Sterling Infrastructure, Inc. Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure Fourth Quarter and Full Year Webcast and Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, February 26, 2025. I would now like to turn the conference over to Noelle Dilts. Please go ahead.

Thank you. Good morning to everyone joining us, and welcome to Sterling Infrastructure's 2024 fourth quarter earnings conference call and webcast. I am pleased to be here today to discuss our results with Joe Cutillo, Sterling's Chief Executive Officer, and Sharon Villaverde, Sterling's Chief Financial Officer. Joe will open the call with an overview of the company and its performance in the quarter. Sharon will then discuss our financial results and guidance, after which Joe will provide a market and full-year outlook. We will then open the call up for questions. As a reminder, there are accompanying slides on the Investor Relations section of our website. These slides include details on our full-year 2025 financial guidance. Before turning the call over to Joe, I will read the Safe Harbor statement. The discussion today may include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Sterling's most recent 10-Ks 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, or adjusted earnings per share on this call, which are all 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 measures in our earnings release issued yesterday afternoon. I will now turn the call over to our CEO, Joe Cutillo.

Thanks, Noelle. Good morning, everyone. And thank you for joining Sterling's fourth quarter and full-year 2024 earnings call. 2024 was another great year for Sterling. We achieved 37% adjusted EPS growth and 7% top-line growth, reflecting our continued focus on driving margin expansion and returns. This is the fourth consecutive year we have generated adjusted EPS growth in excess of 35%. Our gross profit margin reached 20.1%, exceeding the target we laid out a few years ago, and we generated nearly $500 million of operating cash flow. Furthermore, our e-infrastructure backlog reached over $1 billion for the first time in our history. The opportunities we are seeing in our infrastructure business are unprecedented. Both the number and size of projects continue to increase, and we are having discussions with customers for projects that would start in 2027 and 2028. Put simply, we are not seeing any signs of slowdown. If anything, activity is accelerating. We are extremely excited about the future and believe we will continue to drive strong earnings growth over the next few years. The Sterling Way, which is our commitment to take care of our people, our environment, our investors, and our communities while we work to build America's infrastructure, remains our guiding principle as we execute our strategy. Now I would like to discuss our results for the full year and fourth quarter of 2024. For the year, we delivered adjusted EPS of $6.10, up 37% from 2023, and above the high end of our previously guided range of $5.85 to $6. Total revenue for the year grew over 7% to $2.1 billion. While revenue was slightly below our guided range, our adjusted EBITDA of $320 million grew 23% and also exceeded the high end of guidance. For the fourth quarter, we delivered adjusted earnings of $1.46 per share, a 13% increase over the prior year. We grew operating income by 12% on revenue growth of 3% as we continue to shift our mix towards higher-margin services. This is also reflected in our gross margin, which exceeded 21% for the quarter. Backlog at the end of 2024 totaled $1.7 billion, up 2% over the prior year and up 8% sequentially on a pro forma basis. Backlog alone does not capture the full scope of opportunity ahead of us. As our work has shifted towards large multi-phase projects in the infrastructure and transportation sectors, we have greater visibility into future phases of work. Our historical award rate for these additional phases is near 100%. In the first quarter, we have been awarded several hundred million dollars worth of e-infrastructure work, which is a combination of firm backlog and future phases. In addition, we won a large project in transportation. Last quarter, we said we could have close to $1 billion of future phase work by midyear. Right now, we are tracking ahead of our expectations and believe we could end the first quarter with three-quarters of a billion dollars of future phase work. Now I would like to discuss our segment results. In e-infrastructure, full-year segment operating income grew 44%, and operating margins reached 22%, nearly a 700 basis point increase. This was driven by our shift towards large mission-critical projects, including data centers, where our superior project management and our ability to finish jobs on or ahead of schedule are extremely valuable to our customers. In the fourth quarter, e-infrastructure revenue increased 8%, and operating profit grew 50%. Operating margins expanded over 680 basis points to reach a very strong 24.1%. The data center market was again the primary driver of infrastructure revenue growth in the quarter, increasing more than 50% over the prior year period. The infrastructure backlog ended 2024 at over $1 billion, a 27% increase from the prior year period. Mission-critical work now represents the vast majority of our infrastructure backlog, including data center work, at over 60%. Moving to transportation solutions, for the full year, revenue grew 24%, and operating profit grew 21%, driven by strong market demand in the Rocky Mountain region and an increase in the number of projects that meet or exceed our margin thresholds. For the quarter, revenue declined slightly compared to the prior year period. Operating profit margins were 5%, reflecting more typical fourth-quarter seasonality. However, margins declined from the fourth quarter of 2023, which benefited from great weather and timing of project closeouts. We ended the quarter with transportation solutions backlog of $622 million, down 20% year over year on a pro forma basis. This was driven by the timing of awards. In the first two weeks of January, we were awarded close to $200 million of new work. If these awards had hit in December, backlog would have been up 5%. Shifting to building solutions, annual revenue growth was 1%, and operating profit grew 6%. For the fourth quarter, revenue declined 3%, and operating income declined 17%. The operating income decline was entirely attributable to $8 million related to PPG. Revenue from our residential slab business declined 14%, driven primarily by softness in the Dallas-Fort Worth market. Overall demand for homes has been impacted as potential homebuyers struggle with the affordability challenge. With that, I would like to turn it over to Sharon to give you more details on some of our financial metrics and our year guidance.

