Construction Partners Inc. Q2 2023 Earnings Call

Greetings and welcome to the construction Partners, Inc. Second quarter earnings Conference call.

At this time all participants are in a listen only mode.

A brief question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Rick Black with Investor Relations.

Thank you Mr. Black you may begin thank you operator, and good morning, everyone. We appreciate you joining us for the construction partners conference call to review the second quarter results for fiscal 2023.

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.

Information recorded on this call speaks only as of today may five 2023, so please be.

Be advised that any time sensitive information may no longer be accurate as of the date of any replay or transcript reading.

We'd 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 provisions of the private Securities Litigation Reform Act of 1095.

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 this morning's earnings press release for our disclosure on forward looking statements. These factors and other risks and uncertainties are described in detail in the Companys filings with the Securities and Exchange Commission.

Management will also refer to non-GAAP measures, including adjusted EBITDA and 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.

These forward looking statements and now I would like to turn the call over to construction partners CEO Jule Smith jewel.

Thank you Rick and good morning, everyone.

With me on the call today are Greg Hoffman, our Chief Financial Officer, and Ned Fleming, our executive Chairman.

I'd like to start the call by welcoming Greg to his new role and his first conference call as CFO .

Greg and I have worked together at CPI for many years, while I was president of Fred Smith Company in North Carolina, and he was CFO of wire grass, our Alabama platform company.

Alan Palmer hard Greg in 2000.

And he has been part of Cps gross store for well over a decade he.

He has executed our strategy he knows our people and our culture and he deeply understands our financial systems at both the operating company and corporate level.

Over the past two years, Greg has been working closely with me and Raleigh on this planned transition and we both bill it has been a tremendous honor to work without.

I am extremely thankful for Allen's wisdom and hard work in building <unk> into one of the leading infrastructure services companies in the nation.

Before I provide an overview of our Q2 results I'd like to thank our nearly 4000 dedicated employees that move our company forward every day.

Our business safety on job sites and plant sites as a daily commitment and their vigilance to stay alert and their dedication to their teammates health and wellbeing is impressive and greatly appreciate it.

CPI had an excellent second quarter, which is historically a slower winter period in our seasonal business and.

We are right on track with our annual plan for FY2023.

The second quarter played out just as we had discussed on our last conference call with strong performance from each of our operating companies in all six states.

We also had the added tailwind.

Better than expected weather and lower energy and liquid asphalt costs across our geographic footprint.

First warmer and drier than normal weather this winter.

Loud us to complete more of our higher margin backlog and over recover on our fixed cost.

As I said last quarter, when the weather had a negative effect on our fixed cost recovery.

Usually over the course of a full year the weather tends to even out.

The second tailwind in the quarter was due to lower energy prices in several areas of operation.

In our fleet and that our asphalt plants, we've seen diesel fuel and natural gas prices steadily moderate down providing a sooner than expected boost to margins.

As we work on more project backlog with inflation adjusted estimates and higher input costs.

Lower energy costs also provide a better economics at our liquid asphalt terminal on the Gulf coast as we filled our tanks with lower price liquid asphalt.

This facility is a significant part of our vertical integration strategy to capture more margin along the value chain and we look forward to our new liquid asphalt terminal in North Alabama being online later this summer.

As we move into the busy work season, our view of the second half of the fiscal year remains the same as last quarter positive and focused on accomplishing a full play to work.

Overall, the construction industries labor market and supply chain continued to normalize throughout our southeastern footprint.

CPI, we move into Q3 as expected with almost all of our record backlog now containing inflation adjusted costs estimates and escalators.

Accounting for the outperformance in Q2.

And our positive expectations for the second half of the fiscal year.

We have raised and tightened the ranges in our FY2023 outlook.

The second quarter also represented another solid period of winning new work and adding to backlog, which is now at a record $1 $2 billion.

The demand environment continues to remain robust with continuing the migration into the southeast supporting the private sector and the J, a fully engaged and funding investments in roads bridges and airports.

I'd now like to turn to CPI strategic model and our three levers for growth.

As we continue to consolidate and grow relative market share throughout our footprint, our business scales and margins expand.

Our core business generates strong cash flow and we continually evaluate attractive opportunities throughout the southeast to make wise investments.

Compound and grow shareholder value.

Our first lever and primary focus is organic growth in our existing markets as evidenced by this quarter's organic growth of 17, 1%.

