Greetings, and welcome to the Sterling Construction Company's Third Quarter 2020 Earnings Conference Call and Webcast. As a reminder, this conference call is being recorded. 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 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 refer to 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 regulations and rules, these non-GAAP financial measures are reconciled to their most comparable GAAP 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, Dana. Good morning, everyone, and thank you for joining Sterling's Third Quarter 2020 Earnings call on this busy election day. I hope all of you have either already voted or plan on doing so. We often take for granted how great our country is and the freedoms that we have. The right to vote and guide our future is one of those freedoms we should never pass up. Before we go over the results of another great quarter, let's talk briefly about where we are with our strategy to transform the company by reducing risk, increasing margins, and diversifying our end markets. At the end of the third quarter, just over 50% of our total revenues came from our heavy civil sector and less than 30% of our revenues are now coming from low bid heavy highway projects. Remember, in 2015, we had well over 90% of our business coming from low bid heavy highway projects. This shift away from low bid, high-risk jobs to alternative delivery projects in other end markets like aviation and rail has enabled us to increase our total margins in the heavy civil sector, from low single digits to high single digits in just a few short years. Our residential and specialty service sectors now represent close to 50% of our total revenue and contribute over 90% of our operating income. These lower risks, faster turn jobs not only produce more consistent margins but provide solid positive cash flow and higher growth opportunities. As we go forward, the strategy will remain the same. We will continue to focus on improving margins in the heavy civil sector and organically growing our lower risk, higher-margin residential and specialty service sectors. In addition, we will begin looking for strategic tuck-ins and potentially a fourth sector acquisition once we achieve our post Plateau acquisition debt targets. Now let's talk about the fantastic results of another outstanding quarter. I'd like to remind everyone that no company can achieve the quarter-over-quarter, year-over-year results we have without great people. And I'm proud to say our 3,000-plus employees proved again, they are the best in the industry. For the quarter versus the third quarter of 2019, our revenues were up 31%. Our operating income and EBITDA both more than doubled. And cash flows from operating activities more than tripled to $38.7 million. Our heavy civil sector's revenues and margins were both down slightly versus the third quarter prior year. These declines were predominantly driven by project mix and a change in estimated cost to complete a three bridge project in Texas. The mix shift was driven by lower aviation and alternative delivery revenues in the quarter versus the prior year. We believe the mix shift was just a timing issue and will return back to normal in the fourth quarter. Our residential sector was up 6% in revenues and up 4% in operating income. The modest decline in operating margin was driven by a temporary price concession given during the peak of the pandemic, increased lumber prices, and a higher percentage of slabs coming from our Houston market. Our specialty service sector had significant increases in both revenue and operating income driven by the addition of the Plateau acquisition in the fourth quarter of 2019. Overall, the company had an outstanding quarter during some very challenging times and is positioned well to finish the year strong and on track with our guidance. With that, I'll turn it over to Ron to give you more details on the quarter and the year-to-date. Ron?

