All right. Thank you everyone for attending. We are very pleased to have Joe Cutillo, the CEO of Sterling Infrastructure, for a one-on-one discussion. We are going to talk about something we haven't discussed the entire conference, AI and data centers. Joe, you are obviously a leader in the space, and you have a lot of forward visibility being part of what's become an ever-increasing bottleneck around advanced facilities. Great to have you on.
Thank you.
Would love a brief introduction, and then we can get into some Q&A.
Yeah. I appreciate everybody taking the time. Joe Cutillo, CEO of Sterling Infrastructure. We focus in, when we talk about the AI space, in the site development and the electrical aspects of the build-out. As we get into the questions, I can tell you right up front, we've had a lot of questions around slowdowns, delays, pauses, all the political rhetoric. I can tell you firsthand, we've seen no delays, no pauses, no push-outs, no cancellations. Every week we hear from our customer base, which is the biggest hyperscalers in the U.S., along with the second tier below them, "How do we do more faster?" It's interesting in today's world and in today's market, I read the newspaper and I hear and see one thing, and I talk to our teams, and I talk to our customers, and it's 180 degrees from what we are reading.
Yeah. Well, you stole my first question. There's a lot of NIMBYism, and it's manifested itself in a lot of different ways. It's moratoriums, power constraint, just general community uproar. What are your clients telling you about it and
Yeah. I think the hyperscalers will admit one thing. They have not done a good job of getting ahead of what I'll call the public perception of what they're doing. I think there's a lot of myths that are very different from the realities. We were talking earlier with some groups on water consumption, what they're doing with the grid. There's very little water used in these. They're closed systems, so once you fill them, they're not using a lot of water. They're actually building out or funding a lot of the grid build-out to get power to them, et cetera. They haven't done the greatest job. There's a very different reality versus the political rhetoric that we see in the newspaper every day. We're in the state of Texas.
To hear the governor of Texas come out and talk about slowing down data centers, I don't know who had a heart attack first in the state. The reality is, what they've put in place, I think is more guardrails and stuff around small projects. It's had no impact on the large hyperscalers of the projects that are coming out in the fourth quarter, first quarter for sure. We don't see anything happening in the future on that.
Yeah. A lot of these projects, would you say, are building two of a 10-building campus. You have a lot of the elements of feasibility already available, power, et cetera. So, a lot of this rhetoric is related to things that are in the common. To your point, there's more form than substance.
Yeah, it is. The projects, what people don't realize is two things. One, we're in a unique situation that we have three to five years of visibility of what's coming. We're working with these customers for multiple years on projects before they even come out. We haven't seen any of those slow down. When we start a project, all the permitting's done, power's there, everything is completed. So it's not going to necessarily stop.
Yeah.
It's done. The one thing we are seeing with the projects is the size and the scope of them continue to get significantly larger. A few years ago, when we got into this, we got interested when they were around 100 acres. We were really excited when they got up to 300 acres or 400 acres and said if they could just stay there for the rest of our lives, we'd be the happiest people in the world. I'll tell you, we're working on jobs right now that are 10,000+ acres . When you start-
That's amazing.
putting self-power generation on, 28, 29, they're talking jobs or talking campuses north of 30,000, 40,000, 50,000 acres.
Touch on that, because you usually think of other folks like engineers having the front-end part and that level of visibility. But in some ways, you're an N of 1 in terms of a service provider. You're working directly with the hyperscalers to plan out some of the work they're doing. We've had this fantasy of 2030 and then a cutoff, and now we're seeing data that supports not only growth over that period to 2030, but that continued sort of evolution beyond. What gives you that sort of demand outlook confidence over the next three to five years?
Yeah. As I tell people, we're the canary in the coal mine. What most people don't understand is for the next generation of data campuses to start and break ground five years from now, they're working on them today. They're literally spending hundreds of millions of USD upfront to get those ready. So we work with the hyperscalers on their five-year plan. So we know what's coming out, approximately where it's coming out, and obviously the timing. People say, "Well, why is that?" Well, it takes five years today. First, you got to get land. You have to permit the land. You got to either run power or get utilities there in some way, shape, or form. On the self-power generation, you have to order a turbine, which now has a five or six-year lead time, so they're ordering this stuff upfront.
