Greetings and welcome to the Sterling Construction Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference your host, Ms. Jennifer Maxwell, Director of Investor Relations for Sterling Construction Company. Thank you, you may begin.

Thanks, Sam and good afternoon, everybody. Participating with me today on our call is our Chief Executive Officer, Paul Varello; our Chief Financial Officer, Ron Ballschmiede; and our Chief Business Development Officer, Joe Catello. Just as a reminder, today’s conference call includes certain statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act. Such statements are subject to risks and uncertainties, including overall economic and market conditions; federal, state and local government funding, competitor and customer actions and weather conditions, which could cause actual results to differ materially from those anticipated, including those risks identified in the company’s filings with the Securities and Exchange Commission. Accordingly, such statements should be considered in light of these risks. Any predictions by the company is only a statement of management’s belief at the time the prediction is made. There can be no assurance that any prediction once made will continue to actually reflect management’s beliefs and the company does not undertake to publicly update those predictions. And now, I would like to turn this call over to our CEO, Paul Varello. Paul?

Thanks, Jennifer and good morning, everybody. I am happy to report that our turnaround efforts continue to make big progress and produce positive results. Our backlog has grown for the last six consecutive quarters and the average margin has been increasing over that time period. Our balance sheet and our liquidity continue to improve and our net income for the quarter increased, once again giving us two consecutive quarters of improved profitability. Of course we are well aware of the back-to-back quarters of profitable results doesn’t constitute a trend, but it’s a step in the right direction. Still sustained momentum and consistent improvement in the turnaround situation takes time and focus. We are on the right track, but we still have work to do. Four of our five business units had strong performance, with only our Texas unit still not recovering as rapidly as we had anticipated. Part of the problem with Texas was the challenging weather conditions in the first half of the year caused some projects to be delayed and owners took a long-time in starting those projects and giving us notice to proceed. We made good progress in our strategy to shift project mix to more profitable opportunities. As an example [indiscernible] heavy highway work in backlog grew from just 8% a year ago to 21% by the end of the third quarter. We believe that our strategy of a more focused approach on adjacent market opportunities will continue to generate increased margins in the coming years. Later on in this call Joe Catello, our Executive Vice President of Strategy and Business Development will provide greater details on our big results and our strategy going forward. Overall backlog volume and margins continued to increase with a total of $914 million in combined projects awarded plus apparent low bids. The average margin in the combined backlog has increased to 8.2%. We also made substantial progress in strengthening our balance sheet and reducing our expensive debt in preparation for refinancing our loan facility. Our CFO, Ron Ballschmiede will provide more details when he reports. Turning to our revenue outlook for the remainder of this year, we believe that we’ll meet our previously announced full year revenue guidance, which means that our fourth quarter should be in the range of $150 million to $170 million. From a net income perspective however and as mentioned earlier, our Texas business has not recovered as rapidly as we had originally anticipated. As a result we are revising our net income for Q4 to approximately breakeven. Longer term our efforts will remain focused on increasing net earnings, improving project execution, diversifying project mix, controlling G&A, and further optimizing our asset base in our business units. In conclusion, we believe that our turnaround efforts although not complete, will continue to drive significant improvement in earnings and build a solid foundation for sustained growth in the years ahead. Now, I’d like to ask Ron Ballschmiede, to offer his report. Ron?

