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 our 15th consecutive quarter of earnings improvement compared to the previous year, and the sixth time we have increased our annual guidance since 2017. This sustained level of exceptional performance is due to the strength of our strategy and the dedication of our team. Their entrepreneurial spirit and ability to tackle challenges directly enable us to deliver strong results even in tough times. Before diving into the quarterly results, I want to discuss our end markets across different sectors. Our Specialty Service sector is experiencing robust activity, particularly in the East with data and e-commerce distribution centers, which we refer to as e-infrastructure. We secured over $150 million in new business this quarter. Our expansion into new geographic areas has attracted new e-retailers working to develop their distribution networks alongside our core customers. We have not observed any slowdowns in new projects and do not expect changes as we move into 2022. Our residential sector is enjoying significant double-digit growth in Texas and Arizona. In July alone, we poured more than 1,000 slabs, setting a record for slabs poured in a quarter. Demand from first-time homebuyers is strong, and inventory remains low, which we believe will sustain this demand into 2022. In contrast, activity in our Heavy Civil sector is currently softer than usual as departments of transportation and airports await a decision on the next infrastructure bill. Regardless of this bill's outcome, we expect bidding activity to increase in early 2022, fueled by substantial stimulus funding available at the state level for infrastructure. On the supply chain front, we are facing considerable challenges regarding material availability and inflation across all sectors and locations. This inflation and scarcity have affected not only traditional big-ticket items like steel, lumber, and fuel but nearly every item we use. We do not anticipate immediate relief and expect these challenges to persist through the first half of 2022. We will continue to diligently seek ways to pass these increases on or mitigate them through other means. Now, let’s move on to the quarter's results. The top priority for us is always the safety of our people, ensuring they return home each day to their families. Coming into this quarter, we had not experienced a lost time incident in 2021. Unfortunately, after over 5 million hours without such an incident, we had one in the third quarter. This serves as a strong reminder that, despite our efforts to keep everyone safe, we must continually seek to improve. Being significantly better than the industry average is not sufficient when it comes to safety, and we are committed to enhancing our workplace safety every day. Financially, our revenue increased by 21% compared to the previous year, and our gross profit rose by 16%. However, our gross margins decreased to 12.5% due to material inflation and negative productivity from supply chain delays. Our operating income rose by 11.5%, while our earnings per share climbed by 33% to $0.72. The increase in our operating income, despite a decline in gross margin, illustrates our efforts to offset the adverse impacts of inflation while delivering improved bottom-line results. We ended the quarter with a backlog of $1,411 million, and our backlog margin stands at 12.3%. We are generating record cash flow from operations, with year-to-date generation of $135 million. In our Heavy Civil sector, revenues grew by 24%, and importantly, our operating income nearly tripled compared to the same quarter last year. This strong income growth is due to a continued shift from low-bid heavy highway work to aviation and alternative delivery highway projects. Our Specialty Service and Residential sectors were most affected by inflation and supply chain delays. In the Residential sector, we have been able to partially offset our year-over-year margin decline by achieving a record number of slabs produced this quarter. For the quarter, Residential revenue rose 54% compared to the previous year, while operating income increased by 29%. We continue making efforts to pass on these cost increases, though there remains a delay of over 40 days in doing so. In our Specialty Service sector, revenue rose by 6% year-over-year; however, this increase was not sufficient to counterbalance the effects of material inflation and productivity losses resulting from material delays. To provide context for these increases and delays, consider a couple of simple examples. We typically use around 300,000 gallons of diesel fuel per month in the sector. The recent price hikes resulted in a negative impact of nearly $1.5 million in just the third quarter. Additionally, our PVC water pipe, which is normally priced and delivered within the same week, is now taking up to six months for delivery, with prices determined at the time of shipping. Currently, prices for these products have risen by over 100%. We are hopeful that these extraordinary price surges will start to stabilize by mid-2022 and revert to more typical trends similar to those we have seen with lumber. Despite these challenges, our strong performance in the third quarter and year-to-date results enable us to raise our full-year guidance range. We now anticipate revenues between $1.51 billion and $1.52 billion, and net income to fall between $61 million and $64 million. With that, I will turn it over to Ron for more details on the quarter and the full year. Ron?