The time it takes from the decision point of spending money to actually breaking ground used to be about three years. It's now out to five years. Semiconductors, similarly. We started doing the facility in N.Y., and I tell the story, I remember when Micron announced they were going to spend $110 billion or $150 billion on this facility, our phone was ringing off the hook. "Did you get the job? Are you going to do the job?" I said, "There's not a job, first of all." A couple of months go by, and everybody says, "You got the job. You going to do the job?" We said, "There's not going to be a job for five years." One year into it, people said, "Well, you must have lost the job.
You're not talking about this job." I said, "In five years, call me and we'll talk about the job." They were right. I was wrong. It was four years and six months from the time the funding was announced till the time we broke ground. So I was off six months. But the reality is it takes that long to do it.
Yeah.
They are also worried about capacity because the size and amount that is coming at us, they finally realized that there is a capacity constraint coming down the road to build these. So they are trying to give us a much longer look at it so we can build capacity in parallel with them.
Yeah. Part of that is even just alliance agreements with some of these hyperscalers because it is almost like mutually self-assured destruction. You need them as much as they need you, so in some ways they are trying to help you plan and phase so that you can execute for them.
Yeah. No, absolutely. It took us a couple of years of trying to explain to them that this was coming, but they have got it. As a result, it is interesting because in a lot of cases, we are actually working on projects directly for the hyperscaler before a general contractor or electrical contractor is even picked, just to get speed or reduce the total cycle time of the project. At the end of the day, time is money for these guys, and they are really worried about how to speed up these projects and get more done faster. That is all we hear every day from them.
That sort of business model structure, visibility, alliance agreements, if you think contractually in terms of your backlog or what I would call shadow backlog with next phase opportunities related to existing backlog, what kind of visibility do you have there?
Yeah. First, the great thing with how we do this is our jobs are phased. We are not stuck into one large long-term contract. For us, that is the greatest thing. It reduces risk significantly, allows us to adjust pricing along the way as necessary, and does not enable us to get into a lot of risk on the project. To the outside world, it is challenging for us because none of it shows up as backlog. Only a small piece does. We were going through with the groups today an example of a job that we are currently on. When we talk about our backlog and future phase work being $7 billion, I will tell you that that number is extremely low relative to what it really is. I will give you one real-life example of a project that we are on.
The project started out, the hyperscaler, it was not a hyperscaler, it was another group, bought 600 acres of land, and they said, "We are going to build a data campus on 300 acres." We start the 300 acres. That 300 acres, approximately $300 million to complete. We knew that was going to be the minimum. However, we put $10 million or $15 million in backlog. We only talk about future phase where we have 30% of the design complete, so there is probably another $50 million in backlog or future phase. We know it is going to be $300 million. Okay? We are off there by a fair amount to what is going to happen. However, what we do not talk about is that other 300 acres, as soon as they are finished with the first 300 acres, they are going to develop.
That is roughly another $300 million that is not in future phase, not in backlog. In addition, they have purchased 800 incremental acres attached to that. That will be, call it another $700 million or $800 million of work there. Instead of a three-year project, that is going to be an 8-10 year project. Now, to put it in perspective, the projects we are bidding today are 5- 10 times bigger than that project in totality. As we talk about is 2030 or 2032, we are sitting there today looking at projects that we are starting or getting ready to work on over the next 12 months that will be eight, 10, 12-year projects. That does not include the electrical spend that comes on the back end of it, which will extend it out another two to four years.
If you take a look at it, everybody is worried about the slowing down or stopping. Worst case scenario, which would not happen, but if it stopped tomorrow, we would still be working for at least five, probably 7+ years on some of these projects. It is really, really fascinating how big they are in that. Our challenge is how do we articulate to the outside world that we have that much work in front of us that we still have to do that is not technically backlogged or under contract.
