Greetings and welcome to the Sterling Construction first quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jennifer Maxwell. Thank you, you may begin.

Thank you, Matt. Good morning to everyone joining our call. Welcome to Sterling’s 2018 first quarter earnings conference call. I am pleased to be here today with Joe Cutillo, Sterling’s Chief Executive Officer, and Ron Ballschmiede, Sterling’s Chief Financial Officer. Joe will provide us some commentary on the performance of the company and color around market trends. Ron will walk us through a detailed discussion of the financial results for the quarter. Following that, we will open up the call for questions. I would like to begin with an overview of the company’s Safe Harbor language. Some of the discussions today may include forward-looking statements. Actual results could differ materially from 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 obligation to update forward-looking statements as a result of new information, future events or otherwise. With that out of the way, I would like to turn the call over to Joe.

Thanks Jennifer, and good morning everyone. I’d like to start the call by thanking all of those joining us today and give a special thanks to the 1,800-plus Sterling employees for stepping up to the plate in delivering a record revenue first quarter for Sterling. In the quarter, we had zero lost time incidents. We worked on over 150 heavy civil projects, poured over 1,400 residential foundations, hired 300 new employees, and continued to see our backlog grow. We remain disciplined and dedicated to executing the three phases of our strategy: solidifying the base, focusing on high margin products, and expansion into adjacent markets, and as a result we saw significant improvements in our overall profitability and performance. Versus the prior year first quarter, our revenues were up 45%. Our combined backlog grew 6%. Our gross margin increased over 300 basis points, and our operating income improved $8.5 million. This is the first time in almost 10 years that the company made a profit in its seasonally weakest quarter. This is not only a great accomplishment to Sterling but a tribute to our strategy and something that is not common in our sector. In addition to the outstanding performance, we began shifting our focus away from our turnaround efforts and directing them towards the growth of high margin products and expansion into adjacent markets. In the quarter, we added a new Vice President of Strategy and Business Development. We grew non-heavy highway backlog to over 35% of our total backlog and began the expansion of our Tealstone residential business into the Houston market one quarter earlier than anticipated. Our timing could not have been better as Houston’s new housing starts have recently surpassed the number one market in the U.S., Dallas. To date, we have poured 34 foundations in Houston and the surrounding areas and recently won two new developments that are scheduled to start in the back half of the second quarter. As we continue to ramp up crews and resources, we will continue to add further developments throughout the year. We’re off to a great start and we’re excited about the growth opportunities that are in front of us as our heavy civil markets and funding sources remain robust, and our residential markets continue to grow at double-digit rates With that, I’d like to turn it over to Ron Ballschmiede, our Chief Financial Officer to discuss our results in more detail. Ron?

Thanks Joe, and good morning everybody. I am pleased to discuss another strong quarter of operating results. As a reminder, our first quarter 2017 financials did not include the financial results of the Tealstone acquisition, which was completed on April 3, 2017. Additionally, beginning with that acquisition, we moved from our historical single reporting segment presentation to two segments: heavy civil construction and residential construction. Heavy civil construction contains our historical single reporting segment plus the commercial construction business of Tealstone. The residential construction segment includes Tealstone’s residential concrete foundations for single-family homes. At March 31, 2018, our heavy civil construction segment backlog was $885 million compared to $744 million at the end of 2017. We finished the quarter with combined backlog, which includes unsigned low bid awards totaling $1.35 billion, with an overall combined backlog gross margin of 8.4%. Our combined backlog book to burn factor was 121% for the first quarter of 2018. Just a reminder that our backlog figures are comprised entirely of the heavy civil construction projects segment. Residential construction, which accounted for approximately 16% of our first quarter revenue, does not report backlog, reflecting the short term performance cycle of residential concrete foundations which is typically less than two weeks. Another important factor of our backlog strength is the ratio of construction joint venture backlog to combined backlog. While we report 100% of backlog, revenue and gross margins related to these majority-owned projects, our minority partners share in 40 to 45% of the bottom line project economics. On a year-over-year basis, our construction joint venture combined backlog was down $142 million. The positive news around this statistic is that we have essentially replaced this, quote, shared economics backlog, close quote, with backlog where we participate in 100% of the project economics. Now moving to our…

