Jennifer Maxwell - Director, Investor Relations Paul Varello - Chief Executive Officer Ronald Ballschmiede - Executive Vice President and Chief Financial Officer Kevan Blair - Senior Vice President of Corporate Finance.

William Bremer - Maxim Group Tahira Afzal - KeyBanc Capital Markets Hamed Khorsand - BWS Financial Inc.

Greetings and welcome to the Sterling Construction Third Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jennifer Maxwell, Director of Investor Relations for Sterling Construction. Please go ahead Ms. Maxwell..

Thank you, Kevin, good morning. On behalf of Sterling Construction, I welcome you to our third quarter ended September 30, 2015 investor call. I'm joined today with our Chief Executive Officer, Paul Varello; our Executive Vice President and Chief Financial Officer, Ron Ballschmiede; and our Senior Vice President of Corporate Finance, Kevan Blair.

Today's conference call includes statements to 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 market conditions; competitor and customer actions or weather conditions; 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 predictions by the company is only a statement of the management's beliefs at the time the prediction is made, management's beliefs may change over time and the company does not undertake to publicly update those predictions.

Now, I’ll turn the call over to Paul Varello, our Chief Executive Officer..

Thanks Jennifer and good morning everybody. Before we report on our Q3 earnings, I wanted to take an opportunity to announce some great news. Effective today Ron Ballschmiede has joined our company as Executive Vice President and Chief Financial Officer. Kevan Blair who has been our Interim CFO has the name Senior Vice President, Finance.

Ron is participating with us on this call today and I’ve asked him to give you a brief description of his background and experience. Ron..

Thanks Paul and good morning to all of those participating on our third quarter earnings call. I am very pleased and excited to join the Sterling Construction management team and look forward to many quarters and years ahead. Additionally, I look forward to reconnecting with a few of you who are on the call.

For those who might have not had approached to me I also look forward to meeting you in the near-term future. I appreciate the kind words from Paul and would add my appreciation to Kevan for stepping in to the Interim CFO position.

With his excellence they have someone like Kevan on my team providing us with some outstanding bench strength in the financial organization. I thought I would give you a bit more on my background and experience. I am in Scotland native, born and raised in the Northwest Public. I graduated from the Northern Illinois University with B.S.

in Accounting in 1977 and received my CPA and joined the Chicago office of Arthur Andersen’s audit practice in June of that year, I became a partner in 1989. My career was focused on serving the manufacturing, construction and industrial products industry, both as a focused Client Service Partner and also P&L responsibilities for that practice.

With the demise of Andersen firm in 2002 that practice and the majority of the people joined Deloitte’s & Touche office right served as a Lead Client Service Partner on several of Deloitte’s large and well known manufacturing industrial clients.

In late 2005, I was recruited by Chicago Bridge & Iron’s Board and became its Executive Vice President and Chief Financial Officer relocating to The Woodlands, Texas in 2006.

In my early days at CB&I focused on strengthening, the financial and accounting organization the internal control environment and improving its liquidity and financial flexibility and most importantly regaining stakeholders confidence.

With significant accomplishment in each of those areas in the first year or so, the focus moved to profitable growth. During my 10-year at CB&I the company experienced significant organic and acquisitive growth with revenues increasing from $2.3 billion in 2005 to $13 billion in 2014.

Similar growth occurred in profitability backlog and its market capital with that time period. I retired from CB&I earlier this year.

With that background I am looking forward to addressing similar early day challenges at Sterling, [indiscernible] executive team laid the foundation for improved and predictable financial results and liquidity and delivering improved returns to each of our stakeholders. Now, I will turn it back over to Paul..

Thanks, Ron. I also want to take this opportunity to thank Kevan for the great job he has done as Interim Chief Financial Officer, his experience, dedication and willingness to step-in when we needed him the most has been invaluable to our company. With those features of good news behind us, I like to start our earnings report.

Kevan please give us your summary..

Thank you, Paul. I would like to discuss our 2015 third quarter financial performance. Revenues for the third quarter of 2015 were $176 million compared to $189.3 million in the third quarter of 2014, which represented a 7% decrease.

