and material inflation, as well as some negative productivity related to the unseasonably wet weather in May and June. We continue to pass on price increases to our customers, but are still feeling the impact of the 30 to 40 day lag until they take effect. We will continue to see a drag on margins until material prices stabilize and our increases can catch up. Our specialty service sector also saw nice gains in revenue, but a decline in operating income. This was driven by similar issues to our residential sector and a slight mix shift compared to prior year in the quarter. This mix is driven by the number of active large versus small projects, as well as the amount of active commercial projects at any given time, and will fluctuate quarter to quarter and year to year. As we look forward, let's talk about our end markets by sector. Our specialty service sector remains extremely strong. we continue to see significant activity in both e-commerce warehousing and data centers. As we continue to expand our footprint into new geographies with our core customers, we are seeing and winning new opportunities with new customers that are also expanding their e-commerce strategies. As a result, we booked over $150 million in the quarter of new business. In residential, we are seeing annual growth rates in the Dallas and Houston markets of over 20% and do not see any near-term changes in these rates. In addition, our core customers continue to put more and more pressure on us to expand into additional geographies. As a result, we began pouring our first slabs in the Phoenix market in July, a year earlier than we had planned. Even though we're in the very early innings, we believe Phoenix could be a significant addition to our future growth in 2022 and beyond. In our heavy civil sector, bid activity has slowed slightly as states wait to hear the outcome of either an infrastructure build or a surface act to replace the existing FAST Act. We believe the bid activity will pick up significantly in the fourth quarter, as one of the two infrastructure bills is passed or the states start utilizing all the stimulus funds they have received for roads, bridges, and airports. Now let's shift to the full year. Based on the first six months of performance and the positive impact of our amended loan agreement, we are raising our full year net income guidance from a range of $53 to $55 million to a range of $55 to $58 million. With that, I'll turn it over to Ron to discuss the quarter and the year outlook in more details. Ron?

Thanks, Joe, and good morning, everyone. I'm pleased to provide a summary of our strong second quarter results. Today's conference call, together with our earnings release, Form 10-Q, and the investor deck posted to our website, should provide insight into our strategic progress in delivering stronger earnings, cash flow, as well as improving liquidity. Now let me take you through the financial highlights, starting with our backlog metrics on slide number five. At June 30th, 2021, our backlog totaled $1,571,000,000, a 34% increase over the beginning of 2021. Approximately 72% of that backlog increase related to growth in the heavy civil segment with a balance of 28% driven by the specialty services segment, which includes our land development and commercial businesses. The gross margin in our second quarter backlog was 12.4% compared to 12% at the beginning of the year. The higher backlog gross margin reflects an increase in specialty services backlog, which generally has higher margin characteristics than heavy civil projects. Unsigned low bid awards totaled $75 million at the end of June. We finished the second quarter with combined backlog of $1,646,000,000, a 7% increase over the beginning of the year. The gross margin of our combined backlog increased to 12.2%, up from 11.8% at the beginning of the year. Our June 30, 2021 combined backlog margin of 12.2% is the highest in our recent history. Our first half 2021 book to burn factors were 163% and 118% for backlog and combined backlog, respectively. Residential, which counts for 13% of our year-to-date consolidated revenues, does not report backlog as it recognizes revenue as individual concrete slabs are completed. Please flip to slide six for a summary of our consolidated results. For simplicity, I'll refer to the 2021 quarter as the current quarter and a comparable 2021 second quarter as the prior year quarter. Our current quarter revenues totaled $401.7 million, a slight increase over the prior year quarter. As you may recall, both specialty services and residential had exceptionally strong prior year quarters due to a shift in productivity and revenues from the Q1 2020 into Q2 due to severe inclement weather. Consistent with our expectations, Heavy civil current quarter revenues reported a net decrease of $17 million. This expected revenue decline reflects the continuing progress reducing our low bid heavy highway revenues by $43 million in the current quarter, while increased revenues from alternative delivery, heavy highway, and other non-heavy highway projects by $30 million. The current quarter and quarter to date improvements in heavy civil operating margins reflect this improved revenue mix. The balance of the current quarter revenue growth was attributable to specialty services and residential revenue increases of 12% and 6%, respectively. The current quarter consolidated gross profit declined by $3.4 million to $56.2 million, while gross margin declined 14% from 14.9% in the prior year quarter. As I mentioned earlier, both specialty services and residentials had unfavorable 2021 comparisons to the prior year quarter results driven by the recovery from the first quarter 2020 in Plymouth weather. Additionally, both the specialty services and residential segment experienced current quarter negative impacts from weather, inflation, and material supply issues. While a good portion of these headwinds were recovered by the continuation of the respected strong markets, we did experience reductions in the current quarter gross margins, which Joe spoke to earlier. Operating income in the current quarter was $32.7 million, or 8% of revenues, essentially flat with a prior year operating income of $33 million, or 8.3% of revenues. Net interest declined by $1.8 million to $5.7 million in the current quarter, reflecting a continued reduction in our debt levels. Additionally, as we announced in late June 2021, we completed the amendment to our credit facility, which, among other things, reduced our prospective interest rates by two percentage points. We expect this lower rate will reduce our interest expense for each of the third and fourth quarters by approximately $1.6 million. During the quarter, the Small Business Administration forgave our partially owned affiliates PPP loan. This $1.5 million gain is included in net gain on extinguishment debt in the current quarter income statement. Our current quarter net income totaled $20.1 million or 69 cents per share compared to 18.2 million or 65% per share in the prior year quarter. The current quarter EBITDA was $41 million, essentially flat with the prior year quarter of $41.2 million. For the six months ended June 30th, 2021, EBITDA totaled $70.9 million an increase of 9.4 or 15% over the comparable 2020 period. Now let's move to slide seven, which summarizes our cash flow generation and deleveraging strategy. The graph presents our deleveraging expectations and progress to date. Beginning with our October 2019 plateau acquisition and the new five-year credit facility, Our September 30, 2019 pro forma EBITDA coverage ratio was approximately 3.5 times. We set the objective to bring the coverage ratio down to 2.5 times by the end of 2021. The graph reflects where we are to date. We achieved our 2.5% target, 2.5 times turns target coverage in the first quarter of 2021, essentially nine months earlier than anticipated in our strategic plan. Our coverage ratio was 2.3 times at the end of the current quarter. The $75 million revolving credit facility remains fully available. Finally, a few more cash flow statistics for the first quarter of 2021. Our cash and cash equivalents totaled $93.6 million. Cash flow from operations totaled $91.5 million for the period compared to 52.3 for the comparable 2020 period. We invested $21.5 million in net capital expenditures. And lastly, we reduced total debt by $43 million. We expect to continue to explore additional revenue growth and capital alternatives to improve leverage and strengthen our financial position and to take advantage of the trends and opportunities in the infrastructure markets going forward. Please note that we have included modeling consideration slides to the current investor deck to assist our stakeholders in understanding key components of our 2021 financial expectations. Now I'll turn it back over to Joe. Thanks, Rod.