Q3 2021 Construction Partners Inc Earnings Call
[music].
Greetings and welcome to the construction partners incorporated third quarter earnings Conference call. At this time all participants are in a listen only mode. A brief question on answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
On keypad as a reminder, this conference is being recorded it is now my pleasure to introduce your host Rick Black Investor Relations.
Thank you operator, and good morning, everyone. We appreciate you joining us for the construction partners conference call to review <unk> third quarter fiscal year 2021 results.
This call is also being webcast and can be accessed through the audio link on the events and presentations page of the Investor Relations section of construction partners Dot net.
Information recorded on this call speaks only as of today August 6.2021.
So please be advised that any time sensitive information may no longer be accurate as of the date of any replay I.
I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance are forward looking statements made pursuant to the safe Harbor provision of the private Securities Litigation Reform Act of $19.95, we will be making forward.
Looking statements as part of today's call.
That by their nature are uncertain and outside of the company's control actual results may differ materially. Please refer to the earnings press release that was issued today for our disclosure on forward looking statements. These factors and other risks and uncertainties are described in detail on the company's filings with the Securities and Exchange Commission.
Management will also refer to non-GAAP measures, including adjusted net income loss and adjusted EBITDA reconciliations to the nearest GAAP measures can be found at the end of our earnings release construction partners assumes no obligation to publicly update or revise any forward looking statements and now I would like to turn the call over to <unk>.
<unk> partners CEO Jule Smith jewel.
Thank you Rick and good morning, everyone.
With me on the call today are Alan Palmer, our Chief Financial Officer, and Ned Fleming, our executive Chairman.
I'll begin today by talking about the third quarter, followed by commentary about our recently announced acquisitions in Alabama and North Carolina.
We will then have Alan walk us through the financial results before net provide some closing comments prior to us opening up the call for your questions.
I am pleased with our performance in the quarter was generated top line revenue growth of more than 20% year over year. Okay.
Across our footprint in the southeast we continued to win New project work and group backlog to a record high $823 million.
This growth of backlog combined with a bright outlook for infrastructure funding over multiple years at both the state and federal levels has compelled us to invest this year on our people and technology to prepare for and support future growth.
This investment for future growth creates profitability headwinds in the short term, we see these investments as vital to the organization being prepared and ready.
Customer demand project funding on bidding activity remained strong throughout the quarter.
However, similar to many construction and infrastructure businesses, we experienced project delays due to supply chain and labor constraints affecting CPI operations as well as our subcontractors and vendors.
While CPI has a stable and experienced local workforce at our markets and strong purchasing purchasing power across our company we.
We're not immune to these current industry constraints.
We believe supply chain disruptions will subside in the coming quarters as we move through fiscal 2022.
Today, we have revised our fiscal 2021 financial outlook to reflect these transitory issues.
However, our long term growth strategy remains firmly intact.
Let me say, we are very bullish on fiscal 2022 and beyond.
Turning now to acquisitions.
We announced 2 significant transactions earlier this week, expanding our geographic footprint in the southeast and further enhancing Cps vertical integration in Alabama, and North Carolina.
Not only did we acquire critical assets in growing markets.
We also added significant talent to our teams.
These acquisitions totaled approximately $113 million and added for hot mix asphalt plants and 5 aggregate facilities.
In Alabama, where we acquired good hope contracting and its related entities.
All headquartered in comb on Alabama.
In addition to the 4 hot mix asphalt plants and for aggregate facilities. The transaction also included a diverse fleet of trucks and construction equipment.
These assets will help to support and grow our operations in central and Northern Alabama under the leadership of senior Vice President John Harper President of our Alabama platform Company <unk> construction.
The good hope acquisitions substantially strengthens our capabilities, including project acquisition and execution aggregate sourcing and transportation logistics with these added resources.
We are excited to welcome more than 180 talented hard working employees to the CPI team.
In North Carolina, we acquire Dougherty Springs Corey.
Ah crushed stone in aggregates facility located near goes to North Carolina.
This transaction enhances our vertical integration strategy of construction materials to support our asphalt manufacturing operations.
This aggregate facilities uniquely and strategically located in the rapidly growing sand Hills region of North Carolina.
And we expect to use the aggregates mined from this facilities supply multiple asphalt plants, we acquired last fall.
The facility's proximity to our current operations enhances our project bidding opportunities and we believe this will contribute to future growth in these markets.
