Sterling Construction's (STRL) CEO Paul Varello on Q2 2016 Results - Earnings Call Transcript

| About: Sterling Construction (STRL)

Sterling Construction Company Inc. (NASDAQ:STRL)

Q2 2016 Results Earnings Conference Call

August 01, 2016, 09:00 AM ET

Executives

Jennifer Maxwell - Director, Investor Relations

Paul Varello - Chief Executive Officer

Ronald Ballschmiede - Chief Financial Officer

Joe Catello - Chief Business Development Officer

Analysts

John Rogers - D. A. Davidson

Tahira Afzal - KeyBanc

William Bremer - Maxim

Hamed Khorsand - BWS

Operator

Greetings and welcome to the Sterling Construction's Second Quarter 2016 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.

It is now my pleasure to introduce your host, Jennifer Maxwell, Director of Investor Relations. Thank you, you may begin.

Jennifer Maxwell

Thanks Christine and good morning everyone. Participating with me today on our call is our Chief Executive Officer, Paul Varello; our Chief Financial Officer, Ron Ballschmiede and Joe Catello, our Chief Business Development Officer.

Just as a reminder, today's conference call includes certain statements that fall within the definition of forward-looking statements under the Private Securities Litigation Reform Act. Any such statements are subject to risks and uncertainties, including overall economic and market conditions; federal, state and local government funding, competitor and customer actions and weather conditions, which could cause actual results to differ materially from those anticipated, including those risks identified in the Company's filings with the Securities and Exchange Commission.

Accordingly, such statements should be considered in light of these risks. Any predictions by the company is only a statement of management's beliefs at the time the prediction is made. There can be no assurance that any prediction once made will continue to actually reflect management’s beliefs and the company does not undertake to publicly update those predictions.

And now, I would like to turn this call over to our CEO, Paul Varello. Paul?

Paul Varello

Thanks Jennifer and good morning everybody. I am happy to report that our turnaround efforts continue to produce positive results. Our net income for this quarter, which finally crossed over into the black and is the highest quarterly income in more than 13 quarters. We believe that our turnaround is on track and we expect our bottom line to continue to improve.

Although we experienced torrential rains and flooding during the quarter in Texas, we made very good progress in our other geographic markets and that helped to offset a majority of the shortfall. For the quarter, Texas represented only 25% of our revenue, where normally it is closer to 33%.

From a broader perspective, we continue to see sequentially greater investment in infrastructure projects at the federal, state and local levels. Many of the projects that will be out for bid include, roads, bridges, airports and airports and water projects in the $20 million to $80 million range which fits very well with our capabilities and allows us to be selective in choosing the best jobs to bid.

We also have been very pleased with the way backlog and project margins have continued to increase during the first half of this year. Our total backlog at the end of the quarter including projects where we were the apparent low bidder, but the contracts had not yet been signed, totaled more than $990 million. In addition, the bid margin in projects awarded during the first half of this year was 9.4%. We see that trend continuing throughout the balance of this year and beyond.

We also completed an equity offering during the quarter which raised $19 million. We used the proceeds to paydown a large portion of our very expensive debt and to fund working capital needs as we ramped up a record number of projects during the quarter.

With our stronger balance sheet and improved financial flexibility we are well positioned to take full advantage of the growth opportunities we see before us. We expect that the rains and flooding experienced in Texas may result in lower revenue and net income for the year as some of this delayed work pushes out into 2017. We now expect full year revenue to be in the range of $670 million to $690 million and net income to be in the range of $2 million to $5 million.

In conclusion, we believe that our turnaround efforts though not complete continue to drive significant improvement in earnings and create a firm foundation for sustained growth in the years ahead.

Now I'd like to ask our CFO, Ron Ballschmiede to offer his report. Ron?

Ronald Ballschmiede

Thanks Paul and good morning everybody. Let me start with building on Paul’s backlog comments by providing a few additional details around our recent backlog trends. At June 30, 2016 our backlog stood at $810 million compared to the end of our second quarter of 2015 a backlog of $243 million. As Paul mentioned our total backlog at the end of 2016 second quarter including projects where we were the apparent low bidder, but the contracts have not yet been signed totaled $919 million consistent with the end of the fourth quarter of 2016.