Thanks, Paul and good afternoon, everyone. Let me start with building on Paul’s backlog comments by providing a few additional details around our recent backlog trends. At September 30, 2016 our backlog stood at $820 million compared to the third quarter of 2015, where our backlog totaled $716 million. As Paul mentioned, our combined backlog at the end of 2016 third quarter, which includes project where we were apparent low bidder, but the contracts were not yet signed total $914 million consistent with the level of combined backlog at the end of the second quarter of 2016. Even more important than the level of backlog is a steady improvement of the embedded gross margin in backlog. At September 30, 2015 the backlog margin was 6.5%. The backlog margin has increased each subsequent quarter at September 30, 2016 the margin backlog increased by 150 basis points to 8%. We believe the trend reflects progress made in the diligence around selecting the right projects to bid on, solid project execution, continued progress to complete legacy projects with little or no margin and significant increase in the transportation and infrastructure bid opportunities. Revenues for the third quarter of 2016 were $206 million consistent with our expectations and more than $29 million higher than the third quarter of last year, which was $176 million. Our revenues for the nine month period ended September 30, 2016 totaled $522 million, a 11% increase over the comparable 2015 period. The 2016 revenue increase reflects the generally stronger transportation infrastructure market. The most significant revenue increase was attributable to a $59 million increase from our Utah subsidiary, primarily driven by the ramp up of two large projects. Somewhat offsetting this revenue increase was a $12 million decline in our Texas subsidiary's revenue for 2006 year-to-date. Our 2016 revenues…

Thanks, Ron good afternoon, everyone. I would like to take a few minutes to discuss further the positive trends we are seeing in our markets, as well as the progress we are making to the strategic efforts. Let's first talk about the market and the market trends, every major market we are in with the exception of California is up in year-over-year awards. These increases have been driven by the five year fast deck, increased cash taxes and other state revenue sources like the two constitutional amendments put in place by Texas. The overall growth for U.S. transportation construction is forecasted to be between 2.5% and 3% for the next five years. We believe our markets will perform slightly higher than the national average and we should see growth rate between 3% and 5% in our heavy highway sector. Next, I would like to discuss the progress we have made with our bid process, bid margins and diversification of our backlog. We continue to be disciplined in our bid selection as well as our bid process. We are no longer bidding to grow revenue but bidding to grow margin. As a result we have bid 20% less projects in 2016 when compared to 2015, yet our backlog has grown 7.9%. In addition, we have seen bid margins continue to improve. Year-to-date our bid margins are at 8.9% and in September we exceeded 10%. Our total margin in backlog versus September 2015 has increased from 6.5% to 8%. If you add the one but unsigned contract our margins increased to 8.2%. We believe with continued discipline and continued market momentum, we should be able to achieve gross margins in the 10% to 11% range over the next 24 to 36 months. The last area I’d like to cover is the progress we have made around diversifying our backlog and the growth we are seeing in higher margin adjacent markets. These markets would include commercial, airport and rail. Historically less than 10% of our business was made up of these adjacent markets, yet the projects in these markets were generally our highest margin projects. In 2016, we began an effort to start leveraging our skill sets across geographies and focusing on specific customers in these markets. As a result we won over $60 million of airport work in Q3. We have increased the amount of non-heavy highway dollars in our backlog from less than 10% to over 20% and we’ll be bidding over $300 million of non-heavy highway work in Q4. As we go into 2017, we will increase these efforts internally and begin looking for starting acquisitions in these adjacent spaces. Even though we are early in the strategic transformation of the company, we are happy with the progress to-date and are excited about the opportunities that lie in front of us, as we go forward. With that, I’d like to turn it back over to Paul.

Thanks, Joe. Now we’d be happy to take your questions.

[Operator Instructions] Our first question comes from the line of John Rogers of D. A. Davidson. Please proceed with your question.

Hi, Good afternoon.

Good afternoon, John.

Couple of things. First of all, is the -- are the Texas operations profitable at this point?

They are right at breakeven, but they are not profitable.

Okay. And then you answered some of my questions about the as bid margins, but that are moving higher, you may not want to give us specifics, but give us the difference between what you’re seeing in the private sector versus the public sector? And I am sorry if you said this but what portion of your backlog now is private sector work?

The second part of that question is 21%, Joe would you mind responding to the question John has asked.

On the margin side, John when we go into the private sector versus the public sector, we are seeing margins, I’ll call them in the 15% range and higher in large percentage of that work. Now that’s not perfect for every project there maybe one or two that are lower, but that’s the general rang that we anticipate the margins to be.

Okay. And what would you -- I mean ideally over the next couple of years, I mean as you grow this business and you talked about the goals of double-digit margins consistently, what do you think the mix between private and public ought to be for Sterling? Is the goal 50-50 or…

Yeah, you’re right. Our internal objective is over the next three years to have a 50-50 split, we would call heavy highway or what you’re calling the public sector versus the non-heavy highway, which would be outside that mainstream DOT type business.

