Q2 2022 Construction Partners Inc Earnings Call
The groundwork for future growth and success.
In this second quarter, our year over year revenue grew 36%.
Of which 17% was from acquisitions and 19% was organic growth.
We also ended the second quarter with a record project backlog of nearly $1 3 billion.
More importantly, our backlog margins continue to grow and we anticipate that this healthy backlog margin expansion will mean higher future profit margins as backlog has converted.
Taken together this strong top line performance record backlog and higher backlog margins are evidence of the continued robust demand for our infrastructure services throughout our five states in 57 markets and in multiple sectors.
We continue to see healthy growth in the southeast economy, and strong private market bidding activity on.
On the public side.
Each of our five states continues to have healthy funding for their transportation and infrastructure programs boosted this current year by the Covid relief bills.
We continue to expect that the federal infrastructure Bill will begin to flow into state budgets later in our fiscal year and become a contributor to our fiscal 2023.
Providing opportunities on numerous types of projects.
These include not only highways and bridges, but also airports and railroads.
<unk> actively preparing to have the workforce and equipment to participate in this generational investment in our nation's infrastructure.
Turning now to the current cost environment.
Continued inflation and accelerated cost led to an adjusted EBITDA of $7 8 million compared to $11 million in the same quarter last year.
To begin with an update the supply chain and labor shortages that began in the spring of 2021 are still very much a fact of life throughout the construction industry.
But as we predicted for the last few quarters CPI has learned to manage through these challenges and to acquire the workforce and resources needed to create top line revenue as evidenced by our growth.
To protect the bottom line for the last nine months, we have been managing through the inflationary effects of these resource shortages by building contingencies and cost escalations into our newer beds to deal with the unprecedented and sharp inflation that began to accelerate last summer and continues today.
This process is ongoing and the results will begin to show is this more resilient and higher margin backlog is converted to revenue.
And additional new challenge this quarter was the rapid rise in energy cost driven largely by the invasion of Ukraine.
This sharply escalated the cost of all energy commodities, the most impactful to CPI in the price of diesel fuel, which had an approximate 43% increase in the span of just over 60 days.
While much of our internal operation is powered by diesel fuel. So also as the fleet of our subcontractors and suppliers.
Gasoline liquid asphalt and natural gas also experienced significant increased costs in the quarter and we have taken immediate actions in response.
We raised our fleet rates used in bids to reflect the new market prices of diesel and other fuels.
We are incorporating additional contingencies into project bids and we have begun implementing diesel fuel index mechanisms with our customers and suppliers where possible.
We are assured that our competitors have experienced similar cost increases by the fact that we're still able to win bids and to book record project backlog with expanding margins.
So even as we deal with this new inflation caused by geopolitical events.
<unk> is adapting to succeed in an inflationary environment and remain steadfast on the pathway to higher margins.
To illustrate this path and the value of Cps business model.
Shorter duration projects remember, we entered into our new fiscal year on October one.
With approximately $1 billion on backlog.
And in the first two quarters of our fiscal year, we've completed approximately half of that beginning backlog.
Most of this completed backlog was the older half with lower margins and fewer contingencies that was booked prior to the summer of 2021.
Most of the remaining backlog from the first of the year will be converted into higher margin revenue during the second half of our fiscal year.
We expect this trend of steady growth in margins to continue in FY 2023, as well as our new backlog being added in FY 2022.
Reflects approximately 250 to 300 basis points higher margin compared to the previous year.
Just as aggregate suppliers or raising prices in this demand environment CPI is essentially doing the same thing in the contracting space.
Turning now to acquisitions, we made two strategic acquisitions in March.
In Florida, we acquired GAC contractors, which included one hot mix asphalt plant as well as experienced asphalt rating and site work crews and their related fleet of equipment.
GAC, it's historically been a large presence in the rapidly growing Florida Panhandle region in both the private and public markets.
In North Carolina, we acquired an asphalt paving contractor southern asphalt located in the coastal city of Wilmington.
