Sterling Infrastructure, Inc. (NASDAQ:STRL) Q4 2023 Earnings Call Transcript
Sterling Infrastructure, Inc. (NASDAQ:STRL) Q4 2023 Earnings Call Transcript February 27, 2024
Sterling Infrastructure, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to the Sterling Infrastructure Fourth Quarter 2023 and Full Year Webcast and Conference Call. [Operator Instructions] This call is being recorded on Tuesday, February 27, 2024. I would now like to turn the conference over to Noelle Dilts. Please go ahead.
Noelle Dilts: Thank you, Joanna. Good morning to everyone joining us, and welcome to Sterling Infrastructure's 2023 fourth quarter and full year 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 and year. Ron will then discuss our financial results and 2024 guidance, 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'll 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. 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 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.
Joseph Cutillo: Thanks, Noelle. Good morning everyone and thank you for joining Sterling's fourth quarter and full year 2023 earnings call. 2023 was another great year for Sterling and our investors. We achieved 40% adjusted EPS growth and 11% top-line growth. This was our third consecutive year generating adjusted earnings per share growth of 40% or more, a testament to our focus on driving margin expansion and returns. Our total backlog ended the year up 46%, providing strong visibility for 2024. We generated operating cash flow of over $478 million, which was about 3.5 times our net income. With our strong outlook and balance sheet, we are in an outstanding position to drive continued earnings growth in 2024 and beyond. Our preferred use of cash remains accretive acquisitions that complement our service offerings and enhance our competitive position.
In addition, in mid-December, we put in place a $200 million share repurchase program that should allow us to take advantage of dislocations in our stock price and return capital to our shareholders. I want to take a second to thank each of our employees for helping us deliver these results. The men and women of Sterling are what makes this company great. We will continue to take care of our people, our environment, our investors, and our communities while we work to build America's infrastructure. This is the Sterling way. We are proud of our accomplishments over the past year, but are even more excited about the platform we have built and the opportunities ahead. With that, I'd like to discuss our results for the full year and fourth quarter of 2023.
Total revenue for the year grew 11% to $1.97 billion. While revenue was slightly below our guided range, our adjusted EBITDA of $260 million was at the high end of our guidance range and net income exceeded the high end. This reflects our philosophy on focusing on profitability and margin over revenue. We delivered adjusted EPS for the year of $4.47 up 40% from 2022 and above the high end of our previously guided range of $4.10 to $4.23. For the fourth quarter, our consolidated revenue grew just over 8%. Our gross margins expanded 350 basis points to 18.9% and our net income more than doubled relative to prior year. We'll now move to our segment results. Starting with E-Infrastructure, our largest and highest margin segment. For the full year our E-Infrastructure revenue grew 3.5% and operating income grew 16%.
Operating margins reached 15%, a 160 basis point increase. For the quarter, though E-Infrastructure revenues declined 12%, our operating profit grew 26%, reflecting the beneficial impact of project selectivity and mix. Revenue in the quarter was impacted by three delayed projects that we discussed on our third quarter call and the slowdown in small private projects in the Northeast. Our Southeastern market remains extremely robust, but would strengthen both onshoring-related manufacturing and data centers. Our very strong fourth quarter E-Infrastructure operating margins of 17.3% improved 520 basis points, reflecting favorable mix, supply chain improvement, and good productivity as we completed large projects in the quarter. E-Infrastructure backlog finished the year up 35%, providing strong visibility into 2024 and 2025.
Additionally, as our mix moves towards large multi-phase projects, we have line of sight into future phases of work that will be awarded, as we complete our current phases. We continue to track a number of new large project opportunities that we anticipate will be awarded throughout 2024 and early '25. The data center market was again the largest contributor to awards in the quarter and actively remains very strong as customers are racing to build the capacity needed for AI technology. Additionally, we continue to see high levels of onshoring-related manufacturing activity in the Southeast in the Rockies. The Northeast remains slow as small commercial and warehousing activities has declined and larger manufacturing project opportunities have not yet progressed to award.