In the past 9 months, we have acquired a total of 17 hot mix asphalt plants and added nearly 700 employees.
Looking forward the acquisition opportunities and the increased pipeline activity, especially in new markets is considerable.
This is the reason we've revised our capital structure, providing more financial flexibility, which Allen will discuss further in a few moments.
We see the opportunities we have the capital structure and we have been investing in our organization for the future growth ahead.
Our senior leadership team continues to actively working to identify and engage companies that may fit well into our future growth plans.
As well as prepare the organization for growth and advance.
As a consolidator in a fragmented industry, we continue to gain momentum through acquiring quality companies assets and people to broaden CPI is relative market share and depth of service.
Turning now to what we're seeing at the federal funding level in our industry.
Most of you we are following the process closely in Washington D C and we remain optimistic about the prospect.
We're a significant infrastructure bill, including bipartisan support.
For infrastructure legislation.
We are confident that our nations infrastructure investing will continue to be a primary focus for our country.
Both as an economic driver and is a critical component for public safety.
Regardless of the pathway to increase federal funding all proposals provide for sizable increases in federal surface transportation funding over the fast Act.
In addition, we expect that the fast act reauthorization will be passed before its expiration in September.
As a reminder, this surface transportation reauthorization.
Along with the bipartisan infrastructure Bill proposal total show a greater than 50% increase over the current funding for the next 5 years.
Such legislation would immediately stimulate economic growth and job creation.
While also driving meaningful project demand in late 2022 and beyond.
Lastly, as we stated before the most critical component of our success is our people.
We are deeply committed to our more than 2900 employees.
That are the key.
Driver of our organization and they are crucial for meeting our near and long term goals.
I'd like to personally thank our entire CPI team for their hard work dedication and commitment to maintaining safe work sites for themselves.
<unk>.
As we head toward our fiscal 2022 the begins on October.
It's an exciting time for CPI <unk>.
We currently expect in the next 12 months per potential upside of 20% overall year over year increase in infrastructure spending by our states.
Substantial federal funding increases for our industry and entry into new markets.
I'd like now to turn the call over to Alan to discuss our financial results.
Thank you Jill and good morning, everyone.
Before I highlight our key performance metrics in the third quarter of fiscal 2021, I want to comment on our strategic acquisitions completed earlier this week.
CPI acquired 2 businesses, both of which contribute to expanding our customer footprint on vertical integration efforts the.
The combined acquisition price was approximately $113 million, which was funded from our recently completed term loan and revolver credit facility. This new facility. After completion of these acquisitions provides the company with $214 million of remaining capital for future acquisition opportunities.
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Turning to our quarter 3 results compared to the third quarter of fiscal 2020 revenue was $261.7 million up.
Up 26%.
Acquisitions completed subsequent to June 32020 contributed $31.4 million of revenue.
And we had an increase of $13.3 million of revenue in our existing markets.
Gross profit was $36.6 million compared to $36.9 million in the third quarter of last year.
As we have stated before acquisitions initially put pressure on operating margins, while the 4 acquisitions completed in the first fiscal quarter of this year and the North Carolina market showed significant improvement in this quarter compared to the second quarter. The gross profit contribution for the quarter was only 1% on.
Revenue.
General and administrative expenses were $23.2 million compared to $16.9 million from the same quarter last year the.
The increase in general and administrative expenses was primarily due to $3 million attributable to increased personnel and related compensation initiatives $1 million attributable to acquisition.
<unk> costs subsequent to June 32020, and $1.6 million attributable to information technology and increased professional fees.
Net income was $9.3 million from third fiscal quarter of 2021 compared to net income of $15.7 million in the third fiscal quarter of last year.
Adjusted EBITDA for the third fiscal quarter of 2021 was $29 million compared.
Compared to $32 million for the third fiscal quarter of last year.
You can find GAAP to non-GAAP reconciliations of adjusted net income and adjusted EBITDA financial measures at the end of today's press release.
Increases in liquid asphalt and diesel fuel prices during most of this quarter as well as lower than expected revenue impacted our overall gross profit in our existing markets. Our gross profit margin on jobs on our existing markets continue to exceed our prior year margins.
Turning now to the balance sheet at June 32021, we had $134.5 million of cash and $214 million of future availability under our revolving credit facility after reduction for outstanding letters of credit.
As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 186.
This liquidity provides flexibility and capital capacity for potential near term acquisitions, allowing us to respond to growth opportunities when they arise.