Thanks, Joe, and good morning. I would like to begin by touching on the impact on our financial reporting as a result of the amendment to our RHB operating agreement. In the quarter, we recorded a non-cash gain on the deconsolidation of $67.9 million net of tax. Under GAAP, this contractual change requires that Sterling no longer consolidate RHB's results. Therefore, starting in 2025, 50% of RHB's operating income will be presented on one line in Sterling's consolidated statement of operations. RHB's revenue, which was $236 million in 2024, will no longer be included in our consolidated revenue. Amortization and depreciation on the fair value of RHB's intangibles and property, plant, and equipment is expected to approximate $9 million in 2025. Excluding these non-cash items, there is no impact on operating income or net income. Moving to our backlog metrics, our fourth-quarter backlog totaled $1.69 billion, a 1.9% increase over the year-ago period when excluding RHB backlog. RHB backlog at December 31 was $491 million, a 21% increase from the prior year period. The gross margin of our backlog was 16.7%, a 150 basis point improvement from the same quarter last year. An increase in both the amount of e-infrastructure backlog and its margin drove this improvement. Unsigned awards totaled $137.9 million in the quarter. We closed the quarter with a combined backlog of $1.83 billion, which was in line with prior year levels excluding RHB. Fourth-quarter 2024 book-to-burn ratios were 1.32 times for backlog and 0.99 times for combined backlog. 2024 book-to-burn ratios were 1.002 times. Shifting to our cash flow metrics, cash flow from operating activities for 2024 was a strong $497.1 million compared to $478.6 million in 2023. Cash flow used in investing activities for 2024 included $70.8 million of net CapEx. 2024 cash flow from financing activities was an outflow of $118.6 million, primarily driven by share repurchases of $70.6 million at an average price of $116.85 per share. $129.4 million remains available under the existing repurchase authorization. We ended the year with a very strong liquidity position consisting of $664.2 million of cash and debt of $316.3 million, for a cash net of debt balance of $347.9 million. In addition, our $75 million revolving credit facility remained unused during the period. As we look forward, our preferred use of cash remains accretive acquisitions that complement our service offerings and enhance our competitive position. In addition, we continue to be opportunistic with our share repurchases. Now I would like to discuss our guidance. As we look ahead to 2025, the ongoing strength of our e-infrastructure positions us for another record year at Sterling. In line with our historical seasonal trends, the first quarter remains our lowest revenue period. In conjunction with our 2025 guidance, we are introducing a new methodology for the calculation of non-GAAP adjusted EPS and EBITDA. This new methodology includes adjustments for non-cash equity-based compensation and amortization of intangible assets. In addition, we are expanding our definition of acquisition-related costs to include earn-outs. Our full-year 2025 guidance ranges are as follows: Revenue of $2 billion to $2.15 billion, gross profit margin of 21% to 22%, diluted EPS of $6.75 to $7.25, adjusted EPS of $7.90 to $8.40, EBITDA of $370 million to $395 million, and adjusted EBITDA of $395 million to $420 million. Considering the diversity and strength of our portfolio of businesses, our strong liquidity position, and our comfortable EBITDA leverage, we are well-positioned to take advantage of additional opportunities to generate significant shareholder value in 2025 and beyond. Now I will turn the call back to Joe.