Both of these acquisitions give CPI and opportunity for future organic growth and high relative market share in those two dynamic regions in the southeast.
Our acquisition pipeline continues to be full as we see great companies that strategically fit cpi's business model.
While we are a consolidator in a very fragmented industry segment, we remain patient and focused on finding acquisitions that expand our footprint and increased both our manufacturing and construction services vertical integration.
Our goal continues to be growing relative market share while also capturing more margin along the value chain of services.
The strong revenue and demand environment in both the public and private sectors across our 57 markets.
Provides tremendous growth potential for the future of CPI.
We are also well positioned to capitalize on future infrastructure demand that the $1 two trillion federal Bill will create over the next decade.
We began the third quarter with our highest backlog in our company's history and expanding backlog margins.
We are adjusting our full year expectations based on higher revenue and the cost impacts on profitability in the first half of our fiscal year.
This revised outlook reflects revenue and profitability for the second half of the year, which is largely in line with our original expectations.
We anticipate a strong second half of fiscal 2022.
With both higher revenue and margins and carrying that momentum into fiscal 2023.
I would now like to turn the call over to Alan to discuss our financial results and revised outlook in greater detail.
Thank you Julien good morning, everyone I'll begin with a review of our key performance metrics from the second quarter of fiscal 2022.
Revenue was $243 4 million up 35, 9% compared to the prior year.
Acquisitions completed subsequent to March 31, 2021 contributed $29 $9 million of revenue and we had an increase of $34 $4 million of revenue in our existing markets.
Gross profit was $12 5 million compared to $18 1 million in the same quarter last year.
General and administrative expenses were $25 million or 10, 3% of total revenue compared to $24 5 million or 13, 7% of total revenue in the prior year.
In fiscal year 2022, we expect general and administrative expenses as a percentage of revenue to remain in the range of eight 5% to 9%.
Net loss was $9 4 million for the second quarter compared to a net loss of $4 9 million for the same quarter last year.
Adjusted EBITDA for the second fiscal quarter of 2022 was seven 8 million compared.
Compared to $11 million in the second quarter last year.
You can find GAAP to non-GAAP reconciliations of adjusted EBITDA financial measures at the end of today's press release.
Turning now to the balance sheet at March 31, 2022, we had $29 $6 million of cash and $77 $7 million of availability under our revolving credit facility.
The reduction for outstanding letters of credit.
As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 274.
This liquidity provides flexibility and capital capacity for potential near term acquisitions, allowing us to respond to growth opportunities when they arise.
Capital expenditures for the second quarter of fiscal 2022 or $19 $6 million we.
We expect capital expenditures for the fiscal year to be in the range of $60 million to $65 million.
We're reporting a record project backlog at March 31, 2022, 128 billion compared to $1 <unk> 9 billion at December 31, 2021, and $773 3 million at March 31 2021.
And finally as was noted in today's earnings release, we are revising our fiscal year 2020 outlook for the year with regard to revenue net income and adjusted EBITDA.
We now expect revenue in the range of 1.15 to $1 2 billion.
Compared to the prior range of $1 75 to 1.15 billion.
Net income in the range of 14, 5% to $25 3 million compared to the prior range of 34, seven to $41 $8 million.
Adjusted EBITDA in the range of $105 million to $123 million compared.
Compared to the prior range of $122 million to $132 million.
In summary, we're pleased with the demand for our infrastructure services driving top line growth as well as our record project backlog with growing margins.
I'll now turn the call over to the operator.
Thank you we will now be conducting a question and answer session.
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Your first question comes from Andy Wittmann with Baird. Please go ahead.
Hi, Good morning, gentlemen, thank you for taking some time with us this morning.
When Andy.
Obviously, the story and the questions are going to revolve around the margins and your ability to.
Kind of get back to historical levels, So I'm going to start by asking questions around that this way.
I do.
The calculations on what the.
The guidance for the second half of your fiscal year implies it suggests that your margins should be up about 160 basis points over the second half of last year.
And this is obviously against a highly inflationary environment. So Alan maybe could you talk maybe about.