Thanks, Joe. Good morning, everyone. I'm happy to share a summary of our strong third quarter 2021 results. This call, along with our earnings release, Form 10-Q, and the investor deck posted on our website, will provide insights into our strategic progress in achieving robust earnings and cash flow. Now, let's go over our financial highlights for the third quarter. As of September 30, 2021, our backlogs were $1,411 million, reflecting a 20% increase since the beginning of 2021. This growth was evenly distributed, with 50% coming from both Heavy Civil and Specialty Services. Our gross margin for the third quarter backlog was 12.3%, up from 12% at the start of the year, largely due to an increase in Specialty Services backlog, which typically has higher margins than Heavy Civil projects. Unsigned low-bid awards reached $115 million by the end of September 2021. We concluded the third quarter with a combined backlog of $1,530 million, consistent with the beginning of the year. The gross margin of our combined backlog rose to 12.1%, compared to 11.8% at the year’s start. For the year-to-date in 2021, our book-to-burn ratios were 1.2x for backlog and 1x for combined backlog. Residential, accounting for 13% of our year-to-date consolidated revenues, does not report backlog as revenue is recognized upon the completion of individual concrete slabs. Now on to our operating results. Current quarter revenues reached a record $463 million, reflecting an increase of $80 million or 21% over the same quarter last year. Revenue growth for the third quarter by segment was 24%, 6%, and 54% for Heavy Civil, Specialty Services, and Residential, respectively. The significant rise in Heavy Civil revenues was mainly driven by the ramp-up in our large design-build joint venture projects. While our low-bid heavy highway revenues saw a slight decline, this aligns with our strategy to shift towards higher-margin alternative delivery projects, leading to a significant improvement in Heavy Civil operating income this quarter. The 6% revenue growth in Specialty Services stemmed from increased site development activities. Operating margins declined by 320 basis points due to ongoing supply chain challenges affecting productivity and efficiency, along with a slightly lower project margin mix. Residential revenues totaled $65.3 million this quarter, marking a 54% increase over the same quarter last year, and a 40% rise from our second quarter revenue in 2021. This surge was attributed to completing several uncompleted slabs due to weather-related delays and strong demand in our housing markets, particularly in Texas and our recent expansion into Phoenix. Operating income margins for the current quarter decreased by 20 basis points compared to the prior year, due to rising material costs for concrete and steel and the inconsistent availability of these materials, as well as increased subcontractor labor costs. While we are collaborating with customers to adjust for rising material and labor costs, there remains a timing delay in implementing price increases that align with these rising costs. Our current quarter consolidated gross profit increased by $7.9 million to $57.8 million, although gross margin declined to 12.5% from 13% in the comparable quarter of 2020. The rise in gross profit and drop in margin were primarily due to higher revenues across all segments, countered by headwinds from inflation, material supply, and labor availability issues, especially in Residential and Specialty Services. General and administrative expenses for this quarter were $19.6 million, or 4.2% of revenues, versus $15.2 million or 4% of revenues in the previous year. The increase reflects the strong revenue volume this quarter and the same pressures on costs as discussed earlier. We anticipate our full-year 2021 G&A expense to be around 4.8% of revenues, compared to 5% in 2020. Operating income this quarter was $32 million, or 6.9% of revenues, compared to $28.8 million or 7.5% of revenues in 2020. Net interest expense fell by $3.2 million to $3.9 million this quarter, thanks to lower interest rates from our late June 2021 credit facility amendment and a continued reduction in debt levels. During the quarter, the Small Business Administration forgave our partially-owned affiliates' PPP loan, resulting in a $1 million gain included in our income statement. Our effective income tax rate this quarter was 25.2%, down from 29% a year ago, mainly due to the non-taxable gain on debt extinguishment mentioned earlier. We expect our full-year 2021 effective income tax rate to be around 27.5%. This quarter, our net income was $21.1 million or $0.72 per diluted share, compared to $15.2 million or $0.54 per share in the same quarter last year. Current quarter EBITDA was $40 million, up from $36.7 million in 2020. For the nine months ending September 30, 2021, EBITDA totaled $110.9 million, a $12.7 million or 13% increase from the previous year. Based on year-to-date performance, including better-than-expected revenues, operating income, and improved non-operating costs, we are updating our guidance for 2021. We now expect full-year revenues to range from $1.51 billion to $1.52 billion, with net income between $61 million and $64 million. Now, let's discuss our robust cash flow generation and liquidity strategy. After the October 19 Plateau acquisition and the new five-year credit facility, our September 30, 2019 pro forma EBITDA coverage ratio was approximately 3.5x. We aimed to reduce this coverage ratio to 2.5x by the end of 2021. We surpassed this goal, reaching the 2.5x target in the first quarter of 2021, nine months sooner than planned. Our EBITDA coverage ratio stood comfortably at 2.2x by the end of this quarter. We did not have any borrowings under our $75 million revolving credit facility in 2021. Lastly, some additional comments on cash flow for 2021. Our cash and cash equivalents were $117 million as of September 30, 2021, an increase of $51 million from the year's start. Year-to-date cash flow from operating activities hit a record $135.7 million, compared to $92.3 million in the same period of 2020. We invested $37.2 million in net capital expenditures, and we also reduced our total debt by $49.1 million so far in 2021. Looking ahead, we will continue to seek additional revenue growth through strategic acquisitions of businesses that meet our gross margin and overall profitability criteria while managing our liquidity and cash. Please reference the modeling consideration slides in the current quarter investor deck to help our stakeholders understand the key components of our 2021 financial expectations. Now, I'll hand the call back to Joe.

