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spk00: Greetings and welcome to the Sterling Infrastructure's second quarter 2022 earnings conference call and webcast. As a reminder, this conference is being recorded and all participants are on 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 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 and 10 filing 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 will now turn the call over to Mr. Joe Cotillo. Thank you, sir, and please go ahead.
spk05: Thanks, Donna. Good morning, everyone, and thank you for joining Sterling's second quarter 2022 earnings call. I would like to start off by thanking all of our employees for delivering another record quarter, the Sterling Way, and enabling us to increase our full year earnings forecast in some very challenging times. The Sterling Way is what defines our culture. It is an understanding that great results to our shareholders are critical, let alone not enough. It is our responsibility to continuously look for better ways to protect our people, our environments, and give back to our communities. It's this culture, these values, that have enabled us to deliver multiple quarters of record results. This morning, I will cover the highlights of our second quarter and the strategic progress we have made. Then I will turn it over to Ron for his financial commentary, and I will finish with a market and full year outlook. Let's start off with our most important asset, our people. In the quarter, we had zero lost time incidents. Our continued focus on the well-being of our employees helps us ensure our colleagues go home safe every evening and makes us an industry leader in safety. Shifting to the strategic front in each one of our segments, the strategy and objectives we established six years ago remain the same and are focused on improving margins, reducing risk while building a platform for future accretive growth. This strategy continues to pay off as we have transformed the company into three different segments, and it will continue to pay off long into the future. Our e-infrastructure segment has become both our highest revenue and highest margin segment. In the quarter, revenues were up 89% versus Q2 prior year. and now represent 46% of our total revenue and 69% of our total segment operating income. The recent acquisition of Petillo has only made this segment stronger and added to our opportunities. Our second highest margin segment, Building Solutions, continued to see strong growth as its revenue grew 15% versus prior year's second quarter. and its segment operating income grew 44%. Building Solutions now represents 17% of our total revenue and 20% of our operating income. We saw significant growth in our expansion markets and combined now represent 18% of our residential revenue, up from 6% in the second quarter, 2021. Our transportation solutions business reduced in size in the quarter versus prior year by approximately 6%, but delivered more earnings as our segment operating income improved 6.5%. Our continued shift away from low bid to alternative delivery highway, aviation, and rail projects continues to pay off. Our transportation segment now represents 37% of our revenues, and 11% of our segment operating income. All three segments delivered an improved year-over-year operating income along with various other great results. For the quarter versus prior year, our revenue was up 27%, our segment operating income was up 31%, and our net income was up 29%. We grew our combined backlog to $1.73 billion up 14% versus year end 2021, and delivered 86 cents per share to our shareholders. The continued strong performance in the quarter and the year to date has enabled us to increase our full year net income guidance from a range of $83 million to $89 million to a range of $90 to $96 million. With that, I'll turn it over to Ron to talk about our financials in more detail. Rod?
spk04: Thank you, Joe, and good morning. I'm pleased to discuss our strong 2022 second quarter results and record quarterly performance. Our updated investor relations slide presentation has been posted to our website and includes additional financial details to help further understand our second quarter 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 in the inclusion of Petillo's financial results for all of 2022. Let me take you through our financial highlights, starting with our backlog metrics. At June 30, 2022, our backlog totaled $1,544,000, up $51 million over the beginning of the year. Our gross margin of this backlog was 12.6%, a 40 basis point increase over the beginning of the year. A higher proportion of our e-infrastructure solutions backlog drove this margin. Unsigned low bid awards at the end of the second quarter, $184 million, an increase from $23 million at the end of 2021. We finished the current quarter with record combined backlog of $1,727,000, a 14% increase over the end of 2021. Our gross profit in combined backlog was 12.5%, compared to 12.2% at the beginning of the year. Our current quarter book-to-bill ratios were 1.06 times for backlog and 1.26 times for combined backlog. Revenue for the current quarter of 2022 totaled $511 million, up $109 million, or 27% over the prior year quarter. Importantly, of this 27% second quarter revenue growth, 76 million or 19% of the revenue growth was driven by the late 2021 acquisition of Petillo with a balance of 8% organic revenue growth coming from Sterling. Including the Petillo results on a pro forma consolidated basis, Sterling's organic revenue growth in the second quarter was 12% and it was 15% in the first half of 2022. The current quarter of e-infrastructure solutions organic growth of $34 million over the prior year quarter reflects a continued strong demand for distribution centers, data centers, and warehouses across our East Coast footprint. Building solutions revenue grew 15% over the comparable 21 quarter. reflecting continued residential revenue growth in our core Dallas-Fort Worth market and in our expanding footprints in Phoenix and Houston. In the current quarter, Phoenix