Greetings. Welcome to Sterling Construction Company’s Third Quarter 2021 Earnings Conference Call and Webcast. As a reminder, this conference is being recorded and all participants are in 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 obligation 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 the SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measures in our earnings release issued yesterday. I would like to now turn the call over to Mr. Joe Cutillo. Thank you, sir. Please go ahead.

Thanks, Sherry. Good morning, everyone, and welcome to Sterling's third quarter 2021 earnings call. The third quarter marked the 15th quarter of period over period earnings improvement since 2017. And the 6th time during that same period that we have raised our annual guidance. This consistent level of exceptional performance is attributed to the strength of our strategy and the culture of our people. Their entrepreneurial spirit, coupled with their ability to address challenges head on, is what enables us to continue to deliver strong results in challenging times. Before we get into the quarterly results, I'd like to spend a little time talking about our end markets in each sector. Our Specialty Service sector continues to see very strong activity throughout the East in data and e-commerce distribution centers or what we call the e-infrastructure. During the quarter, we booked over $150 million of new business. In addition to our core customers, our geographic expansion has opened up opportunities to new e-retailers, building out their distribution networks. To-date, we have not seen any slowdown in new project activity and do not anticipate any change as we go into 2022. Our residential sector continues to see strong double-digit growth in both the Texas and Arizona markets. We poured over 1,000 slabs in the month of July and set a record for slabs poured in a quarter. Demand of first time homebuyers remains very strong and inventory remains very low. We anticipate this demand will continue into 2022. Good activity for our Heavy Civil sector remains softer than normal as the DoTs and airports awaited decision on the next infrastructure bill. Regardless the outcome of the infrastructure bill, we believe bid activity will pick up in early 2022, driven by billions of dollars of stimulus money sitting at the state level…

Thanks, Joe. And good morning, everyone. I'm pleased to provide a summary of our strong third quarter 2021 results. Today's conference call together with our earnings release, Form 10-Q and the investor deck posted to our website should provide insight into our strategic progress in delivering strong earnings and cash flow. Now, let me take you through our financial highlights for the third quarter. At September 30, 2021, our backlogs totaled of $1,411 million, a 20% increase over the beginning of 2021. The backlog increase was evenly split with 50% of the growth attributable to both Heavy Civil and Specialty Services. The gross margin in our third quarter backlog was 12.3%, compared to 12% at the beginning of the year. This higher backlog gross margin primarily reflects an increase in Specialty Services backlog, which generally has higher margin characteristics higher than Heavy Civil projects. Unsigned low-bid awards totaled $115 million at the end of September, 2021. We finished the third quarter with combined backlog of $1,530 million, essentially the same as at the beginning of the year. The gross margin of our combined backlog increased to 12.1%, up from 11.8% at the beginning of the year. Our year-to-date 2021 book to burn factors were 1.2x and 1x for backlog and combined backlog, respectively. Residential, which accounted for 13% of our year-to-date consolidated revenues, does not report backlog as it is recognized -- revenues recognized as individual concrete slabs are completed. Moving to our operating results. Our current quarter revenues totaled a record $463 million, an $80 million or 21% increase over the prior year quarter. Third quarter revenue growth by segment was 24%, 6% and 54% for Heavy Civil, Specialty Services and Residential respectively. The significant increase in Heavy Civil revenues was primarily due to the ramp up on construction…

Thanks, Ron. We’ve had three great quarters and our positioned to finish with another record year. More importantly, we have positioned ourselves to continue this trend into 2022. As we look at closing out 2021 and into 2022, we believe the supply chain and inflation issue will continue to be a challenge for us throughout the first half of 2022. However, it's very comforting to know our end markets remain extremely strong and our current backlog and backlog margins are near record highs. Our diverse culture continues to exceed our expectations in delivering outstanding results and generating record cash. Our strategy to diversify our business towards higher margin, lower risk jobs, and end markets continues to pay significant dividends and will not change. We will continue to look for accretive acquisitions that either help us build out our existing sectors with additional services or potentially add on a fourth. This will enable us to continue to grow our combined margins and further reduce risk and volatility. We will ultimately become an infrastructure solution provider able to build or service our customers’ greatest needs. Whether it's building something new, rehabilitating something old or serving infrastructure throughout its useful life, we will be there in the critical time of need. We have truly come a long way in transforming our company from what it was, but we are only at the beginning of what it will be. We are positioned well to make another significant transformational step forward in 2022, and deliver another record year to our shareholders. With that, I'd like to turn it over for questions.