Thanks, Joe, and good morning, everyone. I am pleased to provide a summary of our 2020 third quarter results. With this being a full year of including the Plateau acquisition in our consolidated results, most of the acquisition integration and new financing noise related to one-time costs are now behind us, providing a cleaner picture of our financial performance. The actions we have made progressing our multiyear strategy, including the transformational acquisition of Plateau, continue to be apparent in substantially all of our financial measures. 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 and improving liquidity while reducing risk. Not to be overlooked, this strong performance came during the most challenging period across our country in many decades. Now let me take you through our financial highlights. Starting with our backlog metrics on Slide #5. At September 30, 2020, our backlog totaled a record high $1.238 billion, a 16% increase over the beginning of the year. Heavy civil backlog increased 13%, while specialty services backlog increased 25% from the beginning of 2020. The gross margin in our third quarter 2020 backlog was 12.4%, a 90 basis point increase from December 31, 2019. Unsigned low bid awards totaled $270 million at the end of September 2020. We finished the third quarter with combined backlog of $1.508 billion, a 12% increase over the start of the year. The gross margin of our combined backlog increased to 11.6% at September 30, 2020, up from 11% at the beginning of the year. Our year-to-date 2020 book-to-burn factors for the combined heavy civil and specialty services segment were 118% and 117% for backlog and combined backlog, respectively. Note that the book-to-burn computations include only the revenues from heavy civil and specialty services and exclude residential revenue as it is not a backlog-driven business. Please flip to Slide 6 for a summary of our consolidated results. Note that this slide includes quarterly results for 3 periods, the second and third quarters of 2020 and the comparable prior year third quarter. Given the magnitude of the Plateau acquisition and the related acquisition financing and changes in NOL accounting, which occurred in late 2019, the second quarter of 2020 was included to highlight the 'same-store' sequential quarter revenues. Our third quarter 2020 revenues of $383 million increased by $92 million or 31% over the comparable 2019 quarter. Third quarter 2020 specialty services revenues increased by $107 million over the comparable 2019 period driven by the Plateau acquisition. The acquisition was also the major driver of the significant increase in gross profit and the 300 basis point gross margin improvement over the periods. The Q3 2020 revenue decline from the sequential prior quarter reflects a $17 million reduction in heavy civil revenues. I will discuss the significant year-over-year segment results in a moment. The increased SG&A from Q3 2019 reflects the Plateau acquisition, including corporate-related costs. While SG&A decline in the sequential quarter was principally the result of lower stock-based compensation expense. The third quarter 2020 decline in other operating expense net for both prior periods reflects a decline in gross profit from our 50% owned consolidated subsidiaries, reflecting a lower income sharing expense. This decline reflects the temporarily lower revenues during the and gross margin from a mix change in Q3 2020. We continue to expect our full-year other operating expense net to be in the $14 million to $16 million range. Operating income for Q3 2020 was $29 million for an operating margin of 7.5%, which was consistent with our expectations. Operating income for Q2 2020 totaled $33 million and operating margin of 8.25%. Our record second quarter 2020 operating returns benefited from entering the second quarter with record combined backlog and poor weather in Q1 2020, which pushed incremental revenues and earnings into the 2020 second quarter. Higher net interest expense in both 2020 periods over the 2019 period reflect the acquisition-related borrowings. Our effective income tax rate for the first 3 quarters of 2020 was 28.5% compared to 8.9% for the comparable 2019 period. Beginning in 2020, our income tax expense includes a noncash tax provision of approximately 22% of our taxable income or approximately $11 million year-to-date. We expect our full-year effective income tax rate to be approximately 28.5%, an increase from our previous expectation of 28.2%. Our third quarter net income totaled $15.2 million or $0.54 per share compared to the third quarter of 2019 net income of $8 million or 30% per share. Third quarter 2020 EBITDA increased more than 2x to $36.7 million from $15.4 million over the comparable 2019 period. Slide 7 highlights the third quarter segment results. Heavy civil revenues decreased by $18 million or 8% in the third quarter, reflecting a $6 million increase in heavy highway revenues and a $24 million decrease in aviation and other heavy civil revenues. This temporary revenue mix change to a higher heavy highway component had a negative impact on our operating returns for the quarter. Also during the quarter, heavy civil results included a charge for increased estimated costs to complete a three bridge project in Texas. We continue to expect substantial completion of these 3 bridges in the first, second and third quarters of 2021. The increase in specialty services revenues and operating income primarily reflects the inclusion of Plateau in the 2020 results. Additionally, Plateau entered the 2020 second quarter with record backlog. And as I previously discussed, poor first quarter weather pushed work into the second quarter of 2020. Both of these factors, together with a favorable project mix contributed to the second quarter 2020 operating margins. Third quarter 2020 residential revenues totaled $42.4 million or a 6.3% increase over the third quarter of 2019. Our Houston expansion continues to pick up speed. Houston accounted for 15% of residential's third quarter 2020 completed slabs compared to 11% in the third quarter of 2019. Residential operating margins declined 50 basis points in the Q3 '20 period, resulting from temporarily temporary COVID-19 related pricing pressures from our customers and significant cost increase for lumber and concrete during the quarter.

Slide 8.

