Greetings and welcome to Sterling Construction Company Fourth Quarter 2019 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded and there are accompanying slides on the Investor Relations section of the Company's website.Before turning the call over to Joe Cutillo, Sterling Construction's Chief Executive Officer, I will read the Safe Harbor statement. Some discussions today may include forward-looking statements after 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 obligations to update forward-looking statements as a result of new information future events or otherwise.Now, I'd like to turn the call over to Joe Cutillo. Please proceed sir.

Thanks, Latania, and good morning everyone. I'd like to start by thanking all of our Sterling employees for their hard work, safe practices and dedication to our customers in our company. The fourth quarter marked the final quarter of another monumental year for Sterling and its shareholders. In addition to being the final quarter of our fiscal year, the fourth quarter was the final quarter of our original three year strategy that was put together in 2016. I think it's important to take a minute and look back at what we've accomplished, how the Company has changed, and how those changes positioned the Company for future growth. Please refer to Slides 3 through 5 as I go through the following.We ended 2015 and headed into 2016 with our fifth consecutive year of losses. At that time, approximately 95% of our business was in low bid heavy highway work. Our gross margins were in the low single digits and we consistently executed five to six points below our estimated mid March. We had a balance sheet that was heavy on capital assets, but skinny on cash. We were heading for the rocks and needed to change faster.In 2016, the team put together a strategy focused on growing the bottom line, reducing risk, showing up the balance sheet and building a platform for accreted future growth. The plan consisted of three key elements, solidifying our base, growing high margin products, and expanding into adjacent markets. Along with this plan came some very ambitious goals that most people never thought we could achieve in such a short period of time. We set out to take the Company from a loss of $0.40 per share to a gain of over a $1 share while reducing risks in three short years.I'm proud to say with…

Thanks, Joe, and good morning. I am pleased to discuss our 2019 results for a truly transformational fourth quarter and year. As we saw in yesterday's press release, the fourth quarter included a variety of one-time transactions, which certainly complicated the financial statements.The earnings release included several additional non-GAAP financial presentations to help provide a better understanding of both the 2019 results and our prospective reporting. I will discuss those matters in more depth shortly. I will also provide some additional 2020 financial details, which are the underpinning of our 2020 revenue, earnings and cash flow related guidance. These details are summarized on Slides 13 and 14.With the acquisition of Plateau on October 2, 2019, we reorganized our reporting structure into three reporting segments heavy civil, specialty services and residential. The heavy civil reporting segment includes our legacy, heavy civil businesses with the exception of our commercial business.Our commercial business combined with the Plateau business forms the specialty services reporting segment. Another way to look at these two reporting segments is by type of customer, heavy civil being predominantly serving the public sector such as the DOTs and Municipality, and specialty services serving the private sector, principally, general contractors and developers.The residential reporting segment is essentially unchanged from its prior reporting. For consistency purposes, our past segment reporting has been conformed to our new three reporting segments structure. You'll find a conformed three segments reporting in the quarterly information footnote of our 2019 Form 10-K.Now, let's about our 2000 results in our 2020 expectations beginning on Slide 6. Our 2019, I'm sorry -- December 31, 2019, our backlog was $1.68 billion compared to $850 million in 2018. This $217 million increase in backlog contained $164 million related to Plateau. The gross margin in our 2019 backlog was 11.5% compared to…

Thanks, Ron. 2019 was another significant step forward in our journey to transform Sterling. Over the last three years, we have seen revenue compounded annual growth rates of 14.3%. Our gross profit compounded annual growth rate of over 36% and we've grown our EBITDA over 500%. As we go into 2020, our markets in all three sectors remain strong. Our combined backlog is up 17% and our margin in combined backlog is up 210 basis points.Our revenue projections for 2020 are up over 20%. Our average gross margin will range between 13% and 14%. Our debt income will be up over 60% and our EBITDA, which is grown over 500% in the last three years will more than doubled to approximately a $130 million. This would be incredible for any years, but stack that on top of the performance over the last three years and you have a company that continues to outperform its peers in the general market.With that, I'd like to turn it over for any questions.Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Sean Eastman with KeyBanc. Please proceed with your question.

First one for me is, in the release we have a $125 million to $135 million adjusted EBITDA range. Presentation has $125 million to $130 million. Just curious what the difference between those two ranges are? And then also, if you could maybe just round out the bridge from that EBITDA to operating cash flow for 2020 just around cash interest, share-based comp, any working capital considerations would be very helpful?

Sure. So, first apologies, the range is $10 million, $125 million to $130 million EBITDA interest on that where it is. So let me help you with a couple of bridges. So, EBITDA, I guess it was mid-point $130 million to $125 million but either way, that's what our guidance is. Our CapEx as you see in some of the details is $25 million to $30 million. So, mid-point is 7.5. So, that gives us about a $100 million for interest expense to be covered.Interest expense, we believe -- the mid-point of our guidance number includes about a $33 million interest expense for the year, and after that, about $70 million what we would call a free cash flow available for debt service -- sorry, not interest but scheduled payments, and other needs that we might have.As I mentioned in my prepared remarks, we don't expect a significant change in working capital. Certainly, with our large projects in our legacy business, they tend to fund themselves and Plateau does an excellent job with their working capital to do the same thing. So, we wouldn't expect a big change other than our normal. We tend to grow working capital in the first half of the year and harvested in the back half of the year. Just the way our projects ramp up and ramp down with the seasonality primarily.