. The first question is from Brent Thielman with D.A. Davidson. please proceed.

Hey, I guess the first question is on the Residential segment, I’ve heard slowness with respect to labor and capacity, supply chain constraints for homebuilders, but the business is up 54% this quarter. I guess I'm just trying to flesh out what else is going on there. It doesn't seem like that's holding you back at all.

I will tell you, it's much more of a struggle. We don't get stuff the hour we want it, we may get it in the afternoon, so the morning or the next day in some cases, but our team has done a great job of maneuvering delivering crews and projects and all that stuff to keep the volume up. You've seen the hit we've taken on the margin side, a couple of hundred basis points. But that's due to the combination of the inflation and what we’re having to do to keep up. The market is staying incredibly strong. We're not seeing any slowdown. We will see, what I'll call the seasonal slowdown in the fourth quarter, that's natural, slows down a little bit, and it'll give the builders time to regroup and get lands available for first quarter, second quarter of next year. But first time homebuyers continue to remain strong, inventory is virtually non-existent in the places that we're working today. We think that trend is going to continue.

And Ron, do you have the increase in slab count for the quarter, I know you said it was a record, just wondering what the year-on-year change was?

Yes. The slab count was up 36% for all -- for this all -- the three -- Texas and Arizona, ramp up of Arizona, compared to that 50 some percent. So it's sort of demonstration that we're getting price increases, but we're not being able to keep up with a continuous price increases we have them every day, whether it's material or even shortage of labor.

And I just -- I mean, on the short-term stuff, the guidance for revenue, I mean, you're sort of implying flat to lower revenue for the fourth quarter. I guess, where do you feel like to being most conservative, when do you see an adjusted buyback, as we sit here today understanding it's -- 4Q can have some seasonality to it?

Well, I think there's a couple of drivers. We certainly run into the winter months. So some of the large alternative delivery projects out in Utah and Colorado will get shut down, or could be shut down, personnel. Utah has already had two big snowstorms. So we've that. You’ve got what I call the seasonal slowdown in the Residential that happens in the fourth quarter. As you can imagine the public builders don't want to have a lot of -- have built houses on the ground coming into year end, try to preserve their cash for year-end numbers and then start going crazy at the beginning of the year. And then we’ve just factored in just the natural -- we got two holidays. Our teams have been running nonstop all year, we did in all our vacation and all that stuff, usually the back half of December, for most of our teams. So we've got to do our annual maintenance and all of that on our equipment. So part of it is scheduled on our part to kind of regroup and get ready going into the next year, part of it’s driven by just weather in the in the fourth quarter and holidays. And then the last piece, we always run the risk now with some of these material delays, where the stuff just gets pushed out, the work gets pushed out of the quarter into the first quarter.

And then back to the margins, I guess, the Residential and Specialty, just given your comments this could continue on to the first half of next year, which seems fair. And is it your expectation we're going to continue to have around these levels for those segments that you saw in 3Q kind of going in through the first half of next year?

I think that's fair to assume. If the material prices can stabilize, we can start catching up. But I’ll give you an example. The good news with our Specialty Service sector projects are normally only six months long. So they're pretty quick. The new projects we're bidding, we're obviously building in the new pricing and try to forecast the investor ability what the pricing is going to be. But with these rapid changes and in a lot of cases, you don't even get pricing until it's delivered. It's a little bit of a guessing game. Once it plateaus, or at least comes in at normal levels, then we can start eating back in some of that margin erosion. I don't see us losing any significant amounts more unless something really changed for the worse that it is right now in the supply chain. But part of us believes that the material has gone up 100% or 200% or 300%, I don't see it going up another 100%, 200% or 300%, and may go up another 10% or 15% or 20%. But we're feeling the brunt of the pain of those real big, fast moving items that happened early in the cycle and moved consistently over the last six months.

Our next question is from Sean Eastman with KeyBanc Capital Markets.

So we've got these three year revenue growth targets out there, they all look intact, the 3% to 5% Heavy Civil; 5% to 7% Specialty; 7% and 9% Residential. Is there any reason those segments shouldn't be in those ranges in 2022? I mean, it sounds like the demand side of the equation has only really improved over the course of this year, but I don't know maybe labor is a constraint there. How should we think about that?

