Okay, great. Good afternoon, everyone, and thank you for joining the Sidoti & Company March 2025 Small- Cap Conference. My name is Julio Romero, and I cover building products, industrials, engineering, and construction at Sidoti & Company. Really pleased to be able to host Sterling Infrastructure. Their ticker is STRL. With us today, we have Joe Cutillo, Chief Executive Officer; Ron Ballschmiede, Chief Financial Officer; and Noelle Dilts, Vice President of Investor Relations and Corporate Strategy. We're going to kick it off with some prepared remarks by the company, and then we'll get into some Q&A. If you have any questions for the company, type them into the Q&A section at the bottom of your screen, and time permitting, I'll ask on your behalf. With that, Joe, Ron, Noelle, thanks so much for being here.
Thank you. Let me give a quick overview of Sterling, who we are, and what we do. At Sterling, we're an infrastructure service provider that's broken into three fundamental segments. Our first segment is what we call the E-Infrastructure. In this segment, we help with site selection and develop the sites for large mission-critical projects like data centers, large manufacturing facilities, semiconductors, e-commerce distribution, along with smaller projects like industrial warehouses. We do the complete site development from the time the ground is broken until the building is going to be put in place, along with all the underground utilities. Our second segment is Transportation. That's where the company started.
We focus in three areas in Transportation: highway, road, and bridge, predominantly focused in alternative delivery design-build type projects where there's a high level of value-add. Aviation, where we work on runways, taxiways, parking garages, etc. Rail, which is the smallest piece of that, where we predominantly focus on bridge repair, replacements, or new bridge processes. Our third segment is Building Solutions. It focuses in two different areas. The first is what we call commercial, which is light commercial building, predominantly multifamily residential. The second is residential, where we are in Houston, Phoenix, and Dallas-Fort Worth. We do two types of services in Dallas. We perform or build the slabs for high-volume builders. The top three builders in the U.S. are our top three customers. We also do plumbing for those homes as well.
In Houston and Phoenix, we just currently do slabs, but we'll eventually add plumbing and other services to those. We take a look at our overall market conditions. We have very strong tailwinds in the infrastructure with the growth of data centers, the onshoring of manufacturing plants, and the future builds of chips and semiconductors, along with the e-commerce rebounding fairly significantly in the first part of 2025. Transportation, very slow, or very what I'll call strong, slow, and steady. We work 100% off customers' money. That business grows at low single digits, but is very consistent and is halfway, a little over halfway through the federal spending cycle. We've got another year and a half of spending to come. In our residential business, Building Solutions, we see mixed results right now. The Houston market continues to grow.
Phoenix is down slightly, and we see a little bit larger decline currently in the Dallas-Fort Worth market.
Excellent. Thank you so much for the rundown. Maybe kicking it off with what you're seeing on everyone's favorite topic, the data center front. On the last call, you were quite adamant about not only are you not seeing a slowdown on data center-related construction demand, but rather an increase in activities, inquiries, etc. Maybe, you know, as you see it, if you could help us understand kind of that disconnect a bit in terms of the broader headlines about DeepSeek and what we all see there and concerns related to CapEx for data centers versus what you're seeing on the ground yourself.
Yeah. First of all, we are seeing nothing but acceleration, not only in the existing projects, but in talking with our core customers on future projects that they see over the next several years. We see just the opposite of what people are worried about in the news. In addition, I think there's a misconception on a couple of different things. First of all, regardless of what chip is used in these plants or these data centers, I should say, they still have to build. We do the groundwork to build them. We don't really care what the technology is inside them. And frankly, if they become less expensive, we believe the customers will actually build at a more rapid rate. They have limited capital budgets. They're building out to their capital budgets.
If they could build them for half the price, they'd build twice as many, which is perfect for us because we're doing the groundwork for that. I also think there's a little bit of misunderstanding and misconception. There's an article out on Microsoft and going to more of a lease model. It doesn't matter to us whether Microsoft owns the end facility or Amazon or Meta. As long as that's being built, that's where we perform. If somebody else is building that and leasing it back, that's still a job that we're going to do. It doesn't impact us like some of the other areas that may impact.