I'm sorry, Slide 8. The graph presents our deleveraging expectations. Beginning with the October '19 Plateau acquisition and the new 5-year credit facility, our September 30, 2019, pro forma forward-looking EBITDA coverage ratio was approximately 3.5%. Based upon our continued progress in executing the strategic actions to improve our base business results and our confidence in the quality of Plateau's future cash flows, we were comfortable with the higher acquisition-related day 1 leverage ratio. We set the objective to bring the coverage ratio down to 2.5x by the end of 2021. The graph reflects where we are to date and our targets through the end of 2021. Importantly, only the scheduled funded debt payments are included in the leverage computation for the future periods presented. During the third quarter, we repaid the $20 million of revolver borrowings, which were outstanding at June 30, 2020. At the end of the third quarter of 2020, we had zero revolver borrowings and have full availability of our $75 million revolver. Our confidence in our de-leveraging strategy has been reinforced by the experience of the first 4 quarters of Plateau results, together with Sterling's base business performance and our consolidated expectations. Examples supporting our confidence include record backlog levels with increasing gross margin. Secondly, our first 9 months of 2020 performance exceeded our initial expectations, supporting the midyear increase in our 2020 revenue and net income guidance even with the challenges of managing through the continuing COVID-19 issues. Next, our adjusted EBITDA for the first 9 months of 2020 totaled $99.2 million, a $57 million improvement over the 2019 comparable period. We continue to believe that our full-year 2020 adjusted EBITDA will be in the $125 million to $135 million range. In addition, our cash flow from operating activities for the first 3 months of 2020 totaled $90.9 million, a 10-fold improvement over the $8.5 million of cash flow from operations in the comparable 2019 period. For the full year 2020, in addition to depreciation and amortization, we expect additional noncash expenses totaling $24 million to $28 million. These noncash expenses include the utilization of our NOL, stock-based compensation, and noncash interest expense. Finally, moving to our balance sheet. Our September 30, 2020, cash and cash equivalent balance totaled $72.6 million compared to $45.7 million at the beginning of 2020. This cash increase reflects investing $20.5 million on net capital expenditures during the year-to-date 2020 period. Finally, please note that the third quarter 2020 investor deck posted to our website includes an appendix to assist our stakeholders with modeling considerations, understanding the key components of our cash flows and various non-GAAP disclosures. Now I will turn the call back over to Joe. Joe?

Thanks, Ron. And once again, another outstanding quarter. As we look forward to the fourth quarter and beyond, our Dallas and Houston residential markets remain strong, and our largest customers remain bullish for 2021. Our specialty service sector markets are driven by multiyear build-out strategies that have only become stronger as a result of the pandemic. In the heavy civil sector, we have seen several states around the country reduce their 2021 DOT budgets, and we anticipate 2021 bid activity across the country will be down slightly versus 2020. However, with our strong backlog, improved backlog margins, and our diversification away from heavy highway, we are less concerned about a significant impact in 2021 and believe 2022 will return to historic or above historic levels for the DOTs. As a result, we are holding our full-year guidance and anticipate continued bottom line growth into 2021. Our full-year guidance of $1.415 billion to $1.430 billion in revenues, and an adjusted net income, midpoint of $42.5 million, represents a 73% improvement over 2019 and will deliver approximately $1.52 in earnings per share to our shareholders. Overall, 2020 will be another outstanding year for the Sterling team and its shareholders. With that, I'd like to turn it over for questions.

Our first question is coming from Sean Eastman of KeyBanc Capital Markets.

Gentlemen, nice job this quarter. I just wanted to start on the civil margins. Just trying to get some perspective on both the charge in the quarter, the increase in cost to complete, as well as the mix dynamic? Just as I try to think about where heavy civil margins should trend into 2021? I'm trying to understand what sort of a normal range is there and understand how the mix is shifting in that business as we look into next year?

I'll begin with the mixed aspect, and then Ron will provide more details. I wouldn't worry too much about a significant mix change, as it's primarily a timing issue. This quarter, we had four active projects, alongside our aviation projects from last year that are ready to start. Our three major design-build projects are in the early stages of ramping up. This creates some variability, making comparisons challenging. However, when we examine our backlog, there's not a significant mix shift. Generally, we've seen a decrease in low bid heavy highway work, and moving into next year, we plan to continue reducing that segment of our business. Ron, would you like to discuss the margins?

Sure. So yes, a couple of things in the quarter, but the largest single item is the updated cost on the Multi Bridge project in Northern Texas here. This is a project that was bid and won in 2014. It is making progress. We continue to have challenges with the owner's design and the related productivity that comes out of that. So we took a $3.5 million charge in the quarter. The good news is we're still on pace to finish those jobs. The schedules are moving forward on a couple, backwards on one, but in the end, we continue to expect hitting our dates that we thought we would hit at the beginning of the year, after the fourth quarter true-up and settlement we had with the Texas DOT on the project.

One of the things we're doing on that project is handling change orders and claims as they arise. We're choosing to pay as we go, so if we encounter a cost increase, we're absorbing that now instead of facing a large adjustment later. We're managing this situation very closely. If we believe there's a need for an adjustment, we're willing to accept the consequences. We'll pursue claims and change orders at the end of the project, hoping to recover some costs, but our focus is on avoiding a buildup of risk at the end.

