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spk00: 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.
spk03: 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?
spk02: 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.
spk03: As we look at the rest of the year, we're entering the second half cautiously optimistic. As markets remain very strong, but the supply chain remains very fragile and schizophrenic. We do not believe we'll see material prices stabilize until late fourth quarter 2021 or first quarter 2022. In the second half, we will stay focused on delivering our improved net income forecast of 55 to 58 million, buying down debt, and continuing to look for tuck-in or new sector acquisitions. We continue to see a greater deal flow than normal but we'll remain disciplined to make sure we find the right fit. Now let's talk about the company longer term. We're now halfway through our sixth year of transforming our company and our culture. Six years ago, we were a construction company with low growth, low margins, and high risk. Today, we're an infrastructure service provider with a much broader portfolio of end customers, geographies, and capabilities. We have a compounded annual revenue growth rate of over 15%, a compounded annual EBITDA growth rate of 66%, and a solid platform for future growth. We have a diverse culture that continues to demonstrate its ability to deliver results to our shareholders under the toughest conditions. yet understands our responsibilities go beyond just that. They are committed to each other to ensure everyone goes home safe. They are committed to our customers to ensure we meet or exceed their expectations. They are committed to their communities and helping those in need and are committed to their environment to ensure it's a clean and safe area for future generations. This is what we call the Sterling Way. As we go forward, the key elements of our strategy remain exactly the same. We will continue to solidify our base or our core by maximizing price and driving productivity. We will continue to focus on growing our highest margin products, and we will continue to expand into adjacent markets through accretive bolt-on acquisitions that fit in one of our existing sectors or add on a fourth sector. Our combined margins will continue to increase. Our further diversification of businesses, services, and end markets will further reduce risk and volatility. We will ultimately become an infrastructure solutions provider, able to build or service our customers' greatest needs. Whether it's building something new rehabilitating something old, or servicing infrastructure throughout its useful life, we will be there in the critical time of need. We've come a long way, and we're positioned to have another record year. But what is even more exciting than that is we're just at the beginning of what we will become. With that, I'd like to turn it over for questions.
spk00: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment while we poll for questions. Our first question comes from the line of Brent Thielen with DA Davidson. You may proceed with your question.
spk04: Yeah, thank you. I guess, Joe or Ron, first question. If I take the midpoint of the revenue guidance, that sort of implies you'll grow 3% to 4% in the second half. Where should we expect to see some of the slowness or, I guess, implied slowness come from? Is it heavy civil or does specialty and residential... growth rates sort of ease off of what we've seen here so far.
spk02: Yeah, it's really a heavy highway where we will see what we've been seeing, continued minimum growth, probably negative revenues actually, because of the strategic direction to continue to reduce our backlog on that heavy, that hard bid work and replace it with the alternative delivery. That was a big headwind to follow on the revenue reduction in the first half. That won't go away. We are not done yet shifting that profile. Although we've come a long ways, we will see a little bit of that in particularly the fourth quarter as our typically slows down a bit and we start reaching unfortunately the snow season there in the back part of fourth quarter. We'll be back to the usual slowest quarter in that business will be the fourth quarter. The balance of residential and specialty, we don't see that slowing down.
spk04: Okay. And does the outlook imply the residential segment is going to see the same sort of margins that you saw in the first half? I mean, could they get worse from here as you're trying to play catch up with pricing?
spk03: Yeah, they're not going to go up. in the second half. We continue to fight increases. I'll give you an example. We had passed on an increase two weeks ago for rebar and post-tensioning cables, and literally just two days ago got another 8% increase on the materials, right? We're passing things on as fast as we can. We're hoping that things stabilize on a positive front. Lumber looks like it's coming down in kind of September, October timeframe. So we should see some stabilization there and a little bit of relief on that front. But concrete and steel have not slowed down by any stretch of the imagination. So I think we'll be close. We might see a little bit of a further decline if inflation keeps getting crazy and we see multi-increases in a month. But as we get into the fourth quarter, we really think that starts to begin to stabilize, Brent.
spk04: Okay. And then on residential, can we just sort of explore the Phoenix market decision that obviously came a little sooner than, than I anticipated, I guess, beyond, you know, beyond Joe, the fact we know it's a great housing market. I assume there, you know, some different labor and other dynamics to the market. So, you know, how do we get comfortable? You can, you can execute as well there as you have in Dallas and Houston.