Even more important than the level of our backlog is the steady improvement of our embedded gross margin in that backlog. At June 30, 2015 our backlog margin was 6.3%. The backlog margin has increased each subsequent quarter and at June 30, 2016 the margin backlog increased 150 basis points to 7.8%.

We believe that this trend reflects progress made in the diligence around selecting the right projects to bid on, improvements in project execution, continued progress to complete legacy projects with little or no margin and the significant increases in transportation and infrastructure bid opportunities.

Revenue for the second quarter of 2016 reflects $190 million a bit short of our expectation, yet more than $13 million higher than Q2 of last year which was $177 million. The second quarter of the year was not helped by the poor weather in some of our markets, particularly the very wet weather in Texas which is normally our largest market.

On the positive side our geographic dispersion mitigated a portion of that negative revenue pressure in Texas with increasing revenues in each of Nevada, Hawaii and the Rocky Mountain

States.

Gross profits for the second quarter totaled $16.1 million or 8.5% of revenues compared to $9.1 million or 5.1% for the comparable period of 2015. The second quarter 2016 9.5% gross margin is the highest quarterly margins since 2012.

Our extra gross margin performance against estimated margins continues to be solid. For the six months of 2016 with $316 million of revenue driven by over $800 million of backlog our changes in estimated revenue and gross margin resulted in a net charge of only $500,000.

Importantly, and as we discussed in our first quarter call, net small charge for the full half year of the year included a first quarter charge of approximately $1 million related to a subcontract previously completed legacy project in California. While never able to declare project execution victory, our progress over the past year and a half has been significant.

Our general and administrative expenses for the second quarter were $9.1 million, down from $9.6 million in the comparable quarter of 2015. The year-over-year decline was largely the result of lower employee and benefit related costs. Other operating expenses $3.6 million compared to other operating income of $300,000 in the first quarter of 2015. The increase was primarily due to increased non-controlling interest expense driven by the combined increased income from the company's two partially owned subsidiaries.

Additionally, one of the subsidiary's 2015 non-controlling interest was classified below net income and included in non-controlling owner's interest in earnings and subsidiaries and joint ventures. As a result of amendments to that subsidiary's agreement, both subsidiaries 2016 non-controlling interest are now included and will be moving forward in other operating expense, net.

You will note that during the quarter we also reported a $520,000 expense of non-controlling owners' interest in earnings of subsidiaries and joint ventures, the line just below net income on our income statement. In 2016, this line item represents only our partner's share of our construction for essential income.

Interest expense for 2016 second quarter was $312,000 compared to the second quarter of 2015 of $634,000. The increase reflects the higher interest rate of our asset-based lending facility and changes in our average debt balance. The summation of all of these changes results in a second quarter net income attributable to Sterling’s common share stockholders of $2 million and net income per share of $0.9 per share compared with second quarter 2015 loss of $2.5 million or a loss of $0.13 per share.

Turning to our balance sheet, we ended the quarter with a cash balance of $42.6 million compared to a cash balance of $14.9 million at the end of 2016 first quarter. Our June 30, 2016 balance sheet include approximately $23.6 million of cash held by our California veritably interest entity and our consolidated construction joint venture which is reserved for use in both entities. The comparable cash reserve balance at the beginning of the second quarter of 2016 was $5.9 million.

Our debt totaled $17.9 million at June 30, 2016 compared to $32.1 million at March 31, 2016. Taken together, our cash net of debt position at June 30, 2016 was $24.7 million improved by almost $42 million from the beginning of the second quarter. Significant cash generation activities during the quarter primarily included the net proceeds of $19.1 million from our current stock secondary to offering which I will discuss further in a moment and improvement in our investment in contract capital of $15.4 million and our cash flow from operating earnings.

We believe that the level and changes in our contract capital are good measures to manage our investment in project activities. Our contract capital reflecting the combined balances of our contracts in process, receivables, inventories and accounts payables, improved during the second quarter 2016 by $16.3 million.

