Sterling Infrastructure - Earnings Call - Q1 2020

Transcript

Speaker 2

Greetings and welcome to the Sterling Construction Company first quarter 2020 earnings conference call and webcast. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded, and 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 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 obligations 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, and adjusted earnings per share on this call, which are financial measures not recognized under US GAAP. As required by SEC rules and regulations, these non-GAAP financial measures are reconciled to their most comparable GAAP financial measure in our earnings release issued yesterday afternoon. Now, I'd like to turn the call over to Joe Cutillo. Please proceed, sir.

Speaker 1

Thanks, Jesse. Good morning, and thank you for joining Sterling's first quarter 2020 earnings call. I hope all of you joining us today and your families are safe and making the most out of these difficult times. I'd like to start off by thanking our 3,000 employees for their hard work, dedication, and commitment to keeping each other safe. Though many of our employees have family and friends sequestered to their homes, they have not missed a beat fulfilling the obligations we have to our customers and our investors. The entire Sterling team will continue to do everything we can to ensure our employees have a safe, productive workplace as we go forward. During the first quarter, we felt very fortunate that all our businesses were deemed essential, and all our employees continued to work throughout the period.

At the field level, our focus was on keeping our employees safe, complying with new guidelines, and continuing to serve our customers. At the corporate level, our focus was on cash preservation, liquidity, and scenario planning in case our essential business designation changed. For the quarter, we not only met our internal expectations both financially and strategically but had an all-time record EBITDA quarter, even with all the challenges that were put before us. Versus prior year, our revenues were up 32%, our gross profit was up 81%, gross margin percentage was up over 300 basis points, and our operating income was up 156%. Versus our year-end 2019, our backlog grew $127 million, or 12%, and our gross margin and backlog improved 120 basis points. Our newest acquisition Plateau exceeded our expectations as they booked over $100 million of new business and are now at an all-time record high backlog.

Even more important than all of that, our liquidity improved in a quarter where we have historically burned $15-$20 million in operating cash flow. As we discussed for the last three years, the overall driving principle of our strategy is to increase the bottom line faster than the top line while reducing our overall risk. The results of the first quarter are just another example of us continuing to execute that strategy as our bottom line growth rate more than doubled our top line while creating positive cash flow in a very turbulent time. To put it all into perspective, our $20 plus million of EBITDA in our slowest seasonal quarter was more than our entire EBITDA for the full year of 2016, a pretty remarkable improvement in a short period of time.

As we look forward to the remainder of the year, there are things we will have to do that are anything but business as usual. Many of our customers and offices are now virtual. Instead of traveling and meeting in person, our meetings are conducted via Zoom. Our procedures and protocols on job sites have changed. Masks and thermometers are now alongside hard hats and safety glasses as standard PPE. Even with all these changes, we believe our heavy civil and specialty service sectors will continue to perform very near our original expectations. We will, however, see a small impact coming from productivity hits associated with new rules and regulations. Our biggest full-year risk, and unknown at this time, revolves around our residential, multifamily, and commercial office markets.

Though we had strong performance in all those areas in the first quarter, we are seeing builders pull back on starts and new land development in the second quarter. In addition, we are seeing future bid activity and project starts in the multifamily and commercial office space get delayed or canceled. It is still unclear the total magnitude and duration of these slowdowns since we were at the beginning stages, but we do know it is highly likely they will have an impact on our full-year 2020 results. Because of this, we have chosen to pull our full-year guidance at this time until we have a clearer picture of what that impact will be. With that, I'd like to turn it over to Ron to give you more details on the quarter and the full-year outlook. Ron?

Speaker 0

Thanks, Joe, and good morning. I am pleased to provide a summary of our 2020 first quarter results. With this being the second quarter of our reported results inclusive of the Plateau acquisition, most of the acquisition transaction-related noise and one-time costs are now primarily behind us. The progress we have made progressing our multi-year strategy, including the transformational acquisition of Plateau, is apparent in our first quarter financial performance and cash flows. The passing of another post-acquisition quarter also allows for a cleaner picture of our financial performance. Unfortunately, now enters the complications of the global pandemic. There are many continuing uncertainties related to the pandemic. Today's prepared remarks and Q&A time, together with the investor deck posted on our website, should provide insight into the business aspects thus far and our expectations for the next few quarters.