Yes. Reflecting on the revenue mix, it wasn't an ideal situation this quarter. Our aviation revenues decreased by about 50%, but this is temporary. We currently have just under $250 million in aviation backlog, which should recover in the latter half of the year. Key projects include the Salt Lake City airport and others, as well as a significant project in the Pacific that will ramp up in late first quarter and second quarter of 2021. The timing is crucial here. Meanwhile, we are focusing on changing our project mix, reducing pressure on low bids and hard bids, particularly in Texas, which typically operates under a hard bid framework. Texas revenues intentionally decreased by $16 million quarter-over-quarter, and we will continue to prioritize alternative delivery methods and opportunities outside of standard heavy highway hard bids. We anticipate this trend to reverse as project activity increases. Although ramp-up has been slower for the three major alternative delivery projects in the Rocky Mountain region, they are progressing well and will continue to develop. Weather conditions in the latter part of the fourth quarter, particularly snow in the Rocky Mountains, may affect this progress. Overall, we expect a return to normalcy. Looking at our backlog, which totals $1.5 billion, we do foresee a slowdown in 2021, but we have approximately 1.75 years of heavy civil backlog, the longest we've seen in quite some time. Therefore, we are well-positioned for 2021 and are hopeful for improved bidding activity going forward.

There is a lot of useful information here. To complete the discussion, as we look ahead to next year with the alternative delivery projects increasing, likely with margins above the overall segment average, what are the expectations we should consider regarding the heavy civil operating margin for next year? Should we anticipate it to be above 2%? Could you provide a rough idea of the acceptable margin performance in that segment for next year?

I don't think we see that margin going backwards by any stretch of the imagination, we'll continue to tick up from historical averages as we wean off more and more of the low bid heavy highway, that's our lowest margin stuff. We pick more of the alternative delivery and aviations. If you look at the differential of margins, there's several points between the two of I'll call the low bid and getting into alternative delivery. So Sean, that should not be going backwards, that should be ticking up slightly and following. If you follow our backlog trends and our margins and our backlog trends, we've picked up, what, 50 basis points or 60 basis points. Overall the margin should follow that. We've been very good at executing right on or slightly above the average bid margins, the anomaly this quarter is that old three bridge project where we took some more costs than we think we're going to have between now and the end.

As we look back, we have essentially completed our major projects by the end of 2019. In 2020, we are mainly in the process of ramping them up, and a good indicator of this is our minority interest, which year-to-date amounts to hundreds of thousands, representing about half ownership by our partner. This indicates that we really have very few significant heavy highway alternative delivery projects in 2020, with a slight increase expected in the fourth quarter. In summary, if we compare Q3 year-to-date last year, prior to the fourth quarter, we anticipate surpassing that average margin moving forward, driven by the ongoing reduction of the hard bid element in our heavy highway backlog.

Got you. Great. And then shifting over to Specialty. Clearly, a marquee year for this business, pretty impressive results. I just wonder, is this a really tough comp in this business as we look into next year, it seems like the end market visibility and demand is very resilient, but I wonder about from a capacity perspective, is there a point at which here you've got to sort of ramp hiring and training and maybe some CapEx to actually grow off of the EBIT level?

You are absolutely correct. Our primary challenge as we enter 2021 is managing capacity. While we can always acquire more equipment, the growth in the Plateau business has far surpassed our expectations, and our team is currently at full capacity. We are implementing an active recruiting and training program for new project managers and other essential resources, but this process takes time. Therefore, we do not anticipate seeing an increase next year that matches this year's growth rate, although we do expect some growth since the markets are strong. We are optimistic about the market conditions, but we need to be cautious about how much we can scale without compromising the quality and service our key customers expect. The last thing we want to do is let them down by pursuing growth too aggressively.

Our next question is coming from Brent Thielman of D.A. Davidson.

Great quarter. Maybe following up on specialty. Joe, talk a little bit about the market dynamics there. What are you hearing from your customers? Is there any unusual delays, anything like that as we start to frame some sort of external expectations into '21?

Yes. I think what people often underestimate is that our major customers have long-term plans in place. For instance, Home Depot is working with a 5-year plan and Amazon has a 4- to 5-year plan. They are committed to these strategies, which offers us good visibility. We also believe that the data centers and e-commerce sectors are experiencing increased activity due to the pandemic. The demand is definitely higher, and as we move further into 2021, we expect not only to continue our relationships with our core customers but also to see more engagement from other clients who are looking to enhance their e-commerce efforts. The challenge is that we can't simply decide to double our e-commerce distribution centers overnight. There are steps involved, such as purchasing land and securing locations. Therefore, I don't anticipate a significant change at the beginning of 2021. However, I expect that in the latter half of 2021, while we will continue to see strong engagement from our core customers, we may also start to see larger initiatives from a new group of customers who are still in the early stages of their e-commerce strategies.