Right. But in some ways, you have proof points with historical work that you've done that sort of lead off into—
We have 100%. When we plant our flag, as we say, when we plant our flag and start a project, we have 100% hit rate to complete everything that's done on it.
Wow.
Just in this year alone, we've picked up four major campuses that we didn't start, that we're in bowing the customer out because it was either in a geographic footprint we weren't in, or was in a timeframe that we didn't have the capacity to start.
You touched on a good point. What is the bottleneck? Is it customer demand? Is it just the ability in terms of labor, resources, capital to prosecute the work that's ahead?
Yeah. A little different for site versus electrical. Site is more around project management skills. The equipment is going to start getting tight towards the end of this year and next year. Then that will be a challenge. We have done some stuff with Caterpillar to get our fair share or maybe more of the equipment coming out. On the electrical side, it is labor. It is pure electricians. But the piece that gets a little confusing, as a country, we finally have started more technical schools, getting folks into trades, young kids, and even some middle-age adults actually going back for career changes. But the problem is, it takes four years to get an electrician certified. So we have now hundreds, if not thousands, or thousands if not tens of thousands of young people and apprentices going through the electrical program, which is great.
However, there is just one fundamental flaw with that, is you have to have a journeyman for apprentices. So in the state of Texas as an example, every journeyman can have a maximum of four apprentices. So if I do not have enough journeymen, it does not matter how many apprentices I have, and it is going to take four to five years to get these folks to become journeymen.
Wow.
We have this four-year window that is going to be very challenging until those classes start to graduate and become journeymen to really build the population of electricians that we can use in the industry.
What is to solve? Is it modular work? Is it guest worker programs? Like—
Yeah.
You can look at the Bureau of Labor Statistics, and by 2030, we're going to have something like a 30% shortage in electricians. What's going to solve for it, or is that just going to constrain the cadence of activity?
What we're going to see is there's going to be a couple things that happen. First, no question, we just tripled the size of our modular and prefabrication facility. Anything we can build in the factory and get out, we can save 15%-20% of the cost and labor on. That's a piece of it, right? That's one piece. How do we continue to grow it? Two, what we're going to see in what we're doing, we're hiring 80. Just in Texas alone, we hire 80 electricians a week. It's not that we're losing 80 electricians a week. We grew that business 140% year-over-year. We're using 80 more electricians a week. How are we able to do that?
What's going to happen is if you think of the electrical business, there's a lot of small electrical companies out there today, and they may do work on maybe a hotel like this or a small office building or a small industrial building. Highly competitive, and not high dollars in revenue. Those crews are mostly traveling crews. What we need are traveling crews to go out to these facilities that are not in metropolitan areas anymore. They're in pretty rural areas. What we're able to do is take those electricians. We can pay them more, $5, $10, $20, depending on where it is, an hour more. They get 60 hours of work. Instead of moving from project to project every six months, they're now on a project for two or three years, right? So they got more stability in their life.
They're making a lot more money, and we can kind of rob them. What's going to happen is the small electricians or the small electrical businesses are really going to start struggling to get labor. So the big guys will be successful more so than the small guys until you deplete that pool, right? Then you have a whole other problem. So there's a few things. The challenge is to get through these next three to four years until the graduating classes start. But we believe that there really needs to be some immigration reform on top of it. That's the fastest way for us to bring in skilled, certified electricians from around the world that can help us out.
Yeah. That is after data centers have created a huge sucking sound for any other form of infrastructure development. You have talked about the Micron project. How does that change your view around semiconductor facility and other sort of derivative forms of advanced facilities in the U.S.? Then we talk about reindustrialization of the country, but if these data centers are sucking up all the craft labor because they are paying better prevailing wage rates, how is that going to marry with all the other work that is yet to be done?
Yeah, I think in some ways, look, data centers are the hottest thing.
Yeah.