As you saw in our earnings press release, the first quarter included acquisition-related costs of $473,000. The earnings release and investor deck include several non-GAAP financial presentations to help provide a better understanding of the Q1 2020 results and our prospective expectations. Additionally, as we discussed during our year-end earnings call, the U.S. accounting standards required the reversal of our NOL income tax loss allowance. The 2020 and future consequences of this accounting requirement require Sterling to provide a non-cash income tax expense. Accordingly, in 2020, we expect to provide income tax expense at an effective tax rate of 26-27%, of which approximately 21% of pre-tax income will be a non-cash expense. For the 2020 first quarter, this non-cash expense totaled $913,000. Because of the recurring nature of this tax expense going forward, we have not eliminated this expense from our non-GAAP presentations.

Please refer to our investor deck materials for additional 2020 cash flow information. Now, let me talk specifically about our first quarter results. At March 31, 2020, our backlog was an all-time high of $1,190 million, a 12% increase over the end of 2019. Approximately 58% of the backlog increase related to the growth from the heavy civil segment, with a balance of 42% of the growth driven by the Plateau operations, which is included in specialty services. The gross margin in our first quarter backlog was 12.7%, also a record high, and up from 11.5% at the beginning of the year. Unsigned low-bid awards totaled $241 million, a decrease of $32 million from the end of 2019. We finished the first quarter with a combined backlog of $1,432 million, a 7% increase over the end of 2019.

Our gross profit in combined backlog increased to 12.1% at March 31, 2020, from 11% at the beginning of the quarter. Our 2020 book-to-burn factors for our combined heavy civil and specialty services segments were 147% and 135% for backlog and combined backlog, respectively. Residential, which accounted for 12% of our consolidated revenues, does not report backlog, reflecting the short-term performance cycle of our residential slabs. Revenues for the first quarter were $297 million, an increase of $72.7 million, or 32%, over the 2019 quarter. The revenue increase was attributable to the specialty services segment due to the inclusion of the Plateau acquisition. Consistent with our expectations, the first quarter heavy civil revenue was $155.6 million, up slightly, or $5.1 million, over the 2019 quarter.

We expect accelerated quarter-over-quarter heavy civil revenue growth for the balance of the year as we ramp up each of our three large design-build joint venture projects in the Rocky Mountain region. Residential revenue for the first quarter was $36.4 million, down from $42.8 million in the first quarter of 2019, while up from the $34.5 million for the December 13th, 2019 quarter. Completed slab count declined 11% from the first quarter of 2019. This decline was primarily driven by record rainfall in March 2020, which pushed revenues from its first quarter into the second quarter of 2020. To a lesser extent, the shift we saw in mid-2019 to higher demands for small homes, which generate less revenue per slab, also had a negative Q1 2020 revenue impact. Our Houston market expansion continues to pick up steam.

Houston accounted for 14% of the residentials completed slabs in the first quarter of 2020, compared to 9% in the first quarter of the prior year. The Houston area ramp-up and increasing scale has had a favorable impact on its operating income returns. Consolidated gross profit was $35.2 million in the first quarter, an increase of $15.7 million over 2019. Consolidated gross margin was 11.9% for Q1, an increase of 320 basis points over the prior year quarter. The inclusion of Plateau drove the consolidated margin improvement. General administrative expenses increased as a result of the Plateau acquisition and increases in stock-based compensation and corporate insurance-related costs. Intangible asset amortization increased $2.2 million to $2.8 million in the first quarter as a result of the Plateau acquisition. Operating income for the 2020 first quarter was $12.1 million, an increase from $4.7 million for the comparable 2019 quarter.

Income tax expense increased by $1 million year-over-year, predominantly due to the non-cash tax expense position, which I discussed earlier. The net effect of all these items resulted in the first quarter net income of $3.1 million, or diluted earnings per share of $0.11, compared to the first quarter of 2019 net income of $1.8 million, or an EPS of $0.07. Net income in 2020, excluding the after-tax charge or acquisition-related costs of $374,000, resulted in an adjusted net income of $3.5 million, or adjusted earnings per share of $0.12. Our first quarter EBITDA totaled $20.3 million, more than double that of Q1 2019 EBITDA of $9 million. As a percent of revenues, EBITDA improved to 6.8% of revenues for the first quarter from 4% for the prior year quarter. EBITDA in 2020, excluding the acquisition-related costs, resulted in an adjusted EBITDA of $20.8 million, or 7% of revenues.