Thanks Ron. Again, we are very pleased with the strategic process we have made and the results we were able to achieve in the first quarter. The first quarter represented our fourth profitable quarter in a row, our 11th consecutive year-over-year quarterly improvement, and the first time in almost 10 years that we have shown a profit in our seasonally slowest quarter. As we shift our focus from turning the business around to high growth, high margin products coupled with our robust markets, we are confident these trends will continue and want to reiterate our full-year revenue guidance of $1 billion to $1.35 billion and net income of $23 million to $26 million. With that, we’d be happy to take your questions.

[Operator instructions] Our first question is from Sean Eastman from Keybanc Capital Markets. Please go ahead.

Hi team. Congrats on a great start to the year. I just wanted to start out on the gross margin trajectory here. The gross margin and backlog has been pretty steady at 8.4% for a couple quarters now. I was hoping maybe you could just comment on the aspects of mix and pricing and cost inflation, and what you guys are expecting around potential margin expansion in the legacy heavy highway business , and maybe if there’s some non-traditional heavy highway work that you guys are bidding that could drive that margin and backlog up over the next few quarters.

Yes, thanks Sean for the compliment. It was another outstanding quarter for the team. I’ll let Ron talk about where we get to the overall margins for the year. We still feel very confident in everything we’ve put out there and where it goes from there by some of those categories. Ron?

Sure. I think from a top level standpoint, as you know with our seasonally slow first quarter, we have diminished margin coming from what I’ll call under-absorbed overhead in manufacturing terms of not having many hours and productivity as we will have in Q3, Q2, Q4, Q1 - that’s the order of big to small. That number in the first quarter, if you take it across the full year and average it out, will put a charge of about $3 million in the first quarter, so if you add that back, you get pretty close to our expectations for the full year of just under 10% on a consolidated basis. Now moving into the gross profit side, I think this shift I mentioned in my prepared remarks is going to be pretty significant from the bottom line standpoint when you start replacing $140 million, plus or minus, and getting double the economics on the bottom line. That doesn’t change the gross profit by a little bit, but it does drive some improved earnings. I think as we continue to book and move into some of these alternative delivery, non-heavy highway businesses, you will start to see some of that margin improvement. We have some pretty significant projects in our bid activity in the back half of this year, and frankly even the large project that we booked into backlog in the first quarter, the $140 million one, it’s a nice project, good heavy highway business, but in the 8s, not running that up much. We expect that trend to switch over as we start putting some of these large projects that we’re bidding on during the year into backlog. We would expect to see that number continue to pop up a little bit.

The only two other points I would add is when we take a project like the large one in Utah, we’ll put that in relatively conservative on the backlog as we start. That is a design-build project, so we won’t really understand all the margin we can extract out of that until we get into the job. The other piece that we continue to chip away at and get better at is on the execution side, so if you take a look at last year, we finished net maybe slightly up after we executed the projects versus bid margin, so we’ll keep creeping the heavy highway up. We can only go as fast as the market is. I will tell you in the Texas market, as an example, we’re down to roughly leaving 1% on average on the table versus our competitors’ bids, which is really, really good when you’re in a low bid situation. We continue to drive those activities across the enterprise, and we’ll pick up some more as the market increases along with the execution.

And our execution results were favorable again in the first quarter of 2018, which is a tribute to the organization executing the projects a little bit better than we’re entering the year in margins and the backlog on, so that helps us also.

Got it, that’s helpful. Ron, you mentioned there’s a couple of bigger projects in the works for the second half of the year. I’m just curious - you guys had a pretty good bookings clip this quarter. Wondering what we should expect around the backlog trajectory here, and maybe if you could just comment on the profile and region of stuff you’re seeing in the near-term pipeline.

Yes, I think we were very happy with the backlog results coming out of the first quarter, especially since Texas is pretty far behind on bid lettings, TxDOT. They plan on bidding anywhere from $500 million to $800 million a month June through August to try to catch up. I’ll believe that when I see it - hopefully they do, but we have some nice bid activities across the country and there are some sizeable bids coming up in the Rocky Mountain regions as we enter the end of the second quarter, into the third quarter is where they’re currently scheduled to take place. I just always put the caveat that generally big projects never happen on time and bid on time, but there is some very, very nice activity out there that would position us fantastically for 2019 and beyond.