Cash provided by operating activities was from 9.3 million for the 9 months ended June 32021, compared to $51.4 million from the same period last year.
Capital expenditures through the first 9 months of 2021 were $39.6 million.
We still anticipate total capital expenditures for the year of $47 million to $50 million.
We're reporting a record project backlog at June 32021 of $823 million compared.
Compared to $650 million at June 30 of last year, and $773.3 million at March 31.2021.
Approximately 35% of the backlog will be completed in the last 3 months of our fiscal year.
And as Joel mentioned, we are revising our fiscal year 2021 outlook.
Year with regard to revenue adjusted net income and adjusted EBITDA.
We now expect revenue on a range of $940 to $960 million.
Adjusted net income on the range of 36, 9% to $38.4 million.
And adjusted EBITDA in the range of 105 to $108.
$3 million.
In summary, we are pleased with our third quarter results, the recent acquisitions and our project backlog.
I'll now turn the call over to our executive Chairman Ned Fleming net.
Thank you Alan.
Before we open the call to your questions I want to reiterate that the company is performing well we.
We continue to grow organically, coupled with an increased pace of acquisition growth both organic growth and recent acquisitions further enhance vertical integration across the organization.
The result is relative market share is increasing and our existing footprint, while the company is expanding geographically.
The leadership team in conjunction with our board continues to prudently invest in the right people.
Processes and technology to further strengthen and support a robust yet disciplined growth plan.
We are very pleased with the acquisitions announced earlier this week towards the future benefits will continue to be realized for many years, we're getting scale and depth of service offerings, along with a long term focus of capturing more margin from rock to road.
These acquisitions bring new service offering and the addition of 5 aggregate facilities.
All of which enhance our vertical integration strategy.
As a significant consolidator in a highly fragmented industry.
We are maintaining momentum through important strategic acquisitions that provide us with quality companies and great people.
Just as we have done for the past 20 years through many different economic cycles.
Despite short term headwinds there is a very positive long term momentum in the industry and throughout the company.
We expect to carry on with a successful execution of our long term strategy of disciplined profitable growth to enhance shareholder value in our company.
With that we'll now take questions operator.
Thank you we will now be conducting a question and answer session.
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Okay.
Your first question comes from Andy Wittmann with Baird.
Hi, great. Good morning, Thanks for taking my question guys, I guess kind of a series of questions here, just all kind of based around.
Some of the changes in the inflationary environment that you guys discussed here are my questions I guess.
I want to start I guess the first question is what are you doing today in the model too.
Dress inflationary factors and particularly those around the labor markets could you talk maybe a little bit about how the labor market is affecting you.
I guess, maybe a follow up to that would also include.
How are your competitors.
Reacting to these factors are they adjusted presumably their prices. So that you all kind of competing on the same footing.
Maybe you could start there I'm going to keep going with a follow up from there but drove once you're on to what you can do with those.
Okay. Good morning, Andy Thank you.
So.
Inflation's, a real thing and the economy.
<unk>.
Entire economies dealing with.
At CPI.
On the things we've talked about is inflation is mainly a pass through cost for us. So.
As wages increase we immediately putting those back into the bids that we then put out and so.
That's something that.
Our project duration on our project size, that's an advantage.
I would say so it's business as usual for us we take the revised input costs and put them into our bids.
As far as our competitors, they're largely due on the same thing I would say.
Those.
Larger projects projects with a longer duration projects that you have to give a fixed price for.
Those are things where inflation becomes.
More of a challenge and but that's not really the typical nature of our projects at CPI.
And so as we've always said inflation, we just we try to pass that along very effectively.
Okay. So.
Just to drill into that a little bit more I mean, clearly the quarter saw cost pressures here.
From these factors you called them out so.
How much more exposure is in the backlog I guess from.
Contracts that were priced prior to the cost inflation that you have that youre seeing today, and therefore is that risk maybe maybe the amount of backlog, if you could quantify that or or the duration of it sounds like is this is this going to impact to you again in the fourth quarter. It sounded like I think in the press release, you said that it was going to affect you.
<unk> 22.
So.
Maybe you could just kind of address that a little bit more specifically because clearly, it's having an effect and just trying to understand.
When the contracts catch up to the dynamics that youre seeing out there today.
Andy.
Let me let me just say in my prepared remarks I addressed.
Dealing with supply chain issues and labor constraints, it's really not cost increases.
Let me give you a few examples just to help you see so.
