Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure Second Quarter 2024 Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded on Tuesday, August 6, 2024. I would now like to turn the conference call over to Noelle Dilts, Vice President, Investor Relations and Corporate Strategy. Please go ahead.

Thank you. Good morning to everyone joining us and welcome to Sterling Infrastructure's 2024 second quarter earnings conference call and webcast. I'm 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 updated 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-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 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 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'll now turn the call over to our CEO, Joe Cutillo.

Thanks, Noelle. Good morning, everyone, and thank you for joining Sterling's second quarter 2024 earnings call. Our second quarter results reflect our commitment to delivering strong bottom line growth in cash flow to our shareholders. For the quarter, we delivered EPS of $1.67, up 31% over prior year and a new second quarter record. Our continued focus on margin expansion helped drive gross profit margins to over 19%. We grew operating income 20% on revenue growth of 12% as we continue to shift our mix towards higher margin services. We are seeing strong tailwinds across our markets and bidding activity remains very solid. Backlog at the end of the quarter totaled $2.1 billion, an increase of 21% over prior year and a 2% increase from the beginning of the year. Combined backlog, which reflects a more comprehensive view of our awards, was 2.45 billion, a 2.2% increase from the prior year. Our book to burn ratio for combined backlog was above 1 for the quarter and we continue to have very good visibility into the opportunity pipeline ahead. Our outlook is even better than what is captured in our backlog metrics. As our work shifts towards large multi-phase projects in both Transportation and E-Infrastructure, we have greater visibility into future phases of work. Though we are not guaranteed to win these future phases, we have historically had a high probability of doing so. This high probability work pipeline now totals over $0.5 billion. We had another great cash generation quarter with operating cash flow of 121 million. Our balance sheet is in great shape and our net cash position is now $211 million. We are actively seeking acquisitions that will complement our strong platform and accelerate growth. The Sterling way is our commitment to take care of our people, our…

Thanks, Joe, and good morning. I'd like to take you through some of the details of our financial results, beginning with our backlog metrics. Our second quarter backlog totaled $2.1 billion, a 20.9% increase over the year-ago period. The gross margin of this backlog was 16%, a 50 basis point improvement from the same quarter last year. A higher level of E-Infrastructure backlog and an increase of both the amount of transportation backlog and its backlog margin drove this improvement. Unsigned awards totaled $347.2 million in the quarter. We closed the quarter with combined backlog of $2.4 billion, a 2.2% increase from the prior year second quarter and up modestly over the first quarter of 2024 to a new record. Second quarter 2024 book-to-burn ratios were 0.49x for backlog and 1.05x for combined backlog. Award timing is inherently lumpy in our business and is best viewed over a multi-quarter period. Year-to-date book-to-burn ratios were 1.04x for backlog and 1.09x for combined backlog. Turning to our second quarter income statement, revenue was $582.8 million, an increase of 11.6% over the prior year quarter. Organic revenue growth was 8.4%. Current quarter consolidated gross profit was $112.7 million, an increase of 22.2% over the 2023 period. Gross margin increased to 19.3%, a 160 basis point improvement over the second quarter of 2023. This margin increase primarily reflects improvements in E-Infrastructure and transportation. General and administrative expense was 4.8% of revenue in the quarter. G&A expenses increased in the quarter by $3.8 million to $27.9 million. The increase reflects the PPG acquisition, general inflation and growth. Operating income for the second quarter was $72.7 million, a 20.7% increase over the prior year quarter. Our operating margins increased 94 basis points to 12.5%. Our effective income tax rate for the second quarter was 24.8%. We…

