Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure First Quarter 2024 Webcast and Conference Call. [Operator Instructions] Following the presentation, we will conduct a question-and-answer session. This call is being recorded, Tuesday, May 7, 2024. I would now like to turn the conference over to Noelle Dilts. Please go ahead.

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Thank you, Jonah. Good morning to everyone joining us, and welcome to Sterling Infrastructure's 2024 First 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 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 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 First Quarter 2024 Earnings Call. Despite challenging weather in January and February, the Sterling team was able to deliver $1 of earnings per share to its shareholders, which was a new first quarter record. This represents a 56% increase over prior year. .

We grew operating income 30% on revenue growth of 9%, reflecting our continued focus on driving margin expansion and maximizing returns. Demand trends across all our end markets remain strong. We ended the quarter with a backlog of $2.35 billion, which is up 45% from the first quarter of 2023. .

Additionally, we generated operating cash flow of $50 million, and our balance sheet remains in great shape. We are working hard to find the right deals that will complement our strong platform and accelerate growth even further. .

I want to personally thank each of our employees for helping us deliver another fantastic quarter. Safety is a key element of the Sterling Way, which is our commitment to take care of our people, our environment, our investors and our communities, while we build America's infrastructure. .

This week is National Safety Week. At Sterling, we believe safety is a critical element of any great company. We know that our people are what makes our company great and we're committed to getting everyone home safe every day. In the quarter, we had 0 lost time incidents and only 1 recordable incident and over 1.5 million hours worked.

We are proud that we have achieved one of the best safety records in the industry and are always focused on what more we can do to protect our people. .

Now I'd like to discuss our results for the first quarter of 2024. With the strong start of the year, our backlog position and our balance sheet firepower, we are in a great position to deliver strong earnings growth and execute additional acquisitions.

We are seeing incredible opportunities across each of our business segments and could not be more excited about the future. .

In infrastructure, our largest and highest margin segment, operating income grew 12% relative to the prior year, driven by operating margin expansion of 290 basis points to 14.7%. This reflects the normalization of the supply chain and our mix shift towards large mission-critical projects. .

We achieved this profitability growth in spite of a 10% revenue decline in the quarter, which was predominantly driven by weather and the schedule of large project starts. At the time we issued full year guidance in February, we anticipated the first quarter revenue decline in the infrastructure.

We continue to expect high single to low double-digit revenue growth in this segment for the year based on our current backlog. This could go higher if we are successful at winning additional large projects that start in 2024. .

The infrastructure awards were $332 million, driving a backlog to $961 million, a 32% increase over the first quarter of 2023. The data center market was again the largest driver of awards as customers are racing to build the capacity needed for technology advancements, including AI.

We have continued to leverage our resources across our business segments to expand the key infrastructure business into the Rocky Mountain region. .

We are -- we now have 3 sizable data center projects. Data centers now represent 40% of our e-infrastructure backlog. Additionally, activity in the Northeast is beginning to pick up with awards accelerating in the second quarter. .

Moving to Transportation Solutions, revenue was up 34% and margins expanded 68 basis points, driving 53% growth in operating profit. We ended the quarter with $1.31 billion in Transportation Solutions backlog, a 64% increase from first quarter 2023.

We continue to see strong broad-based demand and margin growth entire -- across our entire geographic footprint. .

First quarter awards of $270 million reflects strong levels of aviation work, accounting for about 60% of the new awards. We expect continued momentum in aviation for the year. .

Building Solutions revenue grew 23% in the quarter. This reflects a 56% growth in our residential business, including 26% organic growth. This strong growth is particularly notable given the heavy rainfall in the quarter. .

Our commercial business declined $10 million, which was in line with our expectations. On a pro forma basis, PPG, our latest acquisition, grew 27%. The mix shift towards residential slabs and plumbing had a favorable impact on the segment's operating margin, which expanded 377 basis points to 13.8%, and drove operating income growth of 70%. .

In residential, we remain bullish on our key markets. Dallas-Fort Worth, Houston and Phoenix are all population growth markets and continue to outperform the national averages. The PPG operation is off to a great start, and we're very excited about the opportunities ahead.

With that, I'd like to turn it over to Ron to give you more details on the quarter and our full year guidance.

Ron?.

Thanks, Joe, and good morning. I am pleased to discuss our very strong and record first quarter performance. Let me take you through our financial highlights, starting with our consolidated backlog metrics. .

Our first quarter record backlog totaled $2.352 billion, up $285 million or 14% from the beginning of the year. The gross margin of this backlog was 15.6%, a 40 basis point improvement over the end of 2023.