As we have discussed in our year end 2015 and our first quarter 2016 earnings calls, we were exploring different capital raising alternatives to further strengthen our financial position and provide with additional financial flexibilities to take advantage of the improving market.

Our capital raising alternatives included the potential sale of real estate, equipment, businesses in equity, the favorable resolution of outstanding contract claims, refinancing our equipment based facilities or a combination thereof. Many of these alternatives remain available to us to strategically transform and improve the profitability of our company.

However, to provide the much needed incremental working capital necessary to ramp up our recent significant new awards and restart our seasonal projects, we initiated and completed a secondary common stock offering in early May. We issued 5 million 175,000 shares of common stock and received net proceeds of $19.1 million on May 09.

Approximately a third of those proceeds were immediately necessary to bring our payables back to normal terms. The balance of the proceeds went to improving our financial condition and financial flexibility allowing us to continue the turnaround and position us to return to a more traditional credit facility for the end of 2016 or early 2017.

As expected, and exempted by a significant improvement in liquidity at the end of the second quarter, these early spring working capital remains are now behind us and we are beginning a generally stronger seasonal cash flow quarters.

With that, I'll turn it back to Paul.

Paul Varello

Thanks Ron. Now I'd like to hand up to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of John Rogers with D. A. Davidson. Please proceed with your question.

John Rogers

Hi good morning.

Paul Varello

Good morning John.

John Rogers

Hey, Paul or Ron, I guess the first thing and congratulations on the return to solid profitability, in terms of the outlook for the rest of the year the impact on net income from the deferred revenue it seems a little more extreme where it is lingering into the second half of the year, whereas I would have expected weather related delays and some of that would be made up in the second half of the year. It sounds like you are seeing some or expecting some continuing margin pressure, or am I reading this wrong?

Paul Varello

No, I don’t think it was so much margin pressure as really three factors. The rain in Texas was one of the big contributors. It is our biggest market in terms of revenue. Ron, when I get done, please go over the math of how that impacted net income. But if we just think about the revenue shortfall this year the recast revenue John, it is the delay due to the flooding in Texas. We had really what they call around here Biblical flooding in really all of March and three quarters of April. We lost almost all that time in Texas. After that it dried out and it seemed to be fine.

While that was contributor one, contributor two was we didn’t have enough, if you remember the equity raise really generated the additional money on around May 09. We were really spoon feeding the projects that had a ramp up as early as March. We had won a bunch of jobs in December and January, frankly more than we thought we would and those jobs would sometimes take a while to ramp up, all were relatively quick starters which we realized then was going to drain our working capital coffers pretty quickly.

So we had a slow play that until we could get that capital raise in hand, we did that. I feel very good about how we were able to hit as many jobs as we could and that was the larger, at least 50% of the impact was from that the second being the weather. I guess the just two really big drivers. Ron, could you explain how the revenue shortfall impacted the net earnings?

Ronald Ballschmiede

Sure, I think couple of just add-ons to what Paul just said would be, we will make up some of that revenue shortfall, but most of it just will fall in subsequent quarters and in addition to that just we've seen somewhat of a slowdown in bringing the new awards to and then progress on the awards to fruition just timing of being released to do more work.

So a combination of things eventually just slid almost $40 million of revenue if you go midpoint to midpoint from 2016 to 2017. Top down EV [ph] math broke down. EV [ph] of course math they know it at 8% to 9% margin, that moves, that number works, it gets $38 million delta times 8% or 9% margin and that's about what we're seeing from an income standpoint being shot into 2017.

Paul Varello

And as I think we all know is there is hardly any upside to being terribly optimistic on these forecasts and so we believe that had the second quarter not been as difficult weather wise, we had a chance of certainly staying within our guidance. But even the second quarter turned out to have these kinds of challenges, we decided everything else was going so well, we would just be wiser to set a target we felt more comfortable with.

John Rogers

And then, my other question was just in terms of the margins that you saw in the quarter and you touched on this a little bit in your comments, but they are above or they were above the margins that are estimated within your backlog. Was there some notable project closedowns there and is that a repeatable scenario?

Paul Varello

Joe Catello, our Chief Business Development Officer has joined us. Joe, can you handle that one?

