Sterling Infrastructure Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 7, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Sterling Infrastructure Third Quarter 2023 Conference Call and Webcast. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Your host, Noelle Dilts, Vice President of Investor Relations and Corporate Strategy.

Operator

Thank you. You may begin.

Speaker 1

Thank you, Joanna. Good morning to everyone joining us, and welcome to Sterling Infrastructure's 2023 Third Quarter Earnings Conference Call and Webcast. I'm pleased to be here today to discuss our results with Joe Cottillo, Sterling's Chief Executive Officer and Ron Walchmidtty, Sterling's Chief Financial Officer. Joe will open the call with an overview of the company and its performance in the quarter. Ron will follow that up with a detailed discussion of the financial results, After which, Joe will provide a market and full year outlook.

Speaker 1

Then we will open the call up for questions. As a reminder, there are accompanying slides on the Relations section of our website. Before turning the call over to Joe, I will read the Safe Harbor statement. Some discussions made today may include forward looking statements. Actual results could differ materially from the statements made today.

Speaker 1

Please refer to Sterling's most The company assumes no obligation to update forward looking statements as a result of new information, future events or otherwise. The financial information herein and discussions are related to the company's continuing operations. Please also note that management may reference EBITDA, adjusted EBITDA, adjusted net income or adjusted earnings per share on the call, which all are financial measures not recognized under U. S. As required by SEC rules and regulations, these non GAAP financial measures are reconciled to their most comparable GAAP financial measures

Speaker 2

Good morning, everyone, and thank you for joining Sterling's Q3 2023 earnings call. I'd like to thank our Sterling team for another record quarter. Their hard work and dedication has allowed us to deliver 11 quarters Our diluted earnings per share for the 3rd quarter We're $1.26 This represents a substantial 25% increase compared to our same period In 2022 and surpassed our internal projections, revenue growth in the quarter was 13.7% Or 11.7 percent on an organic basis. Demand trends across our key markets remain strong. The best reflection of this is our backlog, which is up 42% from the beginning of the year and totaled over $2,000,000,000 Our cash flow generation remains excellent.

Speaker 2

Operating cash flow in the quarter was $150,000,000 Bringing our total cash position to $409,000,000 at the end of the quarter. Our focus remains on deploying our cash into acquisitions They complement our current offerings and enhance our competitive position. We have intensified our targeting efforts And remain extremely active on this front. As we continue to expand our business both organically and through strategic acquisitions, We remain unwavering in our adherence to our guiding principles, the Sterling Way. These principles underscore our commitment to take care of our people, our environment, our investors And our communities, while we work to build America's infrastructure.

Speaker 2

With a strong third quarter performance, Year to date results, backlog position and visibility into the Q4, we are raising our full year guidance. The midpoint of our increased earnings per share guidance would represent a 32% growth over 2022. Moving to our segments. E Infrastructure Solutions backlog grew 48% from the beginning of the year To a new record of $891,000,000 We continue to see a strong pipeline of work related to data centers And on shoring of manufacturing, we currently have line of sight in the several large projects slated to bid In 2024 2025 in both of these markets. In the quarter, We did see a slight decline in eInfrastructure Solutions revenue and margins relative to prior year.

Speaker 2

This was driven by timing of several new project starts and the continued softness in e commerce distribution centers In Small Warehouses in the Northeast. Our Southeastern operations continue to show strong growth in margin expansion As we execute on large manufacturing and data center projects, the early start of large manufacturing projects in the Southeast Has allowed the region to more than offset the softness in e commerce distribution in small warehouses. This has not yet been the case in the Northeast, where we are just seeing the 1st large manufacturing opportunities emerge. In Transportation Solutions, revenue increased nearly 23% year over year and 28% sequentially. We are seeing very strong demand and margin growth across our entire geographic footprint.

