Sterling Infrastructure, Inc.

Greetings and welcome to the Sterling Construction Company's fourth quarter and year-end 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 company 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 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 obligations 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, Kyle. Good morning, everyone, and welcome to Sterling's fourth quarter and full year 2021 earnings call. Sterling recorded another record fourth quarter in another record year. exceeding our expectations. Our people and our strategy continue to deliver exceptional performance time and time again, even during a year with significant challenges. This morning, I will cover the highlights for our fourth quarter and full year, then turn the call over to Ron for his financial commentary. Before I discuss our highlights, I will speak briefly about our journey and reflect on the strategic elements that transformed Sterling from a heavy highway construction company to a leading specialty infrastructure provider with expertise in e-infrastructure, building, and transportation solutions. Since 2016, Sterling has been on a transformational journey, born of a strategy and vision that levers our entrepreneurial spirit and our customer-centric culture. This blueprint for reducing our risk, improving our margins, building a platform for future growth, and consistently outperforming our peers is made up of three fundamental elements. Solidifying our base, growing high margin products, and expanding into higher margin, higher growth adjacent markets. This vision and strategy has not changed and will remain the same in 2022 and beyond. In 2021, we continued to make significant progress towards our vision. Our e-infrastructure solution segment generated 60% of our profits in 2021 and remains our highest margin, fastest growing segment as it grew 18%. With the acquisition of Kimes and Petillo, both closing in December, We now have an even broader portfolio of capabilities and geographic coverage for 2022. The Petillo acquisition now expands our e-infrastructure footprint to cover all the major markets on the East Coast and bring several new large e-infrastructure customers to our portfolio. Our building solution segment generated over 24% of our profits in 2021. and is our second highest margin and second fastest growing segment as it grew 15%. In 2021, we continued our expansion in the Houston market and began the additional expansion effort into Phoenix. With the addition of Phoenix, we are now currently in three of the top four housing markets in the U.S. In our transportation solution segment, we continued our shift away from hard bid highway projects to alternative delivery transportation and aviation projects. Now less than 20% of Sterling's total revenue is from hard heavy highway. This shift along with continued improvements in execution and productivity enabled us to improve our operating income as a percentage of revenue by 500 basis points. This improvement would be impressive in any year but is even more impressive in a year of hyperinflation. Turning to the fourth quarter and full year results, we continue to be an industry leader in safety with our incident rates at approximately one-fifth the industry average. Last year, we once again received recognition and accolades for numerous safety awards. We finished second for the Associated General Contractors of America National Safety Award, and we had one of our employees named the AGC's 2021 Construction Safety Champion of the Year. Turning to the financial front, we closed the year with a record fourth quarter, despite the ongoing supply chain and inflation challenges. Versus prior year, our revenue increased 11%. Our gross margin increased to 13.6%, our operating income increased 13%, and our earnings per share increased 43% to $2.15 per share. Our backlog increased to $1.49 billion, with $211 million attributed to the Petillo acquisition. Our strong cash generation continued. resulting in $152 million of cash flow from operations. We used this cash to pay down debt and funded a portion of the Petillo and Kimes acquisitions, enabling us to reduce our leverage to 2.4 times EBITDA. As we look forward to 2022, our e-infrastructure solution segment enters 2022 with robust markets throughout the East Coast. The recent pandemic has accelerated demand and increased the size and scope of projects for e-commerce distribution and data centers. This aligns well with our strategy and competitive advantages. During the quarter, we booked new business, including Plateau and Petillo, bringing our total e-infrastructure solution backlog to $433 billion. In addition to the strong markets, we believe we will begin recovering some of the lost margin related to inflation back in 2022. For our building solution segment, we expect the demand in our markets from our top customers to grow at double-digit rates in 2022. In addition, we believe we have the opportunity to double our growth in Phoenix in 2022 versus 2021. Our transportation solution segment will remain disciplined and focused on margin growth and the continued shift of our portfolio towards alternative delivery highway and aviation projects. Our diverse portfolio continues to position Sterling in the right markets with the right solutions for our customers at the right time. Our strategic actions in 2021 along with the strong end markets in our e-infrastructure and building solution segments, have positioned us for yet another record year in 2022. In 2022, our revenues will be between $1,825,000 and $1,875,000. And our net income will be between $83 million and $89 million. 