spk03: Yeah. The pros and the cons of the, of the Phoenix market. It's a, The Phoenix market is generally the fourth or fifth largest market in the U.S. I haven't seen the latest statistics, but they're doing about half as many new home starts a year as Houston. And by the way, Houston just passed Dallas on housing starts, so it's the number one market right now. That's good. The other good is in the Phoenix market, one of the reasons we got pulled there harder, faster, quicker – is because there aren't any really big players. One of the things we've continued to battle with and it's taken us a little bit longer in the Houston market is there's two large players in the Houston market. There does not appear to be any large players in the Phoenix market, which helps us get in and get a foothold easier. The biggest challenge is labor. What we've done is we've taken, to start out, we've taken some of our traveling commercial crews and put them in Phoenix. They seem to be doing very well. The nice thing about those folks is they spent all their time on the road doing commercial work for us. And that commercial market is not only declined in demand, but we've seen a significant pricing decrease in the commercial market. So we're reallocating those resources to get a foothold in Phoenix. We can grow, I say, as fast as we want in Phoenix right now. Tremendous demand. It's going to be how fast we can bring crews up to speed and bring them on. And pricing appears to be good in the market in relative terms. So we should see, you know, it won't be up to Dallas margins right away, but we think we can get very close to those Dallas margins over a period of time.
spk04: Okay. And then last on the specialty services, you're heading to the second half with, you know, considerable level of bookings, but I guess I'm curious what the, what the market like or competitive fields like for kind of the smaller, faster kind of book and burn work you participate in, in that segment, is it, is it as robust as you've seen?
spk03: Yeah. You know, surprisingly I would have, I would have really thought when we went into COVID, that the, you know, I'll call it the privateers, the smaller warehouses that are speculative, would have really slowed down and dried up. What actually happened is the Amazons of the world and several others went in and bought up everything that was on the market, at least through the southeast, because they didn't have time to put in additional distribution centers. So we're seeing the privateers working as quickly as they can to refurbish fill that inventory of spec-type warehouses. As you can imagine, it's not that easy to go out and buy a whole bunch of land and get it permitted today, right? So it takes a little bit longer, but that market activity is still very strong.
spk04: Okay, great. Thank you.
spk00: Our final question comes from the line of Sean Eastman with KeyBank Capital Markets. You may proceed with your question.
spk01: Hi, gents. Nice quarter. Compliments. Thanks, Sean. Just touching on the guidance as well. I mean, if we look at the EBITDA guidance, it implies lower at the midpoint implies lower EBITDA in the second half than the first half. Yet we kind of have this residential catch-up dynamic. Just curious why that makes sense. You know, I guess what I'm getting at here is it seems like there might be some conservatism in the outlook. And, you know, I'm just curious what in particular warrants caution here. Is it really just residential supply chain labor constraints or maybe something else we should be kind of vigilant of as we go into the second half?
spk03: Yeah, well, I think there's a little bit of caution on our front in the sense that this material, I got to tell you, it is hand-to-hand combat out there. It's been a long time since you have your biggest suppliers calling you and saying, I know I gave you an increase two weeks ago. By the way, here's another one. Take it or leave it. And you got two minutes to make a decision or we're going to sell it to somebody else. It's just a unique environment. And When that stabilizes, I don't know. You know, everything we see looks towards the end of this year as you start hitting the winter months and some construction starts slowing down and all that stuff. But, man, I would have never imagined the number of increases that we've seen already this year. And being able to pass those on, there's always that lag, right, and that issues. Labor pricing is going up. It is going up incredibly fast. So when we talk about the labor pool, the good news is we've been very fortunate and have worked very hard to maintain the pool that we have. But it's costing us more, and it's extremely difficult if you want to go add people or replace people right now. So we're trying not to get over our skis. We see some slowdown in inflation.
spk02: uh and uh some timing of a couple projects hit and start off a little earlier than uh than we would uh anticipate um those are all good things for us uh but that's kind of where ron do you have anything to add to that no i think that that's right actually the good news is we're tracking uh certainly from operation operating income on up pretty much as we uh planned and we didn't know how to spell uh supply chain at that point in time so Those are big things to overcome. So staying with our original kind of revenue operating ranges that were out there, that's, I think, a pretty good accomplishment given what we've seen in the first half here.
spk01: Yep, indeed. Okay, and then we seem to talk about the supply chain and labor constraints in the context of the residential business mostly. I wonder, does this bleed over into the specialty or heavy civil segment at all? Is there any risk there? I'm curious in particular around the specialty equipment fleet, whether there's any risk about not being able to support growth and access the yellow iron, etc.? ?