Speaker 2

Awards in the quarter $472,000,000 drove backlog growth of 43% from the beginning of the year. Though the majority of backlog growth year to date is attributable to the highway market, aviation bid activity has picked up significantly And we expect to hear final decisions on several projects in the 4th quarter. Transportation Solutions margin Operating margins reached a new high of 7.5%. We believe we have an opportunity to continue to increase margins As long as the market remains robust, this is supported by the improving margin profile in our backlog. In Building Solutions, we grew revenue 41% or 29% on an organic basis.

Speaker 2

On the residential side, we continued to significantly outperform the national market. Our revenue growth was 52% compared to an average increase of 7% for single family home starts nationally In the Q3, we remain confident that the dynamics in our markets and our strong customer relationships We'll drive sustained outperformance. Continued strong demand in multifamily and attractive margin opportunities Enabled us to grow our commercial revenues by nearly 23%. Building Solutions operating profit margins remained strong at 11.3%, driving income growth of 38%. With that, I'd like to turn it over to Rod I'll give you more details on the quarter.

Speaker 2

Rod?

Speaker 3

Thanks, Joe, and good morning. I am pleased to discuss our 3rd quarter performance. Let me take you through our financial highlights starting with our backlog metrics. At the end of the quarter, our backlog totaled a record $2,010,000,000 an increase of $596,000,000 from the beginning of the year. The gross margin of this backlog was 15.2%, a 90 basis point improvement from the beginning of the year.

Speaker 3

Higher transportation and e infrastructure backlog Margins drove this improvement. Unsigned awards at the end of the 3rd quarter totaled $375,000,000 Substantially all of our unsigned awards relate to our Transportation Solutions segment. We expect to have the majority of unsigned awards We finished the quarter with combined backlog of $2,386,000,000 A $696,000,000 increase from the beginning of the year. Our gross margin and combined backlog was 14.9%, An increase of 70 basis points from the beginning of the year. The 14.9% gross margin is the highest level in Sterling's history.

Speaker 3

Our year to date backlog book to burn ratio was very strong 1.5 times For both backlog and combined backlog, revenue for the current quarter was $560,000,000 up $67,000,000 over the 2022 quarter. As a result of our strong backlog and our opportunities across each of our markets, Our updated increased full year revenue guidance is now between $1,990,000,000 $2,050,000,000 Consolidated gross profit was $92,000,000 in the quarter, an increase of $12,000,000 over the prior year period. Gross margins increased to 16.4 percent or 30 basis points over the prior year quarter. General and administrative expense was $25,000,000 for the quarter, an increase of $3,000,000 when compared to the same quarter of the prior year. The increase was driven by general inflation, increased revenue related incremental costs and G and A related to the late 2022 Arizona Slab Acquisition.

Speaker 3

We continue to expect our full year G and A expense to be approximately 5% of revenues. Operating income for the quarter was $57,000,000 an increase from $49,000,000 or 15% over the prior year quarter. Our current quarter operating margin increased to 10.2% from 10% in the Q3 of 2022. Our effective income tax rate for the Q3 was 25.7%. Our tax rate benefited from increased tax deductions related to stock based compensation.

Speaker 3

We continue to expect our full year 2023 effective income tax rate to be approximately 27%. The net effect of all these items resulted in record 3rd quarter net income of $39,400,000 or $1.26 per diluted share Compared to $30,700,000 or $1.01 per diluted share in the Q3 of 2022. With our year to date 2023 strong performance and the strength of each of our key markets, We have increased our full year 2023 net income guidance to $128,000,000 to $130,000,000 $132,000,000 Our EPS guide is now $4.10 to $4.23 per diluted share from our prior EPS range of $4 to $4.20 per diluted share. EBITDA for the quarter totaled $71,200,000 an increase of 16% over the prior year quarter. EBITDA margins improved to 12.7 percent, up from 12.5% in the prior year quarter.