The decrease was primarily the result of the substantial completion of several large projects in Texas, which were ongoing through the second quarter of 2015 slightly offset with increased revenue from projects under construction in Utah.

Despite the lower revenues, gross profit for the third quarter of 2015 improved by more than $6 million, reflecting gross margins of 8.2%, compared with 4.4% in the 2014 third quarter. This improvement was the result of improved contract execution.

Operating income was $2.4 million compared with some operating loss of $1.6 million in the prior year period. Net income attributable to Sterling common stockholders was $0.3 million or $0.01 per diluted share compared with a net loss of $3.9 million or $0.21 per diluted share.

This quarter’s results were adversely affected by employee severance and consulting costs totaling $1.6 million. Excluding these costs, operating income would have been $4.0 million, and net income attributable to Sterling common stockholders would have been $1.9 million or $0.09 per diluted share.

General and administrative expenses of $11.1 million in the third quarter of 2015 reflected an increase from the third quarter of 2014.

As I mentioned previously, there were the employee severance and consulting costs this quarter of $1.6 million, consisting of $0.5 million of non-cash charges for restricted shares vesting on employee severance, and $1.1 million in consulting services for a major construction equipment study and for strengthening the company’s financial reporting processes.

The equipment study is expected to enable the company to realize more than $5 million from the sale of under-utilized equipment and to significantly reduce future equipment operating costs.

Total backlog at September 30, 2015 of $718 million was down about 3% from June 30, 2015, but excludes it $112 million of projects where the company was the apparent low bidder but had not yet been awarded the contract. The comparable amount of such projects for the June 30, 2015 backlog was $57 million.

The estimated gross margin in projects awarded in 2015 has improved to more than 8%. Capital expenditures for the third quarter and year-to-date 2015 were $3.8 million and $7.1 million, respectively, compared with $4.6 million and $11.2 million, for the respective periods in 2014.

The lower level of expenditures in the current quarter and year-to-date period reflects management’s efforts to control expenditures and to optimize utilization of the existing fleet of equipment.

Working capital totaled $41.6 million in the third quarter including $11.5 million of cash and cash equivalents, and there was $2.2 million of availability under the company’s new equipment based credit facility. The tangible net worth was $67.6 million. I will again turn the call over to our CEO, Paul Varello..

Kevin, thanks a lot, you did a great job on this. I am happy to report that we remain very much on track with our recovery plan. Our third quarter results reflect the progress we’ve been making in the areas of estimating, project management and contract administration.

While backlog was down slightly Q3 compared to Q2 when we have projects awarded, but not yet signed during the quarter, we actually have a nice increase of more than $61 million in our pipeline of new projects. In addition, all of our business units reported improved margins on new awards during the quarter.

Although, growth in backlog and revenue is important, our near-term focus has to remain on bottom line profitability. As our operational performance continues to improve, we once again grow both our topline and our bottom line plus but for now is about the bottom line.

I am happy to report that this quarter all five of our subsidiaries reported operating profits. As we announced in our latest earnings call, we successfully completed the sale of several non-core assets during the quarter.

We believe that we have additional opportunities to monetize non-core assets, which will allow us to further paydown debt and ultimately lead to the refinancing of our credit facility at more favorable terms.

We expect margins backlog to continue to increase through the end of this year to more than 7% and further improve throughout the balance of 2016. Our target for SG&A next year is 5% to 5.5% of revenues as we maintain high control on overhead spending.

Taking a broader view of this business, we are very pleased that to learn at late last Thursday the house had passed the bill authorizing nearly $340 billion in new funding for highway and transit programs over the next six years.

The bill also includes the mechanism from funding the entire six-year program, while the house bill must now be reconciled with the similar bill in the senate, we are hopeful that this much needed legislation will be passed into law by the end of this month.

We do this legislation as a huge shut beyond for our industry and particularly for our company. In conclusion, our turnaround efforts are starting to show meaningful results and we are increasingly confident that Sterling is well-positioned to generate the improved profitability and shareholder value in 2016 and beyond. Thank you.

