Greetings. And welcome to Sterling Infrastructure's 2023 First Quarter Earnings 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. [Operator Instructions]. 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. Thank you, you may begin.

Thank you, Paul. Good morning to everyone joining us, I am pleased to be here today to discuss our first quarter results with Joe Cutillo, Sterling's Chief Executive Officer, and Ron Ballschmiede, 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. Then we'll open the call up for questions. Unless otherwise stated all numbers discussed today will be for continued operations which excludes our late 2022 divestiture of Myers. As a reminder, there are accompanying slides on the investor 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. Please refer to Sterling's most recent 10-K 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 note that we may discuss, EBITDA, adjusted EBITDA, adjusted net income or adjusted earnings per share on this call, which are all financial measures not recognized under U.S. 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. Thank you for joining Sterling's first quarter 2023 earnings call. It's always great to be able to discuss strong results, but what I'm really proud of is what our Sterling team is doing to achieve these results. Our people are out in the field every day, using their entrepreneurial spirit to win projects, execute flawlessly and push Sterling to the next level. This is even more impressive when you consider the unprecedented supply chain and macroeconomic challenges we are facing. This team is delivered quarter after quarter and is doing a great job. In these dynamic times, it is important we stay committed to our guiding principles, the Sterling way, which reminds us of our duty to continuously improve how we protect our people, our environment, and give back to our communities while working to build America's infrastructure. These values of gains -- has again help us to deliver another record quarter. Safety is a cornerstone of how we operate. This week kicks off National Safety Week, which we believe is a great time to reflect on both our success in achieving one of the best safety records in the industry. And on what we can do to further these efforts. This is a particular importance as we head into the busy construction season. Moving to our financials, our first quarter results capture the resilience of our business model. Looking at E-Infrastructure, which is now over half of our revenues and is our fastest growing highest margin segment. We delivered 22% organic top line growth. This reflects a rapid increase in activity related to high value advanced manufacturing projects. We have announced some of the largest projects in the Company's history over the past few months. And we see more of these opportunities on the…

Thanks, Joe, and good morning. I am pleased to discuss our record first quarter performance. Let me take you through our financial highlights, starting with our backlog metrics. At the end of the quarter, our backlog totaled $1,624 billion, up $210 million from the beginning of the year. Gross margin of this backlog was 14.8%, a 50 basis point improvement over the beginning of the period. The 14.8% backlog margin represents the highest backlog margin in our history. A higher proportion of E-Infrastructure backlog and increased Transportation backlog margin drove this improvement. Unsigned awards at the end of the first quarter totaled $131 million. We finished the first quarter with combined backlog of $1.755 billion, a $65 million increase from the beginning of the year. Our gross profit in combined backlog was 14.6%, an increase of 40 basis points from the beginning of the year, another historically high watermark. Our first quarter 2023 book-to-burn ratios were 1.6 times of backlog and 1.2 times for combined backlog. Revenue for the first quarter was $404 million, up $38 million over the 2022 comparable period. As a result of our strong backlog and opportunities across each of our markets, we are confident that we will be well within our full year revenue guidance range of $1.9 billion to $2 billion. Our current quarter E-Infrastructure revenues were $206 million, a $37 million increase over the prior year period. The e-commerce -- the E-Infrastructure, organic revenue growth of 22% reflects the continuing strong demand for data centers, distribution centers, warehouses, and more recently, the new manufacturing opportunities across our expanding footprint. Transportation revenues were $111 million in current quarter, a decrease of $5 million or 4% from the 2022 period. The revenue decline was driven by a shift of transportation resources to perform additional higher-margin…

