Brian Manning - EVP and Chief Business Development Officer Peter MacKenna - CEO Tom Wright - CFO

Allie Hemmings - D.A. Davidson

Greetings, and welcome to the Sterling Construction's Third Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Mr. Brian Manning, Executive Vice President and Chief Development Officer of Sterling Construction. Thank you, sir. Please go ahead.

Thank you, Melissa. Good morning. On behalf of Sterling Construction, I welcome you to our third quarter 2014 investors' call. We'd like to thank those who have served honorably in our military, and as we celebrate Veterans Day this week, please remember and appreciate their sacrifices for our freedom. I'm joined today with our CEO, Peter MacKenna; and our CFO, Tom Wright. Today's conference call includes statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act. Such statements are subject to risks and uncertainties, including overall economic and market conditions, competitors' and customers' actions, or weather condition, and other risks identified in the company's filings with the Securities and Exchange Commission, which could cause actual results to differ materially from those anticipated. Such statements should be considered in light of these risks. Any prediction about the company is only a statement of management's beliefs at the time the prediction is made. Management's belief may change over time, and the company does not undertake to publicly update the prediction. Now, I'll turn over the call to Tom Wright, our Chief Financial Officer.

Thank you, Brian. I'd like to discuss our 2014 third quarter financial performance. Revenues for the 2014 third quarter were 189.3 million, which was 1.8% higher than the third quarter of 2013. The increase in revenues compared to the third quarter 2013 was due to an increase in the number of projects and process particularly in our California market. Gross margin for the 2014 third quarter declined slightly to 4.4% of revenue compared to 4.5% in the third quarter of 2013. Gross margin in the 2014 third quarter was suppressed by the downward revision of two problem projects in Texas and one problem project in California. Excluding the margin erosion on these three projects, gross margins for the 2014 third quarter would have been 6.2%. General and administrative expenses in the 2014 third quarter were 9.3 million, compared to 8.2 million in the 2013 third quarter. This increase was the result of slightly higher headcount and employee benefit cost in 2014, combined with the one-time decreases in employee benefit cost in the prior year's third quarter. As a percent of revenue, G&A was 4.9% as compared to 4.4% in the third quarter of 2013, and 4.9% reported in the second quarter of 2014. The operating loss for 2014 third quarter was 1.6 million, compared to operating income of 1.7 million in the third quarter of 2013. Operating income in the third quarter of 2014 included charges of 3.5 million related to three large projects awarded prior to 2012. Net loss attributable to Sterling common shareholders for the 2014 third quarter was $3.9 million, compared to a net loss of $0.2 million in the third quarter of 2013. Net loss per diluted shares attributable to Sterling common shareholders for the 2014 third quarter was $0.21, compared to a net loss of $0.06 in the third quarter of 2013. Capital expenditures for the 2014 third quarter were 6.7 million, compared to 4.6 million in the third quarter of 2013. Capital expenditures for the full year of 2014 are expected to be slightly higher than the 2013 levels of approximately $15 million. Bookings for the 2014 third quarter were $176 million, representing a book-to-bill ratio of 0.93:1. Total backlog as of September 30, 2014 was $759 million, up from $727 million at June 30, 2014, and $687 million at December 31, 2013. Total backlog at September 30, 2014, excluded $82 million of projects where the company was the apparent low bidder, but had not yet been awarded the contract. We estimate that the current average gross margin of our projects and backlog is in the mid 6% range. Our 2014 third quarter working capital totaled 53.7 million, including 17 million of cash and cash equivalents. The company had borrowings of 37.1 million, and tangible net worth of 92.1 million. The company was in compliance with all bank covenants at the end of the 2014 third quarter. I'll now turn the call over to our CEO, Peter MacKenna.