Well, certainly the market is there. And the issues that we run into as we go into 2022, that we're trying to proactively get ahead of, you hit on one of them is labor, as you grow 7% to 10% in some of these, you need 7% to 10% more labor. The other one we're running into, we've had equipment on order for 8 to 10 months, that still hasn't come in for this year and equipment rental is getting tighter and tighter. So we've got to get more equipment, more people and all that kind of stuff. As you can imagine, those are good problems to have, because the market is so strong, but the reality, problems out there that we’re having. I was talking to someone here recently, who's in our industry, and knock on wood, we haven't run into this yet but they have, where they're running into just spare part issues for a lot of their big equipment and he was telling me how many pieces of idle equipment he has sitting there. And it was staggering to me for anything from $25 to $30 filters to $1,000 part that they just can't get. So those are the things that worry me Sean on how much ducking and weaving do we have to do and that sort of stuff. But I will tell you, the market is out there. And we are going to bust our hump to do everything we can to capture as much of that market.

And certainly for the private sector work of Residential and Specialty, leaders, supervisors, the hard people to get, we can't find 20% increase in those people available to help us. So that's -- I don’t know what Joe's on to but another situation where you just -- you just can't hire enough people, they just aren’t out there, unfortunately.

Okay. And just as it relates to the equipment side that you're describing, Joe it's interesting that you actually took up CapEx guidance. Is there something strategic in that, it's a little counterintuitive?

Well, there's two drivers that where it's taking us longer to get equipment, and so we're having to put it on and buy it. So we're buying next year's equipment now. We actually put an order in a couple of months ago. The other thing that we have historically levered is kind of flex capacity is rental equipment and lease equipment. And it is very hard to get right now. The availability that is very well. So in some instances where we might lease historically, today it actually makes more sense to buy. And we're always looking at that model. Every time we look at a piece of equipment, do we rent, do we lease, do we buy? Is based on pricing and availability, that can shift any quarter or any year.

If you go back to last year, our Specialty Group increased revenues 37%. This year with our large joint venture contracts cranking up that you saw in the quarter, all that revenue takes you out more yellow iron. And so, you kind of -- we kind of peak at that at this point, at least for this year.

Okay, interesting. And then, of course, this past quarter, you guys rolled out these big 2024 targets. The margin numbers are definitely notable. So, I guess what you guys are saying is you think you can get to 16% gross margin organically through 2024, and that kind of 250 basis points is mostly from a shift in mix. And then if you execute more M&A, you think you can get to 20% by 2024. Is that how we should think about it?

Yes. And I think the only thing that's been added to that is obviously we got to claw back some of the margin we have lost with the inflation, right? So, there's probably another couple of points of challenge to us as we go forward. But that's right. If you just look at the growth patterns in the mix change over the continuing time, plus the continued movement we'll see in the Heavy Civil sector as we continue to reduce our low-bid heavy highway business, and go into alternatives delivery and aviation, that gets us to that 16% or so. And then from there, to get to 20%, it's got to be through acquisitions or expansions.

Okay. And do you have line of sight on acquisitions or a particular end market or business type that gives you confidence on that 20% number at this point, Joe?

It's always hard to have everything lined up for four years. But we believe, by continuing to grow out in the Residential sector and the Specialty Service sector, that will continue to move us towards that point. And then at some point in time, I think we are going to need a fourth sector in some way, shape or form, that will help drive that. And one of the things that we need to focus on too is the bottom-line impact of all that. At the end of the day, it's easy for us to talk about the gross margin and that's what we are shooting for internally. But what falls through and how do we get that impact to the bottom-line. So there is other levers just besides the gross margin for us to get to the ultimate number….

Okay. That's helpful. Last one, this one's for you, Ron. I mean, if we just look at the ratio of operating cash flow expectations, relative to EBITDA for 2021. Is there anything moving around there, as we look out to 2022, or should you guys be kind of converting that EBITDA at a similar clip, as we look in the next year?

Yes. That's probably the hardest thing to predict for us, just the timing of projects and front-end payments and burn-off and everything else. But the good news is, we -- even in the margin challenges this year, that cash flow has beat our expectation by a fair amount. But having said that -- I've said that for two years in a row. So, I think that, we'll continue to kind of start with -- the way I look at it is kind of start with operating income and generally in each of our sectors or segments, we don't really have working capital move with revenues, just because of the way we build for -- build very quickly short cycle for Residential, and then the cash churn we get from property structuring contracts. So I would expect it to beat operating income a bit, continue to -- that is where I start with the most predictable one and beat that as we've done the last couple of years. You can't keep beating it by 20% ahead of improvement opportunities, unfortunately.

And we do have a follow-up question from Brent Thielman with D.A. Davidson.