Joe Catello

Yes, what's really driving that margin is mix. So if you take a look at one of the caveats Paul brought up is Texas represented a lower percentage of our total revenue than it normally does, much higher revenue out in the west than the [indiscernible] states and Hawaii. In addition, some of the zero percent margin jobs that get pushed into Q3 and Q4, so they didn’t hit the quarter as much as we anticipated out of Texas.

Paul Varello

And the western jobs had better margins than the Texas job did plus the zero. So the net impact of all of that was something that I think will continue but to a lesser degree as Texas snaps back.

Ronald Ballschmiede

Yes, and John that is one of the reasons I thought it conservative to tailor some of accounts involved which is the job at the other income statement related to 6% on the ventures. Our charge in the quarter for that was $3.8 million give or take. So it is pretty easy math it is all in the few you double that.

So those two ventures made almost $8 million and of course that is some great work in the geographies. So that certainly was the biggest factor in the mix that Joe described, that's a very significant there. I'll think more expense in the non-controlling there was some less as a matter of fact. What that means is, pay more people and we save more money which has been that.

John Rogers

Okay, and then, sorry and lastly if I could, bidding prospects in the second anything of note there, how does the pipeline work look in terms of opportunities?

Paul Varello

Joe, can you handle that?

Joe Catello

I mean, we're in the busy season of bidding. We're not seeing any slowdowns in any of our general markets. We're still waiting for the pickup in Nevada. Nevada is one of the lowest share, that's the slowest state that we have going right now. But we see some great job opportunities coming out of Utah, Colorado, and it is toward the back half of the year there is a big job at Hawaii that could be coming out late this year or early next year.

John Rogers

Okay, great. I'll get back in queue. Thank you.

Paul Varello

Thanks John.

Operator

Our next question comes from the line of Tahira Afzal with KeyBanc. Please proceed with your questions?

Tahira Afzal

Hey, Paul and team, congratulations on a fantastic quarter.

Paul Varello

Good morning Tahira. Thank you very much.

Tahira Afzal

So, I don’t know if this is the question for Paul yourself or Ron, but does the fact we have some pushed out revenues into the third and fourth quarter caused some of the typical seasonality to change, so I know typically your third quarter is very pronounced and then the fourth quarter either, is there a chance we see more of a rollout and a gradual build out into the fourth quarter this time?

Paul Varello

Tahira, first of all the third quarter will again be substantially will be our best quarter, you know it is and we're already essentially a third of the way through it and it's certainly a little early, but it’s certainly on track to do that again. In terms of margins, we think margins will be slightly less, but I’ll remind you that with fixed G&A and a very high revenue, more of it flows to the bottom line. So, we are still believing that the net income line will have a strong third quarter. Ron what would you add to that?

Ronald Ballschmiede

Yes, I think that’s right and certainly the gross profit will be assisted also by some of that fixed cost. But I think, in the Q and I'll give you the numbers now, we entered the quarter with $70 million of legacy projects margin is, I’m sorry $70 million of backlog on margins it had no profit in it.

We heard about $30 million of that number. So, 30 divided by the quarterly revenues to 190 caused pretty big significant number offset as Joe mentioned by the mix that’s – the 40 that’s remaining of the third and fourth quarter most of it in third, but mathematically it becomes a much smaller parentage of the total. So, it has less impact in the third quarter and almost and much of it, less impacted in the fourth quarter on a mathematical basis than it did in the second.

Tahira Afzal

Got it. Okay, Ron that’s actually pretty helpful. And Paul, the last time we talked there was a chance, you might have somewhat sort of margin making as well to some close outs to something that could have helped you close the gap and meet net income or operating income even with the weather changes. Any change that's happened over the last couple of weeks helped you decide to be a little more conservative as you look at how this low prime stops?

Paul Varello

Yes, what we were speaking of, there is a part of the business that I would just say is the normal business and those opportunities for additional margin come from change orders primarily as well as continuing that secured against the base project. Beyond change orders and we had several, we always have several in every quarter, but they generally are not big significant numbers. The larger more significant numbers are claims and claims unfortunately are one off things.