Okay, Joe, can you discuss your focus on reducing debt over the next 12 months? Additionally, could you share some of the initiatives planned for the business next year regarding entering new markets in specialty and residential areas or exploring cross-selling opportunities?

Yes. So we'll start with residential. The nice thing is that the Houston market is on fire and continues to be on fire. I think people are finally realizing everybody thinks that the Houston market is an oil-driven market. That is no longer the case. This is a rapidly growing market for a lot of different other business reasons. We have plenty of runway within Houston to grow out over the next 12 to 24 months without any problem and still not have a dominant market share. I will tell you, though, in parallel, we're early. I think as we get into the back end of 2021, the Austin market appears to be coming on faster than we would have anticipated with the announcement of Tesla moving there and a few other big companies moving operations there, and we're seeing builders trying to acquire land in and around that market, at greater rates than they have historically. So I think as we get towards the end of 2021, if it continues down this path, we'll be talking about Austin more for 2022 timeframe. On the specialty side, Brent, our strategy is to let our key customers pull us to new geographies with them. And the nice thing is we've recently been pulled to Tennessee with Facebook and to Mississippi with Amazon, which are both 2 new states for us, 2 new geographies, and we're going to let them kind of drive and dictate where we go with them and where we expand. That's our first premise. We do also believe that there is within the geographic footprint of specialty, there are some other markets and customers that we historically have not gone after, which would be natural organic growth for us, but in parallel, we talk about buying that debt, and we'll continue to do that at an accelerated rate. If we could find the right tuck-ins to add incremental goods or services, I'll call it, to the specialty sector, which could broaden their footprint with their existing customers and get these, I'll call it, accretive margins to the company. We've started talking about that approach and have been kicking around some different ideas in that space.

Okay. That's great. Maybe on residential, you talked about a little bit of compression in margins. I get the inflationary effects there, but more wondering about the negotiations with customers getting back to kind of the pricing levels you've seen before?

Yes. I will tell you, with the exception of one customer at the existing time, all the other customers have gone back to their historical pricing. We still have one customer that is resisting, but the others went back. So we had a little bit of a timing issue there, and we believe that lumber prices should start coming back to normal in the first quarter of 2021. We saw lumber, you kind of put it into perspective. I think it was costing us over $300 more per slab than just lumber prices. So they've more than doubled for us in the period. And that doesn't sound like a lot, but when you're doing the volume of slabs that we're doing, it is a tremendous amount. Remember, the slabs are smaller now than they were. So as a percentage of cost, it's a sizable increase. So the team did a great job of overcoming a lot of that cost, it would have been a lot worse if they just kind of took it and once that's low, but it was just a reality and the timing of that unable to push those costs on in the middle of price reductions.

Okay. Great. Maybe one more, Ron. If I take the EBITDA guidance, how much free cash flow you generated year-to-date. I mean, it looks like you guys could be doing $90 million to $100 million in free cash flow this year. Is that roughly what you're expecting?

I believe that across all of our segments, they have done an excellent job managing not just collections but also their overall investment in contract capital and other areas. I think we will continue to see some growth in that area and remain within that range by the end of the year. To address your earlier question, we have now secured a clearer understanding of the fourth quarter and our capital requirements, which will be between $20 million and $25 million in net CapEx. It's possible that number could increase slightly in 2021, but we will update once we have more clarity. Specifically, the Plateau does not use smaller equipment; they utilize expensive machinery. Therefore, we are focused on ensuring we achieve optimal returns, as new CapEx will need to support that. We will certainly discuss this further in early 2021.

Well, to elaborate on that a bit more, Ron, regarding the possibility that capital expenditures may increase slightly, if the Plateau remains stable into next year, the residential business should perform well, and the civil sector appears solid as well. Is there any reason to think you can't generate a similar range of free cash flow again in 2021?

No, I think our model is working, and we wouldn't expect any big change in the model.

Congrats again.

At this time, I'd like to turn the floor back over to Mr. Cutillo for closing comments.

Thanks, Dana. I'd like to thank everyone again for joining today's call. If you have any follow-up questions or wish to set up a call, please refer to the information provided in the press release associated with our Investor Relations. Thanks again for participating, and I hope everyone has a great day.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines and log off the webcast at this time, and have a wonderful day.