STERLING INFRASTRUCTURE, INC. Q2 FY2025 earnings call

• Revenue grew 21% in the quarter, with E-Infrastructure Solutions up over 29% and Transportation up 24%. Adjusted earnings per share grew 41% to $2.69 and adjusted EBITDA was $126 million, an increase of 35%. Gross profit margin expanded 400 basis points. Operating cash flow generation was very strong at $85 million.
• Backlog at the end of the quarter totaled $2 billion, a 24% year-over-year increase. E-Infrastructure Solutions backlog of $1.2 billion was up 44%. Pipeline of future phase opportunities tied to current projects was approximately $0.75 billion.
• Announced agreement to acquire CEC Facilities Group, which will add mission-critical electrical and mechanical services to the Sterling portfolio, allowing delivery of higher value end-to-end E-Infrastructure solutions.
• Sterling Way is the guiding principle, committing to taking care of people, environment, investors, and communities while building America's infrastructure.
• In E-Infrastructure, continued shift towards large mission-critical projects like data centers drove growth. In Transportation, strong market demand and mix shift towards higher margin services contributed to growth. In Building Solutions, faced headwinds from soft housing market but benefited from diversified portfolio.

E-Infrastructure Solutions

• Second quarter revenue grew 29% over prior year and over 42% sequentially. Data center market was the primary growth driver, with revenue from this market more than doubling year-over-year. Adjusted segment operating income grew 57% and adjusted operating margins reached 28%, an increase of over 500 basis points. E-Infrastructure backlog was $1.2 billion, up a very strong 44%.

Transportation Solutions

• Second quarter revenue grew 24% and adjusted operating profit grew 78%. Ended the quarter with Transportation Solutions backlog of $715 million, a 5% year-over-year increase. Sequentially, segment backlog declined 17% due to strong revenue burn and seasonally slower awards.

Building Solutions

• Second quarter segment revenue declined 1%, adjusted operating income declined 28%, and adjusted operating margins were 11%. Overall demand for homes was impacted by affordability challenges, with revenue from legacy residential business declining 11%.

• Increased guidance ranges for 2025: revenue of $2.1 billion to $2.15 billion, net income of $243 million to $252 million, diluted EPS of $7.87 to $8.13, adjusted diluted EPS of $9.21 to $9.47, EBITDA of $406 million to $421 million, adjusted EBITDA of $438 million to $453 million. This represents an increase at the midpoint relative to previous guidance.
• Guidance does not include any contribution from CEC as it has not yet closed. Expectations for CEC's full year performance are unchanged.

Q: One of the big trends coming out of earnings season thus far has been the major increases in CapEx from the data center hyperscalers. Investors are wondering is a significant portion of these projects expected to land in your core markets? And in the past, you've provided a qualitative color on the data center book-to-burn. Is it fair to assume that the book-to-burn remained above the 1x level?

A: Yes. We think we're positioned extremely well for a large percentage of the data center capital that's coming out. Data centers are now 62% of our total backlog and E-Infrastructure. And we saw very good bookings again in the quarter. Data centers are now 62% of our total backlog and E-Infrastructure. And that's up a couple of points, but it's even more impressive when you look at the growth of our e-commerce distribution businesses in the quarter. We were up almost 700% in the quarter for backlog in e-commerce.

Q: Related to those comments in terms of expansion into Texas and the Northwest, do you need any additional acquisitions for that to happen? Or is the general blueprint to expand organically?

A: Yes. I think we'll do both. We've got very nice reach out of Utah. We almost touch some of the far Northwest markets out of our Utah business today. So it's another few hundred miles for us to go. But we're also looking at potential acquisitions in those markets. Similarly with Texas, we can strike and do work in West Texas and we've bid work and won work all the way over to kind of the Dallas, Oklahoma region. So we have the ability to do that organically. But long term, we either need to establish a beachhead in Texas and up in the Northwest. So we're not traveling quite as far or make an acquisition. So the bottom line is we're looking at both.

Q: Are there any expectations in terms of the timing in terms of how long will it take for Sterling to start winning like large jobs in the Texas and Northwest markets as you already have customer relationships, but how long will it take to hire than necessary workforce?

A: Yes. I think the Northwest is further out. The projects haven't come there, they're future projects. So we're, I'll call it, preplanning 12 to 18 months before those projects start to get released. But in Texas, I'd be disappointed if we didn't have some wins for the end of this year with the bid activity that we're seeing and what we're being asked to put project plans together for. So we're excited about the Texas market that will only accelerate with bringing on CEC once we can start talking to customers jointly. I think we're going to see some very nice not only opportunities, but some very nice wins in Texas. Similarly, I don't think it's going to be very long before we start pulling them into the Southeast more and more with our existing customer base.