While we have <unk>.
Steady work force.
Labor market is so tight right now.
We in any 1 market may have 20 to 30 dump trucks and on a normal basis Theyre running wide open this time of year.
This year, we're seeing that maybe 2 of those trucks at any 1 time may be sitting still because of just the need to find drivers on.
We recently had a site work job, where the utility crew that subcontract it out.
I had to wait a week to get pipe PVC.
<unk> pipe those are that's normally not even an issue in normal times, just the supply chain of getting PVC pipe.
And the last example, I would give you we have a milling subcontractor that normally we count on having 3 crews.
All work season.
And recently.
They let us know what we just have 2 crews right now and so you need to tell us which job can wait and see.
1 on 1 of those crews gets finished so that's just an example, I would say.
For US you know.
I use the example of.
Slight running with ankle weights you know we've got a record backlog, we've got plenty of open running room and we're running we're running as fast as we can as hard as we can.
These these supply constraints these labor market constraints, it's like have an ankle weights on your ankles.
You're just not going to run quite as fast.
We see those normalizing we see the labor markets normalizing over the next couple of months, we're already starting to see it normalize in 3 of our 4 states, where the federal unemployment benefit has been stopped.
<unk>.
It does have an effect, it's a little bit of a headwind while you're running.
So that's really it it's not as much cost increases as it is just our ability to generate top line revenue.
When the supply chain issues that a lot of companies are experienced you know CPI on our vendors and suppliers are dealing with those same things.
That's really helpful context, Thanks, Joe just 1 last 1 on this 1 and then I'll yield the floor, but I was just wondering having done. So many acquisitions I think you said 17 asphalt plants in the last few.
A few quarters here I was just wondering if.
What I would call them more legacy CPI business is managing their labor relations are.
On the ability to deal with some of these challenges differently from the companies that are more recently acquire where maybe you don't know.
The full staff as well are there differences between kind of what you bought recently and the legacy company in terms of that significance propensity of these challenges and how youre dealing with them.
Yeah, Andy I would say when we.
Acquire company wanted to things that really helps is that our benefits and our ability to all for growth and advancement. That's a positive and we've seen that with acquisitions, we've made and so in a sense I think that.
CPI getting and being able to acquire those new markets.
Is help to keep that labor force intact.
But in the new markets, we're dealing with the same issues as we are in our traditional markets.
This is 1 thing that.
I can look across the entire southeast and it's pretty much the same everywhere. It's just.
It's ankle weights everywhere and it's not any 1 thing this dramatic it's not any market that gets shut down its just a little bit of drag across the board and we see that those markets are going to normalize we know that.
But it's just something that we just like a lot of companies are having to work through in the short term.
Got it thank you very much.
Okay. Thank you Andy.
Your next question, Michael Feniger with Bank of America.
Hey, guys yeah. Thanks.
For taking my question.
You only have a few.
Good morning, guys you have a few weeks left to finish the year.
When we look at given the low end of your range right now, we're still talking about over 35% revenue growth year over year, I think 20% growth on the EBITDA line in the last 2 quarters. Your sales have been up double digits and EBITDA has been down so just help us understand on the call like your confidence level even with.
The guide in the fourth quarter.
And the next few weeks that we're going to see that type of revenue growth acceleration on top of seeing some type of leverage to the bottom line is there anything in July that you can tell us that kind of gives you confidence on.
Your ability to hit that.
Yeah. Good question, Michael now I'll take that 1 gig jewel just a breather.
What I would say is what gives us confidence is that there was a significant improvement.
And.
What was causing some of that margin margin compression in the prior.
Bob.
Quarter, and then left still into here and the situation was the acquisitions that we made in North Carolina.
<unk> had.
Virtually no backlog when we acquired them they were in a market where.
All 3 of those 4 acquisitions, primarily did public and a large percentage DLT work and we all know the.
Status of where the North Carolina Dot was last year in the first quarter of this year. So the backlog that we acquired there the early backlog that we added there.
Was.
Not at typical levels for an acquisition.
And for our market. So there was there's been a dramatic improvement between the second quarter and the third quarter and how those acquisitions have per.
Were formed.
And so we see that momentum and that improvement.
Flowing into the fourth quarter so.
That was a big drag in the second quarter.
Much smaller drag our gross profit on.
On that revenue was about 1% in this quarter.
Quickly returning to a more normal our existing operations to.
So the growth that you talked about our organic growth in the.