A higher level in e-infrastructure backlog and an increase in both the amount of the transportation backlog and its backlog margin drove this improvement. .

Unsigned low bid awards totaled $68 million at the end of the quarter, as several previously unsigned contracts were executed in the first quarter. We closed the quarter with a combined backlog of $2.420 billion. .

Gross profit in combined backlog was 15.5%, the highest in our history, compared to 15.4% at the beginning of the year. First quarter 2024 book-to-burn ratios were 1.8x for revenue -- sorry, for backlog and 1.14x for combined backlog.

Our March 31, 2024, combined backlog of $2.4 billion represented an approximate average of 16 months of prospective backlog revenues. The comparable 2023 computation was approximately 12 months of backlog revenues. This represents a 25% in our prospective backlog duration at the end of the first quarter. .

As a reminder, our residential revenues, which represent approximately 20% of our consolidated revenues, are not included in backlog statistics as revenue is recognized upon the completion of each slab or a plumbing phase. .

Turning to our first quarter income statement, revenue was $440 million, up $37 million over the prior year quarter. Consistent with our past seasonal characteristics in our first quarter historically is the lowest revenue quarter. The quarter was further negatively impacted by unusually severe weather in the Southeast and East Coast geographies. .

Current quarter consolidated gross profit was $77 million, an increase of $15 million over the 2023 period. Gross margin increased to 17.5%, or 220 basis points over the '23 quarter.

This margin increase reflects organic margin improvements from each of our 3 segments in the quarter and the positive contribution from our mid-November 2023 PPG acquisition. .

General and administrative expenses increased in the quarter by $4 million to $27.3 million. The increase reflects the PPG acquisition and cost increases driven by higher volume-related incremental costs and general inflation. We continue to expect our full year G&A expense to be approximately 5% of revenues. .

Operating income for the first quarter was $42 million, an increase from $33 million over the prior year quarter. Our operating margin increased to 9.6% compared to 8.1% in the 2023 quarter. .

Our effective income tax rate for the first quarter was 18.4%. The favorable tax rate in the quarter primarily resulted from stock-based compensation tax deductions in excess of GAAP expense, driven by the higher stock price at the vesting dates.

We expect our updated full year effective income tax rate to be approximately 25%, an improvement over our prior expectations of 27%. .

The net effect of all these resulted in a record first quarter with net income of $31 million or $1 per diluted share, an improvement of 58% and 56% compared to the first quarter of 2023, respectively. .

First quarter EBITDA totaled $55.7 million, an increase of 21% over the prior year quarter. As a percent of revenues, EBITDA improved to 12.6%, up from 11.4% in the prior year quarter. .

Cash flow from operating activities for Q1 2024 was a record $49.6 million compared to $49.1 million in the 2023 quarter. Cash flow used in investing activities included $20 million of net CapEx, which is consistent with our expectations.

Our cash flow from financing activities was a $19.7 million outflow, primarily driven by $13 million for stock-based related withholding taxes and $6.6 million for the scheduled payments of our term loan facility. .

We ended the quarter with a very strong liquidity position, consisting of $480 million of cash and debt of $335 million, for a cash net-of-debt balance of $145 million. In addition, our $75 million revolving credit facility remained unused during the period. .

Despite fighting off Mother Nature, we had a very solid start of the year. The expected reduction of our income tax rate and the lower net interest expense for the balance of the year has resulted in an increase in our 2024 net income guidance to $160 million to $170 million and an increase to our diluted EPS guidance range of $5 to $5.30.

Additionally, with our strong first quarter results and significant opportunities in each of our operating segments, we expect we will deliver results toward the higher end of our financial guidance ranges. .

Finally, considering the diversity and strength of our portfolio of businesses, our strong liquidity position and our comfortable 1.1x EBITDA leverage, we are well prepared to take advantage of additional opportunities to generate significant shareholder value in '24 and beyond. .

Now I'll turn it back to Joe. .

Thanks, Rob. We see years of opportunity ahead associated with the revitalization of America's infrastructure. Sterling is playing a critical role in building the manufacturing production coming back 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.

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In e-Infrastructure Solutions, we anticipate continued strength in data centers as current capacity only represents a fraction of what is needed to support artificial intelligence and other emerging technologies. Additionally, we continue to see a strong pipeline of large manufacturing projects tied to electric vehicles, batteries and solar. .

We continue to believe that, in the coming years, we will see more projects emerge related to semiconductors, pharma and food and beverage. These projects are located both our current footprint and other potential geographies.

We expect the e-commerce and small warehouse markets will remain soft through 2024, but are encouraged by some of the preliminary activities we are seeing in these areas for 2025 and beyond..

