Sterling Infrastructure (STRL) Q4 FY25 earnings call: guidance and Q&A

Transportation backlog was stronger than expected. Were there any large awards or notable call-outs?

No single large project, but consistent good bid activity. Only 50-60% of the current funding cycle has been spent, and projects continue to be let. The end of the funding cycle is not a 'toggle switch'; extensions adjusted for inflation are common.

“Nothing in particular. There wasn't one big giant project or anything. I think what people tend to get confused with is even though we're coming to the end of a funding cycle, only about 50% to 60% of the total funding has been spent.”

asked by Brian Brophy · answered by Joseph Cutillo

Update on progress entering Texas for site prep and how it's marrying with CEC joint awards.

Very excited about the Texas market, seeing strong data center expansion. Expecting significant awards in Texas in the first half of the year. The integration of site development and CEC is ahead of schedule and exceeding expectations.

“We're really excited about the Texas market, one from the CEC side on what we're seeing for data center expansion, electrical. But two, we're getting pulled very rapidly on the site development side. And I think in the first half of this year, we're going to be able to talk about some very nice awards that take place in Texas.”

asked by Brian Brophy · answered by Joseph Cutillo

How has the pipeline evolved at CEC since acquisition, are awards getting bigger, and what supports higher margins for that business?

Jobs are getting much larger, with data centers evolving into 'data campuses.' Margin improvements are expected from CEC's mix shift towards data centers and from combining exterior electric with site development, similar to past successes with dry utility acquisitions.

“The jobs are getting a lot bigger. These data centers in Texas, we were joking at our recent leadership meeting our team said, remember when we were so excited, we got the first 100-acre data center. And this is just a few years ago. And we said, yes, we thought it was the biggest project and all that kind of stuff. And they said, yes, we just started one in Texas and the parking lot is 100 acres, right, kind of put it in perspective.”

asked by Brent Thielman · answered by Joseph Cutillo

Why shouldn't we think legacy site development margins have peaked, given they were flat this quarter?

Margins are not expected to decline. Opportunities for larger jobs in the Northeast and investments in equipment for Rocky Mountain operations (duplicating East Coast methods) are expected to drive margins up. Strategic vertical integration tuck-ins are also planned over the next 12-18 months.

“We don't see them going negative. That's for sure, especially as we're seeing larger and larger jobs come out. We're also seeing some opportunities in the Northeast for some larger jobs that will help their margins improve significantly.”

asked by Brent Thielman · answered by Joseph Cutillo

What are the capital allocation priorities, especially regarding M&A, and why are there more quality acquisition targets now?

Focus is on growing and expanding services and geographic footprint within E-Infrastructure, not necessarily a 'fourth leg.' More quality businesses are available because owners recognize the tremendous, multi-trillion-dollar infrastructure opportunity but lack the capital to fund growth independently.

“Our focus won't be necessarily on a fourth leg. It's really around when we step back and we look at data centers, semiconductors, pharmas coming some other manufacturing that we see along with longer-term projects. Right now, for the next 5 to 7 years, the best returns for us are going to be how do we grow, expand good services and geographic footprint within the infrastructure.”

asked by Manish Somaiya · answered by Joseph Cutillo

Can you elaborate on expanding into Texas, covering other key markets, and if jobs have been won on the East side of Texas?

West Texas is growing rapidly, with active job wins expected to be announced in Q1. The 'East' attack refers to the Dallas/Houston corridor, using the Plateau business. The 'West' attack uses Rocky Mountain resources. Strategic acquisitions in Texas are being sought to add assets and capacity.

“West Texas is growing very rapidly. And I would tell you, we're actively working and winning jobs in West Texas that we'll be able to announce in the first quarter. What we consider East is kind of Dallas, Houston, that corridor, not East Texas is the piny forest. There's not a lot going on there yet.”

asked by Louie Dipalma · answered by Joseph Cutillo

Will profitability in new markets like Texas and the Pacific Northwest be lower than core E-Infrastructure, impacting overall margins?

If equipment is moved, margins should be similar. Rocky Mountain margins were initially lower due to ramp-up but are expected to grow. Acquisitions typically have lower initial margins but improve with Sterling's processes. Projects generally start with lower margins and improve over time.

“Yes. I think depending on if we move equipment suite as an example from the Southeast to Texas, we're going to see the exact same margins. We've seen a little lower margins, the same pricing, same kind of process, a little bit lower margins in our Rocky Mountain, not because of the market just because we're ramping up that equipment profile.”

asked by Louie Dipalma · answered by Joseph Cutillo

More details on the CEC modular expansion, square footage, and what is being done modularly.

The new modular facility is over 300,000 square feet, tripling its size. Modularization aims to reduce on-site electrician needs and improve productivity/cost. Activities include exterior piping, conduit, duct banks, and cabinets for data centers. The company is exploring multiple such facilities across the U.S.

“So the new facility is over 300,000 square feet. I will tell you that we're looking at does it or does it make sense to have multiple facilities throughout the U.S. that can make these components. So we're doing everything from the exterior piping and conduit around the duct banks to the actual cabinets that go into these centers.”

asked by Adam Thalhimer · answered by Joseph Cutillo

As mission-critical projects get larger, is the mix of above-ground versus underground infrastructure changing, and is it margin accretive?

No significant shift in above-ground vs. underground mix. The next generation of projects will likely include self-power generation, creating more underground development opportunities (water, utilities, electrical). This will increase the scope of work Sterling touches, but these projects are mostly expected from 2027-2028.

“I wouldn't say we've seen any significant shift on above ground versus below ground. I think what we will see kind of the next generation of these projects are going to have self-power generation on them. That will create more development opportunities on these because if you have a power plant, you got all the underground, whether it's water utilities, you got the electrical coming in, all that stuff.”

asked by Julio Romero · answered by Joseph Cutillo

How is Sterling positioned with AI tools, and can it widen its differentiation against competitors?

Sterling is actively using AI in estimating, bidding, and project execution. Three pilots last year yielded a 15-20% increase in project manager capacity. Currently, 6 AI projects are underway, improving efficiency, effectiveness, quality, and safety. Management believes the company is ahead in AI adoption.

“I think people would be shocked what we've done and what we're doing in and around AI and how we're tying that to not only the estimating and bid process, but the project execution. We did 3 pilots last year. To say the teams were excited when we first -- when we first started them, everybody said, how is AI applicable to what we do.”

asked by Julio Romero · answered by Joseph Cutillo