Thanks, Ron. As we look forward, we believe Sterling has a critical role in the build-out of our nation's infrastructure. Whether this is the data infrastructure that enables our increasingly connected way of life. Next-generation manufacturing facilities that are bringing production back to the U.S., the highways, bridges and airports that connect us or the homes we live in Sterling is leading the way. We expect the E-Infrastructure will remain our fastest growing, highest margin segment for the next several years. The reemergence of U.S. manufacturing through onshoring is happening faster than we anticipated, and the projects are very large. Our recently announced awards for Hyundai and Rivian exemplified the types of opportunities we are seeing. We believe that we are one of the few companies in the U.S. that can take on projects of this size and scale. This, coupled with our proven ability to deliver projects on time makes us a key trusted partner for our customers. Data center activity remains strong and the need for the data management continues to grow. Every day, more technology is integrated into our homes, businesses and infrastructure. Our customers are racing to build the capacity they need to stay ahead of the demand curve. While e-commerce distribution center activity with Amazon has slowed, other big-name retailers continue to build out their networks. We expect Amazon distribution center activity to remain muted in 2024 with a rebound in 2025. We will continue to look for acquisitions in this segment to add further capabilities or geographic coverage. In our Transportation Solutions segment, we continue to improve our margins by focusing on alternative delivery highway, aviation and rail. In addition, we are taking advantage of and looking for more opportunities that support the Building Solutions and E-Infrastructure segments outside their geographic footprint. This remains…

[Operator Instructions] Our first question is from Sean Eastman with KeyBanc. Please proceed with your question.

Hi, guys. Can you hear me?

Yes, we can now. How are you?

Nice start here, guys. And Noelle, congratulations on the new job. I think it's great. You guys got to real ringer here and at the same time, Relieve Brent and I have some competition. So really fantastic there double way. So maybe starting on the E-Infrastructure margins. Just a little more color on the lower year-on-year performance in the first quarter. I'm just wondering what's in that bridge? And how do we think about the trajectory from here?

Yes. Well, I think there's a couple of factors. The first quarter for us is always seasonably lower and a little more variable from a standpoint of the impact of weather. The other thing that, that tends to drive, Sean, is more focused on some of the smaller projects where they can get in, in between weather spurts or have short durations work on so if we look at Southeast less impacted more so in the Northeast in the winter, we tend to see a little bit. In addition, what we do during that period of time as we take advantage of the slow period and we ramp up or revamp and rebuild and do all of our stuff to our equipment so that we're ready to hit the busy season running. So that adds some cost and takes out some productivity as we have less equipment out there working and getting that ready. We see those margins coming back. It doesn't concern us. We can titrate to specific items. And we believe that will come back in the second and third quarter.

Okay. Great. So it sounds like kind of right on track with the internal plan there, which is good. And just relative to the shift in the customer base we're seeing here, where perhaps that traditional distribution, warehousing, customer bases, going to be outpaced by maybe some of the manufacturing -- larger manufacturing jobs on a go-forward. Is there any difference in the approach to project execution for those customers relative to that traditional customer base that you guys are having to adapt to?

No. It's all about speed. It doesn't matter if it's an Amazon distribution center, a Facebook data center or Hyundai battery plant. We're winning on our horsepower and our capabilities to get projects done faster. We were just at the Hyundai job two weeks ago, I think it was now, and we have got 200 of the biggest piece of equipment you've ever seen on the first 200 acres we have to have traffic control. That's how many vis-a-vis equipment, how fast they're moving. So it's fundamentally the same stuff. That's the beauty of it. We -- whether it's a data center or a distribution center or manufacturing facility it doesn't matter. We just like bigger more dirt that has to be moved. That's our specialty.

Okay. Very helpful. And then the comment about Transportation Solutions, reallocating some resources to E-Infrastructure, it's kind of interesting. I wonder if there's some sort of deeper integration happening that could improve your visibility into the overhead leverage in the model over time. Or maybe I'm overthinking that comment?