And so in our forecast, we are not anticipating in any of the forecast guidance we’ve given you, any claims which we hope do happen, but because they are one off we tend to say that’s not a, we’d like to look at our business as a normal run rate kind of earning stream. So, what I would say is there is only upside if we are fortunate enough to execute and collect on claims, claims different from change orders during the balance of this year.

We did execute several change orders this quarter, but it’s pretty much mundane several million dollars of all in the total revenue of 190 was now moving in the – a lot we always get some of those every quarter.

Ronald Ballschmiede

Yes and that’s a revenue number, so little bit on my opening – I talked little a bit at opening comments about our changes in some of the gross profits. The way we do that, that's all changes in our backlog. So, in the first quarter we had that project in California that essentially was a $1 million and that was a change in all of our backlog, not – it wasn’t the only one, but it netted out and that’s really the objective. In the second quarter that same concentration netted out the $500,000 up of GP [ph]. Again…

Tahira Afzal

Got it.

Paul Varello

That is our objective. We want the negatives and the positive all of that to offset and a possible looks more credit. So the quarter – the second quarter only add about $500,000 benefit, so 200, 300 basis points on our margin. But I would call that just normal noise of settling change orders, updating estimates, appreciating the rain, the rain effects and everything else. So I think normal quarter, nothing extraordinary closeouts or margin coming out of that, the change orders that we just talked about.

Tahira Afzal

Got it. Okay and last question before I hop back into the queue, if I do the math correctly based on what all are saying, I sense you know John ph if you put in low bids et cetera you could be exiting this year with backlog up potentially let's say in the low mid-teens, maybe a little higher than that. Do you still feel capacity wise and maybe it is question for Joe, you can actually translate that into a revenue growth of the same pace? In other words do you feel you have the capacity to really generate revenue growth off the mid-teens level?

Ronald Ballschmiede

Yes I think we look at it in two ways, if you start with kind of the back office few days it supports the growth, we still feel very comfortable we've got enough capacity to get us close to that $1 million mark in total down in the operations watching up that capacity as we grow should not be an issue and frankly we have excess capacity now. Hence we sold - amount of equipment, we still have some assts that we could either get rid of or maintain to support that capacity there.

Tahira Afzal

Got it, okay. Well, good quarter guys and I'll just hop back in the queue.

Paul Varello

Thank you.

Operator

Our next question comes from the line of William Bremer with Maxim. Please proceed with your question.

William Bremer

Good morning, Paul, good morning Ron.

Paul Varello

Good morning, Bill.

William Bremer

So Ron, I want to go to your legacy backlog. You voiced that this quarter you realized approximately $30 million, so year-to-date and I just want to correct, if there is any issues here, approximately $56 million or I should say $46 million has been worked off, is that correct?

Ronald Ballschmiede

Yes, I think we started the year with $86 million and we ended the second half with $40 million left, correct.

William Bremer

Okay, okay. So are we on target at the conclusion of 2016 to be say below $10 million, is that the way, did you see those other $40 million projects sort of ready to go as December [ph] so that in the end that you guys are finally going to be able to complete this?

Ronald Ballschmiede

Yes, I think those would be gone and in our world we always have some projects that are lower margins, but that is just noise of this, there will be just noise. In fact that entire $40 million be burnt third quarter, fourth quarter give or take two-thirds, one-thirds of that - I didn’t do a scientific roll off of that, but that is order of magnitude that is not right.

William Bremer

Okay. And then I want to go into your waiver, very impressive in this quarter. Other peers are sort of voicing some inflation, how are you able to keep your labor in check at this point without potentially losing some of your top hats and top managers?

Paul Varello

It is competitive for supervision, project managers, project superintendents, it has certainly continued to ramp up and we think our profitability and our execution is really attracting very good people. So, while I think we still have to continue to create opportunities for people for growth, it is there.

On the labor, the craft labor front, we haven’t experienced substantial inflationary effect that we didn’t have built into our estimates. Our number is down here in Texas, it is still running modestly low and we had that built into our bids. We are also thankful that the average life of jobs less than two years, we can recycle the estimates every time. So you reprogram the rate you are going to use based on any inflationary impacts and we always put an inflationary assumption in our estimates. And so far Bill, we have been spot on, there hasn’t been much impact from that.