Hey, Ron on the cash flow question, it sounds like you're sort of pulling forwards in CapEx, in order to get in front and security equipment you need, because that implies cash flow could be even -- or free cash flow could be even stronger next year?

No, we'll probably need to add -- we don't -- right now, we're going to have to add more capital next year. So we go back to the growth rates in the market, the markets are growing faster today that we can grow. So as you can imagine, we're working diligently to find operators, working diligently to find equipment. The hardest ones for us, as Ron said, is when you get into our project management teams and that sort of stuff, that's a critical piece. But we don't see us not buying or slowing down in the next year based on what our end customers are forecasting for next year, and the year after, in the e-commerce space and data center space. The other thing that's coming on Brent, we haven't seen any projects yet, but it's coming out quickly, is the -- I'll call it reshoring or onshoring of manufacturing, and onshoring of inventory with all the supply chain issues. And there are a lot of projects out there looking for land, looking for designs and that to build these warehouses. And we think that's going to be a nice little bump for us probably late '22 or early '23.

Yes. When you think about our largest -- or over half of our CapEx is in our Specialty Group as you might guess. And that when you think about the site development business, it is all about moving dirt. And if you have more volume, you need more equipment. So that's why I don't see us going backwards. We'll put some more clarity around that as we work on our 2021 -- our 2022 planned release and things at the end of the year, but it….

And it also -- I wouldn't underestimate that if we picked up an incremental project, that we needed 30 piece of equipment, we could go across the street to the Cat dealer and put together a package. It's a rental package for that project. And if we saw the long-term demand for that, we flip it into the CapEx spend. If you go to that same Cat dealer today, you actually as John Deere ag equipment sitting on his lap, because there's no Cat equipment available. But it's kind of like the car dealers right now. There's just not a lot of equipment out there. So it’s, we want to keep feeding the beast and we're going to be required to spend a little more capital as a result.

And then I wanted to talk about that the gross margin targets you've laid out for '24 to '26, 16% to 20%. Obviously, you can't time and predict M&A. I think it would be helpful to hear just some of the actions you're already taking to get yourself toward those targets, whether it be geographic expansion, et cetera. I'd love to hear a little more about that and what you're doing today already to get yourself in that direction?

Yes, so a couple of things and as we go into 2022 to do some things structurally as well to help drive a more enhanced focus on things like aviation, we really liked that business. If the infrastructure bill ever comes through, that spend rate doubles over the next five years. How do we take advantage of that, and again, that's on the Heavy Civil side. But the expansion in the Phoenix is a great example. It's going very well. As a matter of fact, if we had a lot more people we would be doing even better. Pricing is better in Phoenix than the Houston market. And that seems to be growing even faster than the Houston market rates. So we'll continue to build that out and grow it. So every dollar we bring in, in the Residential side obviously helps move that margin. Geographically, we'll continue to move further North with our Plateau business as we get into the more of the Virginia, Maryland market and then the D.C. proper area. And we're trying to figure out strategically how we go all the way up to I'll call it Pennsylvania, New Jersey, that come together there. That market is very similar to Atlanta in the sense that, that seems to be a real big distribution hub where the Amazons and all of those folks are putting these distribution centers, their close proximity to still get into New York City, D.C. and some of the big markets but far enough out rural areas that they can buy hundreds of acres of land and be able to afford doing it. So we'll continue to go up through there. On the acquisition front, look the market is good. We are seeing and looking at a lot of deals. But I think the more important thing is, we're seeing more quality deals here and have some opportunities for both, I'll call it quick tuck-ins to add goods and services to our sectors and some out there that look a little bigger on the surface, too early to tell at this point in time. But we're optimistic that we'll be able to start using some of this free cash flow and cash that we're building up to do something before the -- certainly before the end of the first half of 2022.

And Joe is your -- are you finding with -- as you're moving Plateau into new regions, you can still get the margins that business has historically had? I know you’ve got the inflation issues.

Yes, believe it or not, we tend to get better margins in the newer areas because it's more of a pull from our customers that really want us there. The most competitive market for us is the Atlanta proper area, just because there's a lot of contractors there. And those jobs, we do big jobs around there, but a lot of those jobs are those B, what we call the B jobs or the smaller jobs. So no, our team has actually done better as they've expanded into these other geographies.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Joe Cutillo for closing comments.

Thanks. Sherry. I'd like to thank everyone again for joining today's call. If you have any follow-up questions, please refer to the information provided in the press release related to our Investor Relations Group at Sterling, or our partners at the Equity Group. I hope everyone has a great day and thanks again.

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