I think the one thing that hasn’t changed that’s important is our selectivity on what we’re bidding, particularly in the heavy highway portion of our business. The market is strong, there’s no reason to go fill up our backlog with margins and risk profiles that we don’t think make any sense, so we’re going to continue to do that and you’ll continue to see this shift in backlog to a greater percentage of the backlog being other than heavy highway. That doesn’t mean heavy highway is going to shrink - it’s not, it’s going to continue to grow, but those commercial and other projects tend to be smaller, tend to burn faster, so it will be a little different metrics coming out of our income statement than the traditional big, two year-plus projects that we have in there. More to come on that, we’ll try and keep that separated so you can understand a little bit better as we continue to increase the proportion of backlog into that non-heavy highway side of the contracting business.

Yes, I always just say, keep watching the bottom line.

Got it, got it.

[Indiscernible]

Last one from me, guys, is just on the Houston expansion - I think you said 44 slabs were laid in Houston this quarter. Just wondering if you can throw some numbers around where that quarterly run rate could trend through the year, maybe what you’re building into your guidance on that front, and then also just curious how you’re finding the availability of subs there as you move into a new region and any other challenges you might be facing in that initiative.

Sure. We’ve got not 44, 34 slabs to date that we’ve poured, and our model starts out a little different in the Houston market, as you can imagine. We’ve talked many times in Dallas, it takes us roughly six crews to do a slab - we have a reverse manufacturing model. In Houston, as a start-up we have to start with one or two crews, and we don’t get quite the efficiencies out that we have in Dallas yet; however, the crews have performed very, very well. We have been very fortunate in getting some good crews in the Houston market. The two developments that we’ve picked up, they’re not hundreds of slabs a month - we’re talking probably 20 to 30 slabs a month, and we’re still holding firm to--you know, we built about $1 million or so of income related to the Houston expansion into the plan for this year, and I think we’re on pace for that. It’s good, the customers have been very receptive, we’ve been very happy with the response the team’s got; but again, I want to reiterate to everybody that we only want to grow as fast as we can serve the customer better than anybody else. I’d rather go slow at the beginning and build that momentum to be successful at the end than try to squeak another half million or million dollars of income into the year and screw up the model.

Okay, thanks. This is really helpful. Thanks so much, guys, and congrats again.

Thanks Sean.

As a reminder, if you’d like to ask a question, it is star, one. Our next question is from Bill Newby from DA Davidson. Please go ahead.

Good morning guys, and congrats on another great quarter.

Thanks Bill.

I guess just to start off, we had a couple of guys note some pretty tough weather in Dallas this quarter. Did that give that Tealstone business any headwinds?

There was a lot of rain in Dallas, there’s no question. The nice thing about the model that we have is it certainly causes complications - I’m not going to lie; however, the model that we have and the flexibility we have with the subcontractors to ramp up and ramp down capacity as needed, as long as we don’t get 30 consecutive days of rain, if we get a couple days of rain during the week, we’re able to make those up on the weekends without significantly impacting our margins or having a negative impact on our margins. Hats off to the Tealstone team - they faced some serious headwinds in the quarter, but they had a record quarter for their business and did a great job managing their way through, which is again a tribute to the model and to the team that’s up there and the ability to work with those customers and get through those tougher times.

That’s good to hear. Then Joe, on the last quarter you noted you guys had found some costs and opportunities with that Tealstone business and just some of the large home builders giving your civil businesses in other markets some opportunities. I think it was in Nevada that you mentioned on the last call. Are you continuing to find opportunities like that? Is there any more additional color to add there?