We will now be happy to take your questions..

Thank you. I will be conducing the question-and-answer session. [Operator Instructions] Our first question today is coming from William Bremer from Maxim. Please proceed with your question..

Good morning Paul, Kevin and welcome Ron..

Thank you..

Paul, nice quarter and nice margin.

Recently proposition seven was passed on Texas and just give us a sense of what are the implications to Sterling given your material exposure to Texas?.

That’s great question Bill and good morning, I would tell you if failed to mention proposition seven here in Texas, but in Texas just two weeks ago, last week actually, we voted on a bunch of highway and an infrastructure projects not only in Texas broadly, but also in Houston and Dallas and others.

So they award projects, bridge projects, road projects. They all passed with very strong margins.

I think that proposition seven specifically along with the federal program is going to be gigantic arm in all of our markets, because we are put for exactly where a good deal of those expenditures on the federal level would be and certainly here in Texas would have been still a major part of our business in the neighborhood of 40% of our revenue.

That’s going to be a great step forward for us and we are pretty excited about that..

Okay, great. And Paul, I’m sure you are seeing it as well, the P3 are taking more dominant roles in a lot of projects. Can you give us a sense of how you are – what’s your strategic plan, maybe it’s a 2016 plan.

What is the strategic plan for Sterling on the P3 activity?.

P3 is something we believe will be a very important part of our business going forward. It is very much in our strategic plan for 2016; frankly 2015 is all about turnaround and turning this company into profitable business.

We only now are starting to really step back and start thinking more strategically about where we go for the year and P3 is certainly an important part of it.

We are already bidding on some P3s as a sub because those projects tend to be rather big and need rather substantial financial support, but we are getting more and more opportunities and we see that happening in 2016 and even a bigger share of the market as we go forward..

And then my final question this is more accounting. So Kevan I’ve noticed that we had two parcels of land sold this quarter and as well as the selling of the long-term receivable.

Can you just voice how that was accounted, does that all flow into other income or how is that accounted for?.

Yes, that’s a good question. The two parcels of land or two pieces of vacate land which way in the sale price with the book value resulted into gain and the receivable was factoring of the large receivable on an Idaho based job that resulted in a loss, but the gain and the loss offset each other so it was virtually breakeven..

And did they hit the book value?.

Yes, that the net gain or loss which under 100,000 was reflected on the corporate books in the other income section..

Okay so the net of the three items I mentioned came into a net of approximately a 100,000?.

Yes, it was about [indiscernible]..

Okay great. Thank you..

You bet..

Thanks. Our next question today is from Tahira Afzal from KeyBanc Capital Markets. Please proceed with your question..

Thank you very much and Paul congratulations on a great quarter..

Thanks Tahira..

Paul, if you look at the house version of the bill essentially is indicates and annualized funding increase of 1.5% over the continuing the limit right now. So I assume just a passage of a long-term bill is helpful versus the actual amount of increase.

Could you help that in perspective in terms of maybe the profile of projects that are likely to go through if the six-year transportation bill is approved..

Yes, the interesting thing about the project is that there are less likely to be the kind of things that are larger competitors in the market, we’ll find all that attractive the projects will tend to be the bottlenecking projects, highly improvement traffic slow projects so what’s you are applying is additions of bridges, widening of roads typically things the bottleneck roads and those tend to be very much into our sweet spot maybe under $100 million in terms of value for project because individually those projects are stable over the place.

And so it’s hard to imagine as oppose to a big interstate highway bill where you going to put in a brand new road for several $100 million from one place to another.

These projects are typically going to be smaller projects I can tell you here in Texas there are literally 100s of projects skewed up waiting for this federal money where is a matching fund and the state along with proposition seven that Paul mentioned earlier was really very well prepared to start getting those projects as early as first quarter next year.

