Q3 2022 Construction Partners Inc Earnings Call
To additional factors that boosted the third quarter's top line were favorable weather across our region.
as well as an approximately $10 million of revenue from liquid asphalt index adjustments due to the large increase in asphalt prices during the three month period.
Despite our strong performance in the third quarter.
Today's economic environment remains challenging in the three years of labor, inflation, and supply chain. In the three years of labor, inflation, and supply chain.
The labor market continues to be tight and very competitive.
However, we believe our model is prevailing by offering local and steady work that allows our employees to be at home every night have great benefits and opportunities for advancement.
with a dynamic and growing company.
On our last call, I discussed the inflation hitting the construction industry.
We don't anticipate this inflation going away anytime soon.
That said, our model of shorter duration projects.
is allowing us to pass through more of these higher calls at the bid table and add back on with more call assessor's built into our estimates.
In regard to the supply chain, this area continues to be very inconsistent.
and CPI is currently having to manage through this abnormal environment.
Whether it is rock deliveries by Railroad and South Georgia in Florida.
Seaman in South Carolina or Pipe in North Carolina.
It's a daily fight to be productive in this environment.
With these challenges, I consider our results as quarter to be a testament.
to the perseverance of all of our employees and their ability to adapt to an ever changing micro environment. and their ability to adapt to an ever changing micro environment.
as we move into the last quarter of our fiscal year.
due to the high revenue in Q3 and the record hot backlog.
We are raising our FY22 Outlook for Revenue.
We have also revised our outlook by tightening our Justin EBITDA ranges.
which maintains the same midpoint as before.
From a margin perspective, we spoke last quarter about how margins would improve from Q2 to Q3 to Q4.
That is still the case.
The pre-inflationary backlog that we have had to work through has mostly been completed now. And we are steadily adding newer backlog at higher margins.
We continue to see our pricing of new backlog.
being added, reflecting approximately 250 to 300 basis points higher margin compared to the previous year.
We expect this trend of steady growth in margins to continue into FY 2023.
Current now to acquisitions.
Earlier this week, we announced a purchase of Southern asphalt, a bolt-on to our South Carolina platform, King asphalt.
This expands our footprint into the dynamic of the Emerald Beach Metro area.
We've added two hot mix asphalt plants and more than 200 employees.
Serving an area that is considered among the fastest growing markets in the nation, providing us opportunities to bid on the attractive mix of public and commercial projects.
In regard to future acquisitions, we continue to have conversations.
with potential sellers both inside and outside our current footprint.
And we remain patient and focused on finding the right strategic acquisitions that expand our footprint and grow our relative market share. And we are now in the market share. And we are now in the market share.
Before turning the call over to Allen to review the financials.
I'd like to reiterate our optimism for the future of CPI.
Despite having to adapt to a challenging operating environment the last 18 months.
Our long-term strategy has proven to be sound, and we have consistently stayed focused on executing that strategy and building value for our shareholders.
We are well positioned throughout the Southeast to continue to grow in both the public and private markets.
We are also poised to capitalize on the generational investment in infrastructure that the IIA will create over the next decade as it becomes a significant factor later this calendar year.
We begin the fourth quarter with a high-spac log in the company's history and expanding backlog margins.
These positive dynamics coupled with a continuing benefit of being the primary consolidated in our industry will drive margin expansion.
as we move into FY 2023 and beyond.
We're excited for the road ahead.
I'd like to now turn the call over to Alan.
Thank you, Joel, and good morning, everyone. I will begin with a review of our Chief Financial Matrix in the 3rd quarter fiscal 2022.
Revenue was $380.3 million up, and $45% compared to the prior year.
The increase included 53.1 million dollars of revenue attributable to acquisitions completed subsequent to June 30th, 2021, and an increase of approximately $65.5 million of revenue in our existing markets from contract work and sales of hot mix asphalt and aggregates to third parties.
Rose Profit was $45.3 million compared to $36.6 million in the same quarter last year.
General administrative expenses were 26.6 million dollars or 7% of total revenue compared to 23.2 million dollars or 8.9% of total revenue in the prior year.
Net income was $12.2 million for the third quarter compared to net income of $9.3 million for the signed quarter last year.
Adjusted EBITDA for the third quarter was $37.6 million, an increase of 30% compared to $29 million and $3.25 last year.
You can find gap to non-gout reconciliation of adjusted EBITDA financial measures at the end of today's press release.
Turning now to the balance sheet. At June 30, 2022, we had $26.1 million of cash and $258.6 million of availability under our new amended credit facility after the reduction for outstanding letters of credit.