Now, let's move to our liquidity and balance sheet. Our cash balance increased by $28.2 million to $73.9 million for the first quarter. Historically, Sterling's first quarter is its seasonally slowest period for both cash flow and earnings. This has not changed, but it has improved. As a result, we have typically had negative cash flow from the operating activities of $15-$20 million in the first quarter. Our cash flow typically then levels off in the second quarter, and we generate cash in the third and fourth quarters. Cash generation from operating activities in the first quarter of 2020 was a positive $10.8 million, compared to cash usage of $19.2 million in the comparable 2019 quarter. All three of our segments contributed to this $30 million cash flow improvement. Cash flow from financing activities included net borrowings of $24.9 million.

In light of the uncertain future around the pandemic environment, we felt it prudent to borrow $30 million on a revolving credit facility late in the first quarter and park the cash on our balance sheet. In addition, we made our first scheduled term loan payment of $5 million at the end of March. We ended the quarter with available borrowing capacity of $25 million on our $75 million revolving credit facility. Our first quarter 2020 capital expenditures, net of disposal proceeds, totaled $6.8 million, compared to $3.7 million in the 2019 comparable quarter. Our original 2020 plan anticipated net CapEx in the range of $25-$30 million. Considering the current pandemic-related uncertainties for the balance of the year, we have been working with our business leaders on an alternative, lower cash outflow CapEx forecast.

Our reduced CapEx alternatives include deferring non-essential purchases, short-term rentals, increased utilization of our operating lease facilities, and pursuing the variety of OEM vendor programs, such as rent-to-own, low-cost rental programs, and trade-in or used equipment opportunities. We will continue to monitor our CapEx as the year progresses. Our alternate 2020 CapEx range is $15 million-$25 million and is dependent on how the COVID-19 uncertainties play out for the balance of the year. Please note that we have added a modeling consideration cash flow slide to the Q1 2020 investor deck to assist our stakeholders with understanding key components of our cash flow. Lastly, our existing 2017 Form S-3 Shelf Registration Statement comes to the end of its life later this month. We continue to believe that having an effective Shelf Registration Statement on file with the U.S. Securities and Exchange Commission is a best practice.

Consequently, this morning, we filed a new Form S-3 Shelf Registration Statement to replace the existing document. Currently, we do not have plans to issue security under this shelf. Now, I'll turn the call back over to Joe. Thanks, Ron. As I reflect back on the quarter, the last 30 days felt more like 30 years. I don't believe any of us could have imagined the whole world economy changing as much as it did in such a short period of time. However, the results of the first quarter and how we are positioned to get through the rest of this year exemplify the continued strength of the business and the value of our overall strategy. Our teams will continue to figure out how to adapt, and what seems foreign today will become the new norm tomorrow.

As we look forward to the second quarter and the full year, we entered the second quarter with record backlogs and record margins. We have a solid liquidity position that only gets better throughout the remainder of the year. We have a team that has shown great ability to adjust quickly and rapidly to changing environments, and we feel confident that we will be able to successfully navigate any challenges we face associated with slowdowns in the residential, multifamily, and commercial office markets. Even though we are stepping back from giving full-year guidance until we have a clearer picture of the full COVID impact, we still believe we will have a year that delivers a strong financial performance. With that, I'd like to turn it over to any questions. Thank you. We will now be conducting the question-and-answer session.

If you would like to ask a question, please press Star 1 on your telephone keypad. The confirmation channel will indicate that your line is in the question queue. You may press Star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. Our first question comes from the line of Brent Bailman with D.A. Davidson. Please proceed with your question. Great. Thanks. Good morning, Joe and Ron. Hey, Brent. Morning. Maybe on residential to start, can you guys give us any context or framework about what you're hearing from homebuilders on the declines coming and just so we have something to think about in terms of what we could see in that segment for the next couple of quarters? Yeah. I will give you the feedback we're getting.

It's a little bit mixed. I think everybody has anticipated a larger, faster falloff to date that hasn't happened nearly as much as people thought. However, as we look forward to what builders are looking at for, I'll call it the back half of May and June starts, they're predicting somewhere between a 30-50% drop in starts. Now, Texas just opened back up last week. I haven't got that we won't have this week's, I'll call it, foot traffic reports until the end of the week. We're hoping that that picks up quickly and comes back. Right now, we're seeing two things. They're pulling back on those starts towards the end of May. We're also seeing, for the first time, some of the new site development plans delayed. They're not breaking ground on that new development. We'll keep close to it.