The confidence that you have and expanding margins by that much in the second half.
Based on what's in your backlog today, maybe discuss.
How much of the backlog that's going to be burned through in the second half as quote new backlog that recognizes this would be kind of one way to frame that.
Answer, but but other things that you could add would be helpful. I think.
Yes, Andy. This is this is Joe good morning all.
Start and Alan can.
Liam.
Under those.
Calculations would be asked so.
We understand as we looked at our guidance.
That.
The margins will be a question and.
Here's sort of how we see it.
When we ended our third quarter in 2021, we had an $823 million backlog.
Sure.
Inflation really was on our minds that was booked.
Once we realized inflation was really.
Going to be a large part of.
The economy in our.
Our operation, we started bidding with contingencies and and trying to get ahead of inflation.
The reality is in the fourth quarter, we burn some of that backlog, but we brought about $575 million of that pre input inflationary mindset backlog into.
This fiscal year.
In the first two quarters of this year, we burned about $445 million of that off.
So what gives us confidence is a lot of that is behind us and most of the backlog we have moving forward.
We knew inflation was going to be a factor and so it is going to be at higher margins.
We feel like that.
About in the second half of our year.
About 20% of our project revenue is going to be completing that backlog.
About 60% of the revenue is going to be work that we did both in the fourth quarter of last year in the first quarter. This year.
But as you know in the spring time and summer.
Do a lot of book and burn work that we were able to book in the winter and.
And the pricing acceleration that we've seen this fiscal year and this winter.
We think is going to really help our second half of the year and start to show up in the results. So I will let Alan.
Give some color to that but that's really where we get our guidance from.
Yeah, Andy kind of looking at it at a quarter. This year in the quarter last year first half of this year first half last year versus second half.
Jules point last year, we started off the first two quarters is pretty good, but we kind of faded in the last two quarters last year, because we were beginning to hit those inflationary costs and they were beginning to impact what should have been the best half of our year and muted that a lot. This year were really.
Having the reverse of that we got really hammered for reasons Jewel just talked about in the first half, but our second half compared to last year as an improving second half this year over the first half compared to a declining second half last year. So that's what gives that 150 basis point difference in March.
But really our second half this year is just returning more to the normal of what we've seen.
And regular years.
A big part of that improvement is that change between the timing of when those jobs would be at and what margins and what cushions. We've got in those.
That makes a lot of sense. Thanks for the thorough answer to that for my follow up question I wanted to ask about the backlog and obviously, it's a big number its up a lot sequentially and so that's all fine well and good and our pre inflationary environment. We wouldn't have had to ask a question about how.
<unk> has affected that backlog, but clearly you're increasing prices.
To get this margin back so.
I guess, maybe if you could talk about.
The actual volume increase is.
Maybe on a sequential basis since the since last quarter and how much of.
The increased backlog is just price increases maybe another way to answer that question would be.
Talk about the level of price increase that you need today.
Today versus maybe six months ago even.
To earn the same.
Profit margin.
Yes, Andy.
Quarter over quarter backlog I think grew just around $200 million, even as we burned off we had a good revenue quarter.
So clearly.
Pricing is going up.
And that's reflected in our beds and in our revenue. We also are our hot mix asphalt tones or.
They're up 35% year over year.
57% and that drives a lot of revenue.
No.
Does that answer your question as far as the backlog.
Yes.
<unk>.
I guess just the question I had on whats the price increase that your customers are seeing basically to cover the inflation that we've seen in the last three months is that percentage.
Percent increase or what how much is that just to kind of get back to level set how much you need get your margin.
Yeah, Andy or are new work that we're selling now we're seeing a 250 to 300 basis points.
Increase year over year in margins.
And so.
That's a 20% to 30% increase in some cases so.
Part of that is to cover inflation and part of that frankly, just pricing acceleration that we're seeing the big backlog.
On one hand, we have to convert it and so inflation and inflationary environment, especially when you get a surprise like we did in this quarter with the energy cost you have to absorb that.