Really helpful context there. One other key in market served by your E-Infrastructure segment is manufacturing, or more specifically, the onshoring or reshoring of manufacturing back to the U.S. Can you just kind of dive into what falls under your manufacturing umbrella as it stands today? I think you've talked about semiconductor fab, automotive, biotech, etc.
Yeah. The projects we've seen, we're still waiting for the big semiconductor plants to get started. They're still a little ways out. We've seen automotive. We're seeing a slowdown in some of the solar and battery plants that we had been working at. That's being picked up by things like pharma. What's been really interesting is we haven't seen a segment or a market come back. We haven't seen pharma as a whole come back, but we've seen a couple of pharma facilities.
We haven't seen food come back as a whole, but we're seeing a couple of facilities, and there's more conversation on what follows. We think we're in the very, very early innings. We're seeing a nice, constant, steady pace of a couple of projects here and there that we're working on. We think the wave doesn't really start for another 12 to 18 months by the time people start looking for properties to secure them and start moving the manufacturing back on a much larger scale.
Got it. When you say that the wave doesn't really start for another 12 to 18 months, help us think about the sequencing of that. Is it going to be kind of a rising tide of sorts or more of a big hit?
No, I think we'll see an initial hit, and then the tide will continue to rise, right? We'll see an upfront slug and then a nice continuation of growth probably for another three or four years after that takes place.
Got it. One thing that you've also talked about is the CHIPS Act. As I understand it, not necessarily done any meaningful projects related to that as of yet, but just help us kind of frame the opportunity related to the CHIPS Act in the coming years. Secondly, given that site prep in relatively flattish land doesn't really lend itself to your typical return hurdles, where geographically do you foresee yourself participating in projects related to the CHIPS Act?
Sure. First of all, I think the CHIPS Act and the chip plants are on the drawing board. Forget the act itself. There are multiple plants in plan. What people don't understand is the amount of upfront work it takes from the time you decide to build one of these facilities to the time you break ground. First of all, you got to find these things are three, four, five hundred acres of land, right? You got to find that right piece of land. You got to permit it, which takes a lot more time than people realize to get the permitting through. You're going to work with local, state, and sometimes federal governments on tax rebates or incentives to put that facility in that land. As you're selecting land, you're kind of negotiating. Then you have to get utilities and water to it.
Most of the time, it's not like they're building these in the middle of a metropolitan area. They're usually fairly far out. You have the time associated with that. All that stuff takes years. It doesn't take weeks or months. It's literally years of work. As you can imagine, the bigger and more complex these projects are, the more complex that pre-work becomes to get all that through. That's why when we say we really thought late 2026, 2027, I will tell you with the shift that I think is going to take place from less federally funded CHIPS money to more publicly funded, I think realistically, we're not going to see the big wave come to shore until 2027, 2028 in that area. I think in between, we're going to see manufacturing come on top of the data centers before the big chip plants, okay?
We'll see the chip plants follow right in there. If they all hit at the same time, that is going to be a bonanza of builds.
Got it. Just to clarify, you were saying federally funded to privately funded.
Privately funded, yeah.
Yeah. Yeah. I'm sorry if I misspoke.
No, just correcting for the transcript. All good. You talked about permitting. Kind of brings up the topic of the new administration. How does the new administration kind of impact infrastructure funding? What is Sterling's exposure to federal funding and consequently your end markets?
Yeah. I think the good news is today, as we sit, virtually no risk to our current backlog projects or what we see on the horizon. Most of our federally funded projects are in Transportation, and those are funded with half federal money and half state money. Those bids and projects do not come out until the funding is available. Once the funding is there, they come out. We have seen no slowdown, no pullback. As a matter of fact, with the extension of the budget, they have just approved and appropriated the rest of 2025's Transportation spending numbers. We are in really good shape there. The next Transportation bill does not come out for another year and a half. Everything we have seen, there has been no pullback or lack of focus on Transportation and what I will call core infrastructure in the U.S.