Brent, that's really the biggest driver to us pulling the guidance is we think we're at the very early stages of this. We'll certainly know more over the next 30 or 60 days. It looks like what the builders are telling us is that drop looks like it'll be a 90-day kind of drop. I don't think it'll return 100% back to normal, but it'll have some rate of return as we get into that third period in the back half of the year. Okay. On the heavy civil backlog, I mean, good level of visibility there. I think you talked about kind of quarter-over-quarter growth through the rest of the year for the segment. To what degree, I guess, does that backlog give you visibility into 2021? Yeah, it does.

We have very good visibility as that backlog continues into 2021 and some of it goes into 2022. We generally enter the year with, call it, 70-80% of the year locked and loaded before we get into it. We have not run the 2021 numbers, but we have very good visibility going into 2021 right now. Yeah. When you think about it, with the book-to-burn that we have had so far this year, that 70% typically stays level. If you are booking more than you are burning, obviously, that has a comforting factor the longer you look out. As we sit here, we probably could do the math, but it will be in that ballpark of 70% for the next 12 months' activity or sitting in our backlog.

I think the other thing, Brent, is we have not seen in our markets bid activities from DOT slow down. We have seen some of the little municipality and county work slow down a little bit, but that's not a big part of what we do. As a matter of fact, Utah just came out with their 2021 budget, which is over $3 billion, which is the biggest one we've seen in a while from them. We feel good that the heavy highway will continue to click along. Everybody is concerned about the FAST Act coming to an end, but the reality is, even if it does come to an end, they'll put some sort of extension on that as it goes forward, at least overall.

In the states that we're currently in, those states seem to be positioned pretty well to continue with their programs as we go into 2021. Yeah. One last thought on backlog, Brent, is the duration of our backlog is extended. Certainly, probably a third of our backlog is in four to six projects that are two years plus. That gives us a comforting, predictable 2020, 2021, so we know what we had to fill up and have plenty of time to do it. The backlog is obviously as large as it's been, it's most profitable it's been. Now, we just got to execute it as we do our job here and get it done. Okay. Maybe one more for me, and I'll get back in queue. Sure.

I guess, given the cloudier outlook, seemingly really into the back half of the year, Joe or Ron, I guess, want to gauge your comfort levels in terms of meeting your financial covenants for the year and understand the free cash flow should be pretty good, but kind of the levers you can pull on that front. Yeah. I'll let Ron answer the details. I think the one thing that's really important for people to understand is, with the acquisition of Plateau and what we've done over the business over the last three or four years, the cash flow that we generated in the first quarter is, I'll call it, night and day compared to what it's historically done. We are actually in a better position today than we probably have ever been from, I'll call it, the stability and solidness of the business.

Ron can talk about the covenants and all of that stuff as well. Sure. Let's start with so people understand when we talk about residential, the potential magnitude of our short-term builder-driven view of 30%-50% down for, let's just say, a whole quarter. Our earnings in the residential side are pretty pro-rata throughout the year. Our EBITDA expectations are plus or minus $25 million in that business. Do easy math and round it down a little bit, $6 million a quarter overall. As we've talked many times, their fixed costs are 50 people. All the others are variable costs, only paid when you're building slabs. As a result, it's a variable margin business.

You can almost do the math, not quite, because we probably have, I don't know, $500,000 of D and A, maybe with D and A, maybe $1 million, but per quarter, almost. That'll continue. In that 90-day, maybe it's 3 to 4, $3 million is sort of the easy math. That by itself is not a big mover. Obviously, we got the first quarter underneath us with a strong first quarter on the operating margin side. That decline won't happen until sometime in the big decline back half of this quarter and hopefully comes back. Just order of magnitude, if you just assumed it would stay to that pace, it's $10 million on a very dark view of it a little bit anyways, at least what we're hearing today. That's the only thing we can rely on.

Now, to get to your question, our cushion and our bank covenants are essentially the same, particularly when you consider the $30 million that we borrowed under our revolver is essentially sitting on our balance sheet as just a precaution in these days of uncertainty. We could pay back that $30 million today if we so desire. We do not think that is a good idea. With that, we are essentially flat with the first quarter, which at that time had, give or take, $25 million of EBITDA-driven cushion. We will be in good shape to pay down in the second quarter. We paid down $12.7 million over the final payments of the seller notes and rep and warranty holdback on Tealstone. Those have been paid off in the first week of April. Then a $5 million payment on the term loan at the end of the second quarter.