Yes. I don't know if it's as much in the overhead. The way I look at it, and this is also a little bit of our margin erosion in the first quarter that -- what we've done is we've had an opportunity to leverage some blue-chip customers that are doing projects out in the Rocky Mountain areas. And we certainly with plateau and Petillo, don't have capabilities, but our RLW business does all of the Rocky Mountains continuously. So we've leveraged those resources to do data center up there and a manufacturing facility, and it's worked out really well. Now their margins are not quite as high as we would get out of plateau and Petillo just because of the efficiency those guys have and the horsepower they have, they have a little bit smaller equipment on the Rocky Mountains. But we'll continue to look at that. And the way we think of it is yellow -- a piece of yellow iron is a piece of yellow iron, what's the best return on capital we can get out of that piece of equipment. In the private sector is traditionally always been higher margins than the public sector. So ideally, if we could continue to shift a little more of those resources over there, our total margin goes up as a company and our retirement on capital continues to go up.

Okay. Interesting. And just one last one for me, a little higher level. I mean how would you frame the operating environment or operating conditions as we head into this year's busy construction season versus last year just relative to supply chain, equipment and material deliveries, pricing being kind of commensurate with the cost environment. Maybe just help us contrast where we're at this year versus last year from that perspective.

I think on a positive front, availability has become better as a general statement. Fuel has somewhat stabilized, though the stocks that are going up this summer again. Pipe lead times are still extremely long. We're still seeing increases, the one dichotomy or challenge we have is concrete prices are still going up is the builders are putting more and more pressure on price concessions to the supply chain on it. So that's a little bit of a disconnect on what you would normally think. Wood is stabilized and has come down, but we don't use a ton of wood. Aggregate in general is still up. But we're at least able to get materials right now. Equipment availability is out there again. We've seen that over the last quarter. The downside of that, it's about 30% more expensive to buy the same piece of equipment this year as it was 18 months ago. So we'll still have what I'll call the productivity challenges in the E-Infrastructure until we can get the material sequencing right. There's some redundant work that has to take place there. A little bit of challenge with concrete on the residential side. The rest of the stuff, I would say that has stabilized and is on track to not cause significant problems for the year.

Thanks a lot Joe. I’ll turn it over there.

Thank you. Our next question is from Brent Thielman with D.A. Davidson. Please proceed with your question.

Good morning, everybody. Joe, maybe just -- it sounds like March, April activity just with respect to slabs is getting better? What's the view you're getting from your homebuilder customers at this point? I mean, does this effectively kind of call the bottom? Or maybe just some more color around that.

Yes. I would say our customers continue to be more bullish, much more bullish than we are. We've been pretty conservative on our forecast numbers and outlooks. They remain very bullish. I think they're seeing a turn some data that just came out this morning, the percentages of cancellations. If you remember last year, they were kind of mid- to high single digits as a normal run rate, we'll call it, and they went up to 30% on the cancellation rates, and they're back down under double digits again, which is a good sign that people are buying houses and they're sticking with the contracts. They're seeing a pickup in demand and frankly, they're -- again, they're much more bullish than we've been. We saw that happen. January and February were very slow, with the acceptance of Houston. Houston has continued to grow, not stop. March kicked down in Dallas. In late March, we saw Phoenix come on in April and the outlook for May looked like that trend is continuing forward. So these guys are back to build homes and they're running hard.

And so Joe, even in the face of some of these inflationary headwinds, that -- it sounds like that mix is going to work back in your favor in the coming quarters hopefully, benefits Building Solutions margins at the same time. Is that fair?

Yes. Well, it certainly depends on the rate of increases. Multifamily still is strong. But theoretically, you're absolutely correct. Is the mix shift goes back to a higher percentage of residential, there's a higher percentage of commercial? That commercial business has always been much lower margins than the residential side. So yes, that's correct. We will pick up some of that margin as we continue through the year. And if we can prevent the June concrete increases, which I say we can't do anything for the tail on the dog. But if they don't go through because the market softening overall for raw materials, that would help us tremendously.