Okay. And then I guess just the last things, in terms of the fourth quarter and the shortfall there were there specific job that you had to bring -- that your expectations for margins have come down on or kind of what happened there? Because I know it doesn’t take a lot, but it’s a pretty big swing from what was expected just couple of months ago.

Yeah, Ron you want to handle it.

Yeah, I would start John by both the third quarter and the fourth quarter were less than expectation. So obviously the whole delta between our prior guidance and our current full year guidance or fourth quarter plus three quarter of essentially a year-to-date loss or component of both. In the let’s say third quarter by itself you know there were a couple of what I’ll call our business is not small, but here is what's in the third quarter, I mentioned our year-to-date $1.1 million of cumulative changes in estimated costs. So what that means is we compare our margins that we thought we would get on every item of our backlog at the beginning of the quarter versus what we think at the end of the quarter versus for all the things that occurred, in the quarter we had a net charge of about $600,000. So while we're never happy about charges versus income what we had in first quarter. You always have some of that and it's I think that's within the bandwidth of which isn’t nugget. So the goals over a long period of halt period of time multiple quarters to get that to be a push. Also in the quarter we finished the -- we talked about a project that we had that was in the separate entity that have been created some years ago in the West Coast unfortunately in the first quarter we took about $1 million charge on that project as we fully settle up all the sub-contractor claims that we had and unfortunately couple of them went bad on us. As we essentially have now closed. And I wouldn't say liquidated yet. But it is empty it's done, so stick a fork in it [ph] done, we had about another $600,000 charge…

Okay. So I guess what I worry about that is the margin -- I mean your margin in backlog keeps climbing, but we're getting this lag before it showing up in the income statement. And at some point it's got to go I would assume it goes the other way, but is that out into the '17?

Well, backup though. I mean it's been steadily marching up obviously every quarter, but it does take time. For instance it's nice and Joe can talk about the timing better than I can. But $60 million of airport work that we announced in the third quarter I would say a nod on John close to it in revenue in '16 and by the time they have ramps it will really going full board mid late 2017. So -- and then you of course got multiple year projects that come rolling in. So if in general we're a two year backlog kind of thing I don't have or at least lot of two year duration jobs. Each quarter you're filing the bucket by a quarter and taking the quarter off. And I guess as long as I am on that topic I'd sure that I'll be asked. If you recall we started the year with $86 million of zero or low income margin from our legacy projects, we continue to make good progress on those. We'll work that $86 million down to 40 at the beginning of the third quarter. And right now it's about $21 million less to go. It was less than we thought burned just the factor of how fast these projects or how slow the projects got approach completion. But we're going to stay with our belief that we would suggest that by the end of the year the remaining work on that legacy work is going to be not big enough to talk about going forward. It will be sort of in the wash of what is pretty normal for a company like ours to have a couple of those projects in the backlog, but not move the needle in total.

Okay, thank you. I'll get back in the queue.

Our next question comes from the line Tahira Afzal of KeyBanc Capital Markets. Please proceed with your question.

Hi, folks.

Hi Tahira.

So first question Ron just to sum up what you were really saying it seems like the projects that you have joint venturing might have outperformed in terms of revenues?

Yeah so it gets confusing, and I wish I could make it simpler. There is really two elements of that. There is some very nice joint venture work going on that's driving our Utah subsidiary's revenue. And the most of what you see below the line I'll call the bottom-line of the income statement that 500 plus for the quarter is on projects like that. Where it's a single project venture when the venture is gone the entity is gone. And for the quarter that well it’s 740, sorry I said the third quarter number so it's a 70-40. The balance of it is the success of our combined 50% owned enterprises and both of those are in the other income category starting late 2015 forward and all of it’s earned in 2016. So that's the element of mix that is hard to -- there has been so many places over the year it’s hard to bring it in. But I think that big element of that is just the year-to-date number, but currently being that together with our earn out almost $8 million and on a comparable period it was $3.7 million attribute to the performance of those two 50% owned entities.