Third quarter was over 6% year over year.
And that the margins on that work are very much in line with what our original.
Guidance provided about 1% down from last year because of the cost things with liquid asphalt and diesel fuel in the the other things that we've talked about many times before but we see the acquisitions getting.
Sure.
In shape and kind of how would say it is it typically we say it takes about.
12 to 18 months to kind of get them.
Going and I would say the first 9 months of this year.
Ben well below that and so we're getting them back to where they typically would've been on acquisition day. So.
In the in the fourth quarter, we've got about half of the a little over half of that.
Growth percentage that you've talked about the 35% is coming from those acquisitions in a little bit from the 2 that we announced earlier. This week and then the remainder of that almost half of it is organic growth and we see that while not hitting the full.
<unk>.
11% to 12% that we thought at the beginning of the year to getting closer to the 8% to 9% organic growth year over year. This year. So that's what's really giving us confidence about that fourth quarter.
Okay and.
Based on some of the comments about transitory yet.
And this goes back to I think Andy's questions earlier, I mean, it's transitory yet it could bleed for the next few quarters. So I just just to put a fine point on it I mean, your stock's down 9% today because investors are worrying that these headwinds are there any eat into 2022, everyone recognizes you guys have an IDE.
Geographic mix well position for infrastructure. That's that's understood I guess the question is if we fast forward to 2022 and Youre growing your topline, 20%, 25% how much should investors expect the bottom line to grow off that do you guys expect to be able to.
To expand margins.
In 2022, any way to frame that I think would help.
Investors in market right now understand how much of this is transitory how much maybe bleed into the first half of 2022.
Well.
Answered by our expectations is that a lot of the margin drag. This year. The facts are that a lot of the margin drag this year have been acquisitions, and we certainly see those acquisitions returning to a more normal.
Situation so.
In 2022 net to has nothing to do with the.
On the issues with with labor or those type things Rev.
Revenue.
Our backlog is up.
The margin on our backlog.
Compared to what it was we worked through a lot of those very low margin jobs.
We've been able to complete and we've also gotten the volume up because a lot of the drag has just been again.
In different markets, including the ones that we acquired when you have that lower volume and you've added 13 asphalt plants. There is a lot of fixed costs that in the second quarter until much lesser degree in the third quarter.
We didn't recover through those jobs, but our job performance volume say 1 thing our job performance.
Existing pre acquisition markets. The profit margin is actually up on those compared to the prior year.
And again once you work through some of that acquired backlog.
Of that early backlog that we had to book to keep those operations going that's not non carryover into 2022.
Okay and is there any view internally with management you guys have done a lot of these acquisitions right now.
We're seeing from these constraints is there any view to hold back a little bit on the M&A strategy right now digest some of these acquisitions.
And just.
Get get all your ducks in a row for a hopefully to infrastructure package is there I'm curious how you guys are feeling you guys did a lot of acquisitions so far.
And Youre working through it is there any view internally to maybe pause on on.
On the pace of M&A so far.
Yes, Michael I would just say this on.
On the North Carolina acquisitions, we made we took the long term view these were great markets, but clearly.
We always say and acquisitions, we inherit issues with acquisitions that's.
Constant, but all acquisitions that are different.
And these acquisitions, we new.
It would be coming in with very little backlog as Alan said.
North Carolina team has done a great job integrating them.
They are now part of adding to this record backlog, we're adding backlog in these markets at good margins. So I would just I would say that.
We know that acquisitions are.
<unk> always going to take time to get our hands around but with this federal funding Bill.
1 of the things that you.
We are we are investing in our organization. We are trying to get prepared for the growth ahead. So that we can continue to integrate these acquisitions in.
We see a lot of opportunity out there, we clearly don't want to get.
It out over our skis too much we want to be prudent in pes we grow.
But thats 1 of the reasons you see us investing in our organization and our people on our technology is to prepare to be able to handle future growth.
Michael Let me just make 1 statement there we've got a long history and proven history of being able to integrate multiple.
Acquisitions and the challenges in North Carolina, we're not.
Okay.
2.
What had happened with North Carolina.
So on.
Our concern about integrating future acquisitions, there is no concern there because as Jules.
<unk> said the team up here in North Carolina has done an excellent job of doing that and working through conditions that.
Had nothing to do with the integration has to do with the abnormal market when those were acquired.
Understood and fuels al on my last question.
I'll yield that is.