Shifting to transportation solutions. Revenue growth for the year was over 16% and margins expanded 174 basis points, driving 57% operating profit growth. For the quarter, revenue grew 39%, operating margins expanded 300 basis points to 7% and segment operating profit more than doubled. We ended the year with transportation solutions backlog up 66% to $1.18 billion. We continue to see strong broad-based demand and margin growth across our entire geographic footprint. Fourth quarter awards of $337 million reflects strong levels of highway activity. Additionally, subsequent to the quarter end, we were awarded a $155 million aviation project which will be included in the first quarter backlog. We expect continued momentum in aviation throughout the year.
In Building Solutions, annual revenue growth was 26% or 13% on an organic basis. Our residential business grew 12% organically and our commercial business grew 14%. Segment operating margins were flat with 2022 levels at 11.4%. In the fourth quarter, Building Solutions revenue grew 24%. Our residential business grew 65% in total, including 25% organic growth. This was partially offset by a slowdown in our commercial business which was down 27%. The mix shift towards residential had a favorable impact on segment operating margins, which expanded 100 basis points to 12% and drove operating income growth of 35%. In residential, we remain very bullish on our key markets. Dallas-Fort Worth, Houston and Phoenix are each population growth markets and continue to outperform national averages.
While we're able to take advantage of some attractive project opportunities in the commercial market in 2023, we anticipate that the trends that emerged in the fourth quarter will continue into 2024, driving a decline in commercial revenues. A recent acquisition of Professional Plumbers Group, which brings plumbing capabilities into our portfolio, is a fantastic complement to our existing services. PPG is a great cultural fit with Sterling, has excellent growth prospects, and is nicely accretive to margins. With that, I'd like to turn it over to Ron to give you more details on the quarter and full year. Ron?
Ronald Ballschmiede: Thanks, Joe, and good morning. I am pleased to discuss our very strong record fourth quarter and full-year performance. Our updated Investor Relations slide presentation has been posted to our website and includes additional financial details to help further understand our 2023 financial results. The presentation also provides additional modeling considerations which underpin our 2024 revenue and earnings guidance. Let me take you through financial highlights starting with our consolidated backlog metrics. At December 31, 2023 our record backlog totaled $ 2,067,000,000 up $653 million or 46% from the beginning of the year. The gross margin of this backlog was 15.2%, a 90 basis point improvement. A higher level of E-Infrastructure backlog and an increase in both the amount of transportation backlog and its backlog margin drove this improvement.
Unsigned low-bid awards totaled $303 million, an increase of $28 million. We finished the year with combined backlog of $2,370,000,000 reflecting a 40% year-over-year growth. Our gross profit and combined backlog was 15.4%, the highest in our history compared to 14.2% at the beginning of the year. Our full-year 2023 book-to-burn ratios were 1.38 times for backlog and 1.4 times for combined backlog. Our December 23, 2023, combined backlog of 2.4 billion represents approximately 16 months of prospective backlog-related revenues. The comparable December 2022 computation was approximately 12 months of backlog-related revenues. Turning to our fourth quarter income statement, revenue was $486 million, up $37 million over the prior-year quarter. Current quarter consolidated gross profit was $92 million, an increase of $23 million over 2022.
Gross margin increased to 18.9% or 350 basis points over the 2022 quarter. This margin increase reflects the margin improvements from each of our segments for both the fourth quarter and the full year. General and administrative expense increased in the current quarter by $3 million to $26.1 million. The increase reflects the late 2022 Arizona Slab acquisition and the November 2023 PPG acquisition. The balance of the increase was driven by inflation and higher revenue-related incremental costs. Operating income for the fourth quarter was $56 million, an increase from $37 million for the 2022 quarter. Our operating margins increased to 11.5% compared to 8.3% in 2022. Our effective income tax rate for the 2023 fourth quarter and full year was 22.5% and 22.5% and 25.1%, respectively.