Speaker 3

Our updated 2023 guidance for EBITDA is now $252,000,000 to $260,000,000 for the year. Our consolidated cash balance increased by $228,000,000 from the beginning of the year to $409,000,000 The end of the Q3, our cash balance exceeds our total debt of $358,000,000 by $51,000,000 Cash flow from operating activities for the 9 months ended September 30, 23 was a very strong $331,000,000 compared to $138,000,000 As well as favorable improvements in our working capital. Cash used in investing activities was $25,600,000 for the 9 months ended December 30, 23 compared to $47,800,000 for the 2022 period. The decrease was driven by the timing of net capital expenditures offset by the Q1 receipt of $14,000,000 from the late 2022 Meyers divestiture. We expect full year capital expenditures to be $50,000,000 to $55,000,000 reflecting the strong organic growth of our E Infrastructure Solutions Cash flow from financing activities was an $81,000,000 cash outflow for the 9 months ended September 30, 2023, Primarily from debt repayments of $77,000,000 The debt reductions include voluntary early debt payments totaling $53,000,000 Considering the diversity and strength of our portfolio businesses, our strong liquidity position In our very comfortable EBITDA leverage, we are well prepared to take advantage of additional opportunities in 2023 beyond.

Speaker 3

Now, I'll turn the call over to Joe.

Speaker 2

Thanks, Ron. As we sit here today, There appears to be no end in sight to the growing need to build and revitalize America's infrastructure. We play a critical role in building the manufacturing plants that are reshoring production to the U. S. The data infrastructure that enables today's way of life, the highways, the bridges and the airports that connect us In the homes we live in.

Speaker 2

In eInfrastructure Solutions, we continue to see a robust pipeline of large manufacturing projects tied to electric vehicles, batteries, semiconductors And Pharma, both in our current footprint and other potential geographies. We anticipate continued strength in data centers As current capacity represents only a fraction of what will be needed to support artificial intelligence and other emerging technologies. We believe that the e commerce and small warehouse markets will remain soft through 2024, but pick back up in 2025. These dynamics support strong growth opportunities over a multi year period for eInfrastructure Solutions. In Transportation Solutions, we think we're now in a market environment where we can accelerate growth relative to historical levels, As long as margins remain at current levels or higher.

Speaker 2

In Building Solutions, We continue to see strong residential activity in our markets and our customers remain bullish as we enter into 2024. In addition, multifamily starts remain robust and margin opportunities strong. With our very healthy cash flow and balance sheet, we continue to look hard at acquisitions in the infrastructure and building solutions. We're proud of how far we've come, but even more excited about the opportunities ahead of us. We believe that the build out of the U.

Speaker 2

S. Infrastructure will remain strong over the next 3 to 5 years. With our visibility into the Q4 and our record backlog, we are confident in our increased guidance and are positioned for an even better 2024. With that, I'd like to turn it over for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. First question comes from Brent Thielman at D. A. Davidson.

Operator

Please go ahead.

Speaker 4

Hey, thanks. Good morning, Joe, Ron, Noelle.

Speaker 2

Good morning, Brent.

Speaker 4

I guess first question, Joe, you talked about it A bit in the closing comments there, but this sort of drag from the e commerce projects, some of the stuffs in the Northeast, You mentioned that it will carry through 2024. How should we think about that impacting your ability to get the e infrastructure business Still to those kind of long term compound growth rates you've talked about for the business, I guess, the 9% to 12%.

Speaker 2

Yes. We're still Brent, we're still confident Let me explain a little more detail what happened in the Q2 because there's really a couple parts of that. On the positive side, We had great weather in the Q2. Teams are running hard and we actually finished some projects that would have been anticipated to Finish in the Q3 a little early in Q2. So our Q2 numbers were fantastic.

Speaker 2

What we tried to do Is get other jobs kicked off earlier in Q3 and we had a combination of 1, that not happening and 2, jobs that had actually pushed out To start later, so you got a little bit of a double whammy just in the Northeast that that happened. So that's where the lion's share of The revenue drop was actually all of the revenue drop was there. And as a result, we got a little bit of an impact on Indirect absorption and those sort of things relative to our normal run rates. As we look forward, it's not that the The Commerce Distribution Centers, I mean, definitely Amazon has slowed down. We normally have 5 Amazons going at any given time.