As of the end of the quarter, our debt to trailing 12 months IBITDA ratio was 3.0.
The new credit agreement that was entered into on June 30, 2022, provides additional liquidity and financial flexibility, allowing us to pursue organic and acquisitive growth opportunities.
Capital expenditures for the third quarter of fiscal 2022 were $17.5 million.
We expect capital expenditures for the fiscal year to be in the range of $60 to $65 million.
And finally, as Jewel mentioned, we are reporting a record project backlog that was $1.33 billion at June 30, 2022.
compared to $822.9 million at June 30, 2021, and $1.28 billion at March 31, 2022.
And with that, we're now ready to take your questions, operator.
Thank you. We will now be conducting a question and answer session.
If you'd like to ask a question.
Please press star one on your telephone keypad. A confirmation tone will indicate your line as in the question queue. You may press star two if you'd like to remove your question from the queue. Thank you. Thank you. Thank you.
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Our first question comes from the line of Michael Fennegger with Bank of America. Please go see with your questions.
Yeah, hey everyone, thanks for taking my questions. I'm more in town. Good morning, everyone. Good morning.
If you don't do any other acquisitions going forward and all else being equal, how much growth do we get in 2023 just from the acquisitions this year that roll over?
Good question, Michael.
Couple of the acquisitions that we made this year were made at the beginning of the year, so they would not add any a quiz-to-revenue next year, because they're in this year, the full year, but the additional acquisitions that we made, including the one, just announced, would probably add $7,500 to $100 million of additional revenue or a quiz-to-revenue in next year.
You've got that one that would be pretty much a full year's worth of revenue and then you've got some others that were made later in the year that would have about six months worth of revenue going into next year.
Great, and how do we think with the organic growth that you guys just reported, the improving backlog? How does the organic growth look into next year? Is there signs of deceleration or are we gonna start to see some of the funding kind of pick up based on your regions that have a DOT budget's luck for 2023? I have a DOT budget's luck for 2023.
Yeah, Michael, good morning. This is Drew. As we've said before, we're focused on organic growth and growing relative market share in our markets. And growing relative market share in our markets.
Clearly some of this year's numbers due to inflation, but it's also just due to us growing relative market share.
We anticipate moving forward into next year that, you know, we're going to continue to see a healthy organic growth of CPIs historically done, you know, between 6 and 10%. We certainly see that continuing into the future. I think the demand...
from the South Eastern economy, but also from the infrastructure bill starting to come in, is going to, you know, drop organic growth.
Ned, you have any doubts on that? Well, I mean I think Michael, how are you today?
Good Friday. We're making it. You know, in watching this model over 20 plus years, it's really resilient. And really what you're seeing is the model working through and passing on the costs.
and what's now getting converted is at higher backlog. And as you consolidate this market and you consolidate the different markets and grow the relative market share, what we've seen over time is ultimately that drives margins.
And we're going to continue to see that in our markets that we're in, continue to get better and they continue to grow. So when you think about organic growth, if you come to Raleigh Durham, you can't go anywhere there's not road construction.
same thing all throughout parts of Alabama and parts of Georgia and parts of Florida.
So we're getting the benefit of that from an organic growth and historically we've had about a 10% organic growth for almost 20 plus years.
And are you just lastly on that? Are you hearing and seeing your competitors, the smaller players in the region, having record backlogs as well? The point of the question is, with bidding work potentially picking up, with infrastructure next year, if you feel like there's more discipline pricing on that work going forward. Thanks, and I'll pass it on.
Yeah, Michael, so obviously we don't know our competitors' backlog, but we can see how the bidding environment is. And that tells us that people, due to the demand in our areas, they have a full plate too. And so we've seen pricing reflect that, and that's certainly showing in our backlog. You know, backlog typically during the work season historically has sometimes shrunk, and so that would not surprise us at all.
next quarter. So the fact that it's growing while we're creating record revenue in a quarter just shows the demand that's out there and the fact that we're able to expand margins in the backlog, I think shows that it's a healthy environment for a lot of contractors.
For next question, the line of Andy Whitman with Baird, please proceed with your question.
Yeah, great. Thanks for taking my question, guys. Good morning. Good morning. I just wanted to make sure that when you're talking about 250 to 300 basis points higher margin implicit in your backlog today, that's inclusive of also factoring in the higher inflation for materials, labor, and everything else. So it's really 250, 300 plus the difference in cost as well. Is that the right way to think about that, Jule? Yeah.
It is, Andy, and just to clarify, when, as I said last quarter and this quarter,
What we're seeing is in pricing over last summer, right, a year ago, that is 250 to 300 basis points higher.