Where we have seen pullbacks, and I think areas that are highly vulnerable, are around grants. A lot of these are more pet projects. Some are really critical projects, but they're more specific projects maybe a state or a representative is pushing. I think we're going to see a lot of pullback on those. Some will go through, some won't. We currently don't have any in our backlog and are not working on any projects that I'm aware of that would fall under that category. Limited exposure. As we look forward, though, this administration, when it was in office before, was extremely focused on infrastructure spend. As a matter of fact, the IIJA bill and the infrastructure bill that came out, I think a number, I might be off a little bit, roughly $800 billion-$850 billion, originally started out closer to $1.3 trillion under the Trump administration.
The administration changed, it got pulled back. It actually tried to get pulled back further than $850 billion, but that was as far as they could take it. There are a lot of people that believe that the current administration will actually invest stronger in infrastructure over the next four years than the prior administration. We believe that to be true as well. We are very hopeful that is the case and move forward. The thing the administration could do very quickly that would help these projects immensely is around regulations if this permitted. It is a very, very complex process. It takes way too long, costs way too much money, and delays these projects , more than probably anything else. The contractors can build this stuff pretty quick once they get the green light to go.
You could have more time upfront permitting and preparing this project than it actually takes to build the entire project. I think they've said they're going to work on that. I'm holding them to that. We're very hopeful. That will speed this stuff up quicker. If you talk about the future, whether that's manufacturing and onshoring or it's the chip plants, if they do that, those cycles could actually accelerate, which would be great for all of us. What I'm talking about is kind of status quo on the permitting process and things would stay the same. That's the timeline that we see.
Yeah. Got it. That makes sense. What is your exposure to tariffs? Can you speak to risk mitigation efforts such as price escalators to mitigate that impact?
Yeah. I can go through each one of the areas, but I'd step back on a little more macro look and just say, not too long ago, we went through this thing called COVID. And we saw price escalations of multi-hundred percent on materials. And we all made it through. If I look at the pricing of materials today versus the peak, they're significantly lower. So even if we get hit with a 10% or 15% or 25% tariff, and it happens in a much slower period of time than the rapid fire we're seeing in COVID, businesses are going to get through this. I think people are grossly overestimating the impact of this. We will get through it, right, at the end of the day.
The supply chain disruption and not having material is a heck of a lot more difficult to manage your way through than a price increase or a tariff on materials. We'll figure that out. However, maybe it's a little unfair for me to be that bullish on it because we have a lot less exposure than other companies to the tariffs. If we take a look at our Transportation business, for the most part, we get fixed pricing guarantees on that project upfront. They're building in inflation into that in some way, shape, or form. If you take our pricing and went to spot market pricing, ours would always be higher, but we're guaranteed pricing. There are some escalators in the federal contracts if pricing moves too much as well that helps you.
At the end of the day, the vast majority of our materials have to be made in the U.S. for those projects if there's federal money on it anyway. They're coming from the U.S., much less vulnerability there. In E-Infrastructure, most of the stuff we do is above ground. We're doing piping, underground utilities, but it's a relatively small percentage of our overall cost and expense. As we got through COVID, everybody was pleasantly surprised and happy with our margins as we went up. We had to do some crazy things during COVID where we're exchanging PVC for stainless steel. It's pennies a foot to tens of dollars a foot, and we still managed to get through it. We'll get through that. Our biggest risk in E-Infrastructure is around fuel pricing, but we've got some escalators built in our contracts now after COVID.
The way that we sequence or break up our contracts, each phase gets repriced. Our liability to a contract is not years, it is months. That really helps us mitigate that risk. In Building Solutions, concrete is our biggest material. I think the risk there is a lot of the cement powder. The majority of cement powder still comes from overseas. A lot of it comes from Turkey. Some of it comes from Mexico, some other places. The Mexican piece could have an impact on all of us on cement or concrete cement prices, which relate to concrete total prices on that. The rest of the materials are insignificant: cabling and rebar. If Asia gets a tariff, you can get it onto Turkey and some other places.
I think we'll see a lot of these supplies move around the globe and people get creative in where they get them from. I can tell you, I personally have not lost one minute of sleep worrying about the tariffs. I worry more about supply chain disruptions and material availability than I do the tariff piece.