So Ron I guess you didn't expect it to be this large when you first gave guidance that's I guess what I'm asking?

That is correct. Their revenue is greater and their margins are up and their earnings is up. So the collective of those entities and I would say the same thing for our Utah business. So the collective four other entities are just having a very strong year. Unfortunately it's not enough to offset some of the shortfall we've seen out of the Texas side.

I get the math to it now Ron, so makes sense. The second question is thank you for elaborating on some of the $600,000. You've seen some sort of push outs in a sense and then so when you recognize profit is that being caused by just the work because I know your recognized profits sometimes based on milestones you've hit for a project. So I just wanted to clarify whether that $600,000 was really due to just the stuff sort of working its way usually or is it really tied to cost overruns?

Yeah almost none of our revenue recognition is driven by milestones; it's all pure cost-to-cost calculation. And that $600,000 is collection of pluses and minuses of over 100 contracts that are ongoing, no one big project on negative or the positive side for this quarter or the year-to-date period. So I think having a number of -- it's been for the three quarters ended it’s $1.1 million 20 basis points that's pretty good performance. We'd like it to be zero or positive, but 20% delta is not the highlight of the quarter missing our expectations.

Got it, okay. That makes a lot of sense. And Paul just wanted to get a sense -- Joe thank you for really giving us a lot of color on the embedded backlog. If you were to look at what you can do in terms of margin on an annualized basis as you’ve recalled this backlog. Your first quarter is weak your fourth quarter is weak just from a utilization standpoint. And it seems that you stuck with bad weather in Texas for a while. So when you are looking at that sort of 10% sort of recognition of a 10% type of margin in backlog, does it really mean on an annualized basis we should always be looking at I think 100 basis to 150 basis points below that?

No, I understand your question. I would prefer that to tell you that as we bring up our mix of non-heavy highway to a higher and higher percentages at much better margin, the weighted -- plus bringing up the non -- bringing up the heavy highway margins when inevitably starting to creep up to 10% and better. We’re going to see the combination of the two the weighted average being much more in the mid-teens than it currently is. So we’re optimistic that the combination of a market that’s doing much better in our heavy highway, improving markedly by a percent or more should creep up over 10% and we believe it will hit in the 11% and maybe 12%. Historically we hit as high as 13%, but we think that maybe a stretch, but certainly 10% to 12% seems reasonable. And then in the non-heavy highway we are really comfortable in saying that we’re targeting stuff between 15% to 20% range. So the weighted average of those two gets to be a very attractive return for us, particularly if we can keep our G&A inline and not let it go up dramatically and we think we can do that.

Paul last question in regards to that, I mean are we looking at 2018, where we could see margins like those even if you build in a cushion for weather et cetera?

Yes.

Thanks Paul.

And I think, just the point I’ll add, I think in general weather should be equal for the year, it may affect one quarter or another, utilization could be -- utilization will be always be the best in Q2 and Q3 and always the worst likely in one followed by 12 or by fourth quarter.

And I think the dilemma is not the variation quarter-to-quarter, but the fact you got this fix enough [ph] there is G&A that sort of divide itself pretty equally in the fourth quarter. So if you run light in Qs and run just because of condition seasonality, it injures your net earnings but it makes it more than mix it up in Qs two and three, which are the better one. So the net of all of that should be that margins stay consistent at 10%, but the bigger bite does take place in G&A in those two off quarters and then is compensated in the stronger quarters.

Okay. Thank you, Paul that actually is very helpful.

Thank you

[Operator Instructions] If there are no further questions at this time, I would like to turn the conference back over to our Chairman, Paul Varello for closing remarks.

Thanks, Tim. If you wish to schedule a call, please feel free to contact our Director of Investor Relations, Jennifer Maxwell or our partners at the Equity Group. Their contact information can be found at the bottom of our press release. I’d like to thank everyone for joining us today in our call. Thank you.

This concludes today’s conference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful rest of your day.