This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Greetings and welcome to the Sterling Construction Company's first quarter 2022 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 this company's website. Before turning the call over to Joe Cutello, 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 Starling'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 the 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 Cattell. Thank you, sir. Please go ahead.
spk04: Thanks, Maria. Good morning, everyone, and welcome to Sterling's first quarter 2022 earnings volume. I'm proud to report another record quarter during an unprecedented time of hyperinflation and supply chain challenges. Our teams are working harder than ever to overcome these challenges and ensure we continue to service our customers and our investors. I'd like to take a second to thank them for their efforts and let them know it does not go unnoticed. This morning, I will cover the highlights of our first quarter and the strategic progress we have made. Then I'll turn it over to Ron for his financial commentary, and I will finish with a market and full year outlook. Let's start with the most important highlight of the quarter, and that is we had zero lost time incidents in the quarter, and our teams went home to their families safe every evening. We continue to be an industry leader in safety, driven by a culture that cares as much about their fellow colleagues as they do about themselves. Our diverse workforce, understands that financial results alone are not enough. We're constantly looking for better ways to protect our people, protect our environments, and give back to our communities. This is what we call the Sterling Way. Shifting to the strategic front, our strategic transformation focused on improving margins, reducing risk, and diversification into value-added services continues to pay off. In the quarter, Our highest margin segment, e-infrastructure, surpassed our transportation segment in revenue for the first time in our history. With the addition of the Petillo acquisition, which we completed at year end, our e-infrastructure segment represented 41% of our total revenue and 62% of our segment operating income in the quarter. We continue to be very excited about the incremental opportunities and synergies we have with the addition of Petillo into the segment. Combined with Plateau, we believe we now have the largest, most capable e-infrastructure site development company in the country. Our building solution segment, our second highest margin segment, continued its organic expansion in both Houston and Phoenix. In the quarter versus prior year, operating income increased 27%, and our Phoenix market has now grown to over 10% of our revenue in the segment in less than nine months. When combined, our e-infrastructure and building solution segments contributed 89% of our segment operating income in the quarter. In transportation solutions, Our focus on bottom line improvements versus top line growth and migration away from low bid heavy highway projects continues to pay off. In the quarter versus prior year, our operating income was up 38% while revenue was up 9%. These improvements in all three segments combined delivered another outstanding quarter. For the quarter versus prior year, Our revenue was up 30%, our net income was up 24%, and our, I'm sorry, our operating income was up 24%, and our net income was up 82%. Versus year end 2021, our combined backlog grew to over $1.6 billion, and our cash balance ended at just over $80 million. These great results are a direct tribute to the power of linking a customer-centric, entrepreneur of culture with our strategic focus on improving margins, reducing risk, and building a platform for future growth. With that, I'd like to turn it over to Ron to give you more details on the financial. Ron?
spk03: Thanks, Joe, and good morning. I am pleased to discuss our strong financial start of 2022 and another record first quarter performance. Our updated investor relations slide presentation has been posted to our website and includes additional financial details to help further understand our first quarter 2022 financial results. The presentation also provides additional modeling considerations, which underpin our 2022 revenue and earnings guidance. As you may recall, we closed on the Petillo acquisition on December 30th, 2021. resulting with the full inclusion of Patil's financial results in the first quarter. Let me take you through our financial highlights, starting with our backlog metrics. At March 31st, 2022, our backlog totaled $1,527,000, up $34 million from the beginning of the year. The gross margin in this backlog was 12.8%. a 60 basis point increase over the beginning of the year. A higher proportion of each infrastructure solutions backlog drove this margin improvement. Unsigned low bid awards at the end of the first quarter of 2022 were $142 million, an increase from approximately $20 million at the end of last year. We finished the current quarter with combined backlog of $1,669,000, a 10% increase over the end of 2021. Our gross profit and combined backlog was a record 12.6% compared to 12.2% at the beginning of the quarter. Our current quarter book-to-burn ratios were 1.0 times for backlog and 1.43 times for combined backlog. Revenue for the current quarter of 2022 were $410 million, up $95 million, or 30%, over the first quarter of 2021. Importantly, of this 30% first quarter revenue growth, half of the revenue growth was driven by the late 2021 acquisition of Petillo and half from organic sterling and its revenue. Our segments reported strong first quarter organic revenue growth of 26% from new infrastructure, 13% from building solutions, and 9% organic growth from transportation solutions. The current quarter e-infrastructure organic growth of $25 million over the prior year quarter reflects a continuing strong demand for distribution centers, data centers, and warehouse within our East Coast footprint. Building Solutions revenues grew 13% over 2021 compared to 21 financial quarter, reflecting continued residential growth in our core Dallas-Fort Worth market and our expanding footprints in Phoenix and Houston. In the current quarter, Phoenix and Houston accounted for 18% of our residential revenues compared to 