But I think people are actually too fixated on just data centers. When we look at the macro of what is happening, data centers are the biggest piece today, but it may not be the biggest piece forever. There is a lot of other big stuff coming. In 2028, we will start seeing pharma being built. Those are going to be big factories and big projects. 2030, we got semiconductors coming, right? In parallel to this, you have got the grid being built out. You have got three or so, at least three, there is I think five or six that have been permitted, but three LNG plants are probably going to go in the Gulf Coast. We keep getting asked about the eight nuclear plants that they are looking at starting around 2030 to 2032 coming on. The whole point of this is an electrician is an electrician is an electrician.
Right. That fungibility of that labor pool.
A pipe fitter's a pipe fitter, right?
Yeah.
It's not just data centers that's fighting for these. It's completely different end markets that are all growing very rapidly that are going to be fighting for these same skills and these same trades. So it's going to get more challenging. The bottom line is who pays the most is going to get them. It's really, I think, that simple at the end of the day.
That speaks to project selection that this audience will appreciate being, selecting amongst a variety of opportunity sets in front of them. Have you become effectively like a fund manager and you're saying, "Who are the guys that are giving me the best terms, the best money multipliers, which are the best clients, and I'm going to just work for them and everyone else?
We have. We're very selective. We turn down a lot more projects than people realize, either end customer or contractual terms. We're not willing to do that. But we're not beholden to data centers. If chip plants come out, and they're much better margins and much better customer base, we'll move to them. We've moved multiple times, through our journey. We focus on margin growth and cash flow. For us, that's the most important thing. As we look at the market, not only today, but over the next 7-1 0 years, the opportunities are only going to get better. They're not going to get worse. So why would we go, as we say, practice, with someone when we can make real money somewhere else? We're not going to be alone on that.
I think that's going to be the interesting movement of resources and assets and capital on how that all plays out.
Are you sort of locking in, sort of like what some of the memory providers are doing and saying, "Hyperscaler, I have this kind of pricing mechanism. I'm going to select the projects that I'm going to do for you, but I'll give you capacity.
Well, the way we're-
Is that the next iteration?
Yeah. We're staying away from any long-term commitments. We've been asked multiple times to make some long-term commitments. We don't want to do that. This thing's going to continue to play out. You could have expansion by customer A in a geography you're not in versus customer B in that geography, and we want to stay in certain geographies and stay away from some as well. We're a believer that if we can deliver projects faster than anybody else on time, every time, we can pick who we go to versus getting locked into that.
Especially you're not fungible. That labor pool is—
Yeah. It doesn't matter. For us, it doesn't matter if it's a semiconductor plant or a data center plant or a pharma plant or a battery plant. It's irrelevant.
You touched on margins. I think there was some investor focus on the infrastructure margins. Operating margins were around 24%. Walk me through or color what that margin profile looks going forward. You're obviously integrating CEC. And what structurally supports this sort of margin profile, and how is this sort of competitive environment evolving? I know that's a loaded question.
Yeah. We see margins continuing to improve. If you take a look at what we've done when we bought our Plateau business, it's kind of our foray into the site development side of the Infrastructure. Their margins were 15%-18%. Today, they're double that. We are very focused on margin expansion and cash flow, and we're very good at growing those margins. As we look at the recipe that we've built for Plateau, it's directly applicable as we expand geographically, whether that's in Texas or the Rocky Mountains or the Pacific Northwest. That is, we take a business that's around 15%. We do vertical integration with that. We improve the equipment suite to have the biggest, best equipment. As a result, we come close to doubling the margins in those businesses. We know we can do it, and we'll continue to do that.
Everywhere that we've expanded, we have that opportunity for significant margin expansion, in those. On the CEC side, we told the world 18 - 24 months, we'd expand margins 300 - 500 basis points, which is pretty good in the electrical world. We're on track. We feel very confident. We've got the map and the equation to get us there. What's holding us back a little bit right now is we've got two legacy businesses there that when we bought it, we knew we were getting rid of. They don't make money. As a matter of fact, they lose money. Every good thing we do is we're trying to accelerate getting out of those. It drags us back down. We'll be out of those by the end of 2027.