As we move forward into the future, that trajectory may not always be that steep. But one of the things we're seeing is that pricing improving. But you're right, that's in the margin. In the cost estimate side of our bids, we're trying to cover inflation. We're trying to put escalators into our bids. We've raised our equipment prices due to the diesel that we're buying in the shops. So...
We're doing both. You know, as we said last quarter,
The cost estimate side of our bid is where we're trying to tackle inflation. The pricing and the margin, we hope that all falls to the bottom line. If we've done a good job on the cost side, it will.
Yeah okay I just wanted to make sure and then I guess the comments on the list the the ten million dollar pickup from the liquid asphalt index adjustments I guess we haven't heard you on a public conference call talk about that factor and I was just wondering specifically
Are these index adjustments new? In other words, because inflation is high, you've put these clauses in and now you're benefiting from them as needed? Or have they always been in there and we just haven't seen a spike in some of the input prices, for instance, in liquid asphalt that's just different today?
Yeah, and Andy, good question. We specifically wanted to address that. These are not new indexes. They are, they've been in our, they're in our state DOT budgets. And they've been a part of our mechanism and model for a long time.
They typically aren't this much. In a quarter, it may be up a little bit, maybe a million to two million, or down a million to two million.
What's happened this quarter is asphalt adjusted, just went up so much in the three months. We're finishing older work where the index in the bid was low. And so it just created this spike in revenue that we felt like was important to communicate. It doesn't add margin, it's just a dollar for dollar reimbursement, but it does add a lot of revenue. And so we don't see that moving forward be in that high. You know, asphalt's moderated in price to the month of July .
But it was a big factor this quarter in the top line and we thought it was important to point it out. And we thought it was important to point it out.
Thanks for clarifying that. My final question, if you would.
has to do with basically your guidance. Obviously, revenue guidance up, EBITDA guidance not up. The, like you just mentioned there, some of these crude derived prices have fallen a decent amount since last quarter. I would think that would be somewhat beneficial here for your fiscal fourth quarter. Can you just maybe talk about the interplay as to maybe why the EBITDA wasn't able to get raised commensurately with, or at least.
and slightly at least with raising the revenue given that.
Yeah, so you know, Andy in the third quarter, we had really favorable weather in April and June .
And so that really was the tailwind on our revenue as well as this liquid AC adjustment.
And so that drove the top line. But our EBITDA was largely in line with the guidance we gave at mid-year. You know, the quarter largely played out like we thought it would. The third and fourth quarter, you know, typically, you know, they interact together sort like our first and second quarter. We now know because we've gotten through the month of July that it was a little wetter than normal.
Nothing like the historical precipitation we had last July , but it was wetter than normal. And we still have to see August and September .
But you know, we anticipate just like we said last quarter, just as Q3 was better than Q2, we're seeing that Q4 is gonna be better margins than Q3. But we want to be reasonable in the ranges that we gave, especially in light of the, you know, just unpredictability of the supply chain issues that are out there.
And Andy, let me just mention one thing, because you let off that question by saying that crude oil is down, and certainly that, we have seen that.
But we have not seen that in the price of liquid asphalt yet. Liquid asphalt doesn't track exactly with the up and down of the crude price. Diesel tracks much closer, but that is a much smaller component of our cost than liquid asphalt. But liquid asphalt continued to rise throughout our third quarter, and is still at the top.
near record highs for this year.
That's great context guys. Thank you for those answers. Have a good day.
Thank you.
Our next question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.
Hey, good morning everyone. Thank you all for taking the question. I'm going to stay on. Quick question. You guys mentioned favorable weather in the quarter. Could you hazard a guess, whether it's days or anything like that, that might have helped you out on a year-over-year basis?
No, stand, we don't.
We hadn't really figured that, you know, as far as exactly how it compared the last year. We do know that April and June were a little drier than normal. It wasn't anything historic, but we were able to have some good productivity. May was a little wetter, especially that last week of May was a wash out. But when we look at the revenue, you know, we know that it helped a little bit. I would just say, you know, the last three quarters we've been growing.
So we expected growth. That's why we raised our guidance at the mid-year. And so, you know, I wouldn't say that weather was the major factor. I think the major factor was we're growing, both organically and equisibly.
But we do want to, when we have good weather, we want to point it out just like when we have bad weather we point it out.
And Andy, I mean Stanley, I'm sorry, from a historical model, we've always talked about about a 60-40 in the second half and the first half. And you know, with what we have guided to for the full year, that's going to put about 59% of our revenue in the second half and 41 in the first half, which is actually slightly better for the second half than the percentage we had last year.
