Sterling Infrastructure, Inc.

Greetings. Welcome to Sterling Construction Company's third 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 Joe Cotillo, Sterling's chief executive officer, I will read the safe harbor statement. Some discussion 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 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 their most comparable GAAP financial measures in our earnings release issued yesterday. I would like to now turn the call over to Mr. Joe Cotillo. Thank you, sir. Please go ahead.

Thanks, Sherry. Good morning, everyone, and welcome to Sterling's third quarter 2021 earnings call. The third quarter marked the 15th quarter of period over period earnings improvements since 2017, and the sixth time during that same period that we have raised our annual guidance. This consistent level of exceptional performance is a tribute to the strength of our strategy and the culture of our people. Their entrepreneurial spirit coupled with their ability to address challenges head on is what enables us to continue to deliver strong results in challenging times. Before we get into the quarterly results, I'd like to spend a little time talking about our end markets in each sector. Our specialty service sector continues to see very strong activity throughout the east in data and e-commerce distribution centers, or what we call e-infrastructure. During the quarter, we booked over $150 million of new business. In addition to our core customers, our geographic expansion has opened up opportunities to new e-retailers building out their distribution networks. To date, we have not seen any slowdown in new project activity and do not anticipate any change as we go into 2022. Our residential sector continues to see strong double-digit growth in both the Texas and Arizona markets. We poured over 1,000 slabs in the month of July and set a record for slabs poured in a quarter. Demand of first-time homebuyers remains very strong and inventory remains very low. We anticipate this demand will continue into 2022. Bid activity for our heavy civil sector remains softer than normal as the DOTs and airports await a decision on the next infrastructure bill. Regardless the outcome of the infrastructure bill, we believe bid activity will pick up in early 2022, driven by billions of dollars of stimulus money sitting at the state level allocated to infrastructure. On the supply chain front, we continue to see significant challenges with material availability and inflation in all our sectors and all our geographies. This inflation and availability has gone beyond the normal big ticket items like steel, lumber, and fuel, and is now impacting almost every item we use. We currently do not see any relief in sight and anticipate these challenges will continue through the first half of 2022. we will continue to work diligently to find ways to pass these increases on or offset them in other ways. Now let's talk about the results for the quarter. The first and most important result for us is keeping our people safe and ensuring they go home every evening to their families. Coming into the quarter, we had not had a lost time incident in 2021. Unfortunately, after going over 5 million hours without a lost time incident, We had one in the third quarter. This incident was a strong reminder that no matter how hard we work at keeping everyone safe, we have to continue to do more. Being 10 times better than the industry average is not good enough when it comes to safety, and we will never stop making our workplace safer every day. On the financial front versus prior year, our revenue increased 21%, and our gross profit increased 16%. We saw our gross margins decline to 12.5% driven by material inflation and negative productivity associated with supply chain delays. Our operating income increased 11.5% and our earnings per share increased 33% to 72 cents per share. The driver behind our operating income increasing when our gross margin decreased is just one example of the things we are doing in addition to passing on price to offset the negative impacts of inflation and deliver improved bottom line results. Our backlog finished the quarter at $1,411,000,000, and our margin in backlog is 12.3%. We continue to generate record cash flow from operations. and as a result have generated $135 million year to date. In our heavy civil sector, we saw our revenues grow 24%, but more importantly, our operating income almost tripled versus Q3 prior year. This strong income improvement is driven by the continued shift away from low bid heavy highway work to aviation and alternative delivery highway projects. Our specialty service sector and residential sector were the areas most impacted by inflation and supply chain delays. On the residential front, we're able to offset our year-over-year margin decline by producing a record number of slabs in the quarter. For the quarter, our residential revenue was up 54% versus prior year, and our operating income was up 29%. We continue to work hard to pass on increases, but still have a 40 plus day delay in doing so. On the specialty service side, we saw revenues increase 6% year over year in the quarter. But this increase was not large enough to offset the material inflation and negative productivity we're seeing associated with material delays. To help put some perspective around some of these increases and delays we are seeing, Let me talk about a couple simple examples. We use approximately 300,000 gallons of diesel fuel a month in this sector. With the recent increases, we saw close to a million and a half dollar negative impact in the third quarter alone. Our standard PVC water pipe is normally priced at the beginning of a job and delivered the same week that you need it. Today, it's taking up to six months to get and pricing is determined on the day that it ships. Our current prices are up over 100% on these products. Our hope is that these unprecedented increases begin to taper by mid-2022 and begin to follow similar trends to what we've seen in lumber. Even with all these challenges, our great third quarter and year-to-date results are enabling us to increase our full-year guidance range as follows. Revenues will be between $1.51 and $1.52 billion, and our net income will be between $61 and $64 billion. With that, I'd like to turn it over to Ron to give you more details on the quarter and the full year.