7% in the prior year quarter. Transportation solutions revenue was $160 million in the current quarter, an increase of 9.1% over the prior period. The increased transportation revenues were primarily driven by higher heavy highway and water containment and treatment work, partially offset by lower aviation revenues. The heavy highway revenue growth was primarily due to increased construction activities on our large design-build project. Consolidated gross profit was $56 million, an increase of $11.1 million over the prior year quarter. Consolidated gross margin declined from the comparable 21 quarter by 40 basis points to 13.9% in the current quarter. This decline resulted from continuing supply chain and inflationary pressures, primarily impacting our e-infrastructure and building solutions segments. These challenges make our year-over-year margin comparison difficult as there was minimal impact of the supply chain and inflationary challenges in the first quarter of 2021. General and administrative expenses increased $6 million in the current quarter to $23.1 million. Over half of this increase is attributable to the Petillo acquisition. We continue to expect our full year G&A expense to be approximately 5% of revenues. Operating income for the first quarter was $28.3 million, an increase from $22.8 million in the prior year quarter. Our current quarter operating margin was 6.9% compared to 7.2% in the prior year quarter. The decline is primarily the results of my aforementioned supply chain chain and inflationary challenges, which have put pressure on our margins since Q2 of 2021. In the current quarter, one of our 50% owned entities received a final notice that its PPP loan had been forgiven. Sterling's portion of this debt forgiveness was $2.4 million, and this gain is included in income in the first quarter. The current quarter effective income tax rate was 25.3%, a decline from 29% in the prior year quarter. This effective tax rate decline principally reflects the benefit of the $2.4 million non-taxable gain from the forgiveness of our last outstanding PPP loan. We continue to expect our full year effective tax rate to be 28% to 29%. Our full year 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 results in a first quarter record net income of $19.3 million, or 64 cents per share. The prior year quarter net income in EPS were $10.6 million, and 37 cents per share, respectively. Our first quarter EBITDA totaled $39.8 million, an increase of 33% over the prior year quarter of $29.9 million. In the percent of revenues, EBITDA improved to 9.7% of revenues per quarter, up from 9.5% for the prior year period. Cash flow generation from operating activity in the quarter was $19.2 million compared to $38.1 million in the comparable 2021 quarter. The fluctuation principally reflects our first quarter seasonality and our changes in the mix in our contracts included in backlog. Additionally, the current quarter included approximately $4 million of cash outflows relating to the payment of the Petillo acquisition related costs in 2022. We continue to expect our full year cash flow from operations to approximate our income from operations for the year. Our first quarter capital expenditures net of disposal proceeds totaled $14.6 million compared to $11 million in 2021. This increase reflects our strong e-infrastructure solutions activities, including the impact of the Patil acquisition. Our full year 2022 anticipated net CapEx continues to be in the $50 to $55 million range. Now I'll turn it back to Joe.
spk04: Thanks, Ron. Now I'd like to take a few minutes to talk about our markets and our full year outlook. Starting with the infrastructure, demand throughout the East Coast remains extremely strong. We continue to be very selective on the projects we're taking to ensure we can continue to service our core customers and their demand first. Our ability to increase capacity significantly still remains limited due to equipment and material availability. At this time, we do not see either of these getting better in 2022. As an example, the current lead time for new equipment is now averaging 9 to 12 months. In our building solution segment, our three markets, which are currently top three markets in the U.S., remain extremely strong. However, this strength is leading to even further supply chain issues, and inflation. In the quarter, we began seeing companies put on allocation in several markets for concrete. These allocations are driven by a lack of cement powder availability and are projected to remain an issue through the second quarter. In addition, we continue to see price increases on all of our materials, but have been successful at passing those on more quickly than in the past. We saw the benefit of this in the first quarter as our operating income increased over 100 basis points from last year's first quarter. Our transportation segment is our only segment seeing slight headwinds from the market. At this time, only a small amount of funding from the new infrastructure build has made it through to the bid phase of new projects. Historically, it has taken 24 to 30 months for us to see any significant impact of new funding. This is not a surprise. It is how we planned and forecasted this piece of our business. What is more challenging is the disconnect between our customer's estimate of project costs, or what we call engineer's estimates, and actual bid cost. Because our customer's estimates were developed several months or sometimes several quarters before the bid process. They have outdated material and labor costs within them. As a result, we won but were not awarded almost $300 million of revenue in the first quarter that was 30% to 60% over the engineers' estimates. These jobs will now go back to be re-estimated using current material and labor prices and then re-bid. Even with the significant challenges each of our businesses is facing, our strong backlog position, coupled with a great start to the new year, enables us to remain confident in our ability to maintain our full-year revenue guidance of $1.825 to $1.875 billion, and an EPS range of $2.69 to $2.88. 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 that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Sean Eastman with KeyBank Capital Markets. Please proceed with your question.