Secondly, we have greenfield investments in new asphalt plants and vertical integration facilities, such as the new asphalt terminal we are building in Alabama.

Finally, strategic acquisitions in new markets to expand our geographic footprint and grow relative market share.

In early April we expanded further into the greater Greenville, South Carolina to Metro area.

Our acquisition of <unk> construction headquartered in Anderson, South Carolina added one hot mix asphalt plant and related construction operations with approximately 20 employees.

This bolt on acquisition for our platform company King asphalt expands our reach within the dynamic upstate region of South Carolina, along the I 85 growth corridor between Greenville and Atlanta.

Earlier this week, we announced an acquisition in Huntsville, Alabama.

The operations of southern site contractors, and excavation grading and utilities contractor.

This strategic acquisition further and further.

Further enhances our vertical integration of construction services and the dynamic Huntsville market.

We welcomed a talented team of construction professionals, whose skill and experience allows us to better serve both public and private customers with a wide range of turnkey development services.

We also continue to be very pleased with the beginning of operations for acquisitions made in the first quarter that brought us into two vibrant growth markets, the greater Nashville region, and the rapidly growing Charlotte Rock-eel Metro market with the acquisition of Fair B Corporation.

Both of these acquisitions will provide opportunities to execute all aspects of CPI strategy moving forward from organic growth adjacent greenfields bolt on acquisitions and capturing more margin through vertical integration.

This is the same strategy our company was founded on more than two decades ago and today, its more relevant and effective than ever and building the infrastructure of the southeast and growing shareholder value.

Now having entered our busy work season, our local teams are building a record high backlog and a more normalized construction economy.

We continue to prepare for long term growth by investing in our workforce.

Attracting and retaining the very best construction professionals strengthen CPI with a durable and sustainable competitive advantage.

As we continue to execute on our strategy and deliver topline and bottomline growth in FY2023 and beyond.

I would now like to turn the call over to Greg.

Thank you Joe and good morning, everyone I am proud and honored to join my first call as CFO I'm also very thankful to Alan Palmer for his assistance and guidance throughout our transition process.

He has been instrumental in the success of CPI and has developed and led to strong financial organization that is ready to continue to execute our growth strategy.

I'll begin with a review of our key performance metrics in the second quarter of fiscal 2023 before discussing our raised outlook ranges.

Q2 revenue was $324 $9 million.

33, 5% compared to the prior year quarter.

The mix of our total revenue growth for the quarter was approximately 17, 1% organic revenue and approximately 16, 4% from recent acquisitions.

Gross profit was $26 $3 million in the second quarter, an increase of 110% compared to $12 $5 million in the same quarter last year.

General and administrative expenses as a percentage of total revenue in the quarter decreased to nine 9%.

Compared to 10, 3% in the same quarter last year.

In Q2, we had a net loss of $5 $5 million and.

Movement compared to a net loss of $9 4 million in the same quarter last year.

Adjusted EBITDA in the second quarter was $20 8 million, an increase of 165% compared to the same quarter last year.

You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today's earnings release.

And finally as Joe mentioned, we are reporting a record project backlog of 152 billion at March 31 2023.

Turning now to the balance sheet, we had $36 million of cash $286 million of principal outstanding under the term loan and a $143 $1 million outstanding under the revolving credit facility.

We have availability of $182 million under the credit facility net of reduction for outstanding letters of credit.

This liquidity provides financial flexibility and capital capacity for potential near term near term acquisitions, allowing.

Allowing us to respond to growth opportunities when they arise as a reminder, the company previously entered into an interest rate swap agreement, which fixes so for at 185%.

And results in our fixed interest rates of the company of three 6% on $300 million of our term debt the.

The maturity date of this swap is June 32027.

As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 292.

Our expectation is leverage ratio will trend downward to the low twos by the fiscal year end.

Cash provided by operating activities was $17 1 million for the quarter compared to $3 9 million for the same period last year.

For the first half of fiscal 2023, we have generated $45 $7 million of cash flow from operations.

Capital expenditures were $28 7 million for the quarter.

We continue to expect capital expenditures for fiscal 2023 to be in the range of $85 million to $90 million.

This includes maintenance capex of approximately 325% of revenue with the remaining amount invested in high return growth initiatives.

Historically, we have converted free cash flow in the range of 50% to 60% of adjusted EBITDA After subtracting interest expense and taxes.