Thanks, Sharon. We see years of opportunity ahead associated with the revitalization of America's infrastructure. Sterling is playing a critical role in building the data infrastructure that enables today's way of life, the manufacturing production coming back to the US, the highways, the bridges and the airports that connect us and the homes we live in. In E-Infrastructure Solutions, we anticipate continued strength in data centers as current capacity represents only a fraction of what is needed to support artificial intelligence and other emerging technologies. On the manufacturing front, we anticipate that in the remainder of 2024 and 2025, we will see a fairly steady pace of mid to large size onshoring-related projects. As we look out to 2026 and 2027, there's a very big pool of megaprojects on the horizon this would include chip plants. The size and duration of these projects is staggered and will absorb a significant amount of the industry capacity. Given the complexity involved with developing these projects, we believe it will take some time before awards start to flow. We expect e-commerce and small warehouse markets will remain soft in 2024, but are encouraged by the preliminary activity we are seeing in these markets for 2025. These dynamics support strong profitability growth opportunities over a multi-year period for E-Infrastructure. For 2024, we expect to deliver operating profit growth approaching 20%. In Transportation Solutions, we are now halfway through the current federal funding cycle, have built over two years of backlog and continue to see a very robust level of bid activity. We believe we are now in a market environment where we can sustain elevated growth relative to historical levels as long as margins remain at current levels or higher. We are very confident that our transportation business will deliver strong growth and margin…

Thank you. [Operator Instructions]. Your first question comes from the line of Brent Thielman from Davidson. Your line is now open. Please ask your question.

Hi, thanks. Good morning. Great quarter. Joe I understand the shift you're making in the infrastructure obviously driving significant margins here. I guess my question is that at what point do those projects and commercial warehouse start to make sense for you to pursue again, even if they are potentially diluted to the margins you're putting up today?

Yes. The shift is what I'll call somewhat of a temporary shift is the margins have declined in those commercial and warehouse projects. When they get back so there's a combination of these Brent. There's obviously less projects coming out, those projects are very dependent on interest rates. So we saw that starting to slow down from an activity standpoint, a pricing standpoint, second quarter of last year and just continue up until now. When those margins get back to close or historical levels with the improved margins we have in the other areas we'll start going back after those. And I'll tell you we're encouraged just with the conversations around interest rates dropping and with some of the economic news it certainly looks like it's much more probable and maybe better than greater reductions than we anticipated. We've started seeing just over the last 30 days projects that we've known have been out there coming back and having conversations about pricing and timing and those sort of things. So we think realistically kind of first quarter next year, we'll start seeing those projects coming back. We won't go from zero to 100 where we were overnight, but we're encouraged with what we're seeing and that's kind of what we anticipate.

Yes, that's encouraging. Helpful, Joe. As a follow-up, this $500 million pipeline framework associated with kind of these multi-phase projects, Joe, if you looked at that over time, is there a way for us to think about how quickly that converts into a signed contract? Just kind of wondering as you've looked at it, how does that correspond with the reported backlog over time?

Yes, I think here's the good and the confusing part of this. Strategically, we have been moving towards this over time. Our infrastructure business the way the contracts are structured as you know, Brent is they have multiple phases. So we know that the total project could be multiple hundred millions of dollars, but the first phase release might be $30 million, $40 million, $50 million. And to give you an example on a data center job it's not uncommon for the initial piece to be around $30 million and then that grows well over $100 million through the course of the project. Why we like it just so everybody understands is we bid and complete a phase and then when the next phase comes out we bid and complete that. So if there's inflation spikes or any changes in material availability or market conditions we're locked into a very short period of time and having the ability to change that for E-Infrastructure. On Transportation, these progressive design build projects are even a little more confusing up front. The design phase of a multi-hundred million dollar project might be a $1 million to $2 million and that's what we'll put in. Once the design is complete we price the first phase. So let's say if it's a $200 million project, $30 or $40 million maybe 50 comes into the first phase. We execute that and another 50 comes in. So the timing is hard to give you an exact amount of time. What ends up happening is the backlog becomes more stable in the sense where we burn it down to zero, we put another $50 million in. We burn that 50. We put another $50 million in. So it doesn't look like we've got this big win. If we put $200 million in day one, everybody would be really excited about the backlog increase. We know we have the 200 million, but it shows up as 1.5 million or may show up. We talk about not only why we raise guidance, but as we talk about the tailwinds and the strengths that we're seeing in the markets we certainly have more visibility into future work than we ever had and I will tell you 18 months ago that $500 million number was probably $100 million. I don't have the exact number, but it's grown significantly and I think over the next 6 to 12 months that will grow even further.