William Bremer

Hey Ron, this last one is for you, can you give us a sense on engine bookings, what is the breakdown between the private commercial as well as the public domain of the projects you're bidding on at this time or is that in your backlog at this time, I should say?

Paul Varello

I mean, I’ll let hand it over to Joe, he is the man that studies that very hard.

Joe Catello

Yes, when you look at, what I call the highway side, which would be state or federal, 80% of our total work is in that space. However, when you get into airports and some of those activities as well, they fall under the same guidelines. So about 92% to 94% of our work today falls under that piece and the rest will fall under private.

William Bremer

Okay, thank you.

Operator

Our next question comes from the line of Hamed Khorsand with BWS. Please proceed with your questions.

Hamed Khorsand

Hi guys. First question, if you could just talk a little bit about how confident you are in the new guidance you’re providing?

Paul Varello

Yes, I think we feel considerably more comfortable with this new guidance. And again, I want to remind you, it excludes the one-off opportunities that are inherent in our business. So the actual number with any amount of luck at all, will be probably higher once claims are settled and other one-off things are in there. So I would tell you my confidence in the number of the heat is north of 80%.

Hamed Khorsand

Okay. The reason why I asked is, you were talking about the rains in Texas and that kind of hit the revenue mark for the year and you noted that was in April and March. And I’m just wondering why you didn't – why you didn’t update your guidance in May, if that was the case?

Paul Varello

Yes, I think it was still raining. What was the number of work at that time?

Ronald Ballschmiede

It depends on the geographic area of Texas, but we had monstrous rains in May and well after we released the quarter. So I think the number was somewhere between 15 days to 20 days. When we divide that by 60 or so workdays, normal workdays, that's a very big percentage.

Paul Varello

And we unfortunately don’t get those numbers right on the spot and so if we return by the early May then with the things continuing down the impact of the April numbers was not fully known until later. We really lost the days we didn’t understand the impact until later after those announcements were done.

Hamed Khorsand

Okay and then…

Joe Catello

If we do thing with the challenge is to realize, we lost somewhere of roughly 10 days to 12 days in May and you still have the rest of May and June to get those projects kick back off depending on the level of rain and the level of activities from the customer. So until you explore you just don’t know how faster you are go to ramp that up.

Paul Varello

One last thing is that I hope this habit breaks in Texas, but we are naming floods now after certain holidays. We had the tax may flood, which happened on May – April 15, and it was torrential terrible flooding situation, followed by the Memorial Day floods and so we're naming them based on holidays. Next big holiday is Labor Day, and we're hoping that the rain pattern has changed by then.

Joe Catello

We survived July 4th and…

Paul Varello

We did.

Joe Catello

Hot and dry.

Paul Varello

Hot and dry.

Hamed Khorsand

My next question was on your backlog. It’s down from the end of Q1 and my question is, are you focusing on keeping that at a lower level when it was in Q1 or you are focusing on trying to get it above that level and if you’re trying to get it above that level, any sense of where you can imagine the backlog would be at the end of the year?

Paul Varello

Let me make a first cut at that, Joe, maybe you can offer a color commentary. What I tried to do last year was to concentrate on the bottom line, not the top, and this year the opportunity is coming up with the Federal Highway Bill and other things and the way it's generating better opportunities for better margins means we must participate.

And indeed we now feel good enough about project execution where we will willingly participate with a much greater focus on the things we know, we make money on based on history, which taught us not only where we need money, but where we did not make money and part of the strategy is to avoid those things where we inherently know there's too much risk or we don’t make money.

I would tell you that our tendency for the balance of this year and then the next year is to continue to carefully grow revenue and but more importantly, continued to grow bottom-line. I’m less fixated on top line. I remain focused on the bottom-line. What would you add Joe?

Joe Catello

Yes, I think two things, it is relatively flat. We are focused on selecting the right bids. I will tell you in general, we’re running right at about the same percentage in total, but we are being much more selective of the bids that we're going after. The total bid activity is up and we are trying to make sure that we’re not leaving too much money on the table that we’re chasing the right bid and getting every penny we get out of it.