With the acquisitions that have been completed today, Alan how much of that.
What's the number that kind of goes into 2022 that would be incremental so not asking for obviously your 2022 guidance, but interest.
Just based on the acquisitions that have been done through this year. When we think about 2020, how much incremental is that on top of for next year. Thanks guys.
Well the before that were made in North Carolina, We will have 9 months' worth of revenue in 2021, so those incrementally you're probably I mean.
Mining portion of their first year and the new acquisitions, we're probably talking somewhere between 90 and $100 million additional.
Additional revenue.
All in because most of those.
M.
4 acquisitions, they would've had revenue for 10 months this year.
Perfect. Thanks.
Thanks, guys.
Okay.
Thank you Michael.
Next question Joshua Wilson with Raymond James.
Good morning, guys. Thanks for taking my question.
Good morning, Josh.
Just want to clarify a little more.
Just what's the moving pieces are on the margin so.
Presumably you would have seen a known a lot of the margin headwinds from the North Carolina acquisitions. So can you just give us a little more color on the change in guidance was due to.
Any differences versus expectations in the acquisitions versus.
The broader market headwinds that you've talked about on the <unk>.
Labour side.
Yes, Josh I'll take responsibility for that.
When we make acquisitions, we put together.
All projections and models of what we expect them to do based on their history, but also.
What we see any synergies or whatever.
So the timing of these acquisitions they were added into our 2021.
Budget, if you will based on those models, which were modeling normal times, what we what I fail to.
<unk>.
Recognize that we were not making those 4 acquisitions in normal times and so the margin that we've experienced and we have optimism that the.
We knew what the backlog was we were assuming but we had some optimism that the.
Sure.
In North Carolina, the margins would pick up quicker than they did and then also.
Just the lack of volume.
All of work in those.
<unk> and the margin. So it really was more of a forecasting of what they would do in the first year and not basing it on the actual facts that existed in this market.
Our existing operations.
Absent that come in very very close to what we expect.
Josh This is Joe I, just would say.
A large part of our revised guidance is simply dealing with the transitory issues I talked about at the beginning we're just headwind.
And we largely see that.
Working its way through in the next few months, but that's that's the main part of it I would just say on acquisitions.
Some of our best markets today and.
And CPI, where acquisitions, where we had to work through issues in the first 12 months. So we've done this for a long time.
Some of our best performing markets right now are no different than what we've had to deal with the North Carolina the last 9 months.
And regarding the.
Growth in the backlog can you give us a sense of how much of that was due to the north Carolina acquisitions on how much.
The legacy business.
Well, the North Carolina acquisitions, I guess had been in the backlog.
Since we acquired them so any growth in this quarter.
Would.
It would not be.
I would not really have a factor.
That much I mean, we started as Joe said earlier, we started adding backlog to those just like we have our existing markets but.
We typically say that.
Normally we would have.
9 months backlog is what we would shoot for and if you took their revenue.
If you compare on backlog last year to this year than that probably would be in the $50 million to $75 million range of backlog, if youre comparing to last quarter. It was already in last quarter.
And last 1 from me peers have called out margin headwinds from asphalt and diesel can you give us a sense of to what it.
Commodity costs and timing had on on there.
<unk>.
Yes.
Yes.
First I'd say is it.
If you go back to our original guidance this year, we anticipated these.
These cost increases.
In asphalt and diesel and that's really has played out very close to what we expected for the year, if youre comparing to last year than this year. We had last year. We had those things were dropping and gave us a tailwind this year, they're giving us a headwind, but really they have not been.
<unk> different than what we anticipated this year so.
But from a margin standpoint, compared to last year, it's probably somewhere between $1 million and <unk> million dollars $5 of impact this year that we didn't have last year, but.
From what we anticipated it really is very little difference.
Got it good luck with the next quarter.
Thank you.
Next question, Adam Thalheimer with Thompson Davis.
Okay.
Hey, good morning, guys.
Good morning, Adam.
On the good hope acquisition can you characterize that for us from the standpoint of.
Does it feel like what you did in North Carolina or does it feel like theyre coming in with a healthier.
Backlog on better momentum.
Yes, Adam.
We're excited about the good hope acquisition, it's 1 we've been looking at for a long time.
And it's a great company. If you look at the math, it's almost a perfect fit with our existing operations between Birmingham and Huntsville.
And so we're excited about it gives us 4 new markets for our hot mix asphalt and to build to do work in those areas and for aggregate facilities that support that.