Speaker 2

We've got one Right now, and we continue to we think that's not going to pick up according to Amazon till 2025. The small warehouse activity is really the private side, Which is a little bigger piece of the market up in the Northeast and the Southeast and that softened with some of the financing. However, What we've seen, the biggest difference is when you look at the Southeast, we originally anticipated manufacturing jobs not kicking off till 2024, 2025. The good news is in the Southeast, those jobs have kicked off quicker. In the Northeast, those jobs are in the early stages of being launched and released.

Speaker 2

The difference between us growing at high single digits to what I'll call strong double digits is really literally landing 1 or 2 of those jobs. I will tell you that we've got line of sight to 3 to 5 of those jobs as we sit here today going into 2024 and 2025 And we feel confident we'll land our fair share of those and we'll be in good shape once those big projects kick in To the Northeast. The Southeast continues to grow at kind of strong rates And it's really a lag of the big projects in the Northeast.

Speaker 4

Okay. That's helpful, Joe. And yes, I guess The large project that you mentioned planned to bid 24, 25, are these as big as the record booking you recently announced? Looking maybe for a little more context relative to that or just about the bookings you've seen out for the year today, Joe?

Speaker 2

Yes. These projects Our in total multibillion dollar projects just like the ones we're doing now. Obviously, they vary in size to some degree on our scope, but these are large projects, Brent. The other thing to keep in mind Our backlog position right now is up 40 something percent over beginning of the year. We're in a very good, very strong backlog position.

Speaker 2

So I would tell you, don't let a quarter or 2 of dip Kind of take over the narrative of what the real growth and real opportunity is out there and where we're at with it.

Speaker 4

Yes, understood. And then on Building Solutions, I mean, pretty solid growth here considering the environment. You were more optimistic as the year sort of developed around that business, but certainly things have picked up. But I guess with mortgage rates continuing to climb, Is that having any impact on the KPIs that you sort of track internally slab growth rates, etcetera? Just any measure you'd point to that Yes.

Speaker 4

No. There's no positivity there in light of that.

Speaker 2

Yes. I mean everything it's what I would reflect back and say the strategy we put together A couple of years ago, for the downturn, it's really paying off. As we're able to not only Take advantage of growing markets, but we'll continue to grow market share in the Houston and Phoenix market offset those declines in total, but we're seeing both of those markets remain, including Dallas, they all remain strong. It's working. We're outperforming the general market by a factor of a lot, right?

Speaker 2

So That's been very good. The only thing we've seen that I think is encouraging to us is we have definitely seen the Size of slabs decrease. So what that means is we have to do more slabs to get the same revenue. The nice thing is, if we look at the margins on those slabs versus the older larger slabs, we've been able to hang in there on the margin side. Okay.

Speaker 2

Commercial. Yes. Commercial, yes, on the commercial, I I always forget to talk about commercial because it's normally such a small piece of our business, but we've seen very nice margin growth And very nice opportunities there. If you remember, a couple of years ago, we shrunk that commercial business down to, Yes, I'll call it a small skeleton of what it is today. But the margins remain strong and the activity on multifamily remains very strong in the markets we're at, And that was up 20 something percent.

Speaker 4

Got it. Just the last one that I mean the huge cash generation again this quarter year to date, it looks like you're benefiting from Pretty large advance payments. Does that all reverse in a material way in 2024 where we see sort of cash flow more consistent with Kind of your historical conversion rates?

Speaker 3

Certainly, on a project by Project it will, although our largest project has still more than 4 quarters work to do. What obviously we expect to happen are some of these large jobs starting up with the same characteristics frankly of cash flow in this work on Just the timing of billings and collections. So I don't see I see variability which we have across the board in each of our large Contractor segments, the Transportation and Infrastructure. But I think it will stay Kind of on the favorable side for quite some time with these big projects out there. So it pretty much plateau, no pun intended, At this point in time, I don't see them coming down dramatically.

Speaker 4

Okay, great. Appreciate that, Ron. I'll pass it on.