Hamed Khorsand

Okay, thank you.

Operator

Our next question is a follow up question from Tahira Afzal with KeyBanc. Please proceed with your questions.

Tahira Afzal

Hey Paul, given all the revenue instances you are seeing and who knows, maybe they are sort of prominent with climate change, I assume we’re seeing flash floods across country and draughts in others, are you seeing water infrastructure opportunities becoming more visible for you all?

Paul Varello

Yes, in Texas where these torrential rains and floods have really impacted the entire economy down compounded with the oil price impact, I would tell you that there is an awful lot of conversation about new water projects, particularly flood control projects coming up. Unfortunately they are right now in the conceptual stage that will be followed by the budgeting and design phase, followed by the bidding and then construction phase. So I think it’s a year out before we’ll see meaningful numbers of projects.

But in the water area, particularly flood control, we’re going to see more and more of those projects and particularly here in Texas which is, we are very thankful for that back. In fact the fact we needed is the fact that if that really does hit our sweet spot very well large diameter pipe, flood control projects are really one of our strongest projects with one of our best margins.

Tahira Afzal

Okay. And Paul in that regards, can you sort of hash out how much of your revenue is roughly allotted in infrastructure right now and let's say if these are opportunities to materialize, let's say two, three, years out, how much of that could go by?

Joe Catello

If you take a look at our water Tahira, depending on the year it between 3% to 5% and a lot of that is in the Texas market predominantly. We are starting to grow some of that out on the West Coast, but predominantly Texas.

Paul Varello

And in terms of the second half of the question about how much it would grow, I would say it will grow as much as 10% to 15%, but never be the predominant player just because of the sheer size of the market.

Tahira Afzal

Got it and it's last question on that Paul, I know that crazy pipeline project in California on the water side, if you take it crazy gaining some momentum, to the extent it actually goes through, is that something you guys could potentially play on?

Paul Varello

We looked at that and the project size is only subcontracted, the project sizes are considerably outside of what we call our sweet spot and some of the bigger contract is we do not want to bite it off entirely. So we could be part of either a joint venture or certainly a subcontractor on a part of it. We think that's a long way off and we think that we will be invited in to play with some of the bigger players, but I don’t believe that we will be on point for that kind of work.

Tahira Afzal

Thanks Paul and Joe.

Operator

Our next question is a followup question from William Bremer with Maxim. Please proceed with your question.

William Bremer

Yes, hi. This is a question maybe to Paul, maybe for Ron or even Joe, I guess on China what I understand is, your public projects are well north of 90% surely the better margins on private side. Have you been gearing up maybe your P3 activity to go after the higher margin process, I'm just trying to grasp why so much of the lower margin versus the higher margin projects that are on the docket right now?

Paul Varello

It's actually a great question Bill, because I have said for quite a while, the observation I'd make is this is a business that is very competitive on a good day. It's very competitive, and it drives margins lower. So I agree that our mix of public work, publicly bid works to private work is going to change.

Directionally, we're going to blend in more private work. And we're going to – and our observation comes from simple things like right now our best margin work is with our private customers like the railroads. And it has everything to do with the fact that a railroad, a private business understands the time value of money.

And so if you say to a railroad company, we can replace your bridge in a month, 4x, or in 3 weeks or 2x, or maybe not 2x, but x plus something, they almost always jump on it because they understand the time and value of money. In the public sector, our customers like TxDOT are obligated to be very transparent in the bid to as many contractors who can get bonded and are willing to spend the money to bid.

There is no limit on how many people do the work. And as a result, this really mistakes made by others in just pure competitiveness, margins will never get to be gigantically high. They will always get, if they are lucky, they will crawl up into the double-digits, but it will be low double-digits. What would you add to that, Joe?

Joe Catello

Yes, I think Bill, if you read on it, if you go and read our strategy, and a part of what we've gone back and evaluated it and looked at as we are going forward is, we do see some very nice margin opportunities in the adjacent markets, which a lot of that is private space, which could be commercial customers, it could be even touching in some of the residential space, airports, rail, the margins are significantly higher. You go upstream in the activity, so there's less competition at the bid table at the bid or maybe no competition if you're part of the design team, and that's really what we're trying to drive the longer-term growth.