We continue to track a number of new large project opportunities that we anticipate will be awarded throughout 2024 and early 2025. Additionally, our mix moves towards large multiphase projects. We have line of sight into future phases of work that will be awarded as we complete our current phases.

These dynamics support strong growth opportunities over a multiyear period for e-infrastructure solutions. .

In Transportation Solutions, we believe we are now in a market environment where we can accelerate growth relative to historical levels as long as margins remain at current levels or higher. We are very confident that our transportation business will generate strong growth and margin expansion throughout 2024. .

In Building Solutions, we continue to anticipate growth and margin expansion in 2024, driven by continued strength in our residential slab and plumbing businesses. .

On the M&A front, we are working hard to find the right deals to grow the company and enhance our service offering. The e-infrastructure market remains our top priority for M&A. We will remain patient and disciplined in our inorganic growth strategy. .

As it relates to share repurchases, we are taking an opportunistic approach. .

As we look forward, we are maintaining our full year revenue and EBITDA guidance and are raising our net income and EPS guidance to reflect our lower net interest expenses and tax rate expectations.

As Ron mentioned, we believe we are tracking towards the high end of our guidance, which would represent 12% revenue growth, 23% net income growth and 16% EBITDA growth. With that, I'd like to turn it over for questions.Thank you. We will now begin the question-and-answer session.

[Operator Instructions] Your first question comes from the line of Brent Thielman from D.A. Davidson. .

Yes, just first question on the infrastructure. I guess, how do you sort of see the rest of the year playing out? Do you still anticipate having a little headwind on the top line going into the second quarter? And then, obviously, the comps get easier into the second half of the year and maybe you see more robust growth.

But if you could just talk to the cadence of how you see the rest of the year playing out, that would be helpful. .

Yes. Let's -- I'll give a little more color around the first quarter year-over-year and then when we think it comes back. Two headwinds in the first quarter, we had difficult comps. We started 2 of the biggest projects we had ever started in the first quarter of 2023, both in the Southeast and the Northeast.

And then we had, I think, the great results we had in the quarter don't reflect the 6 weeks of basic downtime we had on the East Coast and through Texas due to weather, [indiscernible] about it significantly. So that plays into that dip in the first quarter. .

We think second quarter, not only do we rebound, but we will see year-over-year growth, decent year-over-year growth in the second quarter, and that trend will continue in the third and into the fourth. .

So you take all of that in the timing of the new project starts, which we understand with the backlog. We feel very good. We'll see year-over-year growth, near double digits in the second quarter. .

And I guess just following on that, the comments that sounds like the Northeast is starting to get busier again. Does that work against the margin profile going forward, just considering pretty strong margins here. And I know that area has been slower for you in recent quarters. .

Yes. Depending on the mix of the job activity, generally, overall, the Northeast margins are lower because not only the size of the projects, but the breadth of what they perform on the projects. They're doing concrete works, out walls, that sort of stuff. .

But one of the things we're doing is we're moving the Northeast further south, and we're looking at multiple data centers in and around the Virginia area. And so far, we've had pretty good luck as we're entering into the second quarter already on some opportunities there. .

Okay.

And then just last one, I don't know if you have any specifics on the contributions from PPG this quarter, just wondering how much of that year-on-year margin expansion in Building Solutions might be associated with that business?.

Ron, do you want to handle that? I know the organic growth was pretty comparable between slabs and PPG was a little bit higher than our slab business. .

Yes, but not by much. They both had organic growth, organic -- pro forma organic growth of course for PPG in the mid low 30s or high 20s or... .

High 20s. .

High 20s. Thank you. So I think that's the critical item. The margin -- their margin is slightly better than our average residential side, but its size -- it doesn't move the needle too much because, of course, the -- it's probably less than -- or about 10% of our total residential margin or a little bit of revenues or a little less. .

Your next question comes from the line of Adam Thalhimer from Thompson Davis. .

Congrats on a strong start to the year. So e-infrastructure, Joe, you mentioned additional opportunities, semiconductors, pharma, food and beverage.

Is that something you can enter organically? Or would you need to acquire to get into those verticals?.

Yes. No, we can -- the beauty of the site development business is we can do all of that organically. It gets a little tougher if they're in crazy remote places. But with the success of what we've been able to do in the Rocky Mountains, expanding into that area, and up and down the East Coast, we've got pretty broad geography that we can cover. .

As we look forward, Adam, what we'd like to add is more types of services for those, whether that's in electrical, mechanical, could be in something around piping, it could be a litany of other things that happen inside the facilities. Those are the kinds of acquisitions that we're looking at to broaden that portfolio. .

