Q1 2024 Earnings Summary
- Sterling has the best backlog they have ever had in Transportation Solutions, with backlog up 64% from first quarter 2023, and expects very strong growth and margins over the next 3 to 4 years due to large multiyear projects and high state funding levels.
- The company anticipates significant opportunities in e-Infrastructure Solutions over the next 5 to 7 years, driven by the ramp-up of data centers and on-shoring of manufacturing, and plans to organically enter new verticals such as semiconductors, pharma, and food and beverage, leveraging their site development expertise and expanded geographic reach.
- Despite first-quarter headwinds, Sterling expects near double-digit year-over-year revenue growth starting in the second quarter, with positive trends continuing through the year, supported by a strong backlog and new project starts. The company also reported record first-quarter gross margins of 17.5%, indicating continued margin expansion across all segments.
- Margin Pressure from Expansion into Lower-Margin Regions: As Sterling expands its e-infrastructure business into the Northeast, margins may decline since the Northeast generally has lower margins due to project size and scope. "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."
- Limited Growth Opportunities in Established Markets: In the Building Solutions segment, Sterling's growth in Dallas may be limited due to already high market share, relying mainly on market growth rather than gaining additional market share. "We've got a very large market share there. You can always pick up a little more, but that's not our strategy."
- Potential Slowdown from Selective Acquisition Strategy: The company's reliance on acquisitions to broaden its portfolio might face challenges due to its selective approach. "One of the core things for us is we're very picky... So it's getting that right match and that right opportunity put together." This could lead to slower growth if suitable acquisition targets are not found.
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Margins Trend in E-infrastructure
Q: Can you help us on how margins might trend in that segment?
A: Management is optimistic about margins in e-infrastructure continuing to grow. Historically, the mix is about two-thirds in the Southeast and the balance in New York/New Jersey, with about a 40 basis point margin difference. The first quarter had a higher percentage of higher-margin territory, resulting in gross margins of 17.5%. They expect about 100 basis points or more pickup in infrastructure margins. As older jobs fall off and new jobs start with better pricing, improved supply chains, and larger projects, they see positive momentum in margins. -
Multiyear Opportunity in Transportation and Building Solutions
Q: Can you comment on the multiyear opportunity for Transportation and Building Solutions?
A: Transportation is experiencing the best backlog ever, with line of sight to many large, multiyear jobs. Over the next 3 to 4 years, management expects strong growth and margins in transportation solutions. For Building Solutions, markets like Dallas, Houston, and Phoenix are benefiting from population growth, with a significant pent-up demand for first-time homes. Builders are planning 18 to 24 months out, sometimes 3 years, and there has been no slowdown in their activities. -
Infrastructure Outlook and Growth
Q: How do you see the rest of the year playing out in infrastructure? Any headwinds on the top line?
A: Despite two headwinds in the first quarter—difficult comparisons due to starting two large projects in Q1 2023 and six weeks of weather-related downtime—the company expects to rebound in the second quarter. Management anticipates year-over-year growth, near double digits in Q2, with the positive trend continuing into Q3 and Q4. -
Acquisition Strategy in E-infrastructure
Q: Are there acquisition opportunities in electrical, mechanical, and plumbing for e-infrastructure?
A: Yes, management has seen and is evaluating several opportunities. They are seeking high-quality businesses with strong teams that they believe they can double over 5 to 6 years. They're being selective to find the right match and fit, and these opportunities are of various sizes. -
Entry into New Verticals in E-infrastructure
Q: Can you enter new verticals like semiconductors, pharma, and food and beverage organically, or would you need acquisitions?
A: The company can enter these markets organically. They aim to add more services, potentially through acquisitions, such as electrical, mechanical, or piping. Over the next 5 to 7 years, with the ramp-up of data centers and on-shoring of manufacturing, there is a shortage of high-quality contractors, and they are forming mega teams to meet the demand. -
Impact of Northeast Activity on Margins
Q: With the Northeast getting busier, does that affect the margin profile?
A: Generally, Northeast margins are lower due to the size and scope of projects, including concrete work and walls. However, the company is expanding into data centers in Virginia, where they have had good opportunities entering the second quarter. -
PPG Contribution to Building Solutions Margins
Q: How much did PPG contribute to year-over-year margin expansion in Building Solutions?
A: Both slabs and PPG had organic growth in the high 20% range. PPG's margin is slightly better than the average residential side, but given its size—about 10% of total residential revenue—it doesn't significantly impact overall margins.