Paul Varello

And the only thing I would add is concrete is concrete, whether it's placed on the road for a public company, whether it's on a P3 project, something that I know you have asked about several times, and we certainly are looking more at that. Whether it's other industrial customers, concrete is concrete, and we are convinced that there are opportunities to help improve. We will never abandon our core business, but it brings in higher-margin stuff that's certainly direction we're going in. Thank you, Bill.

William Bremer

Ron, this is a followup for you based on that, based on the mix of your other income line, what are you forecasting there for the year, given the mix of the backlog and your JV activity?

Ronald Ballschmiede

We don’t really give guidance at that level, but I think the second quarter was very, very strong and the balance of the year will be as strong. I'm hesitant to say it's times two, but the second quarter times two they continue to have some good backlog with little burn off in the back half of the year.

William Bremer

Okay, so back half similar to the first half?

Ronald Ballschmiede

I didn't say that. I just think it's going to be completely strong.

William Bremer

Thank you.

Operator

Our next question is a followup question from John Rogers with D. A. Davidson. Please proceed with your question.

John Rogers

Hi thanks. Just a couple of quick things. What's your average project size now in backlog and how does that compare to 12 months ago?

Ronald Ballschmiede

I think if you looked at our average project size, we're in the $20 million to $25 million. It will actually be a little lower than $20 million. And I don't – off the top of my head, I don't have exactly where that compares to 12 months to be honest. It's probably – let me just step back and answer maybe a little bit differently. If I look at the size of the bids that we're winning year-to-date, it is slightly smaller than the jobs we won last year, year-to-date. So even though we won as percentages, very flat, the number of jobs we're bidding are higher as we we're bidding the increase in the backlog. So they're slightly smaller, John.

John Rogers

Okay. Thank you for that. And then secondly, in terms of the refinancing that you're now hoping for in first half of 2017, what's the – your assessment of the cost save opportunity there?

Ronald Ballschmiede

It's a great question and it's pretty significant for us. If you start with stated interest rates that we're playing today and file it, our line requires us to pay a 12% coupon rate, if you will, for interest expense. But in addition, for any asset based type loan, type program, there are other costs that are incurred. Everything from appraisal costs periodically to the cost of increase and decrease collaterals you move equipment around or still have to buy new. So, I think in total, that number is between 13% and 14%. Certainly, the key of achieving our late 2016 early 2017 would be continued performance because more financial institutions like that.

Second key is one we can check off, which is the equity markets, the equity raise allowed us to have a balance sheet liquidity picture that is much stronger than it was prior to that. So I'm going to go with half the interest rate cost, maybe a little bit less depending on when we structure it and how we structure it.

I would suggest it will still be sort of a combination of revolver and otherwise. But that's what we're looking at. And fortunately, right now, the only thing we have outstanding is our term balance of give us the idea of June 30 of about $15 million. We were un-borrowed under the revolver. So while the interest rates are high, our borrowing is low at the same time. So you're talking about percentages in dollars.

John Rogers

Yes, so Ron, as you're looking at it right now for calendar 2016, how much are you actually going to be paying relative to that 13% to 14%? I mean, will you go into the line at all? So I mean, I understand that it will be...

Ronald Ballschmiede

Well in the line, if we go yes probably, we'll go in and out of the line, just days or weeks, but I wouldn't expect any quarters with the balance in the line. So I would suggest that $15 million at the end of the quarter times 12% plus a little rounding up for the other cost is probably at the high end of what I would expect for the balance of the year, following two quarters.

John Rogers

Okay. That is helpful. Thank you.

Operator

Thank you. Mr. Varello, we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Paul Varello

Thank you very much, Christine. I'd like to thank everybody on the call today for your time and patience and for your questions. If you would like to schedule a call with us, a follow-up call, please feel free to contact our Director of Investor Relations, Jennifer Maxwell or our partners at The Equity Group. Their contact information can be found on the bottom of our press release.

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