Got it. I appreciate you pointing out the multi-phase kind of dynamic of a lot of your work. That's important. I also appreciate the fact that you have price escalators in the federally funded projects within Transportation because that's typically where I would think it would be the hardest to get escalators built in. So appreciate that.
They still fight you. They still fight you, Adam. It's not the government. They're not that easy.
Maybe moving to Building Solutions for a bit. You mentioned the three key markets: Dallas, Houston, Phoenix. You mentioned you do plumbing in Dallas and not yet in Houston and Phoenix. Can you just speak to demand trends across the three geographies, especially given affordability concerns and where rates are today?
Yeah. Let's start with the most positive one, which is Houston. We haven't seen any slowdown in Houston. It's continuing to grow. The rates we saw through last year and the year before. We're excited about the Houston market. We don't see any change in that. The Phoenix market, I call schizophrenic. It's up one or two months and then down one or two months. Net net, I would say it's on a slight decline right now and will be for the first half of this year. The Dallas market is where we've seen the biggest shift from real strong growth last year in the first quarter. I mean, it was on fire to the Dallas market has slowed down. Now, there's a couple of different pieces of Dallas we need to think about. The overall market is down. Our plumbing business is down slightly.
We're seeing more of an impact in our slab business. That impact is driven by our biggest customer is down beyond what I'll call the market being down, right? They're down more, which impacts us obviously more. We're trying to figure out what's driving that dynamic with that customer. The other thing that we're seeing is it goes back to exactly what you said, the affordability issue. It's hitting first-time home buyers a lot harder than the move-up home buyers. We're actually seeing, and the reason our plumbing business is down less, is we're seeing better market momentum in the mid-range houses where we tend to do more of the plumbing than the entry-level houses. We'll see if that dynamic continues.
Those tend to be people that are relocating, that are relocating professionals that have a better chance of buying a house or have sold a house in another market and are coming in for that kind of next level up one or two tiers.
Got it. Historically, weather has been a big swing factor to results in that segment. Just if you could speak to how that's built into your full-year outlook.
Yeah. I think we've got it built in right for the full- year. I will tell you, we've seen in January and February like we've never seen in Texas, not as much Phoenix. We lost 50% of January and over 50% of February between snow, rain, hail. With stuff we don't normally get here, we're normally in long-sleeve shirts and maybe shorts. We're not in winter coats and gloves, that's for sure. We have had just really a rough winter. March, the good news is March has been pretty good. We will try to make up a bunch of ground in March. We can make up ground pretty quickly. We're hoping the last couple of weeks of March stay beautiful and we can run from there. The first couple of months were tough. We're coming off tough comps. Our first quarter last year was a barn burner.
We never expected our first quarter to be as strong as it was last year. The builders came out really, really hard and fast. It was great. We have kind of a tough comp at the end of it. For the full- year, I feel good about kind of where we are. The builders are still kind of sticking to their total numbers. The second half will tell us if they're going to hit those numbers or not when we start getting into the July and August timeframe.
Really helpful there. Maybe turning to capital allocation for a bit. You've got net cash of almost $350 million. Your gross cash position is above $600 million as of the year. You've been very clear about being growth-oriented. I want to ask about M&A, but before getting into that, just given where the stock is, how are you weighing kind of being more opportunistic with regards to share repurchases versus M&A?
Yeah. M&A is always our first priority, but as you know, timing is everything, right? Sometimes there are deals, sometimes there are not deals. When we're waiting for deals, we believe our stock is really undervalued. We've got a strong buyback program in place and we're utilizing it.
Very good. On your fourth quarter call in February, you talked about organic and inorganic growth opportunities with regards to maybe doing a little more scope in E-Infrastructure, some dry utility work, and potentially, which perked my ears up, was looking at some electrical and mechanical as an adjacency that you would kind of explore. If you could expand on that to the extent that you can.