Okay, that's great. Maybe just the last one, transportation I know can kind of be inherently a lumpy booking business, I guess, as you look at the schedules over the regions that you've predominantly served through the rest of the year. There are some pretty good opportunities for additions here to the backlog in the second half?

Yes, I will tell you, I've approved for us to bid more work in the last 30 days than we did in the whole first six months prior to that. So just about six months for transportation. There's a lot of jobs, very good jobs coming out. We're very encouraged about not only where our backlog is today, but where that's going. And I think one of the things we forget as we talk about kind of growth and growing things, transportation is a perfect example and we'll see the same thing with the infrastructure where we said all along we had the rain on the growth of transportation at kind of 3% to 5% until we hit a margin hurdle. We hit that margin hurdle and we grew over 50% this quarter. We can turn on the growth rates very, very quickly. I think people grossly underestimate how fast we can grow the business. When the margins are right we will grow the business like heck. Transportation's there, we're going to continue growing that and take full advantage of the market. The infrastructure will be there again we think early next year and we will accelerate the heck out of that when that time comes.

We'll get back in queue. Sorry go ahead, Noelle.

The backlog for transportation is when you look at the formal backlog or the signed backlog, the awards look lower in the quarter, but recall we moved a lot of work from unsigned backlog into signed backlog in the first quarter and we're sort of rebuilding that pipeline. So really the better metric to look at for this quarter would be combined backlog because it's really more reflective of the core demand for that business.

That's helpful. Thanks, Noelle.

Thanks, Brent.

Your next question comes from the line of Adam Thalhimer from Thompson Davis. Your line is now open. Please ask your question.

Hi. Good morning, guys. Great quarter.

Thanks, Adam.

Joe, do you see any recovery possible in the Northeast next year?

Yes I think if you look at if you remember back the margin profile of our Northeast business is lower than our Southeast business, a combination of things. They do more broader work on these jobs being just sound walls, curb and gutter and they tend to do more smaller what we call smaller projects $15 million-type projects. And a lot of those are really dependent on these interest rates. We saw the Northeast slow down the fastest, earliest last year, but just like the Southeast there's projects out there we're seeing them and as a result we think they will be coming out as interest rates start to fall, but the other thing we did with the Northeast that's really getting ready to start paying dividends is we've moved them further down to the Mid-Atlantic. If you recall we've been asked for several years to go into the Mid-Atlantic. We haven't had the capacity for those size projects. Now that we've got freed up some capacity we will expand it down to the Mid-Atlantic. We've won a couple very nice jobs subsequent to the end of the quarter that are data centers and one's going to be a manufacturing. It's going to offset that small business and that small business will come back next year.

Okay. And then can you just touch on the data centers that you're seeing today? Are they larger than the data centers of 12 months, 18 months, 24 months ago?

Yes, the trend continues. You have to think of markets. Historically, if you thought of Virginia, Dallas was another one, very strong data center markets, but they were one building, small footprints. Those markets are still building. Okay. So when we do a data center in Virginia, it's not a multi-hundred million dollar job. It's more like a $40 million job or a $20 million job, depending on the particular one. Outside of that, the driving factors to this are power and water, which is driving these data centers to go further out to rural areas. And when they get out to rural areas, they find that they can buy larger plots of land and can build data campuses. So instead of a single data center, the stuff we generally are working on have anywhere from three to five data centers on it. I will tell you, there are some really crazy concepts out there for some really big mega projects that would be 5 to 10 times bigger than any data center we've done that we're paying close attention to that probably won't happen for another year or so, but the size and scope keeps getting bigger. Yes. And that's for us, we couldn't ask for anything better.

That's what I was thinking. Okay. And then in transportation, I'm trying to get a sense for what do you think your revenue capacity is in transportation? And where do you think the margins could ultimately go?

Yes, we don't have unlimited capacity in transportation. I would tell you what we do is we still have capacity, we still have room to grow and we are still raising our pricing on our bids. And knock on wood, so far we've still been winning. So I still think there's 100 to 200 basis points of margin expansion over the next probably 12 to 24 months. And we will figure out how to add capacity if the margins are right. That's easy for us to do. We don't like adding capacity when margins aren't right. So we'll figure it out. We have yet to turn down work when we have really good margins on it in any of our segments.