We'll figure out a way to communicate what the margin improvement is on CEC along the way because it's very good. We're very happy with that. They've doubled in size. It's pretty hard to improve the margins like we have while doubling, adding all the electricians, but they've done a great job. The challenge we have is each business margins will continue to go up. As we make acquisitions and throw in another electrical business for $500 million-$600 million of revenue at 10% or 12% before we get it up to 15% or 18% or 20%, you have kind of a sine curve of margins along the way. Trying to explain that to people that, no, it's good overall, margins are continuing to go up. It's just the mix that can get confusing to people.
It's a mix contribution, not a—
Yeah.
Sort of same store sale margin type.
Yeah. No, margins aren't going backwards.
In fact, they're getting better as you integrate pieces.
They're better. Yeah.
The core business, obviously, on the site development front, just walk us through, your margins are fantastic for an infrastructure services provider playing in data centers. Why is that? Why can't someone else compete with you? Why do these hyperscalers try to lock you up for delivering—
Yeah.
Service for the rest of their portfolio?
Well, I think the first thing that people grossly misunderstand on the site side, I can say this now that we own site and electrical, the electricians are, I joke with them, they're prima donnas, and they think their stuff is really complicated. I will tell you, at the end of the day, we have both businesses. Site is exponentially more complicated than electrical. What people don't realize is there's an entire city with thousands of miles of pipe, in some instances. One job we did, we looked at the conduit, I forget, it went up to the moon and back, like twice or something. It was like some unbelievable thing. I didn't believe the guys, then they showed me. It was like, they're actually right.
People don't understand what's going on under the ground, the potential risks, conflicts, and complexity that is much more than the average person can do. We do 3D modeling. We use LIDAR. We have drone technologies. The stuff that our guys do relative to somebody who's just moving dirt, it's night and day. That's the—
You're sort of N of 1 in terms of scale and sophistication.
That's right. There's nobody that has the scale we do. Nobody has the sophistication. Then the vertical integration. People grossly underestimate the value of the vertical integration, not only what I can take out in time, which is the most important thing to my customer, but what I can drive through productivity and margin improvement. We control our destiny, but we can do things within the vertical integration that literally take out millions of dollars of cost that everybody else has to do. When I bid that, I bid that cost in like everybody else does. I just know I'll never use it, right? That helps us on the margins.
Saving them on time means much more than your cost.
Saving them on time, just with the addition of electrical, now doing the external electrical, as part of the site package, in some instances, we can take out months of project time. A real-life scenario, we're talking about data centers, but let's talk about semiconductors. We started the Micron facility up in N.Y. around April, May. We delivered the September package in July. They're actually building the first building. They thought they would start that next year. We'll deliver the January package in September. They've never been that far ahead on a project, neither one of the two GCs or the end customer. For them to start the building six months early, especially if you're a GC and you've got liquidated damages of $250,000, $300,000, $400,000 a day, if I can build three months into your schedule of free money, that's the greatest thing in the world.
They don't call anybody else.
Why would you? That's fantastic. For the end client, getting up and running that much faster is a factor more meaningful in dollars.
I'll tell you that the end client asked us to come look at another job they have and see if we can get it back on track.
You have this crown jewel with E-Infrastructure. You obviously have other attractive segments. How does federal, the transportation side fit into the equation? How did that part of the portfolio evolve relative to what's now become the core?
Yeah. I think the transportation segment, first of all, it's, I'll call it the Rodney Dangerfield of the company because they don't get enough respect. We took that business, which was a losing business, lost money.
We've got a pretty young group here, so you're going to have to update your—
Yeah.
Your characters.
My analogies. But they're best in class on margins, as a transportation business. Any other transportation guys would love to have our margins. However, it shows our strategy, our philosophy on we're not stuck to anything. Even though we've got best in class margins, we've done a great job with that business. In the second quarter, our largest transportation business, for the first time, did more E-Infrastructure work than transportation.