Yeah. If we look, our first priority for acquisitions is E-Infrastructure. Second is Building Solutions. Not to get off E-Infrastructure, but we think there's going to be some unique opportunities in Building Solutions. As things soften, people tend to think about selling their business if they're getting up in their careers. We think some interesting opportunities may arise in there. E-Infrastructure is our first focus in really two areas. Expanding geographically, the site development that we do, there are a couple of geographies we'd really like to be in that we're not today. How do we get into those geographies? One of them is Texas. We're sitting here in Texas today and we do $0.00 of site development for our major customers in Texas. The other area is this whole mechanical, excuse me, and electrical. The reason we like it is multifaceted.
First of all, we touch a lot of that work today. We are preparing all the trenching, everything that is coming into the building. We are doing that site work today. We dig it and we wait. We wait. Electricians, nothing against electricians. We hope to have some someday. Speed is not usually the first thing that comes out of their mouth when we talk to them. We have to wait for their trades to come onto the site and get that work done. We fill it, we put concrete around it, we fill it and make it look like a smooth area.
We think that by having this, not only could we increase the amount of work we're doing on every one of these projects, we think we could take a month to two months of time out of the cycle time of the project itself. That time is of high value to the customers, right? It is a logical next step for us to move, get a little bigger piece of the pie with the customer, but add value to them that we can bundle it and put a package together. The other thing that we like about it, just like our site development, is what we think from what we see the next three to five years of data centers continues like a rocket ship. At some point in time, it will change, right? I do not know if it is five years or seven years, but it will change.
These services and assets that we have are fungible. We don't care if it's a data center or a chip plant or an e-commerce distribution center, or maybe it's something to do with energy if that takes off. It's the same work for us. It's just different end customers. In both of those products, we can move to other end markets as the world changes. In 2022, our biggest customer was Amazon distribution centers. They were, I don't know, I think 70% of our work, a very large number. In 2023, we had $0 from them, right? The world changed that fast. We were able to pivot those resources. That's how we got further into data centers. We're starting to dabble with data centers.
We said, "We've got to go stronger and harder in data centers." It's really a nice flexibility and reduces our risk significantly if a market shifts or changes, we can pivot and rotate into other areas.
That's really helpful context because I guess looking at electrical and mechanical kind of leans into your value prop of some of these mega project developers of the committing to a site deadline and saying, "Hey, I'll get it done for you the first phase on time. You don't have to worry about the front end at the very least." That kind of leans into that and then at the same time gets more value from it. Is that fair?
Yeah. That's exactly how we think of it. Time is the most critical thing right now to these projects, right? I mean, they certainly have a budget and everything, but if this project's six months late, you got billions of dollars of capital tied up and the revenue they generate off these is pretty sizable, right? It is a big number for them.
Just keep it simple. How do you throw off so much cash and so consistently?
First, we work off customers' money. Second, I think we are very good at managing our capital expenditure, capital risk, right? How we generate revenue and maximize the return on the assets that we have. We do a really good job at that. If you have really high margins and you work off customer money and you manage your capital well, you tend to throw off a lot of cash, right? We do not have a bunch of overhead costs. We are very lean. We are very frugal on that standpoint. We run very decentralized. The operations have the support they need in their businesses, but we do not have hundreds of people at corporate. We have a very small corporate office. I think we have 22 or 25 people at corporate. That is how we do it. We are margin-focused. We are not revenue-focused. We like margin.
With about 30 seconds left, just any kind of aspects of the story that are often overlooked in your view and any other key messages you want to pull people away?
It's really challenging for us. We came into 2025 in the strongest position we've ever been in. I will tell you the first quarter is only going to make that stronger on where we are with the jobs that we're seeing, the tailwinds that we're seeing, the projects that we think are coming out this year and next year. It's the first time that we've talked not only about the next year, but we're starting to talk about jobs in 2027 and what we look like in 2027 in the first quarter of 2025. We're normally talking about how we feel 2025 at this point in time. We feel very good about our end markets, our customers, and we've got further margin expansion. We can get the infrastructure and Transportation, which only helps the bottom line more. We are as optimistic as we could be.
The outside world is a little schizophrenic now or crazy, but I can't control it. We'll just keep delivering great results and people will figure it out someday.
Excellent. Joe, Ron, thanks so much for taking the time.
Thank you.