Operator

Thank you. The next question comes from Brian Russo at Sidoti. Please go

Speaker 5

Yes. Hi, good morning.

Speaker 3

Hey, Brian. Hey,

Speaker 5

could you just remind us, I know there are some margin differences Between plateau in the Southeast and Pattillo in the Northeast, it could be union versus non union or Labor force and or just scope of work, just trying to get a sense of as The activity ramps up in the Northeast. You can still maintain the margin profile That you've gotten mostly on the hyperscale data center and reshoring down in the Southeast?

Speaker 2

Yes. Let me I'll answer some of that and let Rod jump in. Brian, we will always have As long as the project scope mix remains like it is today, we'll always have about a 4 point Lower margin in the Northeast versus Southeast. And what that has to do with is, Our customers up there because it's union want to deal with less contractors and deal with 1. So On a site development kind of apples to apples, the margins are very close, but we do a lot of concrete work, curb and gutter.

Speaker 2

We'll do actually paving a parking lot, sound walls. And in the Southeast, we've stayed away from that because the margins are significantly lower. In the Northeast, they require it. I think as we look at the infrastructure, I think what we need to think about is kind of the I'll call it normalized blended average of the 2 businesses in that segment Around 15.5% is what the number should be there. So Let's go runs a little higher, let's go a little lower and you kind of blend it out with revenue and mix and that's about where it falls.

Speaker 3

Yes. During the quarter, it was a bit exacerbated by the slower volume In the Northeast, give or take about a third of the revenues come from the Northeast and 2 thirds from the Southeast. So the Southeast continue to have Nice margin growth. At any time you drop about almost 20% of revenues in the month, which was made up by Southeast, we probably have $1,000,000 to $3,000,000 of unrecovered overhead basically now As we beat up, that will come back. As we gear up for bigger projects and some of the timing of the issues that we talked about earlier, That will come back a little bit.

Speaker 3

So the 4% is a little bit bigger in the Q3 just because of the swing And the margins, the good news is our highest margins grew. The bad news is our lowest margins declined a bit. So the math was okay.

Speaker 5

Okay. Thank you. Very helpful. And then just to switch gears on transportation. If I recall, in the second quarter, You were able to pivot some of your crews and equipment to support an e infrastructure Project in the Rocky Mountains.

Speaker 5

Just wondering given all the activity that we're seeing in that region, Are you positioned to continue to do that and just go where the margins are?

Speaker 2

Yes, I think a couple of things. One, that project has gone extremely well. It's gone so well that The general contractor that's on that job, Winneta, has pulled us into a manufacturing facility In Idaho, it's around food products. And we're actively looking at some other projects with them. They plan on doing a few more metas as well.

Speaker 2

So we will continue if the opportunities are available to reallocate those To what I'll call the e infrastructure space, whether that's data centers or manufacturing or any of those. The team has done a great job. And I think just as importantly, they're as excited about Standing into that market as they could be. They're working diligently to do that. So we hope as we go into 2024 and 2025, Not only do we see the large footprint of projects in the Southeast and starting in the Northeast, This opens up the geography for us to go even broader with those core customers.

Speaker 5

Okay, great. And then just lastly, the unsigned awards, mostly in the Transportation Solutions segment, Are those still mostly comprised of highway work or is that where we're starting to see the aviation Projects pick up in the unsigned bids?

Speaker 3

Yes. I think it's primarily Road Highway and Bridges. There are some early Smaller projects in the aviation side that are waiting for final signatures. So the larger opportunities on the aviation side are Going to fall into 20 maybe awards in this year, but the work will fall into 2024 and we expect that to happen. Nice projects out there being developed.

Speaker 5

Great. Thank you very much.

Operator

Thank you. At this time, I will now turn the call back over to Joe Cutillo for closing comments.

Speaker 2

Thank you. Thanks again everyone for joining our call today. If you have any follow-up questions or wish to Schedule a call, please feel free to contact Noelle Dilts. Her contact information can be found in our press release. I I want to thank everybody for participating and have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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Sterling Infrastructure Q3 2023
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