Over the past two years CPI has invested this cash flow into numerous attractive long term investments, which generated 22% adjusted EBIT EBITDA growth in the last fiscal year. Despite a challenging macro environment and this year is on track to generate 35% to 40% growth in adjusted EBITDA.

As CPI expanses footprint, we expect margins to increase organic growth to continue and shareholder value to compound.

Today, we are revising our fiscal year 2023 outlook by raising and tightening our estimate ranges.

We expect revenue in the range of 153 to 158 billion net income in the range of $34 million to $42 million and adjusted EBITDA in the range of $153 million to $165 million.

That we are now ready to take your questions operator.

Thank you we will now be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

<unk> tone will indicate that your line is in the question queue.

You May press Star two if you would like to remove your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.

Okay.

Okay.

Thank you and our first question is from Andy Wittmann with Baird. Please proceed with your question.

Great and good morning, Thank you for taking my questions. This morning gentlemen.

Good morning, Andy.

And.

I don't want to start first.

I guess, maybe I'll start bigger picture.

State and local budgets with.

With tax receipts.

Having last year and the year before that been very strong and they've gotten supplementary funding from the federal government over the last couple of years.

Just not coming back here for 2023.

Heard all of the comments in your prepared remarks about the funding environment in <unk>.

Totally understand that but im just wondering if kind of behind the scenes the conversations any of your customers might be having about the concerns about their budget outlook against lower tax receipts capital gains.

Even consumer spending has been pretty good but you get the point of what I am trying to go here. So I was just wondering Joe if you could comment on any of the specific tier twos, which of your bigger customers in and what youre hearing from any of them that might be relevant to that topic.

Andy Good question good morning.

I would say we haven't heard any.

CERN from our Dot's about lower tax receipts and Dot's are typically pretty conservative.

And their outlooks, but.

Frankly.

Most of what we see from our six D. O T that we work for is they are trying to do a good job of spending that money.

They all have healthy gas taxes in their states I don't think they've seen a slowdown because the economies in the southeast really haven't slowed down.

But with the funding that they are getting from Washington with J a.

Theyre just trying to do a good job of spending that so we haven't heard any.

Talk about lower.

Tax receipts clearly some of the JA money.

Is go into higher inflation, so cost per lane miles up a little bit.

But it's still a healthy increase and so that's really what we see the dot's focusing on okay alright.

Alright, great and then just kind of feels like.

Obviously, the weather it sounds like it was to your advantage, but you also mentioned some of the falling commodity prices just the way. These things work in your business some of the backlog that youre working off here in the second quarter, and we will be working off in the third year and fourth quarters.

<unk> bid when inflation.

Are the prices of some of these inputs were for.

Even higher than they are today, so well that certainly has been a headwind over the last couple of years it kind of feels like the setup.

For the rest of this fiscal years.

The opposite is really favorable.

I guess question is would you agree with that assessment now that some of the really low.

Low priced backlog is essentially gone.

And if that's the case.

I guess I guess, the implication would be that maybe the margin guidance here, which is up a little bit, but still really not at even what I would call. Your historical level would reach what I would say, it's at least 11% plus.

So I guess I guess, that's the question like if in fact, youre getting the benefit now of quantities against higher.

Priced backlog.

Why isn't the margin closer to that 11 plus rate that you've put up historically.

Yeah Andy.

Our guidance for the second half of the year. When you look at it is assuming.

Pretty substantial EBITDA growth and the percentages of EBITDA to revenue be in <unk>.

<unk> plus and so averaging out for the full year, you've got that first quarter in there.

But clearly our guidance moving forward is pretty positive.

And we're assuming.

The backlog that we've worked hard to sell at higher prices.

That's the margin that's the backlog, we're going to be converting.

And so we don't anticipate in our guidance any headwind significant or any big tailwind, we're assuming energy costs relatively flat.

It's a pretty positive outlook and a pretty significant increase both topline and bottom line in the second half.

Clearly to the commodities.

Falling as.

It has been a good thing.

For our for our margins as I said.

Okay.

Okay, I have one more but I wanted to make sure that I'm courteous to the other people who are in the queue, who will probably ask the question and I will yield to have a good day.

Andy Thank you.

Thank you.

Our next question is from Adam Thalheimer with Thompson Davis <unk> co. Please proceed with your question.

Hey, good morning, guys great quarter.

Hey, Adam Good morning, Thank you.