And I think it’ll do a lot for us particularly as the projects come in I will tell you that margin match expenditures, no big surprise to anybody it’s supply and demand and right now when we had our biggest hits back a few years ago the market had literally dried up everybody a pull back on expenditure every state, every counting and saw we were scrambling for work we had to give up margin.

The opposite is no doubt going to material as competitors get their feel of the work and we see margins coming up even more of an anticipated in the coming year and beyond..

Ron, it okay so I mean Paul is this a bill that passed by the end of the year, could there be a situation whether the margins that need to appetite could drive revenues into growth more sustainably into next year..

Yes, next year I think we will be back on the trial, we’ve gotten ourselves convinced that we stored out our operating challenges and we are back very much into the business in 2016 and growing topline..

Perfect. And Ron welcome to the team..

Thank you, it’s good to be hear..

Ron if you look back at your experience in CB&I, it’s the high profile company and what would you say that you would do differently at Sterling based on your experience at CB&I?.

It’s a great question.

I think – I put my [indiscernible] certainly in the first couple of years, the company had some significant reporting challenges and I spend a fair amount of my time, improving everything from controls to liquidity, so very much focused internally and made great progress with that the company bid in that first couple of year period.

And then same time a variety of strategic amounts, which were taken place off, where could CB&I bolt-on opportunities, they weren’t very far away from our sweet spot, the old days [indiscernible] to not requiring a lot of internal capital to do that. But then also reach the point where we can’t reach some significant acquisition.

So that’s kind of phase II for the next three years, taken advantage of those markets that did require a lot of capital but did require some focus to improve the company’s results and the correct talented growth.

And then finally as you know certainly the largest acquisition that CB&I did in 2013 required a fair amount of integration and consolidation and so only those kinds of three chapters. So if you now Kevan close that on top of Sterling.

Sterling at the beginning is very similar to CB&I’s and I look forward to focusing on that first to – the stage or the platform to allow your step two and three to continue.

And I can tell you slightly because I think under the board and quality leadership have some good underpinning look down on that and bringing in some good people to help them with that challenge. .

And Ron actually that was helpful. And best of luck and I’ll hop back in the queue..

Thank you..

Thank you. Our next question today is coming from Hamed Khorsand from BWS Financial. Please proceed with your question..

Hi, first question I had.

Severance cost in this quarter, are you expecting any severance cost in the fourth quarter?.

We are not unless the Board gets pissed off at me. But assuming that doesn’t happen. Assuming that doesn’t happen Hamed. I think what we are done with that..

Okay.

And then could you provide a little bit more details on how you got to be 8.2% gross margin?.

Yes, Kevan you might what to handle that one..

Yes, the 8.2% margin in Q3 was a result of normal operations on most of our projects. And then as some significant projects reached substantial completion truing up the gross margins on several of the projects, which is a common occurrence when several projects wrap up, which increased the gross margins.

So the combination of both that’s pretty much the story..

Okay, so do you expect that to continue in the fourth quarter?.

Fourth quarter, we don’t have any reason to believe that that will continue from quarter-to-quarter, usually the fourth quarter is one that with the weather approaching and the little bit of a slowdown because of the holidays we don’t see significant year-to-year, we don’t see significant completion standard, completion of projects like we do in – especially in Q2 and Q3 were the heavy construction period of time..

Okay, and on the backlog, I know you said for the backlog added in this year was over 8%.

But can you tell us what the backlog gross margin mix is now?.

We believe in the press release, we did mention that all of the projects that have been awarded in 2015, the average gross margin is just more than 8%. And I believe in the Q, talked about the average gross margin for all of the projects from the older projects and the newer which I believe is about 6.5% or so..

And moving towards 7%..

Actually this, the backlog for this order has moved up north of 7% as these jobs, we had a bunch of jobs that were zero margin, we had taken it down earlier and they are finishing up a couple of them dribble out into next year, which is why margin continue to get better.

The needle moves only a little bit as you add 8% jobs until you start and then start burning some revenue and post them, but we believe that we will see that 7% or better probably well over 7% by year-end..