Wow.
We started two years ago to shift those assets and resources to start providing support to customers in a footprint that we couldn't get to out of our Southeast business. As a result, that business has taken off. It grew 700% year over year, which is pretty good, and is now a major part of that. If we could shift 100% of transportation assets and resources to the infrastructure, we'd do it. We'll never get there, but we're continuing to move more and more there to pick up the capacity.
Got it. That's helpful. You're an asset-light business. You generated a lot of free cash flow. Even the assets you buy, like CEC, generate a lot of free cash flow, so it has a cash compounding effect. You've got, I guess, a best-in-class problem with earnings and cash flow and your balance sheet. How are you prioritizing capital allocation today?
Yeah. It's a good problem to have.
Yeah.
But it's a problem. Acquisitions is by far our best return, right? Acquisitions around site development, electrical, or some ancillary services that we can provide our infrastructure customers are our first priority. We're very opportunistic. When we think the stock is underpriced, we have a fairly robust buyback program in place. We'll take full advantage of that and buy back shares. Then, after that, we don't really have a lot of debt to buy down. We theoretically could pay off what little debt we have at any given time, but acquisitions is our primary focus. Stock buybacks are second.
Got it. How is the opportunity set looking right now?
The good news is it's better than it was last year. Last year was a pretty poor market for acquisitions. Not a lot of high-quality stuff out there, and the stuff we saw was grossly overpriced. We're particular. We're very picky. We'll look at 200 or 300 acquisitions a year before we do a couple. But this year's market is definitely better. Better quality businesses. We're starting to see conversations, with both electrical and site where, especially on the electrical side, this bifurcation of the big are going to get really big. The middle guys are going to find themselves in kind of no man's land and actually become smaller, where they are starting to talk for the first time on how to be part of a bigger team. On the site side, our challenge is there's not a lot of big players out there.
We're starting to look at midsize players more aggressively and see if we can't pull them in for incremental capacity. Part of the challenge is with the owners, they've all grown a lot over the last two or three years. Like us, they're bullish about the market over the next three to five years. So they say, "Well, if I hold on one more year, I'm going to grow another 30%," right? "If I hold on two more years, I'll double and I'll get twice the money." So getting them to the altar is a little challenging right now.
Okay. I can only imagine because most of these institutions have never seen the level of demand they've seen over the last couple of years, so it's hard for them to sort of capitulate and transact.
Yeah. I think what ultimately drives them is they can't invest the capital fast enough to keep up. At some point, what they're going to find, they don't realize it yet today, what they're going to find is they're going to be on the outside looking in because they can't do the job, so they can't take on enough, and the customers are going to find the big guys to step in and do that.
Got it. Well, we're at the hour. One last question. You talked about being valued very cheaply today.
Yeah.
I think that the market's taken a breath, but it's come pretty far from where it was three to five years ago. As you look out to 2030, what do you think the investor should really sort of think about as they think about the Sterling investment thesis?
Yeah. When I look at the business, it's interesting how the world changes, but we put together what we thought was a pretty aggressive growth plan. Grow 20%-30% organically over the next five years, and then on top of it, add 20%-30% growth through acquisitions. So growing the bottom line 50% a year is pretty good, especially with the debt ratios we have and throwing off the cash. Pretty nice business to have. While our stock is a rocket ship. I don't know. You guys know that stuff better than I do, but makes no sense to me. Our problem isn't the market to do that. Our problem is the exact opposite.
Our customers are coming at us at a much faster rate with more work than that plan, and we are sitting back every day trying to figure out how do we become more aggressive with that plan, grow more organically, grow more acquisitively, or else we're going to be giving up a lot more work. 50% growth on the bottom line is not going to be good enough to keep up with what's happening.
Wow. That's off a large base.
It's off a large base, yeah.
Well, thank you for your time. This was very informative.
Thank you.
Appreciate you investing time with us.
Yeah. Appreciate it.