The favorable tax rate in the fourth quarter resulted from an increase in tax-deductible and stock-based compensation expense driven by the higher stock price. The net effect of all that results in fourth quarter adjusted net income of $40.7 million or $1.30 per diluted share. Our fourth quarter adjusted EBITDA totaled $68.9 million, an increase of 37% over the prior year quarter. As a percentage of revenue, adjusted EBITDA improved to 14.2% of revenues for the quarter and up from 11.2% in the prior year quarter. Moving to our full-year financial performance. Our 2023 revenue totaled $1,972,000,000, an increase of 11.5%. Consolidated 2023 gross profit was $338 million, an increase of $63 million over 2022. Full-year gross margin increased 17.1% or 160 basis points.
Both the fourth quarter and our full-year gross margins were at record levels. G&A expense for the full year was 5% of revenues, consistent with our previous annual guidance. For the full year of 2023, operating income was $205.8 million, an increase of $45.9 million over 2022. Our full-year operating margins increased to 10.4% compared to 9% in the prior year. The full quarter adjusted net income was $135.5 million, or $4.47 per diluted share. 2023 adjusted EBITDA totaled $259.9 million, an increase of 24% over the prior year. As a percentage of revenue, adjusted EBITDA improved to 13.2% as compared to 11.8% of revenue in 2022. Cash flow from operating activities for 2023 was a very strong $478.6 million compared to $219.1 million in the prior year, which itself was a record year.
Key elements of the 2023 cash flow used for investing activities included $50.6 million of net CapEx and $51.2 million for acquisitions, primarily the PPG acquisition. Our cash flow from financing activities was $104.5 million outflow, primarily from debt prepayments of $93 million. The debt reduction includes voluntary early debt repayments totaling $63 million. We ended the year with a very strong liquidity position consisting of cash totaling $472 million and debt of $342 million for a net cash - net for cash, net debt balance of $130 million. In addition, our $75 million revolver credit facility remains undrawn at the end of the year. Looking forward to our 2024 expectations, the strong market conditions in each of our three segments, together with our continuing margin improvements and year-on-year-end backlog position enables us to forecast another record year for Sterling.
Our full 2024 guidance ranges are as follows: revenue, $2,125,000,000 to $2,215,000,000; net income growth of $155 million to $165 million; diluted earnings per share range is $4.85 to $5.15; and EBITDA of $285 million to $300 million. Finally, considering the diversity and strength of our portfolio businesses, our strong liquidity position, and our comfortable 1.2 times EBITDA leverage, we are well prepared to take advantage of the additional opportunities to generate significant shareholder value in 2024 and beyond. Now I will turn the call back over to Joe.
Joseph Cutillo: Thanks, Ron. 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. 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. Additionally, we continue to see a robust pipeline of large manufacturing projects tied to electric vehicles, batteries, and solar. We believe that down the road, we will see more projects related to semiconductors, pharma, and food and beverage.
These projects are located in both our current footprint and other potential geographies. We believe that 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 multiyear period for E-Infrastructure solutions. For 2024, our guidance assumes high single to low double-digit top line growth in E-Infrastructure Solutions and a continued operating margin expansion driven by project selectivity and mix. Additional large project awards for the year represent a source of upside potential to our forecast. In Transportation Solutions, we believe we are now in a market environment where we can accelerate growth relative to historic levels, as long as margins remain at current levels or high.
For 2024, we are anticipating 10% to 15% revenue growth with continued operating margin expansion. In Building Solutions, we anticipate mid-single-digit revenue growth in 2024. This is made up of low double-digit organic revenue growth in our residential slab business and a $50 million to $55 million incremental revenue contribution from PPG, which is offset by a significant decline in commercial revenue. The mix shift towards residential and the contributions from PPG will ultimately benefit margins. Based on the midpoints of our 2024 guidance, our revenues will grow 10%, our EBITDA will improve 12.6% and our net income will increase 15%. Finally, as most of you know, Ron has announced his plans to retire in 2024. Ron and I joined Sterling within a couple of weeks of one another and have worked side by side to transform Sterling into the diversified infrastructure company we are today.
It has been quite the journey and we've had a great partnership. Ron will still be here for quite some time, so this is not goodbye, but I do want to acknowledge all that he is done for Sterling. I think we have a good plan in place for a seamless transition in the CFO role. And with that, I'd like to turn it over for questions.
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