Okay. And then just lastly, can you update us on capital allocation? Like you're seeing anything interesting on the M&A side?

Yes, we've looked at people do how many deals we looked at it is probably shocking. We look at a lot. There's a lot of businesses for sale. That's a good news. There's not as many buyers as we've seen in the past. So that's also good news. But there's not a lot of great businesses out there right now. We're looking hard. We're optimistic that we should get something done here this year. Maybe multiple would be nice. But we've got enough on the horizon that I think something will come in before year end. We seem to always push them to year end, which is to me, my least favorite time to do it. But we should get something in this year.

Okay, great report. Thank you.

Thanks.

Your next question comes from the line of Julio Romero from Sidoti. Your line is now open. Please ask your question.

Hi. Good morning, Joe, Sharon and Noelle. Thanks for taking the questions. Really nice to see the margins in the infrastructure surpassed 20% in the quarter. Can you maybe talk about the drivers of that in this quarter and maybe the sustainability of the margin in the infrastructure going forward?

Yes, so the biggest driver is this makeshift, right? Just a larger percentage of our revenue is coming from these megacenters, whether that's data centers or manufacturing or something similar. Again, it doesn't matter to us what type of [indiscernible] the larger it is, the better efficiencies we can get. And generally, we can extract better margins out of the jobs. So we don't see anything in those markets going backwards. As a matter of fact, we think over the next couple of years, capacity gets tighter in those markets. So we should be able to maintain that margin and actually maybe pick up a little more. As the big shift comes back with the smaller industrial projects and commercial projects, those margins are lower, right? So you just do the math on the blend. So our hope is that we can continue to grow the large projects at a rate that when the small ones come on, we maintain the total margin, right? We may not see as much increase, but we shouldn't see a significant decrease.

Got it. That's helpful. And then you mentioned data centers make up about 40% of segment backlog at this point. What's your best guess as to how much of the 2024 segment sales and E-infrastructure end up being comprised of data center sales? And you know, as that pool of mega projects comes to bid in 26 and 27, how do you envision that mix of data center related revenue trending?

Yes, so we're up over 40% now. And I think that's going to continue to grow with the activity we're seeing. We're really confused because we keep hearing people say, you know, data centers are slowing or that. I can tell you, we have more data center activity on the horizon than we would ever imagine. There's no way I could have predicted this much. There's more players coming in from a builder perspective to do this. It is continuing to grow. And there's nothing on the capital planning we see slowing down. As a matter of fact, we see the really big guys starting to have conversations with core contractors on what can we do to commit multi-year capacity to them because they're afraid that everybody's going to run out of capacity. And they're right, if they don't do this, they're going to have trouble. So we're excited about where this is going. So data centers will continue [indiscernible] of our backlog. And I think we'll probably -- I haven't run the numbers, but backlog turns into revenue. So it's going to be pretty close. I would imagine you guys have any numbers on that?

We're going to be about, this is rough, but we'll be about two-thirds large projects and a third smaller projects for 2024.

That's helpful. And then -- understood. And then it was nice to see you folks deploy the share repurchase of 30 million in the quarter. Can you maybe just touch on how we should think about you deploying cash towards repurchases, especially with the recent pullback in the broader market?

Well, I don't have the numbers, but I bet we bought something yesterday and we will continue to buy, at the rates we've been buying in the past. We've got a ladder, I call it a ladder, maybe that's not the right terms, but we've got price points and at those price points, we have automatic share purchases built in. We don't, we turn that all over. It just happens and executes. We still believe that the share price is grossly undervalued. And the best thing we can do right now is until we get an acquisition lined up is buy back some more shares.

Really helpful. I'll pass it along. Thanks very much.

[Operator Instructions]. We don't have further questions at this time. I would now like to turn the call back to Mr. Cutillo.

Thanks, Ivo. I want to thank everybody for joining today's call. If you have any follow-up questions or like to schedule a call, [indiscernible]. Her contact information's in the press release. Everybody have a great day and we appreciate participating. Thanks.

That concludes today's conference call. Thank you for your participation. You may now disconnect.