spk03: Yeah, I think, let's start, it's certainly the labor issue goes across all sectors, right? It's not unique to residential. The uniqueness of residential is those markets are up 20%, and we're not up 20% because we don't have enough labor and material to go do all of that, right? So we are literally turning down work every day. The heavy civil side, Because they're bigger, slower projects, you can plan ahead longer term. We've got people, capital, and assets for that. And we've seen less of an impact on material, though we're seeing availability issues on material, less of a pricing impact as we generally lock into those, or have been able, in some instances where there have been significant impacts, pass those on to the end customer. There's clauses that we can do that. The specialty side. I think similar to the residential, their staff crewed and have the equipment to do the work. I will tell you, getting new equipment has taken us a lot longer than originally anticipated. But we are one of CAT's bigger customers for sure. And in general, they've taken very good care of us and replaced our waiting equipment with rental equipment. So we haven't lost the capacity. It's just more of a a little bit of a pricing issue where we're having to rent where we would have normally owned that product type thing. But yellow iron pickup trucks take six months to get a pickup truck. Standard, you know, kind of put in perspective, standard water pipe that you would call up in the morning. I used to make this stuff. You'd call up in the morning, have a truck load there that afternoon or the next morning. Right now the lead times are 16 weeks and your price is whatever it is the day they ship. They're not going to tell you until they ship it. And that's just one of a thousand examples that are going on out there. It's just a different world than we've seen. The good news is the markets are very strong, so you're able to offset some of this with volume. The thing that would be worse is if our markets were all down 10% or 15% and we're seeing supply chain issues and inflation on top of it, we'd really be scrambling. So we feel good about the market. The supply chain will eventually sort itself out. It just hasn't rebounded yet. So we're focused on making sure that market continues to be strong, and we'll fight through the day-to-day battles and the inflation we have and catch that up as we get down the road. Okay, that's really helpful.
spk01: And in specialty, the geographic expansion, can you give us a little more color on that? kind of where you're going, and should we anticipate a similar dynamic to residential where there could be a bit of a margin drag as you enter those new geographies, or does it work differently?
spk03: No, it's different than residential. We're going with our core customers, and we're pricing in. We're using our same crews, and we're pricing in that cost to be further away. So, no, that doesn't impact that. Obviously, we've expanded into Tennessee. We've got several jobs now in Tennessee. We're in Mississippi, got a couple jobs in Mississippi, looking at Alabama along with some others. So we just keep, you know, we call it the one step. We want to step one state further away. We're starting to look at some work up in Maryland. So to get over that Virginia border into the Maryland stuff, we're bidding on some projects up there. So it's kind of one step at a time. You know, how do you go 50 to 100 miles further than you are today that takes you into a new state with your core customers? But what's really nice is it's opened up other opportunities while we're there. We're seeing other projects from the general contractor community that we're working with where they're working with other customers, and we wouldn't generally even look at those because we're not in that footprint or geography. So we're seeing nice pickups from that.
spk01: Okay, excellent. Last one from me. When we think about new platform acquisitions being potentially on the table here, based on what you're seeing, Joe, would you have to pay a multiple higher than where Sterling's trading today to consummate those types of transactions?
spk03: Yeah, well, it's a good question. I don't know if the... Legalized marijuana laws are transferring stuff further and further across the country, or some of the equity deals have made some of these sellers think their businesses are worth a lot more than they are. We're certainly seeing higher prices in some areas in the marketplace, but we're also seeing a lot of failed deals, right? So what's very interesting is a lot of deals that came out early in the year with the intention of selling either in the equity world or at very high multiples have failed, and they're coming back out and getting realistic about valuations, right? So that's just kind of a general term. One of the things that's... We've looked at a couple different areas for that fourth sector, and one of the limiting factors for us have been some of the multiples today. I don't think we want to... pay a significantly higher multiple than where we are today. And we'll keep plugging away. But there's been a couple out there that would have fit from a strategic profile and from a multiple profile, but for other reasons just weren't the right fourth sector for us at this point in time. So I won't say never. As we get into Things like broadband and some of that stuff, those multiples are much higher. And I think that we would probably start out smaller and try to build something there if we can get something in a fair multiple range if we were to go that route. But we're also looking at several nice tuck-ins to our existing sectors. um that would be you know they're not necessarily huge businesses but uh accretive nice incremental service potential uh and could help us grow uh organically a little faster got it thanks very helpful call and uh congrats again nice job this quarter thanks yeah thanks sean i i don't think uh you know i'm sure my peers all feel it out there but it's uh it's you know it looks like a uh you know, slightly above par quarter, but it was a phenomenal quarter with all the challenges faced out there, and the Sterling team just knocked it out of the park for what we were challenged with.
spk01: Agreed.
spk00: Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to send this call back over to Mr. Joe Cotillo for closing remarks.
spk03: Thanks, Laura. I'd like to thank everyone again for joining today's call. If you have any follow-up questions or wish to schedule a call, please refer to the information provided in the press release associated with our investor relations group at Sterling or our partners at the equity group. Hope everyone has a great day and thanks again.
spk00: Thank you for joining us today. This concludes today's conference. You may disconnect your lines at this time.
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