Okay. Okay. And then, Joe, maybe a little higher level. I mean, look at the E-Infrastructure business, obviously, no slowing in momentum there. I guess thinking across Building Solutions and E-Infrastructure there's obviously you have some concerns about out there about the non-residential environment tightening lending. I'd just like to get your perspective on it, how does that play into your business? Where do you see exposures or potential risk?

It allowed us to, a lot of the stuff that I think is going to get hit the most are what I'll call those $1 million to $3 million type projects that we use as fill-in work or will only do for specific customers when they ask us I think as you're talking about some of the commercial stuff with everybody's saying it's going to slow down. Those tend to be very small projects. We -- I've got to tell you, we are not seeing a slowdown across the board and to put it in perspective, one manufacturing plant could be 30 or 40 of these small projects and equivalent value in size. So we're continuing to stay focused on that. We think that there's going to be a lot more coming on the manufacturing front, not only from further battery plants, obviously, the EV plants but we have yet to see in our footprint at least the release of the first chip plant, and there's several of those stated up through the Northeast. So we're staying close to that stuff. And again, we think there's more upside opportunity out there than potential risk for us over the next -- and that's not just this year. That's over the next three-plus years.

Yes. And Joe, I mean, I heard a lot about manufacturing across other companies, too. You guys are obviously tied pretty close to this stuff. Any context in terms of the prospect pipeline for the next 12-plus months around manufacturing, in particular, maybe relative to what you've seen over the last few years in that business.

Well, I think it's kind of interesting. Our customer for the battery plant has already asked us to go to Mexico and Canada, which we've said no, we don't speak Spanish, and we don't have passports to get over the Canadian border. But they certainly have a lot of activities going on. And we're -- it's early in some of the big projects because they're working on state funding and those sort of things. But the Southeast seems to be the hotspot right now for this stuff to go into. There seems to be much more incentives from the states to pull in these manufacturing plants. The Northeast is a little bit behind, but we think we'll eventually figure this out and pick up.

Okay. Just last one. I mean really strong showing on cash flow again, Ron, great work. I got any pull forward here this quarter? Or this is just true blue cash flow? What we should expect from Sterling?

Yes. I think certainly, cash flow is always lumpy. We've done a nice job at integrating our acquisitions, including takes a while to get the cash flow working. But we think it will be strong throughout the year. Certainly, we used $25 million to pay down some debt. We're attempting to control our interest expense to be within our range and our guidance. So not yet it has today, probably this week, another 25 bps coming at us. So we'll continue to kind of balance that of using our cash flow to fund that, if necessary. And otherwise, we'll continue to look at tuck-in acquisitions or something better if it were to come along. So kind of same story with a little bit of great cash flow helped us. We'd like to keep it around, get more than $200 million, probably too much less than $2 million, I don't like, but I don't never like -- I always like more cash. But anyway, that will be kind of our measuring point.

And Brent, just to follow up a little bit more on the residential on the trending and that sort of stuff. I think what's important to think about is for the quarter, we ended up fundamentally flat with prior year. And if you were to look at the start of January and the first of February, it's really amazing that we were flat for the year. So the trajectory really picked up in late February, March, and then the accumulation of the growth in Houston really was kind of the icing on the cake for that. And we're seeing exactly what we told people would happen, which is weren't sure if we could grow in a down market, and we never thought the market would go down 30%. We're hoping to go down 10% to 15%. But we're staying relatively flat, might even show some slight growth. But we will continue to grossly outperform the U.S. housing market. And we're picking up share as well, which is nice for long-term kind of thoughts.

Okay. Thanks, Ron. Congrats again. Great quarter.

Our next question is from Brian Russo with Sidoti & Company. Please proceed with your question.

Hi, good morning. Just to follow up on the E-Infrastructure. As Sterling kind of migrates and focuses more on the more complex, larger projects. I suppose you have even more competitive advantages. And thus, you should see overall project margins improve relative to maybe what we saw with the smaller projects a year ago?