They came in with a healthy backlog and Theres been no.
There was no abnormal issues were in North Carolina in 2019 and 2020.
So I would say just feels more like a normal acquisition, that's a large acquisition the largest 1 in CPI history.
We're excited about it and.
So we're integrating them and we'll be moving forward we're already.
Winning work in those areas with.
The new the new assets.
Alright, Julian I'd liked your ankle wave comment, but I was thinking as you were going through that.
As an industry can you guys can the industry work its way out of that.
Without seeing it.
Often demand.
Well I really just see it Adam.
I read somewhere where there are 7 million fewer workers right now than they were pre pandemic and that's a huge impact on the labor markets and whether youre in restaurants or service industries or on the construction industry that has an impact and but I think those are going to normalize as we get back to normal.
We're already seeing that.
So I don't think that it really will affect demand at all we're seeing a lot of bidding opportunities.
Southeast has expanding economies and when you talk about the funding.
And last quarter, our states, we're going to have 20% year over year increases in project Lettings due to healthy budgets in the Covid relief funds.
We're seeing that in the Lettings that we're bidding now and then with what they are talking about in Washington with Reauthorizing the surface transportation Bill.
That's going to be a nice increase even if even if they don't get this bipartisan infrastructure bill through just the surface transportation Bill alone.
To provide a lot of stability for our industry for the next 5 years.
So I think that.
It's not going to really affect demand I think what it is going to affect our ability to generate revenue and get us back to normal.
Sounds good I'll leave it there thanks.
Alright, Thank you Adam.
Next question, Andy Wittman of Baird. Please go ahead.
That would be.
Good day here, a little bit more about some of the investments Joe that you are making you talked about at the top of the script.
Company has obviously grown a lot.
Youre, putting some resources behind it what kind of resources.
Hum.
To the show up on SG&A or in the project level.
Maybe for you Alan what's a good new run rate for SG&A, recognizing that there have been some deal costs and other things in SG&A. Historically, so if you could just help us with the channels on that front.
Andy I would say as we look at.
On the healthy south eastern economies and increased infrastructure spending, but also really just the chance to enter new markets and adjacent states.
It is prudent for us to invest in our people and technology right now it would it would be.
Negligent for us not to get ready for the growth that's coming so we are investing.
In our staff and our infrastructure.
<unk> technology and our ability to.
Manage our higher level workforce, a bigger workforce.
We are in the middle right now of investing an entire new ERP system.
So those type of things.
That's that's planting now for the harvest to come and it is an investment, but we really don't look at this quarter to quarter.
Sure.
Managing for the long term and we see that now is the time to get ready for that and so it does show up in a higher SG&A costs right now but.
That's the prudent thing to do I'll, let I'll, let Alan go over the numbers, but that's what we're really doing.
Yes, Andy.
A lot of the cost.
<unk> there is call it deal cost if you will in this.
Third quarter that if we don't make deals.
And do due diligence on acquisitions would not be in future quarters, but as you've heard you all say, we're not we're not putting the brakes on that so those will be in there.
<unk>.
As far as the fourth quarter of this year I think the third quarter run rate is plenty adequate to model out for the fourth quarter.
There will be.
A little bit of increase there because of the 2 acquisitions that have been made since then they will have some but it won't be significant won't be a significant change in the in the fourth quarter. They will be and they are pretty much for 2 out of those 3 months. So.
Going into the future.
We will continue as we have opportunities to make acquisitions to do those and that will obviously impact the G&A, but.
On a lot of the lot of the kind of surge in it if you will has happened.
At the same percentage.
Yeah, Okay, and then maybe just 1 final question here just on the on the cash flow CFO. So far this year last year was actually a good first 9 months.
To be sure, but this year is a lot weaker than I thought maybe you could talk about some a lot of your working capital accounts or use of capital.
Certainly the business has got good growth characteristics, but I was just wondering is there anything else there that we should be thinking about or that you're thinking about as you look at these working capital accounts in terms of opportunity to get some of the cash back out of the business.
Yeah, Andy Great question.
We've said this before.
Because of the nature of the acquisitions that we make which are asset purchases.
Our purchase price does not include working capital that we're going to need for those in the future that that those receivables and payables are staying with our sellers and so then we have to.
Basically fund that working capital post acquisition, so with the number that we've made this year on the revenue you've got part of that is happening there.
Other thing is we.