and Houston accounted for 18% of our residential revenues compared to 6% in the comparable 21 quarter. Transportation Solutions revenue $191 million in the current quarter, a decrease of $11 million, or 6% over the comparable year period. The decrease was primarily driven by lower aviation and, consistent with our strategic intent, declining low bid heavy highway work. These declines were partially offset by increased water projects and higher alternative delivery revenues. We have increased our 2022 revenue guidance range to $1.865 to $1.885 billion from our previous range of $1.825 to $1.875 billion. Additionally, we increased our EPS guidance to a range of $2.95 to $3.15 from our initial 2022 guidance range of $2.69 to $2.88. Our current gross profit was $68 million, an increase of $12 million over the 21 quarter. Second quarter 2022 gross margin declined 60 basis points to 13.4% from the prior year quarter. This margin decline resulted from continuing supply chain challenges and inflationary pressures, which primarily impacts our infrastructure and building solution segments. These challenges principally began at GAN in the second quarter of 2021 and have continued to date. General and administrative expenses increased $7.6 million in the current quarter to $23.4 million. Over a third of this increase is attributable to the Zillow acquisition. We continue to expect our full year G&A expense to be approximately 5% of revenues. Operating income for the current quarter was $41 million, an increase of $32.7 million for the 21 quarter. Our current quarter operating margin was 8% compared to 8.1% in the prior year quarter. The decline is primarily as a result of the aforementioned supply chain and inflationary challenges, which continues to put pressure on our margins. Our current quarter effective income tax rate was 28%, which is consistent with our expectations for the full year. The net of all these items resulted in record second quarter net income of $26 million, or $0.86 per share. The prior year quarter net income and EPS were $20.1 million and $0.69 per share, respectively. Our second quarter EBITDA totaled $54.3 million, an increase of 33% over the prior year quarter of $41 million. As a percent of revenues, EBITDA improved 10.6% of revenues for the quarter, up from 10.2% in the prior year quarter and up from 9.7% in the first quarter of 2022. We've increased our 2022 EBITDA guidance to a range of $192 to $202 million from our prior guidance range of $185 to $200 million. Cash generated from operations for the first half of 2022 was $34.6 million compared to $91.6 million in the comparable 21 period. The fluctuation principally reflects the very strong 2021 cash flow driven by the ramp up of several new large alternative delivery projects, which were awarded and began working in the first half of 2021. And the significant 2022 organic revenue growth from our two fastest growing segments, e-infrastructure and building solutions. These two segments combine pro forma 2022 organic revenue was 26% in the second quarter and 27% for the first half of 2022. The first half cash flow from investing activities included $28 million of net CapEx and a $3 million payment of the final working capital adjustment for the Petillo acquisition. The CapEx increase reflects the increase in infrastructure solutions activities, including the impact of the Petillo acquisition. Our full year 2022 anticipated net capex continues to be in the $50 to $55 million range. Finally, we repay debt of $11.8 million in the first half of 2022. Now I'll turn the call back over to Joe.
spk05: Thanks, Ron. Now I'd like to take a few minutes and talk about our markets and the outlook for the rest of the year. Like most businesses, We continue to battle additional inflation, supply chain shortages, and now interest rate hikes. Our teams are doing an outstanding job combating these challenges, but we believe they will continue through the rest of 2022. The one blemish we had in the quarter was a decline in our gross margin by 60 basis points. This was directly driven by material inflation and material availability. As an example, our e-infrastructure segment alone saw an impact of over $5 million related to diesel price increases in the quarter. Fortunately, we're able to overcome these challenges by levering our strong markets and increasing our revenue. As we look at each segment, our e-infrastructure segment continues to see strong demand in e-commerce and data center activities. In addition, we continue to see more industrial and manufacturing opportunities in the design phase that could produce very nice future opportunities for us. These activities, coupled with our current backlog, give us a high level of confidence in what this segment will deliver in the second half of 2022. Our building solution segment saw strong demand in all of its markets in the quarter. We did begin to see some lumpiness and starts late in the quarter in Dallas. For the back half of the year, we have planned for a slowdown in our Dallas market, yet anticipate continued growth in both our Houston and Phoenix areas. Though our core customers remain cautious, we have not seen the major builders make any significant concessions to entice new sales yet. but believe the latest round of interest rate hikes may cause some of this to happen in the back half of the year. In our transportation segment, we saw bid activity pick up significantly in the back half of the quarter and have begun to see some of the benefits of the federal infrastructure bill. Our record multi-year backlog combined with the recent bid activity positions us very well for the rest of this year and the foreseeable future. In light of our first half performance, our increased backlog levels, and the outstanding execution of our teams, our raise in full year guidance represents a 48% improvement in net income, a 42% improvement in EPS, and a 19% increase in revenue over last year's performance. This is truly an amazing accomplishment in these turbulent times. With that, I'd like to turn it over for questions.