That $17 million is essentially another buffer to keep that cushion about the same number so long as everything else acts as we've talked about today. Finally, the way the calculations work is generally a reduction of $1 million in CapEx is the same as an additional $1 million of operating income or EBITDA, I should say. As I talked about, we went from a range of $25 million-$30 million. If things do not respond like we think we will, we've already brought it down to the top end of $25 million. We can get to $15 million without harming the business and having any noticeable difference. Frankly, we can borrow, we can get lease rates, short-term lease rates, and even operating lease rates less than we could borrow on our revolver for. We tend to do that periodically anyway.

That's just sort of when you do that math, it's a $10 million additional cushion that you wind up having for the balance of the year if we need to really put our foot hard on the brake. If the world changes on the heavy civil, what I'll call our backlog work, we'll step on it harder. Yeah. I think, Brent, we feel a lot better today than we probably did three weeks ago when it was all uncertainty that the specialty sector, for the most part, all of Plateau's work, all of Heavy Highway has been deemed as essential, has backlog, and customers continue to work in those areas. We do know we're going to see a tick back in residential if the economy gets back. When I say economy, people get back working in Texas at a reasonable rate.

Hopefully, that dip is lower and shorter than what we are telling everybody. Right now, our best look at what we predict is a 30-50% drop for 90 days is what we think is probably realistic out there. Okay. Thank you, guys, for all the comments. Appreciate it. Sure. Thank you. Our next question comes from Sean Eastman with KeyBank. Please proceed with your question. Hi, team. Thanks for taking my questions. Thanks, Sean. No compliments. Thanks, Sean. Compliments on the adaptability and cash flow in the first quarter. Thank you. I guess first question for me is just kind of wondering at what point in the year you have a good idea on how 2020 is shaping up.

I just wonder if beyond the residential piece, whether there's a couple bigger jobs you're waiting to see move forward or not, just kind of any color, I guess, as we head into the summer construction season, when you have that visibility and exactly what you guys are waiting for. Yeah. I think the thing we're waiting for, our biggest, we think, swing is on the residential side, right? Right now. That's not to say that a construction project may not start in the third quarter on the heavy civil side or something along those lines. That certainly could happen. We don't have 100% of Plateau's backlog filled for the fourth quarter, but we've got a lot of time between now and the fourth quarter to fill up the gap that's in the Plateau business. It would be very uncommon to have it full at this point in time.

We certainly have those. Right now, we think our biggest risk is really around this residential piece. As we get through the second quarter, I'm hoping that we're all wrong in a positive way in the sense that the residential doesn't drop as much as we think and comes back faster. We'll see as we're getting into that July timeframe if it's going to linger through what's normally a relatively busy season as builders try to get homes completed before the school season starts and people are moving and making all that stuff. If that changes, we'll have a better picture as we go there. Okay. That makes a lot of sense. Just as a refresh, even if residential does see this kind of pronounced near-term drop, you guys have a lot of cost flex in that business, right?

It's not as though the margin profile on the remaining revenue will be that much different from what it would have looked like early. Correct. Yeah. That business, all of the labor in the field, I say all, there's a few laborers that we have, but 90+% of that labor is variable. If we're not boring slabs, we're not paying for labor. There's roughly between 40-50 people in the business. Even there, we'll manage those costs as effectively as we can to keep going. We should not see a significant impact on the margins. What we're really happy with is in the quarter, we saw a significant improvement in margins coming out of Houston as they finally started to get enough critical mass.

We've talked about from the startup, there's that point where you get enough critical mass to where you can get your concrete cheaper, your labor absorbs itself, all of that kind of stuff. The team's done a great job in the Houston market building that and are to that point. We're really, really pleased with the margin improvement that we saw there. Excellent. Just as another refresher, you guys did call out multifamily commercial offices potentially being sensitive here in 2020. Can you just remind us how much of specialty or maybe where else those elements might be reported? Just total exposure there. Beyond that, just how the sort of bid pipeline and award activity has been trending for Plateau through this kind of lockdown period. You want to hit the first, and then I'll hit the Plateau piece?

How much of it is, how much is the office and multifamily? Sure. Our specialty services business is commercial is about—sorry, let me start over. The multifamily, together with some of the smaller commercial work, is about $40 million-$50 million of revenue per year. It is a relatively small part of our specialty backlog and our specialty revenues. Those projects are generally a little more—some go fast, but I would say on average, right around a year duration. That slowdown that we have started seeing here in the last month or so will put a little bit of drag on the back half of the year. $40 million, $10 million a quarter, maybe a little bit more than that. I am sorry, $40 million a quarter. 100 and—yeah, I have got to get this right here. I will correct myself as I go.

