STERLING INFRASTRUCTURE, INC. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Delivered $1.97 of earnings per share, up 56% over prior year. Gross profit margin 22%. Operating income grew over 50% on 6% revenue growth. Backlog at end of quarter $2.1 billion, up 2% from prior year.
• Strong cash generation with operating cash flow of $152 million. Net cash position $326 million. Well-positioned to pursue acquisitions.
• E-infrastructure segment saw revenue growth in Data Center market, driving over 50% of backlog. Transportation solutions had strong revenue and margin growth. Building solutions facing softness in Dallas but bullish on long-term demand in key markets.
• Updating financial guidance for the year: revenue $2.15B-$2.175B, gross profit margin 19%-20%, net income $180M-$185M, diluted EPS $5.85-$6, EBITDA $310M-$315M.

Segment Performance

• E-infrastructure: Largest and highest margin segment. Revenue increased 4%, operating profit grew 89%, operating margins expanded over 1100 basis points to 25.8%. Data Center market drove revenue growth, now over 50% of e-infrastructure backlog. Awards were $314 million, backlog $919 million (up 3% from prior year).
• Transportation solutions: Revenue increased 18%, operating profit grew 28%, margins expanded 67 basis points to 8.2%. Combined backlog $1.4 billion (approximately flat with prior year). Awards $150 million, unsigned awards $308 million.
• Building solutions: Total segment revenue declined 10%, operating income declined 12%. Residential concrete slab business down 29% in Dallas due to softness. PPG had strong margins but revenue softness. Operating margin 11% slightly below prior year.

Guidance

• Updated full year guidance: revenue $2.15 billion to $2.175 billion, gross profit margin 19% to 20%, net income $180 million to $185 million, diluted EPS $5.85 to $6, EBITDA $310 million to $315 million.
• Raised full year profitability guidance; midpoint represents 10% revenue growth, 33% diluted EPS growth, and 21% EBITDA growth.
• Anticipate continued strength in e-infrastructure due to data center demand, robust transportation market activity, and long-term growth potential in building solutions markets.

Risks

• Affordability challenges and timing of interest rate cuts impacting demand in building solutions near term.
• Market lumps in award timing which can affect financial metrics.
• Dependence on successful execution of large, multi-phase projects to maintain growth and margins.

Question and Answer

Q: Hey, Joe, just on e-infrastructure. Tremendous profitability here in the quarter. And you know, it looked to me like you finish out somewhere in excess of 20% this year, I guess with the backlog increasingly skewing towards the data centers. I'm trying to think about that in the context of maybe some of these other markets that might come back for you that don't carry as high margins, ecommerce, manufacturing, how do you sort of think about sustaining this level of profitability in e-infrastructure and kind of 2020 mix of things.

A: There's couple things. You know, we did see a nice rebound in some of the small projects, the industrial projects in the quarter and the hard thing for us is these projects to kind of give you a perspective. We can get a call today. I can give you a real life example that happened last week when I was with our ecommerce guys. We can get a call today, negotiate a contract tomorrow, and be starting by Monday on these small deals, so they pop up quick, move quickly. We saw a nice rebound in the quarter that I think most people would have thought would have diluted our margins but they didn't. The growth of the margin on these large mission critical jobs just continues to get better, and even as that stuff comes back, we believe we're still going to see margin improvement in e-infrastructure as we go into 2025.

Q: And then just last one on building solutions sounds like some slowness in Dallas. Maybe that persists for a couple of quarters here. Interested your feedback on that, just given what you're hearing from builders, but also Joe, just what, maybe what's going on in Houston and Phoenix? Are you still seeing growth in those markets?

A: Yes, so a little different dynamics in each one of the markets. Dallas, definitely down in the quarter. Combination of affordability, we've heard some rumblings with one or two builders on land availability, the overall market is down. I will tell you though, in October, on the plumbing side, we saw the starts double in October from where they finished in September, which is a great sign for us that could be going in the right direction very quickly. That's a leading indicator to us on what's happening. So that's good. We continue to see growth in Houston. Saw nice growth year over year not only is the market growing, but we're working on how to be even a little more aggressive on growing market share in that market, Phoenix, I will tell you, is still growing. Phoenix is a quarter to quarter is a little bit more volatile than what the Houston and Dallas markets are. They're usually very consistent up into the right. Phoenix goes up into the right, but we tend to see, a little more of a spike one quarter, a little less of a growth in the next quarter but directionally, we're certainly happy with the Phoenix market and where that's going, and don't have long term concerns with it.

Q: You guys talked about this, this pipeline of work coming your way on the e-infrastructure side, you mentioned some near term on shore and projects in '24 and '25 but also the much larger projects on the horizon for '26 and '27. I guess how are you balancing the pace of your bids now versus, kind of keeping your capacity open for those 26-27 mega projects?

A: Well, I think the good thing is we can, we can go full bore now, and as we see those projects coming, we have plenty of time if we need to build excess or extra capacity to do that and we would do that. So we're not pulling back on any of these mission critical jobs. We are loading up the boat as much as we can with them, and when these mega jobs come out, we'll be fine. You know, we were very good at expanding up very rapidly, and we're not concerned about that. Let me clarify one thing on the pipeline. We talked about these, this multi-phase pipeline. This isn't work that's out there that we're looking at to bid. This is subsequent work associated with jobs we have. So that's a big difference. I'm not looking at a $1 billion looking a lot more than a $1 billion dollars of work out there. This is work that we have that will tag on is either incremental contracts or change orders to the existing contract to complete the project. So this isn't stuff that we're hopeful on that might happen. This is stuff that has to happen to complete the project. It's more of a contractual structure the way they do that doesn't enable us to book all of that backlog at one time.