Q2 2024 Earnings Summary
- Strong Pipeline of High-Probability Future Work: Sterling Infrastructure has more visibility into future work than ever before, with a high-probability work pipeline totaling over $500 million. This pipeline has grown significantly from approximately $100 million 18 months ago, indicating robust demand and future revenue opportunities.
- Sustained High Margins in E-Infrastructure Segment: The company's E-Infrastructure segment achieved margins surpassing 20% in the quarter, driven by a mix shift towards larger projects such as data centers and manufacturing facilities. Management expects these strong margins to be sustainable and possibly improve further over the next couple of years due to tightening capacity in these markets.
- Growing Demand for Large Data Center Projects: Sterling is experiencing increasing activity in data center projects, with data centers now making up over 40% of the E-Infrastructure backlog. The company reports that the size and scope of data center projects continue to grow, and they anticipate that data centers will continue to be a significant and expanding part of their business. ,
- Dependence on the data center market poses a risk if demand slows down. The company is increasing its reliance on data centers, which now make up over 40% of the E-Infrastructure backlog. Management acknowledges hearing concerns about slowing data center demand, though they remain optimistic. Any slowdown in data center construction could negatively impact their E-Infrastructure segment's growth and margins. ,
- Challenges in finding suitable acquisition targets may limit growth. Management admits that while there are many businesses for sale, there aren't many great ones. This scarcity of high-quality acquisition targets may hinder their M&A strategy and limit future growth opportunities. , ,
- Softness in small commercial and warehouse markets due to high interest rates could persist. The company has shifted away from these projects as margins have declined and activity has slowed. Recovery is dependent on interest rates dropping, which remains uncertain. Prolonged high interest rates could negatively impact revenue and margins in their E-Infrastructure segment. ,
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E-Infrastructure Margins
Q: What drove E-Infrastructure margins above 20% and sustainability?
A: The margin surpassing 20% was driven by a shift towards larger projects like mega data centers and manufacturing facilities. These larger projects offer better efficiencies and higher margins. We don't see these markets reversing and expect capacity to tighten, allowing us to maintain or even improve margins over the next couple of years. As smaller projects return, which have lower margins, we aim to grow large projects to sustain total margins. -
Data Center Growth
Q: How do you see data center revenue mix trending?
A: Data centers now make up over 40% of our segment backlog, and we expect this to continue growing. Despite talks of a slowdown, we have more data center activity on the horizon than ever imagined. Major players are seeking multi-year capacity commitments due to capacity concerns. Data centers will remain a significant portion of our backlog and revenue in 2024 and beyond. -
Transportation Expansion
Q: Are there opportunities to grow Transportation backlog this year?
A: Yes, we've approved bidding on more work in the last 30 days than in the first six months combined. Many good jobs are coming out, and we're encouraged about where the backlog is heading. We can accelerate growth quickly when margins are right, as seen with over 50% growth this quarter. We believe there's 100 to 200 basis points of margin expansion possible over the next 12 to 24 months. -
Capital Allocation and M&A
Q: Any updates on capital allocation and M&A?
A: We're actively looking at many potential acquisitions, though great businesses are scarce. We're optimistic about completing a deal this year, possibly multiple. Until we secure an acquisition, we're focusing on buying back shares, believing the share price is grossly undervalued. -
Share Repurchases
Q: How will you deploy cash towards share repurchases?
A: We'll continue buying back shares at the rates we've been buying in the past. We have predetermined price points where automatic share purchases are executed. We believe the share price is significantly undervalued, and buying back shares is the best use of cash until we finalize an acquisition. -
Resumption of Commercial Projects
Q: When will commercial and warehouse projects make sense again?
A: The shift away from these projects is temporary due to declined margins and fewer projects, which are dependent on interest rates. As interest rates drop and margins return to historical levels, we'll resume pursuing them, likely starting in the first quarter of next year. -
Northeast Recovery
Q: Is recovery possible in the Northeast next year?
A: Yes, we expect the Northeast to recover as interest rates fall. We've expanded into the Mid-Atlantic, winning data center and manufacturing projects that will offset smaller business declines. The smaller projects, dependent on interest rates, should also return next year. -
Increasing Data Center Size
Q: Are data centers getting larger than before?
A: Yes, data centers are increasing in size due to factors like power and water availability. They're moving to rural areas where they can build data campuses with 3 to 5 data centers. We've even seen concepts for mega projects 5 to 10 times larger than any we've done, which may materialize in a year or so.