Because last year we had a very wet July , August , and September .
did not get up to that 60-40, but we had about 30 percent, if you go to the midpoint of our guidance, we did about 30 percent of that in the third quarter. And we're at the midpoint of our guidance, we're seeing about 29 percent in the fourth quarter, which, as you noted, if you take out the 10 million of the liquid asphalt, we're not going to be that far off from a 30-30. We're going to be at the midpoint of our guidance, and we're going to be at the midpoint of our
Yeah, that's fair. I was really more curious than anything. With the tight labor market, are you all having less subs brought in that kind of help on jobs? You're doing more work internally. You're just curious. And then even if you all are helping out, other firms with some contract work or things like that, just giving that you all have the advantage from a large labor force.
Yes, family, I think the labor force continues to be tight, and there are some cases where we're self-performing work that our subs can't get to. I think, you know, we're just continuing to just use our model to give us an advantage in labor, because if you don't have labor, you can't bid. And in this demand environment, the ability to get workers. The ability to get workers.
and the ability to have a workforce is what allows you to grow the top line and to generate revenue. And so we're pressing our advantage with having a local workforce, with having opportunities to grow. And so I think that's, you know, we don't see that changing anytime soon because of the demand.
Ned, you have any thoughts? Well, I think standing the other thing I think gets lost in the numbers with acquisitions is with each of these acquisitions, we've gotten some terrific people. We've got some terrific people.
And so we've been able to grow our workforce in a way that we have revenues coming in, we have profitability coming in, and we've got great people. And I think in the most of our communities, we are the employer of choice. You know, our healthcare and how we treat people on the ability for advancement is higher. So, you know, I think actually overall the whole business, we see the labor market better today than it was six months ago. We expected to be better six months from now. And so you know, it's a burden for our sneakers.
don't lose sight of the fact that in each of these acquisitions the most recent one we got several hundred terrific employees that are excited about the importance CPI excited about the opportunities. The importance CPI excited about the opportunities.
Yep, that makes sense. And one just kind of on the housekeeping side, how do we think about CapEx into next year, giving the inflation? You know, it sounds like some of the OEMs are slow in delivering equipment. Probably you probably would have taken more if you could would be my guess. Just how do we balance that, you know, with the percent of sales or anything, any sort of guardrails would be helpful.
Yes, family. So our cat-backs we envision next year being, like it typically is, about 5% of our sales. But you know, one thing that I think doesn't show through in the financials is the difference in our maintenance cat-backs and our growth cat-backs. You know, to maintain our business, we typically are three and a quarter to three and a half percent of sales. This year, it's gonna be on the low end of that around 3%.
because a lot of our Catholics that we're spending right now is going toward growth initiatives. They're gonna create revenue and margin in the future. We have several green fields going off.
And so I think that's one thing that gets lost is, you know, when we're looking at cat-backs, is we really get bound a pretty lean maintenance cat-backs budget, but we're investing in the company.
That's great guys. Thank you very much and best of luck.
Thanks, Stanley.
Our next question comes from the line of Adam Dallemer with Thompson Davis. Thank you for seeing what your question.
Hey good morning guys, congrats on the strong Q3.
Morning, Adam.
Alan, first one for you, what are your thoughts on Q4 cash flow?
Well, with the revenue growth moderating from Q3 to Q4, we should have a very strong...
cash growth from operations. Part of what hit us, obviously, in the third quarter is when you grow revenue quarter over quarter, you know, basically $100 million, then, you know, even though our average days in networking capital went down, that $100 million of revenue growth quarter over quarter is going up.
chew up a lot of working capital.
But with the fourth quarter being relatively flat, or at midpoint down slightly from the third quarter, that should generate a very positive cash flow from operations because you're not having to finance that revenue growth quarter over quarter.
That's what I was hoping you were going to say. And then...
Jule, do you have any line of sight to these headwinds?
particularly on the supply chain starting to abate.
You know Adam, I wish I could answer that. We're not counting on it, abating what we're trying to do is just get good at adapting to this environment. Right? Adam.
It is a struggle as we said not prepared remarks daily just to be productive. I mean we've got a great backlog. We've got good margin in our backlog.
At some point in time, in the future it's going to normalize, but we're not counting on it happen anytime soon.
Adam, this is an opportunity for me to brag on this management team, but the supply disruptions aren't going away. But the way that they have been able to utilize the workforce, move it synergies from one place to another, when they ran out of pipe in one spot, they could move and continue to work and continue to keep good productivity up, has really been dynamic, and it came through in the numbers.