spk00: Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate 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. Once again, that is star 1 to register a question at this time. Our first question today is coming from Brent Seelman of DA Davidson. Please go ahead.
spk03: Great. Thank you. Excuse me. Good morning. Joe or Ron, just on the residential portion of building solutions, sounds like maybe a more conservative view of the Dallas market, but you've got what sounds like pretty good growth in some of the other markets. Maybe you could just refine what sort of growth expectations you have in the second half for that piece of the business.
spk05: Let me talk high level about the market and then Ron can give you more specifics on the numbers. A couple drivers to our logic, Brent. First of all, if you take the Dallas market, we've got a relatively high market share, certainly compared to the Houston and Phoenix markets. So we have the highest level of vulnerability. If a slowdown occurs, it will hit us more in the Dallas market. In the Houston and Phoenix markets, because we have, though we're growing rapidly in both of them, but because we have such a low market share, any decrease in the overall market is highly unlikely to significantly impact us and hopefully will bring some labor and material availability, make it better for us, so that we can actually pick up incremental revenue from our existing builders that would like us to do more today. So that small market share gives us a heck of a lot of room to continue to grow those in not only the second half, but as we go into next year as well. Rod, you want to add any color to the numbers?
spk04: Yeah, I think the... Each of those regions experienced some strong growth in the quarter. It's hard to predict. It's become a little bit bumpy in the Dallas-Fort Worth area. We'll have a lot of action, then a little bit of slowdown, a lot of action. So we still expect to have some growth in the back half and certainly continue to grow in accelerated growth in our smaller markets. However, getting to 18% of revenue coming from So that's a pretty big boost for us, and we think that will continue for them.
spk05: Yeah, we think the trends will continue like they are. And if you remember back, Brett, our strategy all along has not only been for growth, but to position ourselves in some of these top markets with our top customers that when a slowdown occurred, we could level the market share growth and opportunity in those markets to offset the decline that we knew inevitably would happen. with our market share in Dallas.
spk03: Got it. Appreciate that. Then on e-infrastructure, maybe you guys could just address kind of the concerns out there that maybe Amazon is slowing the pace of build out. Maybe what you're seeing and, you know, are those concerns real for the business?
spk05: Yeah. So I think, look, Amazon had a tremendous amount of build in the pandemic. There's a couple elements, though, that I think are maybe a little confusing to people. First of all, Amazon leased, bought a combination of things, almost every speculative warehouse that was on the market, certainly through the Southeast, where we're located at the time, and we saw similar things after purchasing Petillo. So one of the things they're doing is, everybody talks about them, releasing these properties. Their intention all along was to move out of those properties into their mega centers or their more efficient centers. And we continue to see that as those centers get filled out. In the Northeast, they've continued to run hard and we really haven't seen much of an increase at all. We have seen some projects in the Southeast that were on the drawing board for next year. that look like they're getting delayed or pushed, and we don't have, I'll call it, great details on what's going to happen with that. But on the opposite end of that, we continue to see other retailers that are behind the Amazons of the world, continuing to build out their heat infrastructure strategies. And I've said this in the past, but our biggest project this year is not going to be an Amazon. Our biggest project last year wasn't an Amazon, it was a wine distribution center. So there's a lot of other e-commerce activity that's going on. In addition, we are definitely seeing more and more activity in the early phases and some of it actually in the later phases in the manufacturing and industrial world, whether that's just basic warehousing for work and process goods or finished goods, but there are several new manufacturing facilities that are being built in the U.S. that are very sizable. And up in the northeast, I'll tell you, if anything, that market, especially on the industrial side, continues to ramp up real time, where in the southeast we're seeing those projects in the design phase and coming out later this year.
spk03: Really helpful, Joe. Maybe just lastly, some of the challenges around inflation, material availability, I assume that encompasses sort of concrete and allocation there.