Yes. What I would say is that there is a correlation to project size and margin, right? Certainly, the larger the project, the better opportunity we have to get it. But the more productive we can be on a large project because again, the horsepower and capabilities we have, so there is a correlation. So the thing that we always say is most important is it's less about what again, whether it's a data center a distribution center or manufacturing site. It's more about the number of yards, cubic yards that have to be moved and the amount of rock that needs to be blasted. Those are the two things we really like. And we have what I'll call a specialty action capability that 99% of the people have they don't have.

And I would add, the pace of getting it done to the customer is the ultimate critical value being delivered.

Okay. And I thought your -- the commentary in the press release and on the call regarding reallocating the Transportation Solution resources to higher margin infrastructure work in the Rocky Mountains. And I guess this kind of plays into your whole kind of strategic focus. Clearly, you've got the East Coast covered, but -- and there's a lot of activity to keep you busy, but there's quite a lot of manufacturing in the chip space and even in the auto industry occurring elsewhere in the country. And I'm curious, how -- or do you want to expand your E-Infrastructure footprint there rather than just reallocating Transportation Solutions resources. I mean is there a balance? Or is there a kind of a growth strategy there that you're going to pursue?

I think if we found the right player in a large enough market, we certainly would go after and look at making another acquisition. I think what's really nice that we're able to do is these projects we're talking about are in Idaho. Not a huge market, not going to have a plateau or Petillo up there. But is a market that we play in from a transportation side. So it gives us an opportunity to leverage that in a smaller secondary third primary market, right? Now if there is something, I don't know, pick another area that had a very large footprint very high growth over a long period of time, probably not California, but some other areas, we would certainly entertain and look at potentially making an acquisition or buying someone.

One thing I would add that I think is also interesting about this is it's not like Transportation Solutions is doing this in isolation. You're seeing some nice collaboration across the group with plateau sharing best practices and really helping to get these projects off and on [indiscernible].

I think it's a good point. So the data center team from plateau in the RLW team, both met and worked with the client on the project upfront. They help put together the bid package in the project schedules. And they even will come out once a month from a project management standpoint and just oversee the job to make sure everything is on track, and we're delivering the same level of quality and service that we deliver on the East Coast. And so far, it's gone really, really well and it's very encouraging for us. But yes, they're not on an item.

Okay. Great. And then just on backlog. Obviously, strong expanding margins there. Is there any more color you could provide with the understanding that the E-Infrastructure projects are much quicker burn than transportation. But it seems as if the mix of the E-Infrastructure continues to grow relative to the overall backlog. Just wondering if you could add any more insight into that or how we should be looking at the backlog over the next 12 months?

Yes, I think the good news is we're seeing margin improvements across the board of the backlog. So our transportation margins is the infrastructure bill funding continues to come out. We're seeing very nice projects that fit our expertise and scope and more on the alternative delivery, which enables us to be even more selective in the transportation space. We think we're in the second quarter and third quarter, we're going to see a nice barrage of aviation work that comes out for bid. That I think we're positioned well on several of those jobs would be our alternative delivery for us. And then obviously, you have what I call the portfolio shift the E-Infrastructure margins will be higher than Transportation. So the faster we build that backlog or the higher percentage of our total backlog ratio that is that moves the margin as well. We still think we have a couple of hundred basis points in Transportation to take out. But we are now nicely positioned in double-digit margins with that and continue to make great progress there.

Yes. And I would add that our average project size with some of these large jobs rolling in and the infrastructure side are obviously building up, which means duration goes up. So if you ask that question, we acquired both businesses with the kind of average backlog duration was well less than six months, probably somewhere between 4% and 6%, depending on which one we're talking about. Today, they're probably between six and eight months. So some of that is duration also is driving at least these 100 million-plus projects are really -- it's good work they last longer and at a greater margin. So it's a good combination.

Okay, great. Thank you very much.

There are no further questions at this time. I'd like to hand the floor back over to Joe Cutillo for any closing comments.

Thank you, Paul. 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 on our press release. Thanks, everybody, and have a great day.

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