Thanks, Ron. We’ve had three great quarters, and we're 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 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.

The slab count increased by 36% for Texas and Arizona, reflecting a ramp-up in Arizona, which is notably lower compared to the over 50% increase previously observed. This illustrates that we are seeing price hikes, but we are struggling to keep pace with the ongoing daily price increases related to materials and labor shortages.

Regarding the short-term outlook, the revenue guidance suggests flat to declining revenue for the fourth quarter. Where do you believe you are being most cautious? When do you anticipate an adjusted buyback, considering that the fourth quarter can experience some seasonality?

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 as well. 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 built houses on the ground coming into year-end, trying 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 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. Part of it is scheduled on our part to kind of regroup and get ready going into the next year. Part of it is driven by just weather 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 Q3 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 trying to forecast the investor ability of what the pricing is going to be. But with these rapid changes, 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 changes for the worse from what 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%, it 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 is the 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 a $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.

For the private sector work in Residential and Specialty, it’s challenging to find leaders and supervisors, and we haven't seen a 20% increase in available candidates to assist us. I’m not sure what Joe is referring to, but it’s another instance of struggling to hire enough people, as there simply aren’t enough available.

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 are 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 leveraged is kind of flex capacity is rental equipment and lease equipment, and it is very hard to get right now. The availability is very low. 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. So 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 are 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. Predicting the timing of projects, front-end payments, and overall expenses is quite challenging for us. The positive aspect is that despite facing margin challenges this year, our cash flow has exceeded our expectations significantly. However, I've mentioned this for two consecutive years. I believe we will continue to approach this by focusing on operating income. Generally, in our various sectors, working capital does not fluctuate with revenues due to our quick construction cycle in Residential and the cash flow we generate from property structuring contracts. Therefore, I anticipate it to slightly surpass operating income, which is where I find the most predictability, and we have achieved this previously. However, it's not realistic to expect a consistent 20% improvement moving forward.

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

Hey, Ron, regarding the cash flow question, it seems like you're advancing your capital expenditures to secure the necessary equipment. This suggests that cash flow, particularly free cash flow, could be even stronger next year.

No, we'll probably need to add more capital next year. The markets are growing faster today than we can grow. So as you can imagine, we're working diligently to find operators and equipment. The hardest part for us, as Ron mentioned, is our project management teams; that's a critical piece. However, we don't see ourselves slowing down next year based on what our end customers are forecasting for the e-commerce and data center spaces. Additionally, although we haven't seen any projects yet, there is a growing trend of reshoring manufacturing and inventory due to supply chain issues. Many projects are currently seeking land and designs for new warehouses. We anticipate this will provide a nice bump for us, likely in late '22 or early '23.

Yes. More than half of our capital expenditures are attributed to our Specialty Group. In the site development business, it primarily involves moving dirt. Increased volume necessitates additional equipment, which is why I believe we won't take steps backward. We will provide more clarity on this as we finalize our plans for 2022 and other matters by the end of the year.

I wouldn't underestimate that if we took on an additional project requiring 30 pieces of equipment, we could go to the Cat dealer and create a rental package for that. If we identified long-term demand, we would then convert it into capital expenditure. However, if you visit that same Cat dealer today, you would actually see John Deere agricultural equipment available because there is no Cat equipment in stock. The situation is similar to car dealerships right now; there simply isn't much equipment available. We want to continue investing in our operations, and as a result, we will need to allocate more capital.

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?

As we move into 2022, we're making structural changes to enhance our focus on areas like aviation, which we find promising. If the infrastructure bill is approved, spending in this area could double over the next five years, and we're looking for ways to capitalize on that, particularly on the Heavy Civil side. Our expansion in Phoenix is a strong example of our progress; it's performing well, and with more personnel, we could achieve even better results. The pricing in Phoenix exceeds that of the Houston market, which appears to be growing even faster. We will continue to develop this market and increase our presence. Every dollar gained in the Residential sector contributes to improving our margins. Geographically, we plan to move further north with our Plateau business, targeting areas in Virginia, Maryland, and Washington D.C., while exploring possibilities to expand into Pennsylvania and New Jersey. This region resembles Atlanta in being a significant distribution hub for companies like Amazon, with the advantage of proximity to major cities while still allowing for land acquisitions in rural areas. Regarding acquisitions, the market looks promising, and we're evaluating numerous opportunities. More importantly, we're noticing an increase in the quality of deals available, ranging from smaller tuck-ins to larger prospects. While it’s too early to provide specific details, we're hopeful that we can utilize our growing free cash flow for acquisitions before the end of the first half of 2022.

And Joe, are you finding that as you're moving Plateau into new regions, you can still achieve the margins that business has historically had? I know you’re facing 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.