spk05: Yeah. Concrete's probably one of the biggest ones that impacts all of our businesses. Each one of the segments has some unique nuances. particular products in particular markets. But right now, concrete is on allocation across the U.S., not only to us, to everybody. And on top of it, there's talk of another increase in September, end of August, beginning of September. So it continues to hamper impact and put tremendous pressure not only on the pricing associated with it, but the productivity that you lose. And that's really, when you look at the quarter, those 60 basis points that we lost, we went back and we started looking at more detail. And we were pleasantly surprised that our teams were able to hold on and only lose 60 basis points with some of the huge inflation that we saw. And we saw fuel go through the roof in the quarter on the East Coast. Not only were we paying a buck to two bucks a gallon more than what we thought was going to be the peak, we had availability issues for several weeks where we were struggling to even get fuel, and we're actually transporting it multiple states with our own trucks or with hired trucks just to get fuel to our job sites. So it was impactful. That's the bad news. The good news is it's in our numbers. uh and uh we had a we had a great quarter and without it we would have had i mean just a monumental quarter frankly yeah joe i guess the the question i had is that those issues become more pronounced this quarter where you're just trying to factor in some conservatism around the guidance with respect to the possibility these issues could get worse no we i think uh you know they they certainly got worse for us in the second quarter I think concrete will continue to get worse in the third quarter. There's conversations that multiple furnaces for the issue on concrete cement powder, there's multiple furnaces that are supposed to come back online around September. If they come back online, that could start to alleviate a little bit of the pressure on the total concrete. But I think it will continue in the third quarter. Hopefully the fourth quarter, what I call levels out. I don't think we're going to go backwards. And we'll still have that. On things like pipe, whether it's PVC or ductile, those things are still eight to 12 months out, depending on the market and the type. We don't see that changing. But our teams have adapted better to predict that a little better in the projects still a productivity hit for us, but they've gotten better at accommodating that as we go forward. We've seen lumber, we don't use a lot of lumber, come down a little bit, which is nice. And I think as we get into the third and fourth quarter, I think we should see a little bit of give back or positive on the fuel as we've seen just even over the last couple weeks. So we'll pick up a little bit of benefit from that.
spk03: Okay. Appreciate it, Joe. I'll pass it on. Thanks, Brent.
spk00: Thank you. The next question is coming from Sean Eastman of KeyBank. Please go ahead.
spk01: Good morning. This is Alex on for Sean. Thanks for taking our questions. So, hey, can you talk about the infrastructure margins into the second half? I guess the margin compression in the first half makes sense given Petillo's in the mix and supply chain wasn't as challenging back then. But the comps in the second half get easier. So is there any reason we shouldn't expect margin improvement into the back half of the year?
spk05: Yeah, we've got a combination of inflation and a little bit of seasonality in the first half of the year. Ron, you want to give some color and details on the margins?
spk04: Yeah, I think as we talked about in the first quarter, the addition of Petillo, when you unpeel the onion a little bit, you'll see that the margins for doing like work between Petillo and Plateau are very similar. But Petillo does a little bit more work that is lower margin type work, primarily as a result of requests from their customers to do that. So the underlying, that's a couple percentage points impact, if you will, if you compare it to the 21 period. And that will continue. That's just the way that business works up there, and I think likely the union workforce results in some of that work being pulled in by our clients requesting us to do so. I think the rest are, it's really productivity in the big number, in addition to the fuel side. The second one is just the productivity of these long lead times and shortages where we have to go, the company has to go back and redo, if you will, some work, retrench or otherwise. And that requires, it's less efficient, it takes time to leave equipment where it's required to be there longer, et cetera. I don't know that that will improve in the back half dramatically until the supply chain pressures ease off a little bit. And we really haven't seen those in that business yet this year.
spk01: Thanks for that. And it's interesting to see the activity pick up around the infrastructure package. Can you talk a little bit about when we can start to see new awards hit the backlog and maybe revenues? And secondly, can you just refresh us on how you plan to balance the revenue growth in the transportation solution segments against margin improvement and what your strategy would be?
spk05: Yeah, sure. So the good news is, you know, saw a combination of things. We're starting to see some money flow, and we also see, you know, the states running up against their, you know, their annual – they go into their new fiscal year shortly – So bid activity has picked up. The reality is we'll see virtually none of that hit this particular year. It might be a little bit, but it's not going to be measurable, Sean, from a revenue standpoint. We'll see it in the backlog. All that is really that we're booking for next year. That's when the vast majority of this stuff will start, first or second quarter of next year, depending on the particular project and activities. As we go forward, our strategy remains exactly the same, which is we would anticipate slow growth in the transportation and continue to drive higher margins. I will tell you if the market has better pricing and we see 12% or better margins in projects, we would be willing to grow that at a faster rate than the 3% to 5% we have in the past. But our plan right now is that that still grows at that 3% to 5%, and I'd rather try to pick up another point or two of margin before we would start going aggressively after any further growth outside of those ranges.
spk01: Got it. And the last question from me is on the operating cash flow. It seems like you guys will come in lower than the operating profit target this year, the normalized target. Can you just talk about why this is coming in softer than expected? And do you think you guys can return to a more normalized conversion rate next year? Sure.
spk04: I think it's a story of 2021, really. our cash flow for operations exceeded our operating income. And you can do that once, you can probably do it twice, but you can't do it every year. It just doesn't work that way. And that was primarily driven, if you recall, we booked almost, right around $700 million of new large projects in the first quarter of 2021. And we have been working on all those, and some have been unsigned for about a year. But we have been working on all those, so they were ready to go by the time we got them into backlog. So we ramped up those four big jobs in the first half and continued through the year and kind of get to the plateau by the end of the year. The cash flow cycle favors those new startups, whether it's mobilization or just getting funds to order material, bring in some contractors, et cetera. So that was the largest factor. The other one has an impact. The cash cycle for our e-commerce business is, or e-infrastructure business, sorry, is longer. And with 20 to 30% organic growth year over year, that has a working capital impact. So the majority of the delta, if you, you know, our crystal ball and our guidance, or at least our modeling would say we're expecting cash flow from operations of around $100 million this year. And when you cut through the delta between the two years, about half that delta is a little over half. 60% is that impact of those new projects ramping up throughout 2021. And the other half is just the higher growth and working capital demands of the infrastructure segment with 20 to 30% growth each quarter.
spk01: Makes complete sense. Thanks so much. Thanks, Chuck.
spk00: Thank you. The next question is coming from Brian Russo of Sedoti. Please go ahead.
spk02: Yeah, hi. Good morning. Thank you for taking my questions. Hey, just to follow up on the transportation segment and your comments earlier that you're starting to see activity pick up around the infrastructure bill. Could you share with us maybe what regions of the country you're seeing that activity or the types of projects you think will get funded first, and then your expectations for the competitive bidding for those projects?
spk05: Yeah, so the three areas we saw the largest pickup in activity is in our Rocky Mountain region. So through the Rocky Mountains, we saw a big pickup in Nevada. We also saw a big pickup in Texas. Now, the competitive landscape on each one of those is very different. In Texas, we will take less advantage of that just as we continue to move away from the low bid heavy highway segment. The majority of Texas bids are low bid at this point in time, so we'll see less impact. Through the Rocky Mountain states, that tends to be more of alternative delivery, which is what we like to do. These are more design-build or value-added projects, and the competitive landscape of those, because it starts with qualifications, is different and not as broad, whereas in Texas, it's not uncommon for us to see 10 or 12 people bidding a job. In an alternative delivery, you'll usually have two or three teams that bid the job, so a much different dynamic. And then in Nevada, The thing we don't talk about is we own our own pits and do more milling and paving type operations and dirt work through the Nevada market. So we get a competitive advantage on a lot of those jobs just with the material availability and the logistics of us having those pits and material available very closely. That's a competitive landscape, but we tend to have, for the jobs we're going after, a competitive advantage on a lot of those.
spk02: Okay, great. Thank you. And one more question. Are you seeing any early signs of manufacturing reshoring? And, you know, in what end markets might that be occurring? And then do you see any impact to your businesses from, you know, the CHIPS Act and, you know, expansion of chip manufacturing? I would imagine mostly in the Pacific Northwest.
spk05: Yeah, so harder for us to do stuff in the Pacific Northwest, not really set up there. But we have seen, certainly in the Northeast and through the Southeast, multiple manufacturing sites on the drawing boards. There's a couple of very large projects in the Mid-Atlantic and Southeast that are in the early phases. for onshoring. And we're also seeing not only manufacturing itself, but with the leaning out of the supply chain over the last 20 years, the good news is it ran highly effective and highly efficient. The bad news is when you have a major hiccup like a pandemic or an entire country taken out of the supply chain cycle, it shuts the whole thing down. So we're seeing companies looking at building and putting in more and more warehousing for either work and process inventory or finished goods that they're keeping that buffer in place.
spk02: Great. Thank you very much.
spk00: Thank you. Ladies and gentlemen, this brings us to the end of the question and answer session. I would like to turn the floor back over to Mr. Cotillo for closing comments.
spk05: Thanks, Donna. I would once again like to thank all our employees for their commitment and dedication. Without their hard work and perseverance, we would not be able to continue to deliver the record quarter-after-quarter results we've delivered. If after this call you have any follow-up questions or wish to schedule a call, please contact Mary in our investor relations group or our partners at the equity group. Their contact information can be found in the press release. Thanks, everybody. I appreciate it, and have a great day. Thank you.
spk00: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.
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