Thanks, Sharon. There has been a lot of conversation out there about infrastructure spending, including data centers and transportation. With the backlog we have today and what we are seeing from our customers, these markets remain as strong or stronger than ever. In e-infrastructure solutions, we anticipate that the current strength in data center demand will continue for the foreseeable future. Our customers are discussing multi-year capital deployment plans and are focused on how to align with the right partners to support these plans. On the manufacturing front, we believe that in 2025, we will see a fairly steady pace of mid to large-size onshoring projects. As we look out to 2026 and 2027, there remains a big pool of mega projects on the horizon. This would include planned semiconductor fabrication facilities. Given the complexity involved in their development, we believe it will take some time before these awards start to flow. The e-commerce and small warehouse markets are continuing to show signs of strengthening. These dynamics support strong growth opportunities over a multi-year period. For 2025, we expect to deliver strong e-infrastructure revenue growth in excess of 10% and operating profit growth north of 25%. In transportation solutions, we are now in the second half of the federal funding cycle. We have built over two years of backlog and continue to see good levels of bid activity. For 2025, we anticipate continued growth in our core Rocky Mountain and Arizona markets. We have made a strategic decision to accelerate the shift away from low-bid work in Texas. This will result in some moderation of transportation solutions' top line and backlog that should drive meaningful margin improvement as we move through the year. These dynamics are expected to drive relatively flat transportation solutions revenue after excluding RHB from 2024. However, we anticipate operating profit growth in the low to mid-teens on an adjusted basis. In building solutions, the business is well-positioned for growth over a multi-year period. Our key geographies of Dallas-Fort Worth, Houston, and Phoenix are expected to see continued population growth driving demand for new homes. Additionally, there is a significant opportunity for share gain in Houston and Phoenix. For 2025, we anticipate building solutions revenue growth to be in the low single digits. This reflects a combination of some recovery in our DFW residential business in the second half of the year and share gains in Houston and Phoenix. We anticipate margin expansion in 2025 as we continue to shift our mix towards higher-margin residential slab and plumbing work and away from lower-margin commercial. We are working hard to find the right acquisition to grow the company and enhance our service offerings. The e-infrastructure market remains our top priority for M&A. Additionally, we are seeing some interesting opportunities in building solutions. We will remain patient and disciplined in our inorganic growth strategy. The midpoint of our 2025 guidance would represent 10% revenue growth on a pro forma basis, 15% adjusted EPS growth, and 18% adjusted EBITDA growth. With that, I would like to turn it over for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you wish to decline from the polling process, please press star followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. And your first question comes from Noelle Levitz with William Blair. Please go ahead.

Joe, Sharon, Noelle, good morning, and thanks for taking my questions.

Good morning.

To start off, there has been a lot of new data center developments across the US. For example, Project Stargate, the $500 billion mega data center investment project. A lot of these projects are outside of the typical geographic range for your Plateau and Plateau businesses. You mentioned in the prepared remarks about your plans for M&A. But can you talk about your ability to bid for these projects organically, as well as how it expedites your plans for M&A to increase your presence in these areas?

Sure. I think there are a couple of things. We continue to expand our geographic footprint. Some of the things we have been able to do is leverage assets in the transportation business, so we are now working on several data centers throughout the Rocky Mountains. We are looking at the Texas market and up into Ohio. Some of that we can do organically. It is a disadvantage when we have to ship crews halfway across the country and house them for the length of the project. It is certainly costlier for us to do that, and in some instances, it is cost-prohibitive. However, we are also looking at acquisitions in those markets or for the right acquisitions to do that. The challenge is finding somebody with enough size and breadth of capabilities that can perform at the level we require or that we can help them reach. We have seen a lot of small businesses, but we do not have the confidence they could execute to our standards. We are strategically considering whether to organically put some locations in other geographies and leverage our existing skill sets, move some of our existing resources to those locations, and build a spoke-and-hub model in different areas.

Awesome. That is helpful. And then shifting over to the transportation business, you are forecasting flattish growth this year. You mentioned that a lot of it is attributable to shifting from the Texas low-bid heavy highway work. Is that it, or are you also seeing an impact from IIJA funding-related activity, whether it be from executive orders, DOE cuts, potential tariffs, or is it just a shift?