But the positive of having a really strong backlog as it allows us to be patient allows us to bid with higher margins and we're seeing that having a healthy record backlog is allowing us to drive pricing acceleration faster than we had anticipated.
Thanks, guys, maybe one thing to at least in this quarter with the two acquisitions, we made part of that.
Backlog increase was related to that so.
That was probably 35% to 40% of this quarters increase it wasn't just totally price increases are booking more quantity of work to do.
That was a that was a pretty.
Pretty good factor in this.
Particular quarter.
That's helpful. Thanks.
Thank you Amy.
Next question Stanley Elliott with Stifel. Please go ahead.
Hey, good morning, everybody. Thank you all for taking the question.
In terms of the New guide could you help us in terms of expectations for organic versus acquisition given some of the deals that have been recently completed.
Yes, good morning Stanley.
We had originally said are.
Organic growth was going to be in the 7% to 10% range, obviously with the first two quarters. We've had we feel like that's going to be at the high end of that range.
And we're very pleased with the organic growth we've had that we focused on that and building relative market share in the markets, we're in and vertically integrating in our construction services. So.
We're pleased with the organic growth and we think it'll be in the high end of that range. We had originally said acquisitive growth will be 13% to 16% and obviously with these two acquisitions, it's going to be higher we envision that being around 19% to 20% now.
Okay.
And can you talk a little bit about some of the mechanisms you have in place kind.
Kind of intra quarter to protect the bids.
Right, because it's not only diesel costs, but also I'm, assuming repair and maintenance costs or higher labor costs are.
Increasingly more challenged.
Just holistically.
Little help on how you guys are addressing the cost side of the equation.
Yes.
Stanley.
This past year, we've talked about how inflation is normally and historically been a pass through cost for CPI.
We realized as inflation was pretty slow moving for a decade and so it was a pass through cost, but as it sped up we've had to speed up.
So in our bids now we look at wage rates, we look at repairs and maintenance costs. We look at the price of energy and we tried to get ahead of it.
Someone told me inflation, managing inflations like throwing a football to a speedy wide receiver.
So we've had to learn to.
To lead and to get ahead of inflation, so it's a little bit of all of that.
But within that context, I mean, if youre bidding things 200 5300 basis points higher.
In all likelihood, you're probably going to be realizing something less in terms of the margin because of inflation in some of these other buckets.
Or is that statement correct.
Well leap.
When we say 250 to 300 basis points higher Stanley.
That's our margin what we hope to do is cover the impacts of inflation by looking at as we estimate a job we look at it piece by piece our fleet our plants, our labor our subcontract. So we hope that cover all of that and the cost impacts clearly surprises.
Can impact margins, but what we tried to do for the last nine months is to really start bidding and putting those contingencies and escalators into the cost side of our bids.
And lastly are you guys anticipating any sort of mid year price increases in terms of like clean stone in and things like that that would be.
Part of the project.
Yes.
We have seen price increases from suppliers that can.
Pass along cost increases we've tried to anticipate that in our guidance, but yes.
Clean stone is a significant part of the inflation in the construction industry now.
And I would just say historically we have.
Anticipated those items other than the petroleum based wounds going up once a year.
Now we've seen that not only is the price increase we've seen since June <unk>.
September we've got in there what we have anticipated there will be at least a second price increase in those types of items.
Aggregate and things like that and of course, obviously liquid but other things. So we've not assumed that the price increase we've gotten so far is it for the year theres going to be continuing rounds of price increases on different matters and that's part of what we're talking about when we estimate our costs.
Don't say, it's just even though it's a six or nine month contract for us that those costs are going to be the signing throughout that six to nine months, which is what we would historically assume we're now putting escalators within even the six to nine month contract that says we anticipate all the types of prices.
Go into that cost are going to go month by month end.
And we're putting in a contingency for the ones that are not item by item and Thats, what we will get eroded first before the margin starts getting eroded.
Great guys. Thanks, so much I appreciate it best of luck.
Thanks, Dan.
Next question, Josh Wilson with Raymond James Please go ahead.
