Greetings, and welcome to the Sterling Infrastructure 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 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 measures, financial measures in our earnings release issued yesterday afternoon. I will now turn the call over to Mr. Joe Cutillo. Thank you, sir. Please go ahead.

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, but 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 the 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%…

Thanks, 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 30, 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 million, 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 grown this margin. Unsigned low bid awards at the end of the second quarter totaled $184 million; an increase from $23 million at the end of 2021. We finished the current quarter with record combined backlog of $1.727 billion; 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 1.06x for backlog and 1.26x 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…

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 datacenter activity. 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 would deliver in the second half of 2022. Our Building Solutions segment saw strong demand in all of its markets in the quarter. However, we did begin to see some lumpiness in 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 multiyear backlog combined with the recent bid activity positions us very well for the rest of this year in 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.

. Our first question today is coming from Brent Theilman of D.A. Davidson.

Joe and Ron, just on the residential portion of Building Solutions, it sounds like maybe a more conservative view of the Dallas market, but you've got -- it 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?

Yes, let me talk high level about the market, and then Ron can give you a more specifics on the numbers. A couple of 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 market. 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. Ron, do you want to add any color to the numbers?

Yes. 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 and a little bit of slowdown, then a lot of action. So, we still expect it 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 those tripled in the year in 12 months. So that's a pretty big boost for us, and we think that will continue for the --

Yes, we think the trends will continue like they are. And if you remember back, Brent, 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.

Got it. I 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 are those concerns real for the business?

Yes. So, I think, look, Amazon had a tremendous amount of build in the pandemic. There's a couple of elements that I think may be a little confusing to people. First of all, Amazon lease 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 re-leasing these properties. Their intention all along was to move out of those properties into their mega centers or the more efficient centers. And we continued to see that as those centers get built 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 continued to see other retailers that are behind the Amazons of the world, continuing to build out their E-Infrastructure strategies. And I've said this in the past, but our biggest project this year is not going to be an Amazon and our biggest project last year wasn't an Amazon, it was a line distribution center. So, there's other -- 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 the industrial world, whether that's just basic warehousing for work in 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, we -- if anything, that market, and especially on the industrial side, continues to ramp up real time. We're in the Southeast, we're seeing those projects in the design phase and coming out later this year.

Really helpful, Joe. Maybe just lastly, some of the challenges around inflation, like material availability, I assume that encompasses sort of concrete allocations there.

Yes. Concretes 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 it's -- 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 600 basis or 60 basis points that we lost, we went back and we started looking at more detail, 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 $1.00 to $2.00 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, and we had a great quarter. And without it, we would have had, I mean, just a monumental quarter, frankly.

Yes, Joe, I guess the question I had is those issues become more pronounced this quarter? Or are you just trying to factor in some conservatism around the guidance with respect to possibility that these issues could get worse?

No, I think 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 is 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 8 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 of weeks. So, we'll pick up a little bit of benefit from that.

The next question is coming from Sean Eastman of KeyBanc.

Good morning. This is Alex on for Sean. 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 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?

Yes. I'll let -- we've got a combination of inflation and a little bit of seasonality in the first half of the year. Ron, do you want to give some color and details on the margin?

Yes. I think as we talked about in the first quarter, the -- comparing -- 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 a lower margin type work, primarily as a result of requests from their customers to do that. So, the underlying -- that's a couple of percentage points impact, if you will, if you compare it to the 2021 period. And that will continue. That's what -- 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, just the productivity of these long lead times and shortages where we have to go -- the company had to go back and redo if you will, some or retrench or otherwise. And that requires -- it's less efficient. It takes time to leave equipment, required to be longer, etc. So, 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.

And it's interesting to see the activity pick up around the infrastructure package. Can you talk a little bit about when we could 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 Solutions segment against margin improvement? And what your strategy would be?

Yes, sure. So, the good news is we saw a combination of things we started to see some money flow, and we also see the states running up against their annual -- they go into their new fiscal year here 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.

From a revenue standpoint. We'll see 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 and 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 becomes -- 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 take up another point or two of margin before we would start going aggressively after any further growth outside of those ranges.

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. I think it's a story of 2021 really. Our cash flow from 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 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 it in the backlog. So, we ramped up those four big jobs in the first half and continue through the year and kind of get to the -- plateaued by the end of the year. The cash flow cycle favors those new start-ups, whether it's mobilization or just getting funds to order material, bring in some contractor, etc. So that was the largest factor. The other one that has an impact, the cash cycle for our e-commerce business is, or the 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 -- 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 of 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 in working capital demands of the E-Infrastructure segment with the 20% to 30% growth each quarter.

The next question is coming from Brian Russo of Sidoti.

Just to follow up on the Transportation segment and your comments earlier that you starting to see activity pick up around the infrastructure build. 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?

Yes. So, the three areas we saw the largest pickup in activities 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. And an alternative delivery, you'll usually have two or three teams that did the job. So, a much different dynamic. And then in Nevada, we have -- the thing we don't talk about is we own our own bids and do more milling and paving type operations and third 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 bids and material available very closely. So that's a competitive landscape, but we tend to have the jobs we're going after a competitive advantage on a lot of those.

Okay. Great. And one more question. Are you seeing any early signs of manufacturing reshoring and what end markets might that be occurring? And then do you see any impact to your businesses from the Ship Act and expansion of ship manufacturing, I would imagine mostly in the Pacific Northwest.

Yes, yes. 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, taking out 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 in process inventory or finished goods that they're keeping that buffer in place.

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. Cutillo for closing comments.

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 and 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.

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.