Thanks, Tom, and good morning. In these short prepared remarks, I'd like take a few minutes to address some of the issues and trends that we're seeing in our business. Of course, we'll be available to answer your specific questions in a few minutes. As it has become our custom, I'd like to spend a moment to tell you about the men and women at Sterling. Our hard work and dedication in delivering our strategy continues to bear fruit as we focus on executing our projects safety and efficiently. Nearly all of our 2000 employees have been trained under our Safe and Sound program, and I'm very pleased to tell you that third quarter year-to-date, Sterling has outperformed more than 2.5 million man-hours with best-in-class safety performance. I'm also pleased to tell you we're continuing our efforts on employee development. Most recently, all salaried employees have received training in our Code of Business Conduct. Our Code of Business Conduct is part of our greater effort to develop a culture of responsibility and accountability experiment. Unfortunately, our third quarter financial performance was disappointing. Three of our already mentioned legacy projects, two in Texas, and in California, incurred additional charges during completion of construction. While the projects had achieved substantial completion status at the end of second quarter, extreme main events coupled with spot shortages and the failure of several subcontractors to perform resulted in Sterling incurring additional unanticipated cost. While we believe we're entitled to recovery of some of these costs in the form of certain claims, we have policy that could recognize contingent claims in our reported results. The construction of the two Texas project is now complete with only a minor punch list items remaining, and landscaping, and schedule for the spring of 2015. The California project is scheduled for completion before year end. The impacts of these three projects tended to obscure the improving performance in the balance of our 120 active project portfolio. In the nine months ending September 30, 2014, our revenues were up 21% year-over-year, and EBITDA was 16 million, compared to an EBITDA loss of 17 million in the first nine months of 2013, a $33 million approval. We continue to be encouraged by our level of order bookings and the risk and margin profiles associated with our newer projects. As of the end of September, our year-to-date optical ratio was one point of three to one. As Tom said, our backlog at the end of the quarter was 759 million, but I want to emphasize that does not include 82 million of work pending contract execution, nor does it include the $36 million project in California we announced this past Friday. : We extent among the longest prudent position in North America, this is the first project of its kind in Texas. The Texas 360 Loop is an excellent example of gross subsidiary leveraging. Following my comments, Brian Manning, our Chief Development Officer will briefly discuss our marketplace and the opportunities we're tracking. Looking forward to the balance of 2014, we expect revenue to be higher than the comparable period last year. Gross margins for the third quarter are anticipated to recover to levels experienced in the second quarter in the mid 6% range. However, gross margin improvement is being somewhat constrained by an overheating marketplace, especially in our major Texas markets. As I noted in this morning's press release, we are experiencing spot shortages of construction materials and heavy competition with both craft and support labor. In some Texas submarket, craft labor inflation has exceeded 20% over the past seven months. The company has taken active steps to mitigate these conditions, and we continue to monitor the situation closely. I'll now turn the call over to Brian Manning. Brian?

Thank you, Peter. Our backlog has increased from 694 million as of September 30, 2013, to 759 million as of September 30, 2014. We reported in the Q, an additional 82 million for our current low, but not yet awarded the contract. And on Friday, we announced the project win in California that will contribute to this backlog, once the negotiations with top ten are concluded. Over the next six months, we will continue to pursue over 3.1 billion in traditional bid-build work and alternative delivery projects. According to the ADC of America, 500,000 constructions have been added over the past four years, indicating a sign of recovery from the $2.1 million jobs loss in the construction industry from 2007 through 2010. Even with this positive movement in construction employment, we're currently experiencing a lack of qualified labor in many of our markets. This lack of labor is manifesting itself, also in supply chain shortages as there are not enough truckers to deliver products. According to the American Road & Transportation Builders Association, ARTBA, the first item of business for congress is to pass another continuing resolution for fiscal year 2015 appropriations bill which will expire on December 11, 2014. This important appropriations bill sets funding levels for the U.S. Department of Transportation, which represents about 52% of states highway and bridge funding. The army corporations bill, the highway bill extension expires in May of 2015, and is one of the best opportunities for Democrats and Republicans demonstrate that they can work together. According to the American Society of Civil Engineers, President Obama at his first press conference following the election, mentioned infrastructure repeatedly as an issue where he felt he could reach common ground with the new GOP majority. Voters in the November 4th election continue to support state and local infrastructure measures. In fact, Alpha reports that over the last ten years borders have approved transportation initiative at a 72% rate. This year's election was no exception worth over 21 billion approved for infrastructure. Most notably, in fact this Proposition 1 was supported by voters, and they overwhelmingly approved approximately 1.4 billion annually for transportation infrastructure out of the safe oil and gas production path. (Indiscernible) in California, Proposition 1 was approved at a 69% rate for water infrastructure. This Proposition authorizes 7 billion in general obligation bonds for state water supply infrastructure projects. Now, we welcome your questions.