Jule, Allen, the whole management team has done a terrific job of learning how to be flexible in an environment that you have to be flexible to continue to grow this business. It is a real credit all the way down to the people that are working.
every day on every project that are sometimes working on two projects in one day. So the synergies that we've gained I believe as we've put together and continue to consolidate this company from market to market has given us a competitive advantage of what is a very disruptive supply chain.
And it was nice to see that come through in Q3.
And then the last one for me, I guess for Joule, how would you characterize overall the bidding environment today?
I think the bidding environment right now, Adam, is still strong. You know, we really haven't seen any change. We frankly can't bid everything that comes in. We think that, you know, as the IGA, the infrastructure bill starts to come into full force.
that we may be a bit more public jobs.
and a few less private jobs just because of the number of opportunities that bill will create. But we really haven't seen anything from a number of bids drop off. We continue to see good pricing in the bids we're getting.
So, you know, it really hasn't changed a lot from the last quarter.
Sounds good. Thanks, guys. Talk to you later. Alright, Adam. Thank you.
And our last question comes from the line of Brian Russo with SODOTI. Please proceed with your question.
Hi, good morning.
Hey Brian , I'm glad to have you on board.
Yeah, thank you. Just to follow up on the bidding activity, is there any reason to believe that the bidding environment or activity will change with IIA funding, meaning it seems like there's gonna be a lot of money, especially flowing to the states and DOTs that you operate in. And, you know, I'm just curious. And, you know, I'm just curious.
you know, if you sense margins we're going to be pressured because there's just going to be a lot of work out there for In such a fragmented industry for other players to just capture, you know, the top line.
Yeah, Brian . Good morning. We envision that the bidding environment's going to continue to be strong and the IIA is going to continue really. What we've been experiencing in the last 12 months, you know, the states we're in, that all have healthy state budgets. We're going to be able to see that all have healthy state budgets.
The COVID relief money this past year has given them extra money. And so we really have been projecting and are seeing that the infrastructure bill is just going to continue that. We do think there's going to be some increase in project funding. And so it's going to continue to be a lot of demand on the public side as our nation, you know, is making a really big investment in infrastructure that we see is going to last, you know,
6 to 8 years by the time these projects get done. So.
We're prepared for it. You know, last year we said we saw growth coming and we needed to invest in our organization and we did. And I think that's happening now. And we're continuing to get prepared to have the workforce and the resources available to take advantage of this infrastructure bill. We're going to take advantage of this infrastructure bill.
Okay, great. And then I think you mentioned your current leverage is at three times. Remind me, is that the max leverage ratio allowed in your credit facilities or is this new facility you mentioned give you more flexibility or the max is above three times? Just trying to get a sense of the balance sheet capacity under the credit agreement to pursue acquisitions maybe more aggressively or larger in size.
Yeah, great question. Yeah, the new credit facility puts that max at 3.5. It also allows, if we were to make a larger acquisition that for, I believe, 3.4 is it can actually flex up as high as 4. I don't think it's going to change our plans. It's not really.
providing us, one that provides us with more total availability and gives us some cushion.
leverage ratio should come down if we hit our, even the midpoint of our.
guidance it should come down in the 2.6 to 2.7 because we're bringing on a very good quarter from an EBITDA standpoint and rolling off a much lower quarter from last year. So even with the acquisition and the borrowing we made earlier this week for the Southern acquisition we should be back down around that 2.6 or 2.7 and then as we see the 2023 playing out that should come on back down.
our capex money this year to support organic growth and we see that as a good utilization of capital also. Hey Brian , I think one of the things I will say is Alan and the whole finance team in conjunction with JUUL has done a great job of creating a very flexible capital structure for us. From our standpoint, we like that leverage ratio to continue to come down. We've historically been levered at two or less.
So, you know, we anticipate continuing to have that focus as we grow this business. But one of the things that Alan the team have done if you pull the credit agreement is we have a very flexible credit agreement that allows us to continue to grow the business.
and really not have to be concerned as we do acquisitions, which is a huge benefit. They did a terrific job. I don't think we could hit the timing any better from a pricing standpoint or a flexibility standpoint, but from our standpoint, as a board and as a management team, we'd like to see that continue to come down over time. We'd like to see that continue to come down over time.
Okay, great. My other questions were asked and answered. So thank you very much. Thank you.
And we have reached the end of the question and answer session. Therefore I will turn the floor back to you, management for closing comments.
Yes, we'd just like to thank everyone for being with us today and we look forward to talking to you on the next call. Have a good weekend.
And ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines and have a wonderful day.
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