Q: Maybe just the status of the e-commerce opportunities, which seem to be reemerging in the segment. When did those start to become kind of more accretive to the bottom line to the segment, Joe? Do you start executing on those now? Or is this really more of a 2026 event?

A: Yes. We're in some of the early phases on a couple of these. Several of them will start in the back half of this year and go into 2026. And we think the bid activity will continue through 2026. We had told everybody, this is back in 2023 that Amazon sitting down with some of their key executives at the time had told us that their program would start back up in 2025. We saw our first bid and activity take place in the fourth quarter of '24, which was exciting. We anticipated 2 to 3 projects in total in 2025 that would fall into our footprint. I think we'll end up by the end of this year having 7, 8, maybe even 9 of these projects. That's the good news. The better news is these projects based on what they're building, they're building a bigger warehouse than they have historically done. They're 4 stories, but it's 90-foot tall. The size and scope of these projects compared to our historicals are almost 2x the amount of revenue per project. So that makes it even better for us. So you put all those together, we'll have very nice margins on those, and it's a nice additional tailwind on top of data centers and manufacturing and everything else that we're seeing.

Q: Maybe at least one on one of the tougher areas right now just on Building Solutions. Obviously, you've got some more challenging end market dynamics there. Maybe also, I'm guessing some poor weather here in the quarter, which I know you didn't call out, but I will. What is the kind of implied organic for the segment going into the second half? Joe, to the extent that you're getting any other feedback from customers or maybe good guys of that story? It'd be interesting to hear as well.

A: Yes. I mean that's certainly the headwind that we have. I think on a positive front, we're going to remain pretty focused on what can we do to maintain margins there. I think we'll see for the year, we'll see double-digit operating income in that even being down double digits on the revenue front. Here's the bottom line. That market certainly is softer than we would like. The second quarter was slightly softer than what we saw than the first. We think we're close to bottom on it and will continue through the back half of the year. And the biggest thing for us is how do we maintain pricing and margins on the work that we have. Now the good news is with the model that we have, we talked about our labor is highly variable. Our labor is all subcontracted. So if volume decreases, we eliminate labor. If it increases, we bring them back. We've continued to see price decreases on material. So that certainly has helped. We don't see any major increases coming forward on the material front. So that will continue to help us. On a positive front, we have not seen the developers or our big customers slow down on their land development, which tells us they are optimistic with the pent-up demand out there once interest rates start to drop once the cost starts coming down for a customer in total, that this thing will take off very quickly. So we're kind of fighting the battle. We think organically, through the back half of the year, it will be down kind of low to mid-teens for the back half. But we get some interest rate drops and a couple of positive things, maybe we could see a strong fourth quarter. We're not betting on it though. We don't have any of that in our numbers. If anything, I think we're probably very conservative in our forecast versus what we anticipate happening.

Q: Maybe just what's your best guess of when CEC closes? And if you could just touch on the pipeline to maybe add more tuck-ins over the near to medium term?

A: Yes. We're certainly -- we're building a list of potential candidates. I can tell you where we want to focus strategically. We certainly like geographic expansions into the Southeast further. And then we'll look at as we go up to the Northwest, how do we continue to expand. They're currently in Utah with us right now. We're working on a job together in Wyoming. So they've shown the capabilities to expand where we are. So geographically, Southeast and kind of moving towards that Northwest. From a skill set and capabilities, they've got a nice modular operation up in Dallas. I think there's other things from a modular capability that we can add, again, taking out time and reducing the pressure on a lot of labor on these sites, right? Those are always great things. And then the other piece that is really critical as we think long term, in controlling and having the total life cycle of these facilities that are being built is further service capabilities once the facilities are built and what can we add and keep people at those locations for a long period of time. On the closing front, making good progress. We're to the point now where we're really through all of the main things. We're waiting for states to bring back licenses and permits fundamentally. We're through everything else. So as you can imagine, we like that to be done -- we would like that to have been done before today so we could talk about it and all that stuff. But whenever you're dealing with state licensing and permit agencies, it never happens as fast as you want. We've got everything submitted. And some have progressed. We're through probably 65%, 70% of those right now and are waiting to get through the rest. So progressing well, never as fast as you want, but we don't see any major hangups. It's just really getting, I call it, through the process and the time of state and local agencies at this point.