Good morning, and thanks for taking my questions.
Good morning, Josh.
Maybe just to make sure we're all level set as far as the impact of acquisitions.
Hi.
Figure out future impacts from changes in oil prices can you give us a sense of what the year on year impact was from diesel and asphalt in the quarter.
The impact of energy cost in the quarter.
Josh.
We feel like it was several million dollars roughly roughly half.
Sort of the shortfall was just from energy costs.
And probably and just the other half roughly was just from the backlog that we completed that we had on backlog before sort of the new world hit us.
And what role is your asphalt terminal plain and maybe needing some of the effects and pushing them out or is it emptied out at this point.
Yes.
I would say the asphalt terminal.
One is having a great year, but number two it is helping us and helping our operating companies smoothed out some of those spikes in energy.
That's been a positive.
They've been able to bid with confidence we have been able to fill up our tanks. When we saw that prices were going up.
So I would say all in all the asphalt terminal on the Gulf Coast has been a real positive for CPI through this quarter.
Josh to kind of.
A little bit on that typically we're going to fill our tanks as full as we can during the winter and that gives us lower costs.
Then as we progress like we are now beginning to go into the summer we would hold less asphalt in those to kind of run out right at the end of the season and then fill back up.
The prices escalating like they have been.
Keeping them Fuller.
Then we normally would have this year, so that instead of having a <unk>.
<unk> 30, or 45 day supply that are operating companies. No. This is what my cost is going to be we're trying to keep that 60 to 90 days when the tanks are full for those markets. So it not only protection on price, but it gives you a lot more player P for a longer period of time because of that store.
Ridge flexibility we have.
Great. Thanks, so much.
Thanks, Josh.
Next question, Adam <unk> with Thompson Davis. Please go ahead.
Hey, Good morning, guys, Hey, Matt a question on on win rates I am curious if as you have been raising prices and putting in more contingencies, if thats affected the win rate at all.
No Adam we haven't really seen them.
A real change in the lab.
I would say nine months on that we clearly have been.
Patient with our bids and.
But we really haven't seen a lot of that we're clearly booking a lot of backlog and higher margins, but we really haven't seen that we're winning a higher percentage or a lower percentage.
I think our I think that people are bidding against are also winning work.
So we see.
We really haven't seen a big change there.
What it indicates to US Adam is that those competitors are facing the same.
Cost increases and that theyre getting those into the b because what can happen.
We are raising our prices at much and theyre not at win rate goes down and that means theyre not theyre not yet aware of what's really happening in their cost. So it really gives us good.
<unk> if you will that they are seeing the same things, we are and they're having to get that into their bids.
Got it okay that is good and then.
How does the current environment affect your M&A pipeline.
We really Adam Havent seen that the current environment has really changed our M&A pipeline.
Sellers that we're talking to their priorities really haven't changed.
King.
What's the best plan for their family.
They're looking at how CPI is going to treat their employees.
So we really haven't seen a change there, but our M&A pipeline.
As full robust we're talking to a lot of folks, but we're able to be patient and be selective to find the best strategic fits.
So and we're having some conversations with some really just some great people from high quality companies in some good markets. So.
But.
They clearly are experiencing the same current environment, we are because I talk about it with them.
So in that sense, but it really doesn't change their long term planning.
Got it okay.
Good color thanks, guys. Thanks.
Thanks, Adam.
Next question, Brent Thielman with D. A Davidson. Please go ahead.
Hey, guys good morning.
Morning, Brett.
Hey.
Hi, most of my questions been answered jewel, but maybe just your perception on what youre seeing in the private sector market, obviously the market.
Concerns, but deep background in the industry said that great. So.
What are you seeing anything there.
Yeah, Brett I'm going to let Ned who's sitting here answer that he obviously is in touch with a lot of different businesses. So I'll, let him give it give that answer and ill I may follow up Nick.
What we would see the private sectors really strong, particularly in this part of the country and I think youre seeing an economy that is.
In many respects regionally based.
We happen to be in the fastest growing regions in the country.