So just to be at the midpoint $70 million free cash flow, operating cash flow minus CapEx?

That's correct.

And then I think you guys...

Minus CapEx and interest expense is 70.

Like operating cash flow minus CapEx equals.

Yes, you've got it.

Got, okay. Okay, great. That's helpful. And then just you guys called out the big swing factor I think is the ramp up and phasing of these three large JV heavy civil jobs? I'm just kind a curious at what point in the year will you have more clarity in line of sight on the upper and lower end around those that ramp up just kind of curious for some background?

Yes, we have two pieces of it, two of them a wrapping up in the first half. We've already seen some activities in the first quarter, so depending on whether, if that sort of thing would be that the rate of the first quarter they ramp up. They should be running very strong in the second quarter. And then, the third one we anticipate starting late in the second quarter for the rest of the year. So, we'll have good visibility on two of those three, as we get into the second quarter, by end of the second quarter for sure. And by that point in time, I think we should have a pretty good handle on the ramp up rate of the third one as well.

And I'd add, generally, on these anywhere from 2.5 to 3.5 year projects, call it, 3 years. It takes about three quarters to ramp all the way up to get flat lined and it could come down about the same pace with three quarters left. So in the middle, there is about 18 months to 2 year steady flow.

And then last one from me. Would you mind sort of walking us through the revenue growth and margin assumptions built into the 2020 outlook by the new segments you guys are reporting now?

Yes, we have that one slide. Do you want to go through the details front? I can add some color to it. I think it's pretty consistent with what we've said in the third and fourth quarter last year, coming the year on the growth sides and the margin.

I think that's right. So, obviously, the largest impact of the revenue comes from the Plateau side. Their run rate historically has been right around $300 million for a full year. Obviously, we've got about -- we have three incremental quarters added to our guidance, so that probably brings in give or take $225 million of incremental growth. The balance is coming off the large projects that are going to ramp up.And then, the growth expectations that we have in the slides are sort of three year view. So, obviously, when we ramp up the big three joint ventures, we'll have something more than that. However, it's not all incremental, right, because you only have so many capabilities and service and people. So we've going to finish some of the smaller jobs and support the big job. So we'll certainly have pretty good growth on revenues overall. But not all incremental, all I'm trying to say from the beginning.

And I think, Sean, going back to some of your earlier questions. The big variable is the ramp up of these large projects. We think we've got a factor in it, a normal ramp-up rate. If they ramp-up faster, that's a good thing for us. And if they ramp-up a little slower, I think, we've got relatively a decent room in the range that we should be pretty darn closer.

And then on the margin side, we continue to see hard-bid activity in the high-single digits call it 9% plus or minus. Our alternative delivery, we'll tend to bring in low-double digit margins 10% to 12%. And then our residential, we'll say the same with gross margins up close to 20% and the net returns you see an operating and combined. And then Plateau is in the high 25% to 30%, depending on the mix of work they're doing in any particular quarter.

Yes, I think on the just a little bit of the residential front, we've seen some nice improvements on the margins in Houston, as it continues to ramp-up or grow rate in line with what we anticipated. And, I think, the other thing that was kind of a nice, I'll call it, proof-of-concept. We've talked about the expansion into the Houston market, so if the day comes where Dallas is slowdown, we can offset that.And with that little bit of slowdown starting at third quarter going into the fourth quarter and then changing it the back, really saw firsthand that the ramp-up rate in Houston offset that from a slab count in a revenue standpoint to try to keep it pretty, pretty valid. So, as we continue to grow that and improve margins, I think that's going to play out very, very well for us in the future. So right now, I will say, we don't see any slowdown in Dallas is going crazy again. So, that's a good thing. We can keep the weather for rating up in Dallas, what we sell it.

Excellent, really helpful responses, congrats on getting all this stuff closed and then the numbers seemed like it was a lot of work. So thanks again.

There is a lot more gymnastics in this quarter than normal, but all good things for us going forward and we're feeling pretty, pretty positive about 2020.

Excellent, thanks for the time.

[Operator Instruction] Our next question comes from Brent Thielman with D.A. Davidson. Please proceed with your question.

Good. Joe and Ron, when you guys acquired Plateau, I think they did something around $70 million EBITDA in '18. And if I just assume that going forward and back it out from the mid-point of your guidance that implies something around, call it 60 million EBITDA, so that the core business, which is basically very little growth of '19. So, I guess my question is something changed with the business where we shouldn't assume Plateau can do $70 million EBITDA in '20. Or are you just trying to bake in some conservatism?