spk01: Hi, Joe and Ron. Thanks for taking my questions. Great start to the year here, guys. Joe, I just wanted to expand on the supply chain inflation update here. You know, I think the original – guidance framework sort of contemplated a status quo type of supply chain backdrop over the course of the year. I'm just wondering, you know, has that gotten worse and you've been able to overcome it in some way? How would you frame that here, Joe?
spk04: Yeah, so if I look at the supply chain itself, it continues to get worse. It's not getting better between availability and pricing. But the good news is when we looked at kind of third quarter, fourth quarter trends and fourth quarter coming into first quarter, we're not seeing further margin erosion. There's a little bit of confusion because the first quarter last year, we didn't see inflation. But what we've been watching is, are we seeing any further erosion? As a matter of fact, in our residential business, we've actually clawed back a nice amount of some of the inflation. But part of that is, you know, Once this started hitting us, we got caught in that cycle where we had projects that were already bid. We didn't have enough inflation built into them. We always put some sort of hedge for material to go up, but we never expected some of the increases we saw last year. So we've corrected that process. In addition, in our e-infrastructure business, we've done things with fuel indexing in our contract. We give a price at the beginning of the contract. If it goes up, the customer pays us. If it goes down, we'll give money back to the customer to try to offset those. So supply chain's still very volatile, still going up, but our guys have done an outstanding job of fending it off, and we feel good about the margins. And if it continues at this pace, should see no or very little incremental erosion.
spk03: Now let me help you with a couple oranges and apples. So from an operating return on our segments, Petillo, together with all of our billing solutions group, were flat from the fourth quarter. In other words, we didn't see further decline in the margins. The challenge in the story is the acquisition, which performed a little bit better than we thought they would out of the gates. But you have to remember that the two things. Petillo is in the far northeast. It snows and it's got nasty weather up there in the first quarter. So from a revenue pacing side, approximately 20% of the revenue falls in the first quarter, 25 or so in the second quarter, and then 30% in the balance of the back after the year. So that's pretty important. Of course, that lower volume impacts margins. And the other one, just to refresh your memory, is the Ptillo margin characteristics are different than Plateau. Because of the type of work they add on to some of their large, dirt-moving scope. So, historically, 40 basis points, I'm sorry, four percentage points difference between full run rate plateau, full run rate patello. But that's already been out in the public entity with audited financial statements and performance. We built that in all the plans. So I think that's one of the challenges that's in there. Because we got basically minimal impact in the first quarter of last year and we're doing those comparisons. So it's not only the inflation but also the addition of the of the Patello business, which we're still very excited about.
spk01: Yeah, so this starts to come into my next question. You know, it looks like the 14.5% gross margin guidance is maintained. And so you guys are still confident you can get that 70 basis points of expansion, even though you started the year down 60 basis points in one cube? And, you know, that's largely a comps thing, it sounds like.
spk04: Yeah, I think there's, yeah, the two main elements of that are you had a little bit of a comp differential in the first quarter. You got the seasonality of the Patella business in the first quarter. But they come back strong and their margins really improve over the next three. And, you know, between their backlog activity and their run activity week, We don't have any concerns.
spk03: Even without the total, don't forget, our seasonally slowest quarter always is the first quarter. Same store sales across the board. So, you know, we are clenching on having confidence that we'll remain in that 14.5% bandwidth. Yep.
spk01: Okay, and then last one from me. Is it fair to say that you guys are tracking ahead of budget on revenue here in the first quarter? This run rate seems to leave some room for upside on the full year range, is my sense, you know, unless I'm missing something there.
spk04: Yeah, here's what I would say. You know, we're kind of sticking with the guidance. Not kind of. We are sticking with the guidance today. Yeah. We're still early in the year, Sean. There's still so many moving parts out there with the supply chain. The piece that worries me, everybody wants to understand is your margin of erosion. I feel pretty good about that, is availability. Knock on wood, we've fought our way through, but availability does not seem to be getting any better on these materials. As you can imagine, if projects later in the year can't get raw materials, do they continue to start them or do they delay them a month or a quarter? That's still the wild card we got out there, frankly. We feel good with the backlog we have. We feel good with the tailwinds of the markets. We just have that one variable of the headwind on the supply chain side that we can't control and we don't know at this point in time. We'd be getting over our skis if we went any further than the guides today, I think.