Whether you travel when I'm traveling to Raleigh, Durham, or really any one of our 57 different plants, you're going to see growth.
The public.
Projects growth Youre also going to see a lot of private growth.
Particularly today around airports ports et cetera, which is part of the $1 two trillion dollars of infrastructure build that hadn't even come through yet.
So from our standpoint.
The private sector as part of what your dynamic about this.
Really the organic growth the organic growth is substantially higher than annual price increases that we have made to date.
See that continuing.
From the standpoint of acquisition growth what does happen the acquisitions in a time like this is the same thing that happened to us.
<unk> nine and 10.
If people are on the edge and on the verge of selling or thinking about selling from the standpoint of generational planning this pushes them over that point.
And we've ended up being able to do some things.
Structurally and contractually with the acquisitions that.
That we did back in <unk>, nine which benefit us as we move forward.
So I think as I look out into the future, although there's a lot of uncertainty around supply chain and inflation.
Our European or political.
What we see is a market that dynamically growing.
Theres lots more demand than supply frankly, and when that happens margins go up they're going to continue to go up we say.
For in the near future for the extended future probably.
Which we think is positive acquisitions are going to come in at a pace you know that acquisitions are coming at a different pace. We actually had one acquisition that we talked about that just came in off the website.
I would have never thought that'd be the case five years ago. So I think as I step back and look at it I think this is one of those periods where.
We're learning things.
This company hadn't gone through the inflation market. The last time that I saw was 19, 82% 83, LNR rolling to the table old enough to remember those days.
They've reacted quickly our systems allow us to be able to react as dual set on a piece by piece basis.
The integration of services as well as the vertical integration and the materials has helped us we're really seeing a benefit to that as we move forward. So what's the infrastructure Bill we're going to do roads bridges airports.
<unk>, even railroad infrastructure, which is something that is.
Part of the vertical integration into the services that we'll be able to benefit from.
So as I look out there I think margins are going to continue to go up it's going to be probably a little bit of a choppy ride its never smooth curve.
Organic growth is as strong as we've seen it.
Really in a long long time, probably 15 16 years.
So from the private sector standpoint, we're in the best part of the country.
If you travel happen to come to Raleigh, Durham, or Birmingham or.
Pensacola.
Tallahassee make sure you pick a protocol is a rural driving round because the growth that we see as we travel the markets that we're in.
Is really terrific and so the demand for our product is the best that I've ever seen it in 20 years.
Brian This is Joe.
Just to give you a little tactical perspective on the private market, it's going to be about 35% to 40% of our revenue this year.
Is pretty much in line with historical norms, maybe up a tick.
And as the federal Bill really starts to work its way into the project Lettings. Later this year, we anticipate that moderating down into the low thirties.
Next year, that's our that's our outlook.
Our mix of private to public.
Really helpful. I appreciate that.
<unk>.
Yes, I guess the other question that oftentimes comes from.
From investors is just with all this inflation sort of across the board.
Potentially jobs, having to be reassessed in terms of costs.
And.
In our agency is having finite level of funds to deploy that.
Some jobs can be cannibalized, some things are getting more expensive how would you how would you address that question and what Youre seeing.
Yes, Brent we already hear from our Dot's.
That the federal money come into them is willing to increase their spending it is going to increase their list of projects to do but some of that money is going to cover the higher costs of those projects. So that is a that is a reality that the <unk> in all the states are dealing with.
So we anticipate more work being let as a result of the federal Bill and Theyre healthy mechanisms in the states, but inflation is going to probably eat up a few of the projects at the end of the list, but the good news for us.
That have increased their gas taxes.
And therefore, they're going to have the capital to match the federal Bill So from our perspective, and we're doing shorter term projects I'll just take our strategy works and the environment that we're in much better than many other strategy.
Yes, really appreciate the answers very helpful. Thank you.
Thank you Brent.
I will now turn the floor over to management for closing remarks.
Okay. It's good talking to everyone and we look forward to talking next quarter. Thank you have a good day.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.
Okay.
Yes.
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