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. I am pleased to discuss our record fourth quarter and full year performance. Our updated investor relation presentation and the December 31st 2021 earnings release has been posted to our website and includes additional financial details to help further understand our 2021 financial results. The presentation also provides additional modeling considerations, which underpin our 2022 revenue and earnings guidance. Additionally, as you may recall, we closed on Patello and Kimes acquisitions on December 30th and December 28th, respectively. Given the proximity to the year end, these acquisitions had minimal impact on our 2021 income statement. With these acquisitions, we realigned our operating groups into three reportable segments, transportation, e-infrastructure, and building solutions. Our new segment presentation also breaks out corporate-related costs. For a better understanding of our realigned segment reporting, we have included the historical quarterly segment information for both 2020 and 2021 in the updated investor relations presentation and in our 2020 one earnings release, both of which are available on our website. Let me take you through our financial highlights, starting with our backlog metrics. At December 31st, 2021, our backlog totaled a year-end record high of $1,493,000,000, up $318,000,000 over the beginning of the year. The end of the year 2020 backlog includes $211 million relating to the December 2021 acquisitions. The gross margin of our December 2021 backlog was 12.2%, a 20 basis point increase over 2020. Unsigned low bid awards at the end of 2021 were $23 million, and our full year 2021 book-to-burn factor for backlog was 123%. Note that residential slab revenue is excluded from this computation, as it is not a backlog-driven business. Revenues for the quarter were $401 million, up $54 million, or 16%, over our 2020 comparable quarter. Each of our three reporting segments reported increased revenues and segment operating income for both the current quarter and the full year. Consolidated segment operating income increased by 21% in the current quarter, reflecting the continued revenue mix improvements driven by our higher growth rates from our highest return segments. Our full year 2021 revenues totaled $1,582,000,000, up $154,000,000, or 11% over 2020. Transportation solutions revenues increased $19 million in the current quarter and $42 million or 5.5% for the year. The increases were primarily due to the ramp up of large design build contracts and offset by an $80 million strategic reduction of our low bid heavy highway revenues in 2021. This revenue shift was a principal driver of the improved current year operating margins. E-Infrastructure Solutions revenues increased $27 million in the current quarter and $72 million or 18% for the year. The increases were driven by the continued high demand for large scale site development opportunities within the Southeast and Mid-Atlantic region. Both E-Infrastructure Solutions current quarter and full year operating margins declined by 210 basis points. These reductions were driven by continued headwinds from supply chain issues and related impact on productivity and efficiencies, as well as a lower project mix in the periods. Building solution revenues increased $19 million in the current quarter and $42 million, or 14.9%, for the year. Residential revenues increased 27%, while commercial revenues declined by 3%. The number of residential slabs completed during 2021 increased 24% over 2020. The increase in slabs was primarily attributable to the continued market strength in the Dallas-Fort Worth area and continued expansion into the Houston and Arizona markets. Building Solutions operating margins increased in the fourth quarter by 260 basis points. reflecting progress in recouping the 2021 cost increases experienced in the first three quarters of 2021. Full-year operating margins declined by 70 basis points to 10.3%. The full-year operating margin decrease was driven by temporary price concessions due to COVID and an increase in lumber, concrete, and steel costs earlier in the year. General and administrative expenses for 2021 and 22 were 5% of revenues consistent with our expectations. The dollar increase over the prior year was attributed to higher employee and insurance-related costs. We also incurred acquisition-related costs of $3.9 million, or 10 cents per share, relating to the Petillo and Kynes transactions. For comparative purposes, we have added back expense in our quote-unquote as-adjusted results. Our current quarter operating income was $19.8 million, down slightly from 2020 operating income of $20.9 million. As adjusted, operating income was $23.7 million compared to $28.9 million in the prior year. For the year ended December 31st, 2021, operating income was $107 million compared to $95 million in the prior year. Adjusted operating income was $111 million, or an increase of 16% for the year ended December 31, 2021, compared to $96 million in 2020. Interest expense for 2021 was $19.3 million compared to $29.4 million in 2020. The 2021 $10 million decline in interest expense reflects lowered average debt balances during 2021 and the reduced interest provided by the June 2021 debt amendment. We expect our full year of 2022 interest expense to be in the $19 to $21 million range. Our effective income tax rate for 2021 and 2020 were 27.7% and 34.4%, respectively. The net decline was driven by more favorable 2021 permanent tax differences. Of our full year 2021 income tax expense of $24.9 million, $21.5 million was non-cash as taxable income was absorbed by our net operating loss carry forwards. Cash income tax expense totaled $3.4 million in the current quarter, principally for state income tax payments. We expect to have approximately the same non-cash cash income tax expense relationship in 2022. The net effect of all these items resulted in current year net income of $62.6 million or an EPS of $2.15 and a fourth quarter net income of $10.9 million with earnings per share of $0.37. Adjusted net income and adjusted EPS in the current year were $65.6 million and $2.25 per share. Moving to our balance sheet liquidity. Our year-end cash totaled $82 million compared to $66 million at the beginning of the year. Our debt at the end of 2021 totaled $462 million compared to $375 million at the end of 2020, or an increase of $87 million. During 2021, we repaid $48 million of debt and borrowed $140 million through a new term loan to fund part of our December 2021 acquisitions. At the end of 2021, our forward-looking coverage ratio was 2.7 times EBITDA compared to 2.4 times at the beginning of 2022. We remain comfortable with a target ratio range of plus or minus 2.5 times EBITDA At the end of 2021, we had no borrowings on our revolver credit facility, and accordingly, we have full availability of the $75 million line. Our current year adjusted EBITDA was $143 million, an increase of 12% over 2020 adjusted EBITDA of $128 million. In addition, our 2021 cash flow from operating activities totaled a record $157 million. an improvement of $31 million, or 25%, for the current year. This strong operating cash flow provided us with the opportunity to make debt repayments of $48 million, while investing $43 million in net capital expenditures, investing $45 million of cash for acquisitions, and finally, it enabled us to grow our cash balance by $16 million. With that, I'll turn it back over to Joe.