Inventory cost, whether it be rock, but specifically liquid asphalt.
We've got the large facility with the terminal.
<unk>.
When we fill those tanks. This year, it's virtually it's basically twice the inventory. So are just at the liquid asphalt terminal.
There is over $8 million worth of more inventory sitting in there than there was last year a large part of that is price, but also we're filling because prices are rising we're trying to keep the tanks Fuller.
What I would say as far as the basics of days in receivables and days and payables, which can be a big driver of that.
That is not.
<unk> changed our.
Receivables are not any different are aging our payables are not really different another thing that impacts that is the fact that our private work is up from a year ago and private work we have retain each on those so if you look at the Contra.
Retain age.
It is up.
And that's just a function of.
When you do public work and its bonded.
They don't with whole part of the payment. So it's really those factors that are driving it.
But at some point that stabilizes if you're not.
If youre not grow in 2020 something percent in a year or so.
Alright, Thank you very much.
Thank you Andy.
Next question Zane Karimi D a davidson.
Hey, good morning, and thank you for taking the time to taking my questions.
Good morning Zane.
So first off I know you guys touched upon the inflation dynamics in play over the quarter, but to what degree and how would you quantify the project delays.
And the supply and labor constraints.
Yes.
I thought about that and it's hard to quantify exactly.
Somewhere where some other companies said it was about a 5% revenue headwind.
I thought about that net that sounds about right. That's about what we adjusted our guidance for the third and fourth quarter.
So it's hard to get it exact but that feels about like what the ankle weights create in the short term.
Is that.
But I would just say we have grown 20% year over year and so we're growing in this environment, we're running hard.
It's just where these ankle weights were not running as hard as we had as.
As we have the opportunity to our backlog gives us the ability to run.
Even faster than we are right now.
No.
In terms of quantifying that that's probably a good range anywhere between 5% to 7%.
Zane this al on the good thing is as we've said when we've talked about other types of delays, whether it be weather or whatever that backlog doesn't go away no 1 cancels or contract or anything.
Typically this time of the year on.
Our backlog if you went back for the last 8 or 10 years other than if we made an acquisition in this quarter our backlog will go down because we're completing.
60% of our work in the last 2 quarters.
But that backlog it went up this year part of that is the shortfall in completing revenue but.
Over half of that was that increase was just because of the amount of work that's out there and.
That backlog continues out there to be done.
On delays or changing the margin profile of that work either that's another big factor on at some point when that additional volume goes through our asphalt plants and goes through our.
Equipment usage will regain some of that margin that was lost on those fixed cost that.
For that impact us in the part of the year that we only do 40% of our revenue so.
M.
Okay.
Thank you and that kind of lead Brian The next question on backlog.
Pushing all time highs 823, I believe it was.
Can you talk maybe a little bit more about the composition on its backlog either from a geographic standpoint on margin standpoint are whenever you find most compelling over the current backlog composition.
Yeah of the good news is that backlog is growing in virtually all of our markets and we look at our markets not as just a state, but we look at all.
Yes, 52 markets now.
That we're in as far as our hot mix asphalt plants. So we're seeing strong demand in all of those were.
Across our entire footprint certainly there are some that are.
Stronger than others and the recovery of the D O T in North Carolina has been a big factor in the place.
Places in North Carolina, being able to grow there and that's why it was important that we made the acquisitions. When we did because it gave US 13, new markets in North Carolina to bidding and so, but it's really across our entire footprint because all the states that we're in a very strong <unk>.
<unk> dot budgets, not just the money thats coming from federal but they're passed gas taxes. Some of those that have been indexed and that are phased in or kicking in so it really is a strong demand.
Across all of our markets and as juul.
Mentioned earlier.
Fortunately our competitors are seeing that they've got cost increases. So they are raising their cost and we're not seeing any kind of margin compression at the bid table, we've seen that begin to come up.
As a percentage on our backlog not just because we're completing some of the low margin work that we've completed in these last 6 months, but also because the margin that we're bidding on new work is is improving zone.
Great I appreciate the color I'll jump back in queue.
Thank you I will now turn the floor over to management for closing remarks.
Okay. Thank you operator, just wanted to thank everybody for joining today's call. We look forward to speaking to you again, we're excited about the growth opportunities for the future and we look forward to speaking to you next quarter.
Have a good day.
This concludes today's teleconference. You may disconnect your lines at this time on thank you for your participation.
Okay.
Yes.
Okay.