We have a fundamental premise that over the next 5 to 7 years, if you take the ramp-up of data centers, the on-shoring of manufacturing, and you put all that together, that there's really not enough high-quality folks out there that can complete these big jobs, and these are going to start forming mega teams, and we're already talking to several players on national contracts and long-term agreements related to helping them on their future plans.

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So I think as this continues to ramp up over the next couple of years, people will see a lot more challenges in getting their projects completed on time and on budget, and that bodes extremely well for us. So if we can continue to add to that portfolio, we become a better kind of one-shop to come to. .

Okay. And then the margins in e-infrastructure, can you kind of -- in response to Brent's question, you did a good job of breaking down how the revenue might trend.

Can you also kind of help us on how the margins might trend in that segment?.

Do you want to take that, Ron? I think we're pretty optimistic on the margins continuing to grow. .

Yes. I think when you -- I think historically, the mix is about 2/3 in our original infrastructure acquisition plateaus, the Southeast side and the balance in New York -- New Jersey, sorry. And their margin is about 40 basis point delta difference just in the scope of which they do.

That's been pretty historical, kind of a little cockeyed in the days of the supply chain, et cetera. That will continue. So that math is going to be about the same. So as the first quarter was a higher percentage of our higher revenue -- higher margin territory. .

We had a little bit of pickup, but it's not -- it's less than 100 basis points probably when you cut through a regular quarter there. So that will -- that delta will continue to continue. So I think as that mix changes, that will move it a little bit. .

What we do and where doesn't make a whole lot of difference. It's really that mix that's going to move it, once we get picking up the productivity in the Northeast. .

So we came into the year, Adam, saying we'd have about 100 basis points or a little more pickup in the infrastructure. We still feel very good about that. Coming out of the first quarter with 17.5%, I think, is what our gross margins were. It's just -- that's amazing for us. So we're really happy with the progress. .

As older jobs fell off, new jobs started with new pricing, supply chain gets better. Jobs get bigger. All of that is positive momentum for us on the margin front. Similarly, we're seeing the same thing happen in our transportation, and then just the pure volume with Building Solutions helps us get a little leverage out of that as well. .

Okay. And then the -- so in Transportation and Building Solutions, can you comment on the -- because you already did this for e-infrastructure without me asking, but just the multiyear opportunity for Transportation and Building Solutions. .

Yes. I think transportation, look, we're sitting on the best backlog we've ever had. We've got line of sight to many very large, multiyear jobs. We think the next 3 years to 4 years in transportation solutions, we'll continue to have very strong growth and very strong margins. .

At the end of that, we're into the next cycle of the federal bill. But right now, with the funding levels at the states and the projects we're seeing in our footprint, this is the best it's ever been. .

On Building Solutions, I think the great thing is we've got our 3 core markets today are all population growth. I don't see Dallas, Houston slowing down anytime soon. Phoenix has rebounded very nicely this year. It continues to grow.

It's around that population growth, and there's still a ton of pent-up demand of people trying to get into their first-time houses. So if interest rates towards the end of the year or in the next year, who knows when they're going to come down, I think that only accelerates some of this more. .

And one of the things people don't realize is we work with the builders. The builders are very good at giving us future information as our partners. But it takes them a while to acquire land, develop land and put houses on it, and we haven't seen any slowdown in that.

That's usually 18 to 24 months out is what they're planning sometimes 3 years, depending on the area. .

And your growth in that business, is that more growth in the specific markets? Or is it more growth in your market share?.

Well, we've got 2 different elements. If you take Dallas, Dallas is really more growth in market. We've got a very large market share there. You can always pick up a little more, but that's not our strategy. It's to go with the market, continue to expand out. .

If you take into account Houston and Phoenix, those are market share growth opportunities for us. We're still less than a couple of percent market share in those markets. So we have a long way to go. .

And then last one. So you mentioned acquisitions, electrical, mechanical plumbing at e-infrastructure, and you've done that with PPG at Building Solutions.

But are those opportunities out there? I mean, have you actually being booked for those kinds of opportunities?.

Yes. Yes, we are. We've seen several, we're looking at several. One of the core things for us is we're very picky. We want really good businesses with really good people that we think we can double over a 5- or 6-year period. So it's getting that right match and that right opportunity put together. But they're out there. .

Yes. .

And they're of various sizes. .

There are no further questions at this time. I will turn the call over back to Joe. .

Thank you, Jonah. If anyone has any follow-up questions or wishes to schedule a call, please feel free to contact Noelle Dilts. Her contact information can be found on our press release. .

I'd like to thank everyone again for joining us this morning, and I hope you all have a great day. Thank you. .

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..