Yes, we’re looking at a couple developments, trying to see if we can put a pricing model and execution model together in the Houston market as well. The good news is we’ve got great response from the customers and great demand from the customers to do more of the structure work. What we want to do is not distract the Tealstone team with the expansion and try to figure out how to do that in parallel to the efforts that are taking place there; however, we believe that we have to blend the two models, I’ll call it the skills sets and capabilities we have on the heavy equipment side and the paving side with the low-cost model that the Tealstone team has for the execution side. What we’re balancing is where do you make more money today faster and not distract the foundation growth in the Houston market, but there are more opportunities and we are currently looking at them.

Awesome, thanks. That’s it for me. I’ll jump back in queue.

Once again as a reminder, if you’d like to ask a question, it is star, one. Our next question is from Gerry Heffernan from Walthausen. Please go ahead.

Good morning everybody, and thank you very much for a great quarter.

Thank you.

In regards to bidding projects and the heavy projects right now, can you give us some insight as to what you guys are planning as far as wage inflation goes, your efforts to make sure that you have the proper amount of labor and any other wage or other input cost escalation, be it oil-related asphalt, aggregate, etc.?

Yes Gerry, a couple things. When we’re bidding projects, first of all there is components of the projects that we get fixed pricing over the life of the project, so we build those directly into the project. For things like oil, labor, what we do is we project based on the time of the project, what we think the inflationary rates are for those over that given period of time, and we will build those into the bid process. So if you looked at our diesel costs, we’re probably putting in well north of $4 a gallon for diesel fuel; labor, we’ve been spiking labor up anywhere from 3 to 5%, depending on the market. Fortunately we haven’t seen that level of increases or craziness, but we try to build into the best of our ability those sort of things. When it comes to items like steel or aggregate or some of the higher dollar ticket items, we will lock in a price for that time frame obviously with the suppliers. If it’s over a year or a long period of time, they will hedge their pricing to some degree to try to cover that inflation.

Okay, and your efforts to make sure you have enough people?

Yes, a couple different elements. Labor continues to get tighter, there’s no question about it, but so far we have not run into issues with getting people. In addition as part of our strategic plan, we’ve put in a whole human capital element which is looking out longer term on how do we start recruiting, training and retaining all levels of the organization, and we’re working with the State of Texas right now on some funding to actually go back into the high schools and start recruiting and developing the next generation of operators.

That’s great . You guys mentioned something in regards to discussing backlog and the nature of your business, which is not new, where you’re looking to take less of the heavy highway and going more towards the projects that are commercial aviation, water containment, etc. as you indicated there.

Yes.

However, in your commentary here, you mentioned that there’s a faster burn to that business as shorter term. If I think about dollar for dollar in backlogs being what I saw last year versus what I saw this year, am I right to think that if you win a bid that has a shorter burn period, there should be less risk in that bid and therefore if I’m looking at a backlog today or in the future that has a greater component of these projects, on a comparison basis I’m actually looking at perhaps a lower risk backlog aggregate. Am I thinking about that correctly?

Yes, you can come be part of our strategy team, because that’s exactly what we talk about. Everybody wants to talk about revenue and--look, revenue is critical, don’t get me wrong, but we look at our business as what is the lowest risk, high margin return we can get for our investors, and as we move to faster burn projects that require less capital to operate and run and have higher margins, the risk profile of these projects goes down significantly. The other element that comes into play that mitigates the risk even further is a lot of these projects are alternative delivery projects, so we are involved in the design phase and the build phase, which takes out a tremendous amount of variability versus a low bid project for a DOT where we’ve had no input on the design, we don’t know what the variability is going to be, we did it for what the bid says, and as you can imagine a good percentage of the time, you get into it and it’s not--it’s very, very different. So you’re spot on - that’s a great observation. Most people don’t catch that, but that is our objective and a big part of our strategy, and we are as much risk managers from day to day as anything else.

We also kind of control our destiny on some of these. In many of the large heavy highway projects, we’re at the whim of the DOTs who have their own scope, in some states more scope than in others, but not unusual at all for those durations to be extended. In contracting, a short time is your friend. Extensions eat you up with overhead and otherwise, so all those things go into the strategy element of let’s get a 50/50 mix of heavy highway and non-heavy highway in our heavy civil business, so we can enjoy the strength of that heavy highway business right now with everything that’s going on there and enhance it with commercial and otherwise alternative delivery models.