Thank you. (Operator instructions) Our first question comes from the line of Tahira Afzal from KeyBanc Capital Markets. Please proceed with your question.

Good morning, gentlemen. This is [Sean] (ph) on for Tahira today. My first question is just -- in the current oil price environment, if we see the Shale work start to slow down, would that alleviate some of your labor cost concerns?

Absolutely. Not just in craft labor, but in the supply chain as I mentioned, particularly in trucking. There's an enormous shortage of truck drivers in Texas right now. And I think that would definitely improve if the Shale gas started going down a little bit.

Okay, that's helpful, thank you. And my next question is just -- can you tell us about the mix of your prospects, your project prospects in terms of complex ones versus the more simple ones?

Well, [Sean] (ph), it runs again within the portfolio from relatively simple milling and repaving projects and (indiscernible) too far more complex design build projects in the Intermountain states, and here in Texas in concluding water distribution and transportation. That mix change is literally day-to-day as we decided on whether we're going to attend the particular projects or not, but as Brian mentioned, we're tracking more than 3 billion just in the next relatively shorter period of time, and we also track what we refer to as the steps to take transportation improvement projects, and there's more than 10,000 projects out there in our particular region that we pay attention to. It's really a matter of deciding what is the best use of our fund capacity and our working capital in terms of pursuing the project.

And does the competitive dynamic differ between the more complex ones versus the smaller ones?

It absolutely does, as does the margin profile associated with the project, and that's kind of the calculus that goes into our selection process.

All right, gentlemen. I appreciate the insight. Thanks very much.

Thank you.

Thank you.

Thank you. (Operator instructions) Our next question comes from the line of Allie Hemmings with D.A. Davidson. Please proceed with your question. Allie Hemmings - D.A. Davidson: Hi, good morning.

Good morning, Allie. Allie Hemmings - D.A. Davidson: Two quick questions for you guys; I was wondering when we can expect to see revenues starting to turnaround as we're going forward here.

I think we're running at a record revenue pace. Sorry, record revenue pace right now, and year-over-year were up about 20%. And I think that trend will continue for a while. If you look at our backlog, we're at $760 million in backlog right now, another 82 million that we can't move into the backlog yet because we don't have the contract signed. There is another project we noted on Friday, and there are couple others that haven't been declared yet. So we do have record backlog. We did say that we're chasing smaller projects with short duration. So we'll see that backlog burn much quicker than the past. So I think you'll see the revenue rates that we have now be fairly consistent going forward. Allie Hemmings - D.A. Davidson: Okay. And a quick follow-up on that; what kind of margin that you're expecting for backlogs as you go forward?

In terms of the gross margin associated with our bid, we're seeing that those margins are fairly accretive to our current backlog, and that trend seems to be continuing. And I certainly hope that the market continues to allow that to exist. As these troubled jobs completely burn off, and as the 2012 projects which have a lower margin than the 2013 and 2014 projects, I think we'll see the backlog margin continue to rise. But as I mentioned, there are some constraints that are troubling, even though we put in wage inflation to our bids, and frankly reach to levels that in 30 years of doing this, I've never seen before; there is some concern of us going forward. So we've bid with some healthy margins and we hope to deliver those, but there are market forces that are some concern to us. Allie Hemmings - D.A. Davidson: Okay. Thank you very much.

Thank you, Allie.

Thank you. Mr. McKenna, there are no further questions at this time. I'd like to turn the floor back to you for any closing and final remarks.

Thank you, Melissa. We'd like to encourage anyone of you if you have any further follow-on questions, please feel free to contact us directly or our investor relations from the equity group. Their contact information is on the bottom of the press release as is ours. And we'd be very happy to speak one-on-one with any follow-on question. With that, I'd like to thank you for joining us on our third quarter call, and we look forward to reporting to you in the fourth quarter. Thank you.

Thank you. This concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.