spk01: Yeah, I think that's totally fair and insightful. Thanks a lot, guys. I'll turn it over.
spk04: Sure. Thanks, Sean. I appreciate it.
spk00: Our next question comes from Brent Thielman with DA Davidson. Please proceed with your question.
spk02: Hey, thanks. Good morning. Joe, Ron, congrats. Great quarter. Thanks, Trevor. I guess the first question, just on building solutions, Joe, you talked about some of these allocation issues for concrete. Does that cause some near-term deceleration on the top line in this segment?
spk04: No, no. The good news is we saw them. They started hitting in the quarter. We're fighting through them. If anything, I think our growth in the Phoenix market would be even bigger than it has been. We've been really happy with the team and their performance, and now that's up, you know, 10% or so of our total volume. I think it would be even higher if we didn't see some of the allocations and shortages on the material side. So we've got it all baked in. It's just kind of got the reins on us a little bit here as we speak.
spk02: Okay. And it sounds like the Phoenix market's now bigger than the Houston market for you. Um, maybe that's just a function of the demand environment, but, um, maybe, maybe you could talk a little bit about that and things to grow the business in Houston.
spk04: Yeah. So the Houston market, so obviously great market is bouncing between one and two. It seems one quarter Houston's one next quarter, Dallas is one. Um, The fundamental difference between the two markets is you do have two fairly sizable players in the Houston market. We're doing business for one or two builders and one or two small builders, very limited and very hard to get labor. We're able to grow in Houston. Labor is more of our limiting factor in the Houston market. Phoenix, a lot of small players, not a lot of large players. in combination of the market, the pricing in the market, labor is still a significant issue down there as well, but that market seems to be an easier opportunity for us to get faster traction with not only our core customers, but the potential of some other customers as we go forward. So we from a strategic standpoint, we're spending more and more time on what we might be able to do to even enhance the growth rates in the Phoenix market.
spk03: And certainly the use of revenue increased pretty steadily in 2022 here, but not at the pace that obviously going from nothing to something in Arizona and a lot. You know, it's part of that math.
spk04: I would say probably the right way to look at it is Houston's on par with what we anticipated. Phoenix is greatly exceeding our expectations on how fast and how rapidly.
spk02: Okay. And then on the cash flow side, I mean, first quarter last year was really, really good. Obviously not as strong in this first quarter this year. Maybe, Ron, just the moving pieces, the cash flow side here in the first quarter, is that functions on these supply chain issues or maybe just want to talk through that.
spk03: No, I think it's consistent with what we thought it would be. So the difference year over year is several of our large design build projects were getting off the ground and ramping up into the first quarter of last year. Generally, that's good for cash flow because we're getting you know, money in to mobilize and early payments. They're not huge, but at the same time, we're not spending a lot of money getting there. So that levels off, and we're seeing it level off. So we've always thought, and even through the bidding in the last year, that our best metric around cash flow from ops, because it's a challenging one with all the various variables in there, would approximate our operating cash, or I'm sorry, income from operations for the year, which is give or take $150 million. So we're continuing to kind of stay in that bandwidth for the expectation side.
spk02: Okay. And then just coming back to Sean's questions on the e-infrastructure side, but I guess I just wanted to kind of recap what I think you said in that it sounds like first quarter is sort of a low point for margins. You should get some benefits. of leverage as you get into seasonally stronger quarters here, kind of Q2, Q3, such that we should see some decent improvement in margins in that segment over the next couple quarters. Is that fair?
spk04: Yeah. The margins in the first quarter are not eroded because there's a margin issue or a pricing issue or anything like that. It's seasonality driven.
spk03: And hopefully we'll continue with the flat impact of, I'd like to go away, but our challenges of pricing, of inflation and supply chain. So we haven't built in not to recover too quickly because we just don't see any recovery in 2022 in our short range crystal ball.
spk04: Yeah, I think one of the challenges that you and Sean both have is that everybody's going to have is we haven't gone through a full year with Papillo in the mix yet. So it's challenging. We know kind of the wrap-up rates and the quarterly rates and everything, and I think that will become very apparent as we get through the year for everybody, and it'll be very consistent as we go into next year as well.
spk02: Okay, very good. Thanks for taking the questions, guys. Sure.
spk00: Ladies and gentlemen, we have reached the end of our question and answer session, and I would now like to turn the call back over to Mr. Cotello for closing remarks.
spk04: Thanks, Maria. And thank you, everyone. I'd like to take a minute to reflect back on the quarter and what an outstanding job all the teams have done in some very, very challenging times. 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. I hope everyone's had a great day. Have a great day, and I thank you again for your time this morning. Thanks, everybody.
spk00: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer