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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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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 call is being recorded [Operator Instructions]. There are company slides on the Investor Relations section of the company's website. Before turning the call over to Joe Cutillo, 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 Cutillo. 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 reported another record fourth quarter and 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, borne of a strategy and vision that levers our entrepreneurial spirit in 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 3 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 Solutions 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 & 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 Solutions 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 3 of the top 4 housing markets in the U.S. In our Transportation Solutions 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-bid 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 1/5 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 1 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 & Kimes acquisitions, enabling us to reduce our leverage to 2.4x EBITDA. As we look forward to 2022, our e-Infrastructure Solutions 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 million. 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 Solutions 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 Solutions 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 Solutions segments, have positioned us for yet another record year in 2022. In 2022, our revenues will be between $1,000,825,000 and $1,000,875,000. 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 Relations presentation ended December 31, 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 Petillo & Kimes acquisitions on December 30 and December 28, 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 3 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 2021 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 31, 2021, our backlog totaled a year-end record high of $1.493 billion, up $318 million 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 -- sorry, 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 3 reporting segments reported increased revenues and segment operating income for both the current year and the full year -- third 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 billion, up $154 million 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 product 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 3 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 attributable to higher employee and insurance-related costs. We also incurred acquisition-related costs of $3.9 million or $0.10 per share relating to the Petillo & Kimes transactions. For comparative purposes, we have added back the expense in our "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 31, 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 lower average debt balances during 2021 and the reduced interest provided by the June 2021 debt amendment. We expect our full year 2022 interest expense to be in the $19 million 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 noncash as taxable income was absorbed by our net operating loss carryforwards. 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 noncash-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 and 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 -- I'm sorry, at the end of '20, our forward-looking coverage ratio was 2.7x EBITDA compared to 2.4x at the beginning of 2022. We remain comfortable with a target ratio range of plus or minus 2.5x 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, grow -- enabled us to grow our cash balance by $16 million. With that, I'll turn it back over to Joe.
Thanks, Ron. It's always nice to finish with a record quarter and a record year. But what is even better is being positioned to have an even stronger year ahead. I'm proud to say we will enter 2022 in the strongest position ever, with record backlog, better margins and our highest growth coming from our lowest-risk, highest-margin businesses. Our strong markets, our diverse workforce and proven strategy continue to pay off. We remain committed to the safety and well-being of our people to increasing customer and shareholder value, while also protecting our communities and the environment. We enter 2022 a completely different business than we were just a few years ago. As our strategy and vision drive us forward, we are just the beginning of what we will become. To reiterate our 2022 guidance, our revenue will be between $1,000,825,000 and $1,000,875,000 and our net income will be between $83 million and $89 million. With that, I'd like to turn it over for questions.
[Operator Instructions]. Our first question is from Brent Thielman with D.A. Davidson.
Maybe for Ron, just wondering what margins you've embedded into the guidance for the three business segments now that they are realigned here?
Sure. I think they're -- so 1 of the things we did is to help you, did 8 quarters of history to match up with how we're going forward. And I think it helps a lot on understanding the operating income characteristics of the units by breaking out the corporate expense. So take a look at those. So I think certainly, a few things by segment here. I'll start with the heavy -- I'm sorry, with the Transportation Solutions group. We will continue to see margin leverage on that coming from the continued shift of moving to higher-margin projects and et cetera. We probably got 1 more...
We're continuing to reduce the low-bid side of that world.
So that continues to eke up a little bit. We got 20 basis points in margin increase in backlog, but look, we expect more out of that than 20 basis points for the full year. On the Building Solutions side, special note to the fourth quarter margins. We essentially recouped what we would have had, but for the pressures on supply chains and inflation for the year from -- a fourth quarter doesn't make a year, but we certainly had a great recovery on that. And probably, for the second quarter in a row, we had revenues per slab growing faster than the number of slabs done. So what that means more price per slab, obviously. So we expect year-over-year to have that fourth quarter looking results continue into 2022, maybe a little bit lumpy. The last, e-Solutions, obviously, we'll pick up Petillo in our -- in that segment. Margin characteristics are very similar to those of Plateau. So I think the challenge will be how fast can we continue to recover from the supply chain and inflation side of it. So as time goes by, that tends to run through backlog and improve, but we expect that to get better in 2022.
The biggest shift in going from prior segments to the new one is our Commercial business comes out of what used to be the Specialty segment, which is now the e-Infrastructure and that goes into Building Solutions. So that margin is a little lower than our historical residential business, so you'll see that impact to a small degree.
Yes. And that, of course, takes that lowers -- it helps operating margins for the e-Infrastructure group and reduces margins for just stand-alone residential in the old, at least.
Okay. Appreciate that. Maybe just on the outlook, a question around the cash from operations expectation. Just wondering why, it couldn't be significantly higher this year just given the addition of Petillo.
So we start the year with a consistent belief that our cash flow from operating activities will approximate our operating income. That bounces a little bit around quarters just due to the seasonality of our work. But that's where we start every year. And I think our goal is to see if we can continue that and strengthen all together because I don't think it's reasonable to beat that number year after year after year. It's just not -- beat that relationship year-after-year. So that's kind of where we started the year. And over the past few years, we kind of see that average out about that level. So the bandwidth we get around that in the model is really around operating income is our expectation of cash flow from ops.
Okay. That's helpful, Ron. And maybe just last one for me. You seem to offer a fairly optimistic outlook on the residential side. Maybe any other feedback you're getting from your homebuilder customers just regarding plans for this year? That seems to be an area that might be a -- some worry to people out there but doesn't sound like things are slowing for you. So any help there would be great.
Yes. We haven't -- the feedback is we haven't seen anything slowing. If they have any concerns around potential risks, it's more around land availability and developing land at faster rates. As you can imagine, they have already exceeded their 2021 expectations on builds, which eats up land at a quicker pace than their 3-year plan anticipates in a lot of cases. So I know that they're working diligently to develop that next wave of land. But as we step back and we just think of it objectively, we certainly are cognizant of the rates increase a potential rate increase on inflation. But the builders still have a lot of levers they can pull. They're making very high margins on the properties we're selling today. And they don't want that to slow down any time soon. So we think through 2022, barring something catastrophic, everything they're telling us is we're going to see, what I'll call, low double-digit growth going into this year in the 3 markets we're in, which are really the top 3 markets in the U.S. right now, Phoenix bounces back and forth, but we're number one, number two and number three.
And of course, we would expect market share improvement for both our expansions in Houston and in Phoenix. .
Our final question comes from Sean Eastman with KeyBanc.
It would be helpful to just get a bit more of a flavor of the kind of operating conditions you've contemplated in the initial 2022 outlook here. It seems like the residential business is sort of out of the woods in a sense based on the fourth quarter results here. And then I guess the other element is sort of that equipment lead time in the e-commerce solutions business. So just sort of what did you guys see around those dynamics through kind of exiting the fourth quarter? And how have you contemplated those potential risk factors in the guidance?
Yes. What Ron talked about, how we factored in some of the inflation coming back. But the good news is we saw -- and we had said all through, if you remember, 2021, if we can get, I'll call it a slowdown in rate increases, we could start catching up to recoup some of that in the price increases that we're passing through. And in the fourth quarter, we saw that. Now we're going to continue to see some increases throughout 2022. They've already announced some concrete increases, et cetera. But we've done a much better job. So we've got some visibility into recouping that in 2022. And we also hope to start recouping on the settled specialty services or now e-infrastructure solutions, some of that, as we get into 2022 and the new bid projects begin. So we've done that. On the equipment side and capacity side, we have factored in the equipment capacity we have with the equipment capacity that we know we're going to get or added in the quarter. But I'll be honest, for the first time, we're actually turning away work in the e-infrastructure segment just because we're making sure we take care of our core customers, we're making sure we've got capacity for the projects they've got on the books for the year, and we're not getting over our skis. But frankly, if we had more equipment, we would be taking up more work now than we have. But we factored that into the 2022 forecast.
I would add that for the combined backlog of the e-infrastructure group other $470 million. That's a backlog of about 2/3 our revenue expectations. There are run rates that we have, including Petillo. That's pretty strong compared to history, that relationship. What that means is we have the backlog. And of course, as we roll through that backlog, we did roll through it in 2021 into 2022. We've learned a lot about contingency planning around pricing and productivity and things like that. So it's pretty simple that, as we've rolled off the old backlog, we have better insights over what we think it will be in 2022. So that's going to help us. And certainly, the backlog is going to provide us 2/3 of the year, give or take. So I think we're looking forward to that performance.
Got it. Okay. Good stuff. And then how much revenue growth and EPS accretion is in this outlook from Petillo?
I don't have that number exactly in front of me. I want to say it's between $0.15 and $0.20.
$0.15 to $0.20. Got it.
I'll have a better -- I didn't bring my pro formas and have better ones when...
We can give you more detail information on that, Sean.
Yes, I just wanted to work out the organic growth, the underlying organic growth. And then if I look at the backlog in the fourth quarter, pull out Petillo, it looks like book-to-bill was below 1x. But obviously, commentary -- demand outlook commentary from you guys is pretty robust here. So just curious how we should anticipate the backlog trajectory over the next couple of quarters here, whether there's some stuff that's getting ready to load in, whether chunky awards on the transportation side or some e-infra stuff coming in. Just curious how to think about that.
So what we'll see is, I think we could continue to see backlog decline. If you go back -- and we said this last year and coming into this year, and it's playing out pretty accurately...
Yes, and make sure you break out backlog.
Yes. And backlog for transportation is declining, backlog for e-infrastructure is improving. But if you remember, Sean, at the beginning of last year, we booked several really large design-build jobs in the quarter. They had been sitting in won but not signed for a long period of time. So that skews the spike up to some degree, and we're burning that off. And there's not those mega-projects to replace that. So we're still hitting singles and doubles and making sure we're focusing on the small quick-turn projects and higher margin. So I think on the transportation side, we'll see that continue to decline as we get through the first half of this year. And frankly, the results of the new infrastructure bill, bid activity has not -- we have not seen a significant increase in bid activity. And there's yet another factor that is taking place. We've won probably a half a dozen or more jobs in the last couple of months, of which, none of them are being awarded because our EOTs did their engineering estimates pre-inflation have not adjusted the engineers' estimates. So we're seeing all the jobs that are being won, coming in anywhere from 30% to 60% higher than the original engineers' estimates. So they go back into the cycle and reestimate those, and then they'll bring them out for rebid versus what you would normally do, is just course-correct the material prices because that's where all the issues are. So we think that will continue to decline. On the e-infrastructure space, again, one of the nice things that's happening as a result of COVID and some of the inflation. Where we have seen, if you remember us talking about some of the big data centers and some of the big e-commerce distribution build outs, a lot of the times, they would buy 100, 200, 300 acres and develop that over phases. So we come do the rough cut of the entire thing. We finish Phase I, they build a data center. A year or 2 later, we come back, we finished Phase II. They build a data center, year 3. What we're seeing them do is ask us, on the projects we've recently won, to do all phases at 1 time. So they're bigger, they're more complex, which is great for us. Reduces the playing field out there on the competition, but also keeps us there on location longer and bigger. So those are beneficial. And that's why, candidly, we're turning away some of the mid-range and smaller work to make sure we got the capacity for the line of sight of the jobs we see coming out in 2022. That help?
Interesting. Yes, definitely, it helps massively. And then last one for me. I think you guys are exiting the year here around 2.4x leverage. Not crazy there. So I'm just curious, what's next here? Do we just focus on organic, funding organic growth and delever? Or do you stay on the offensive? What's the message there?
Yes. I think both. Right now, we'll continue to buy down debt, right? I won't to tell you that we're not out looking for tuck-ins that fit for strategic adds in the 3 segments that we have. And at some point in time, I mean, we're looking -- we just haven't found that right fourth leg to broaden it. So today, as we sit here, we're buying down the debt. But I will tell you, we are constantly and actively beating the bushes. The other nice thing that is starting to happen is we are, in a lot of cases, the first or earliest look in a lot of deals. So that gives us kind of a first chance of some deals that we may not have had a few years ago. So that's a nice position to be in.
Yes. And in my comments, I meant -- I hopefully -- it was helpful from the standpoint of we've been very clear now on -- we are very comfortable with a 2.5x kind of plus or minus future EBITDA kind of calculation. And I think in our -- 1 of the reasons we are is because the cash flow that we've enjoyed since transforming the business has been consistent and strong. So the other interesting point is, with the Petillo acquisition being funded a little -- $20 million worth of our stock, but majority of it by some debt and almost $50 million of cash we had on our balance sheet, it's immediately accretive and it reduced our leverage ratio. So we can find more transactions like that. We won't be slow at taking advantage of premier economics, if you will.
I think the one thing, Sean, that -- and I'm sure you get it and Brent gets it that we've spent a lot of time on. The cash flow that we are throwing off from this business, the fact that we're able to take kind of -- I call it 1/3, 1/3, 1/3, bite on debt, buy capital and buy businesses last year and bring down the total debt leverage, is really, really an impressive part of what we've been able to do. And it's something we're going to continue to do as part of the acquisition strategy looking for those businesses that either continue that trend or help it even more.
Okay. Again, very helpful. I'm going to sneak one more in here. Just in the spirit of kind of setting up appropriate numbers early in the year. Is there anything you'd point out from an EPS cadence perspective within this full year outlook? I mean, particularly, I don't know, maybe first half, back half weighting or any strange comp nuances early in the year, you'd point out here?
Not really. I mean, our first quarter is always our slowest quarter, right? If you look through history, our fourth quarters as we've kind of transformed the company, it becomes stronger than they were early on. So the first -- but we don't see any significant changes in seasonality. To me, as I look at it, as we get to the back half, if we continue to pick up pricing and continue to see normalization of inflation, that's where we kind of have, I think, some potential upside through the year as we go forward. But nothing of significance from a quarter or back-half loaded. It's loaded just like our other plans.
Yes. I think the shift that we saw in 2021 becomes a new norm by quarter of how that lays out because it's changed pretty significantly from the risk of the Transportation Solutions business being lumpy and weather and things like that. I think with the mix of operating earnings, it will probably look similar to what we had in 2021. Shouldn't theoretically improve a little bit smoother because Petillo and Plateau, we expect the same kind of more or less seasonality in the business, but still feel some in that first quarter.
We have reached the end of the question-and-answer session, and I will now turn the call over to Mr. Joe Cutillo for closing remarks.
Thanks, Kyle. I'd like to thank everyone again for joining today's call. If you have any follow-up questions, please refer to the information provided in the press release related to our Investor Relations group at Sterling or our partners at The Equity Group. I hope everyone has a great day and thanks again for joining in the call.
This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.