Ron? Thanks, Joe, and good morning, everyone. I'm pleased to provide a summary of our strong third quarter 2021 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 strong earnings and cash flow. Now let me take you through our financial highlights for the third quarter. At September 30th, 2021, our backlog totaled $1,411,000,000, a 20% increase over the beginning of 2021. The backlog increase was evenly split with 50% of the growth attributable to both heavy civil and specialty services. The gross margin in our third quarter backlog was 12.3% compared to 12% at the beginning of the year. This higher backlog gross margin primarily reflects an increase in specialty services backlog, which generally has higher margin characteristics, higher than heavy civil projects. Unsigned low bid awards total $115 million at the end of September 2021. We finished the third quarter with combined backlog of $1 billion $530 million, essentially the same as at the beginning of the year. The gross margin of our combined backlog increased to 12.1%, up from 11.8% at the beginning of the year. Our year-to-date 2021 book-to-burn factors were 1.2 times and 1 times for backlog and combined backlog, respectively. Residential, which accounted for 13% of our year-to-date consolidated revenues, does not report backlog as it is recognized, revenues recognized as individual concrete slabs are completed. Moving to our operating results. Our current quarter revenues total a record $463 million, an $80 million, or 21% increase, over the prior year quarter. Third quarter revenue growth by segment was 24%, 6%, and 54% for heavy civil, specialty services, and residential, respectively. The significant increase in heavy civil revenues was primarily due to the ramp-up on construction of our large design-build joint venture projects. Our low-bid heavy highway revenues decreased slightly in the current quarter. reflecting our strategic intent to continue the shift of our mix to the higher margin alternative delivery projects. This change in revenue drove an approximate three-time improvement in heavy civil operating income in the current quarter. The 6% revenue increase in specialty services was driven by higher volumes from site development activities. Current quarter operating margins declined 320 basis points, driven by continued headwinds from supply chain issues and related impact on productivity and efficiencies, as well as slightly lower project margin mix in the quarter. Residential revenues were $65.3 million for the current quarter, an increase of $22.9 million, or incredibly 54% over the prior year quarter. and up 40% over our second year, 21, second quarter, 21 revenue. The strong revenues were driven by the completion of a number of uncompleted slabs, which shifted from second quarter up to 2021 due to the weather-related delays and the continuing strong demand for our new housing markets into Texas footprint. and to a lesser extent, our recent expansion into Phoenix. Current quarter operating income margins decreased by 20 basis points over the prior year quarter due to the higher material costs for concrete and steel and the lack of consistent availability of these materials, as well as increased subcontractor labor costs. While we continue to work with our customers to pass on increases in material and labor costs, There continues to be a timing delay in obtaining price increases that correspond with the timing and volatility of the increased costs. The current quarter consolidated gross profit increased $7.9 million to $57.8 million, while gross margins declined 12.5% from 13% for the comparable 2024. The increase in gross profit and decrease in margin was primarily driven by higher revenues from each of our segments, offset by the continued headwinds from inflation, material supply, and labor availability challenges, particularly for residential and the special services segments. General and administrative expenses total $19.6 million, or 4.2% of revenues in the current quarter, compared to 15.2 million or 4% of revenues in the prior year. These increases reflect the high volume of revenues in the quarter and the same pressures as I discussed earlier on costs. We expect our full year 2021 G&A expense to be approximately 4.8% of revenues compared to 5% in 2020. Operating income in the current quarter was $32 million, or 6.9% of revenues, compared to $28.8 million, or 7.5% of revenues, in 2020. The net interest expense declined by $3.2 million to $3.9 million in the current quarter, reflecting the lower interest rates resulting from our late June 2021 credit facility amendment and our continued reduction in our debt levels. During the quarter, the Small Business Administration forgave our partially owned affiliates PPP loan. The related $1 million gain is included in the gain from debt exclusion on our income statement. Our effective income tax rate was 25.2% in the current quarter, down from 29% in the prior year quarter. This decrease was primarily driven by the non-taxable gain on debt extinguishment I just spoke to. We expect our full year 2021 effective income tax expense rate to be approximately 27.5%. Our current quarter net income totaled $21.1 million, or $0.72 per diluted share, compared to $15.2 million, or $0.54 per share in the prior year quarter. Current quarter EBITDA was $40 million, an increase from $36.7 million in 2020. For the nine months ended September 30th, 2021, EBITDA totaled $110.9 million, an increase of $12.7 million, or 13% over the prior year quarter. Based on our year-to-date performance, including better than expected revenues and operating income, and improved non-operating costs, including interest expense, income taxes, and debt extinguishment gains. We are now providing updated guidance for 2021. We now expect to generate full-year revenues of $1.51 billion to $1.52 billion, and net income of $61 million to $64 million. Now let me provide you an update on our strong cash flow generation and liquidity strategy. As you may recall, with the October 19 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 by the end of 2021. We exceeded our objective and achieved the 2.5 times target coverage in the first quarter of 2021, nine months earlier than anticipated in our strategic plan. Our EBITDA coverage ratio was a very comfortable 2.2 times at the end of the current quarter. We have not had any borrowings under our $75 million revolving credit facility in 2021. Lastly, a few additional 2021 cash flow comments. Our cash and cash equivalents totaled $117 million as of September 30th, 2021, up $51 million from the beginning of the year. Year-to-date cash flow from operating activities totaled a record $135.7 million compared to $92.3 million for the comparable 2020 period. We invested $37.2 million in net capital expenditures. And lastly, but certainly not least, we reduced our total debt by $49.1 million thus far in 2021. Finally, we expect to continue to explore additional revenue growth through strategic acquisitions of businesses that meet our gross margin and overall profitability targets while managing our liquidity and cash. Please note that we've included modeling considerations slides to the current quarter investor deck to assist our stakeholders with understanding the key components of our 2021 financial expectations. Now, I'll turn the call back over to Joe.