Now, if you recall, when we did the transaction from the very beginning, we knew, we were going to spend some money to bring the Company up into the public company world, if you will, of reporting and controls and systems. So from the get go, we had an incremental $5 million G&A spend as a result of the acquisition.And on top of that, you'll kind of get normal and a further increase in just what we will have where long-term incentive plans are because we're putting their leadership on our plan. So between the two of them, from an EBITDA standpoint, which we use EBITDA side as straight definitional that we don't add back stock based comp, but those two things probably knock it down $5 million to $10 million.

Okay. And then, the 25 million in free cash flow in the fourth quarter, anything outstanding within that to be called out? Or is that pretty clean?

I think the big number in there was the collection of the cash for the project that Joe talked about, $17 million. Now some of that was just normal pace, but most of that cash was 2019 deferred for three quarters then cleared in the fourth quarter. So, if you look at the full year of sort of normal pace, but it was heavily influenced by the ultimate settlement in the fourth quarter where that element was agreed to do an addition for -- in addition to the acceleration.

Okay. And on the Texas jobs, did you guys satisfy all your obligations on those? Now is there anything that bleeds over into 2020?

Well, we still have -- we've got -- let me give you a little perspective. We've got all the other foundations and basis of the bridges complete. They're working on the decking of those bridges simultaneously. So, we'll continue -- two of those bridges should be almost a 100% complete by the end of this year. We've got an early first quarter of next year then the third bridge finishes in the late part of next year.So, we're still actively working on it, but the fourth thing is. We've got resolution. These were designed where grossly flawed could to be built [indiscernible] that working with us and realized the same thing. We've got resolution on how to pay and turn in these claims, as we go forward of any design related issues, and it's a much cleaner point for where we are today to the finish line.

And then on the larger civil jobs in the mountain region, it wasn't clear to you. Do you actually have plans to move forward on these now and it's just a function of the weather getting better? Or are you waiting on that?

Two of them, we're going full board. The third one we're working on design stuff and other parts of it. We're just not in the construction phase. But yes, we -- it's just the thing that's hard for people to understand because the design-build process after you win it. It could take a year or so to get the designs and all of that put together. So it's a slow burn, a few million dollars. It's not that it's the big dollars. That third one is coming hopefully quickly to the end of that page here. The other two are up active and moving.

And you said it well. They are in the mountains where it snows. So, naturally, the start tends to be in the second quarter because the reality is, it's hard to start in an uncertain snow weather.

And then my last question, I guess is just, again, on civil, maybe you could talk about what your term bookings prospects look like? You've obviously got a big book of business today, but you know, can you continue to kind of sustain that level?

Yes, we haven't seen any slowdown in bid activity. We're in the final year of the FAST Act. The states have all got budgets that were larger than the prior year equal to our larger, I should say. The fed is up there up the amount of money that they're putting in. You've got three different parallel paths to the upcoming renewal of the FAST Act. You have the Senate bill. You have a bill going to Congress and then you have the Presidential budget.We'll see how that all plays out in election years. The good news is, the Senate bill is probably the furthest along and just looking at, it's been through I'll call it the majority of the approval process. They're looking at the funding source and tried to determine how to do that.But when you look at the other bills proposed, the one in Trump's budget and the one that's going through Congress today just put in perspective, we spend about $65 billion of feds put in about $65 billion a year in spending, the congressional bill calls for $86 billion a year in spending, and the budget through the Trump administration with a one-time, year one, would get a $19 billion -- sorry, $119 billion boost would average a $100 billion a year.So you take the range there and all of them look extremely positive from a market outlook or either 5 years, 10 years or permanent funding sources. It's just a matter of what does it take to get it through in an election year.

And I would add, as we talked about earlier, we are not done, shifting heavy highway from hard-bid to alternative delivery work. We've made great progress in the year with up 43%, a heavy highway compared to the total revenues. But we're going to continue to manage that down and being a selective on the right projects with the right margins. So, by intent, we're going to keep that business at a 2% to 3% growth rate.

I think that's a good point, Ron. And if the market were to go up 10%, we will stay very disciplined guys to accretive margin. If we can grow through accretive margin in the highway space, that's fantastic. That's an alternative delivery. And if the margins continue to creep up on the low-bid side, we'll grow. But we're not going to -- our objective is not to grow at the pace of the market. It's to grow at the pace of how to get our heavy highway business to where it's 12 plus percent gross margins in total and continues to add value to us versus the risk profile versus adding more risk at a lower margin.

Thank you. At this time, I will like to turn the call back over to Mr. Cutillo for closing comments.

Great, thank you. Thanks again everyone for joining our call today. If you have any follow-up questions or wish or schedule a call, please refer to the contact information provided in the press release, associated with our Investor Relations group at Sterling, for our partners with the equity group.I appreciate everybody taking the time this morning to jump on the call. We're pretty excited about 2020 and we'll talk soon. Thank you.

This does conclude today's teleconference. You may disconnect your lines at this time and thank you for your participation.