Okay, that’s great. So if I take that and I combine that with the statement you made earlier of the backlog going forward will not have the large joint venture projects in it, so each dollar of that backlog will be higher economics, we’re really looking for the next--you know, the future here, each dollar of backlog should be at a lower risk profile and a better economic profile.

Yes, the only thing I would add is there are projects that are made to be the best economics by having a construction joint venture; in other words, we have some specific skills and our partner usually has some specific skills, and the reason we enter into those is because it enhances our opportunity to win the work. Now unfortunately, the accounting rules require us to say, well, what’s consolidated and what’s not, so it’s not like we’re going to run away from some of these because we actually are pretty successful at them, but it does highlight some different metrics that we need to help people understand of what is the backlog, pure backlog going to bring home. We should see good economics on our risk of those joint venture projects; in other words, if somebody else got 40% of the risk, we get 60% of the risk and reward, so they’re not bad but they’re more specific as opposed to a strategy or a target. The strategy is let’s do these construction joint ventures when there is a collective better talent than one of us could bring otherwise.

Yes, I think Gerry, to think of the two different worlds, if you think of our heavy highway base business that we’ve historically had, we’re fortunate right now that the markets are overall very robust. Our strategy there is to, what I’ll call cherry-pick the lowest risk and best opportunity jobs that fit our skill sets, and if there’s two of those, we’ll go after two; if there’s one, we’re only going to go after one while we build out these adjacent markets and this heavy civil other that really is that higher margin, lower risk. As we’ve said at the beginning of this and into last year is over a three-year period, our objective is to have 50% of our business from this non-heavy highway, higher margins, lower risk, and 50% will remain in the heavy highway, and we’ll selectively pick those jobs that we can make reasonable margins on, continue to drive out cost and productivity in that to eke up the margins every year, and use that--think of it as our cash cow to reinvest into these adjacent markets in this heavy civil other, to continue to grow those out.

Well, that’s great. I know it’s a plan that you had discussed when you first started talking to us, Joe, and it looks like we’re well on the path to achieving that goal. I don’t mean to be picky, I think in the commentary someone mentioned that the gross margin result, 230 basis points were from Tealstone, yet in the press release it says 200. I just wanted to clear that up - how much of the increase of gross margin from 6.1% to 9.3% was attributable to the new business?

Yes, I think one of the words approximately. I was probably a little bit more precise in my prepared remarks. It’s 230% is Tealstone, 330 total.

Two hundred and thirty basis points.

Yes.

Okay, great. Just lastly, if I go through this correctly, you made commentary, I believe, that of the net income--I forget if you said net income or operating income improvement, 55% was from Tealstone and 45% was construction. Again on an apples-to-apples basis, that says that the construction business alone was darn near above breakeven for the quarter, which makes that first time in 10 years descriptive even more powerful.

Yes, we’re pretty proud of that, to be honest. That is a difficult thing to do in our world and is a huge improvement, and I think it’s a good point. Look - Tealstone, we love that business. These guys have done a great job. They’ve done everything they said they were going to do and performed outstanding, but our base heavy civil business has really stepped up as well and the performance of that is super. In our sector, I haven’t listened to all the earnings calls and all of our peers, but it’s very difficult in this world to make money in the first quarter, and you’re spot on - that’s why we’re extremely excited about the performance and the trajectory we’ve got.

And Gerry, that was operating income, so you got it almost right - 56% Tealstone, the balance of it heavy civil. Of course, the reason we pick operating is because it’s one you can actually understand. We have about $3 million interest cover to effect that transaction. That’s not a complaint - it’s been nicely accretive every quarter we’ve owned them, and it’s a home run transaction. But it’s combination of both and it’s pretty darn powerful, and I think you’re right - if we were non-Tealstone right now, I believe the numbers would still be a profit in the first quarter of just our traditional work.

Well, that’s great results, gentlemen. Thank you very much for all the hard work.

Thanks.

As a final reminder, if you’d like to ask a question, it is star, one. If there are no further questions, I’d like to turn the floor back over to management for any closing comments.

Great. Thanks again everyone for joining our call today. 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 the press release. Again, thanks everybody and have a great day.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.