Okay, and my final question – related Paul you know we’re out in L.A. So the big talk going here is El Nino.

Is there anything you are preparing for in the first few months of 2016 for El Nino or do you not expected to have that much of an impact?.

El Nino is attributed – from most of the rain we had even in Texas, we are almost double the amount of annual average annual rainfall in Texas and we are trying to be very careful about being aggressive on our revenue growth, because the weather is having a greater impact than normal.

West Coast got the same issues that the good news is that the West Coast is finally catching a little bit of rain and that help your conditions out there, but generally speaking some of the projects already capture water and to make it more useful and I see those as opportunities, but so its going to take a while to get into place I wouldn’t have much except for hopefully a lot of wet conditions in the West Coast that maybe help you in your current job situation..

Okay, thank you..

[Operator Instructions] Our next question is a follow-up from Tahira Afzal from KeyBanc Capital Markets. Please proceed with your question..

Thank you.

Hey, Paul and Ron, can you give us an update on all the outstanding claims and I know there are some that might even come in the near-term, anything that would be helpful?.

Yes, one of the largest claims we have, we’ve been putting more meat on the bones under the side now approaching $30 million I think the investors reported in the neighborhood of 28, that claim is moving forward into discussions with the owner and the hopes that we can resolve, we are not going to put I can’t talk much more about that except the discussion with the client or schedule in the next months, at the end of this month, near the end of this month and if we make good progress then we can see potential for our settlement earlier, if we don’t and if we take the longer route and more power obtain for route which is through litigation, but we are hopeful that we can find a way to resolve it as early as Q4 and perhaps into Q1..

Got it.

I guess the Ron, the margin embedded in backlog color you gave earlier Ron, does not include the claim?.

That’s correct..

That’s correct..

Got it. Okay, thank you guys..

Thank you. Our next question is a follow-up from William Bremer from Maxim. Please proceed with your question..

Thank you. First question is based on the legacy backlog that you just voice that having lower, no margin.

Can you give us an idea of how much would result into 2016 and what’s the correct amount on hand at this point?.

Right now about 18% of our current backlog and so about a year $100 million some odd that were situated down under $70 million by the beginning of the year, less that 10% and that place out by Q2..

Okay.

And Paul in the backlog can you give us an update of underlying water projects?.

Yes, those things are giving more and more, but they are still smallish to us, we are bidding two big jobs this coming quarter and I want to believe that I told in the West Coast right now, although we are getting a lot of water projects in the eastern area, because of the drainage issues, bright light shown on that and we think the water projects, there are several buckets one of them of course water treatment which is what we are doing in the West Coast more or less.

But also here in Texas and other places we are doing storm, drains and storm water pipes and other kinds of mitigation projects, storm retention et cetera. Those bills we just passed in Texas were as much about the storm retention and storm control as about highways.

I would tell you that in our backlog would you Kevan currently our water projects are a small part of our backlog but growing..

I would say around 4% to 5%..

Yes its and we are hoping Bill in the coming year that those number particularly some of the jobs we are starting to bid this year could grow to be 10% of our business in 2016..

And then finally, what was the range of the size of the projects that were possibly performed in the third quarter from lowest to highest?.

They ran the full game it they run a few hundred thousand dollars believe it or not in some of our – where we had a project, we added to an existing scope up to over $100 million, the average for the years about how much Kevan..

I think if you look at all of the 2015 projects awarded, I think the average is between $20 million and $30 million which is our sweat spot..

All right..

So on average $20 million, $30 million..

Great. Thanks you gentlemen. End of Q&A.

Thank you. We reached the end of our question-and-answer session. I would like to turn the floor back over management for any further closing comment..

Thanks Kevin. Since I know other questions I would like to thank you again and encourage with any follow on questions to contact our Investor Relations team at the Equity Group. Their contact information can be found on the bottom of our press release. I’d like to thank you for joining us today.

We look forward to reporting our progress to you in the future. Thank you..

Thank you. That does conclude today’s teleconference. You may disconnect your lines at this time. And have wonderful day. We thank you for your participation today..