I think many people are confused about those potential cuts and tariffs. In transportation, 50% of these projects are funded by the state and 50% by the federal government. The projects that we have in place and the projects being bid are already funded in one way or another. We have not seen any impact related to those discussions. I would not say there will never be any impact, but we are not concerned that current discussions would have a significant impact on our transportation business. When the IIJA program began, there was roughly a 30% increase in spending. Some of that has been absorbed by inflation. If you follow the industry, the first year after the IIJA you bid work and prepare; the second year you feel the impact of that. Last year, we grew about 24% in transportation, the biggest growth in a long time. Once that spending ramps to that level, it does not continue to increase every year; it flattens out. We saw the ramp-up last year; now it is relatively flat, growing at 3% to 5%. There is still some growth, but not the double-digit growth seen at the beginning of a program. So we are riding that wave and feel good this is consistent. The reduction of low-bid work in Texas offsets some of that 3% to 5% market growth, so net-net we expect roughly flat revenue, but with meaningful margin improvement and stronger profitability despite flat revenue.

Perfect. That is all for me. Thank you.

Thank you. Your next question comes from Adam Thalhimer with Thompson Davis. Please go ahead.

Hey, good morning, guys. Nice quarter and great outlook.

Good morning, Adam. We are excited about it.

Should be. I wanted to start on e-infrastructure margins. That is a high-margin business. You have done 20% plus margins before, but the back half of 2024 were exceptional results. What drives those exceptional margins?

It is really mix. A combination of our execution on larger projects drives productivity and synergies. The larger the job, the better the margin out of the gate. The shift from e-commerce and small industrial warehousing to mission-critical projects is our sweet spot. We are starting to see e-commerce activity pick back up at an early stage, and we expect a significant pickup in data center activity in the second quarter. We are positioned well with high-margin projects making up the majority of our backlog, and augmenting that with fill-in work should help accelerate revenue and better leverage assets between big jobs. That should help maintain or improve margins in 2025 compared to 2024.

Okay. Makes a lot of sense. And then remind us what your current scope is for typical infrastructure projects, and whether there is M&A similar to what you did with PPG that could expand your current infrastructure scope.

Right now we handle site development: grading, utilities, and preparing the site for slab or facility construction. We are organically moving into dry utilities and are beginning to perform more of the conduit and wiring work. The next natural phase for us is electrical and mechanical, which would be the logical expansion. We prefer a target that operates in data center and semiconductor space to pull us into semiconductor work while bringing them into data centers. We have not found the perfect fit yet, but we are searching actively and expect activity in 2025.

Great color. Good luck in Q1.

Thank you.

Your next question comes from Brent Thielman with D.A. Davidson. Please go ahead.

Hey. Thanks. Good morning. Great to finish the year as well. Joe, maybe just check back on infrastructure. It looks like you are alluding to mid-twenties operating margins on guidance. Could you put more context around the range of margins you are seeing on new work coming in between mission-critical and more short-cycle business? Have margins moved up over the last couple of years because you are more in demand?

We have seen base pricing on larger projects remain stable and possibly tick up slightly. As projects get larger, we can leverage internal capabilities and gain incremental margin. Multi-phase jobs allow staging that increases productivity across phases. We have not seen any backward motion in margins; if anything, we have seen slight improvement and better leverage as we gain experience across many data centers.

Makes sense. Back on building solutions, I missed the exact outlook for revenue for the year, but it sounds like you're optimistic about a rebound in the second half. What is embedded in the outlook for the group in 2025? And could you expand on PPG's performance and whether you are leveraging some of their customer relationships into the core business?

We expect the first half of 2025 to be relatively slow due to seasonality and weather, particularly in the Dallas area, with a stronger second half based on builder guidance and full-year projections. Interest-rate dynamics have introduced some noise, but we expect that to sort out through the year. PPG had a great year and is off to a good start in 2025. We have started cross-selling with them; part of the plan is increasing capacity and capabilities. We expect to add another location in the Fort Worth area in 2025 to address westward expansion, operated jointly across plumbing and slab businesses. Houston continues to grow and we see opportunities to gain share and add capacity. Phoenix is more cyclical, but we see an opportunity to add plumbing capability there to bundle plumbing and slabs, improving delivery times and rapidly increasing market share in 2025. Overall, population growth in these regions supports long-term demand.

