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Sterling Infrastructure, Inc. (STRL) Q3 2023 Earnings Call Transcript

Sterling Infrastructure, Inc. (STRL)

Q3 2023 Earnings Conference Call

Company Participants

Noelle Dilts - VP, IR & Corporate Strategy

Joseph Cutillo - CEO, President & Director

Ronald Ballschmiede - EVP, CFO, CAO & Treasurer

Conference Call Participants

Brent Thielman - D.A. Davidson & Co.

Brian Russo - Sidoti & Company

Presentation

Operator

Greetings, and welcome to the Sterling Infrastructure Third Quarter 2023 Conference Call and Webcast. [Operator Instructions].

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, 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 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 the detailed discussion of the financial results. After which Joe will provide a market and full year outlook. Then we will open the call up for questions.

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 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, all -- which all are 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.

Joseph Cutillo

Thanks, Noelle. Good morning, everyone, and thank you for joining Sterling's third quarter 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 of consecutive year-over-year net income growth.

Our diluted earnings per share for the third quarter were $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% 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 billion. Our cash flow generation remains excellent. Operating cash flow in the quarter was $150 million, bringing our total cash position to $409 million at the end of the quarter.

Our focus remains on deploying our cash into acquisitions that 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. With a strong third quarter performance, year-to-date results, backlog position and visibility into the fourth quarter, 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 million. We continue to see a strong pipeline of work related to data centers and onshoring of manufacturing. We currently have line of sight into several large projects slated to bid in 2024 and 2025 in both of these markets.

In the quarter, we did see a slight decline in Infrastructure Solutions revenue and margins relative to prior year. This was driven by timing of several new project starts and the continued softness in e-commerce distribution centers and small warehouses in the Northeast. Our Southeastern operations continued to show strong growth and 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 first 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. Awards in the quarter of $472 million drove backlog growth of 14% 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 fourth quarter. Transportation Solutions margin expanded 130 basis points driving a 49% growth in operating income. 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. 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 third quarter.

We remain confident that the dynamics in our markets and our strong customer relationships will 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%....

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