That kind of gross profit for the balance of the year is not extraordinarily large. It is a small piece relative to the whole sector, Sean. That whole commercial business that we are talking about is less than $100 million a year. It is closer to that $50 million in those areas. We do have some backlog. Where we start to see the shortfall is as we get towards the back half of the third quarter and in the fourth quarter of this year from that. As it relates to Plateau, we booked a lot more in the first quarter than we ever anticipated, over $100 million. What Plateau is also seeing is we thought the last time we talked, as a matter of fact, we thought that we were going to see a slowdown in what we call speculative warehousing, okay?

Those are the guys that are building one-off warehouses and hoping by the time it's done, they sell it and all that. We've seen just the opposite. With all the activity with e-commerce and Amazon, Amazon can't build and get through their process enough warehouses quick enough. Through the Southeast, they're going out and buying and pre-buying all of these speculative warehouses that were on the books to be built or in process of being built. The one issue they're running into that's taking a little more time than some of these, I'll call it off the drawing board and on the books, is a lot of the counties have been shut down or scaled back. What normally took—I forget the exact time—I think they had 60 days to get a permit through, now is taking 90 days, right, to get permits through.

There is a little bit of an issue there. The activity looks very good. We think on the back end of this, we believe that the e-commerce space and all the activities around that are only going to accelerate as we go forward. Nothing to raise any alarms at this point in time. We think the back half of the year will be strong when stuff resumes. Yeah. I got tongue-tied there for a second. Let me help recover here. Our commercial business outside of the Plateau business is about $120 million per year. About half of that would be basically the base Tealstone business that we acquired that is in the commercial side. It gets back to that 50-60 million, call it $60 million kind of run rate. That is the work that has duration of one year.

That's where we're seeing a bit of the slowdown. Call it $15 million per quarter of revenue, of which we got backlog to cover most of the balance of the year. That'll be the headwinds as we move forward to that. Sorry, I was more crisp a few minutes ago. Got it. Got it. Last one from you guys. You did call out the heavy civil business had sort of the most dislocation from a productivity perspective in the first quarter from just the COVID-19 environment. Just curious how we're trending into the second quarter there. Have you guys kind of got back to normal? How close to normal are we at this point for heavy civil? Just so we can think about margin trajectory there. Yeah.

I think what's really amazing is whenever you go through, I'll call it dramatic change, at first, everybody thinks the world's coming to the end. You just realize how resilient people really are and how able they are to adapt when they have to, right? Nobody likes to adapt if they don't have to. When the world changes and you have to adapt, I would tell you, Sean, if we talked to all of our presidents and all of our business leaders six months ago and said, "We'd like to try this thing called having our offices and our customers work virtual, and we could do this," they would have thought we were absolutely off our rockers. We have a litany of calls trying to keep up with this, as you can imagine.

On one of our calls a week or two ago, we had one of the presidents say, "I never believed this would work, but this is actually working pretty well. And we've got kind of our stuff going." I think we're to the point now where we still have some incremental costs with simple things like safety meetings and all that where you could do them all in 10 minutes, and now you got to have six people or less, and it takes you time to do it, right? You can't have people together as much, and you're not moving crews around as much. There is going to be some long-term impact to that.

I would say I'm really proud of the team and the folks on how quickly they're able to adapt and also work with customers that are now virtual and remote, which is highly unusual for us. They've done a great job. I think we're on a scale of 1-10, we're probably at an 8-8.5 on running what I'll call what will be the new norm, and we'll continue to get better. We'll always see a little bit of impact. It's not points of margin. It's small incremental pieces of margin. Candidly, we're working on some other things to make that up in other ways. When you think about it, not all bad.

Having very few cars on the road when you're a road and highway contractor is a very productive change, as you might imagine, moving traffic to work around. The second one is we burn a lot of diesel. That's the one thing we don't lock in on our projects if we're at that variable risk. It's not like we only have ups. There are sometimes you forget about them because it's pretty dismal every day when you get up and listen to the news. There are some things that kind of balance out on those big projects. Got it. All really helpful responses. Thanks very much. Thank you. We have reached the end of our question and answer session. I'd like to pass the floor back over to management for any additional concluding comments. Thanks, Jesse. Thanks again, everyone, for joining our call today.

If you have any follow-up questions or wish to schedule a call with us, please refer to the contact information provided in the press release associated with our investor relations group at Sterling or our partners at the Equity Group. Hope you all have a great day, and we appreciate you taking the time. Thank you. Ladies and gentlemen, this does conclude today's public conference. Once again, we thank you for your participation, and you may disconnect your lines at this time.