Great. One more on infrastructure: how dependent is your optimism for 2026-2027 on semiconductor facilities associated with CHIPS versus other projects?

Those big projects are expected later than many anticipated; we still expect activity in 2026 and 2027. I believe there will be continued pressure to bring technology back to the U.S., including chips and other manufacturing. Our business benefits regardless of whether the project is a chip plant, data center, pharma facility, or automotive onshoring. What matters is geography and whether the work falls within our footprint. We have good visibility for 2025 and are working on 2027 and 2028 opportunities. If chips come, it would be a significant pickup, but we also see other manufacturing opportunities to fill any gaps. These projects are complex and take time to develop, so timing tends to be slow to start.

Very good. Thanks all. Appreciate you taking the questions.

Thank you. Your next question comes from Julio Romero with Sidoti and Company. Please go ahead.

Thanks. Hey. Good morning, Joe, Sharon, and Noelle. Good morning. So, I did not hear much negative on the data center side either from your prepared remarks or from the previous questions and answers. My first question is a sanity check: you are not really seeing a change in tone from either the hyperscalers or the developers doing data center work. And hand in hand with that, are you seeing any change in terms of the willingness of the general contractors or developers to accept the contractual terms Sterling typically insists on?

We are seeing a change in tone, but it is more aggressive: customers are hungrier to grow faster. Some companies structure build-outs differently to manage capital, such as lease buyback models or building shells. People confuse financial structuring with cuts to capital budgets; they are often just spreading spend differently. For us, it does not matter if a data center is speculative or built for a major cloud provider; the site work is the same. We are getting inquiries from many new players about capacity for 2026 through 2028. I read different headlines, but our conversations with customers are the opposite of contraction. We have not seen changes in contract language or project approach; everything remains steady. Smaller players trying to enter the data center space are failing, which creates more future opportunities for us. Delivery and speed remain the key differentiators, and our model is working well.

Really helpful context. Then thinking about longer-term potential for e-infrastructure margins: your guidance for the segment in 2025 implies significant operating margin expansion. You sound more excited about 2026-2027 than 2025, particularly around advanced manufacturing. How much higher can operating margins go for e-infrastructure over the next half-decade?

Margins will continue to be driven by project size and timing. If projects continue to grow larger, margins should improve because larger projects offer more opportunities for scale and productivity. There are drawings for mega data centers much larger than today's builds; if those materialize, they would present higher-margin opportunities. We do not see margins slowing in 2025 and expect further upticks in 2026 based on current visibility. Historically, we were comfortable with six months of backlog; now we have substantially more across our acquisitions, so our visibility and leverage are much greater.

Very helpful. Last one: on transportation, can you put a finer point on the dollar headwind from moving away from the low-bid heavy highway work in Texas for 2025?

On an annual basis in the Texas market, that business is roughly $75 million a year. As we reduce that, you can bound the impact at that scale. We have baked that into our guidance.

Great. Really helpful. Thanks again.

Your next question comes from Tom Bishop with BI Research. Please go ahead.

Hi. Good morning. I know it's interesting that the stock was at $198 the day before the DeepSeq announcement. What I'm hearing is that the decline was because investors thought footprints would get smaller or fewer data centers would be built. But none of that seems true, and if anything demand is intensifying. So it seems like that sell-off was ill-founded. Would you agree?

We were surprised as well. For us it does not matter which specific chips are used; we build the data centers. We had recent meetings with core customers discussing build schedules for 2027 and 2028 and capacity planning. Headlines suggested everything would stop, but our customers are not backing down. While I am not an expert on all the technical elements around DeepSeq, I believe U.S. companies and the U.S. government will not rely on China to manage critical AI infrastructure. Development and operations will remain in the U.S., which should drive U.S. companies to accelerate builds. Our customers support that view, so we are not seeing a pullback.

I agree. Thanks for clarifying.

There are no further questions at this time. I would like to turn the call over to CEO, Joe Cutillo, for closing remarks.

Thank you, Marissa. I want to thank everybody again for joining today's call. If you have any follow-up questions, you can reach out to Noelle Dilts. Her contact information is in the press release. I hope everybody has a great day.

Ladies and gentlemen, this concludes today's conference call and webcast. Thank you for your participation. You may now disconnect.