Can you guys comment I guess a question for both on the M&A outlook kind of the M&A pipeline and.

As Greg trying to yank, the checkbook away from you or do you guys feel good about your capacity for deals.

No Adam.

We continue to be very busy talking to potential sellers I've been on the road a lot. This last quarter. We continue to have good conversations and these things take time and they happen when the timing is right for both the seller and us.

We feel like we've got.

Substantial dry powder, if a deal makes sense you saw is just due to small deals here in the last 30 days that we're really excited about both.

Both in Anderson, South Carolina to give king further reach down down I 85, and then in Huntsville to get some good vertical integration of services. There were Huntsville has got a lot of growth.

And so that just shows you were talking to a variety of potential targets and we're excited about that and youre going to youre going to continue to see us make deals.

And then.

As we think about I wanted to pivot a little bit to the extent you're willing to talk about it this early to fiscal 'twenty four.

And I guess the question is you had 17% organic growth in the quarter you continue to do acquisitions, you've probably got more coming.

Is it too early to think that.

Double digit revenue growth is possible next year.

Well, Adam I would say double digit revenue growth. If you look back over the history of CPI.

Each year over the course of 20 years of average 15% to 20%.

Revenue growth and we don't see that really changing we anticipate next year being very much like.

Historical norms.

And we envision it being a good mix of organic growth, which as I said, we focus on a lot and acquisitive growth. So no I wouldn't we're already looking out into the future as we plan and we don't really see any change from what the history above CPI has been.

Column, there to give you a little bit.

His take on the future.

No Adam it's nice to have your phone I think if you look at this from a historical perspective, when you have times like this where let's let's face it there is a.

Banking issues all over.

We're in a very good spot.

We would anticipate as we move into the future continuing to do acquisitions. Historically after early <unk>, we did more acquisitions for the next two years than we've done previously.

So I think it really the environment, both with the growth and the demographics as well as the fact that we are well capitalized public company.

Going to create opportunities for us as we move forward.

Alright, Thanks, guys I look forward to seeing Keith you in Q4.

Talk to you soon alright, Adam Thank you.

Thank you.

Our next question comes from Stanley Elliott with Stifel.

Proceed with your question.

Hey, good morning, everyone and welcome Greg.

Thanks, Dan just a quick quick housekeeping of the 20% growth you guys are forecasting this year.

What is the split between organic and inorganic.

Roughly.

We're looking at by the end of the year, 11% acquisitive and about 10% organic.

Yes.

And it looks like some of the recent deals with the smaller deals you mentioned you have been more on kind of the services side on the paving side is that a way.

Have you all become I guess with labor being challenged in the construction market is this becoming more of a focus for you all to be able to get these jobs.

If one and then two when you are picking up these contractor groups do they tend to be customers of CPI or maybe are they by their hot mix from someplace else.

Stanley That's a great question and you're exactly right.

What we did in Huntsville.

In and acquiring southern site contractors is something we've done twice in the last two years in Pensacola and in Wilson, North Carolina, and they've just been great acquisitions, five or 10 years ago. You May have said, we're going to have vertical vertically integrate new services and we'll just do it organically we will just hire the crews.

And by the equipment.

That's a lot tougher to data to do that.

So to be able to buy experienced crews that already are working together have market share.

<unk> is just those have been home runs for us and so we envision the same thing for wire grass.

In Huntsville with that market growing so much in wire grass just does a great job there.

Getting these crews and this equipment and being able to do a wider range of services.

From turnkey roadways to.

<unk> projects.

You're exactly right. It's just.

Easier better way to do it now.

Yes in some cases they are customers.

Our companies and bother asphalt and so we have good relationships with these companies and so.

By adding their crews and capacity it just allows us to vertically integrate and do more work in that market.

Perfect and then lastly, maybe talk about.

Certainly the margins improve you guys have done a nice job of working up the backlog.

But on the other hand, we have heard from some of the aggregate producers yesterday about mid teens sort of claim.

Clean stone big.

Big input for you guys.

What exactly are you all doing to make sure that you guys can maintain the margins and continue to drive that higher hopefully.

Hopefully into next year.

Yes Stanley you know the.

The aggregate Guy.

Guys. They do a really good job of raising prices and we're trying to do the same thing.

With us.

US bidding higher.

Bids on the coal side and the margin side.

Said four year, we're just we're doing the same thing as far as any mid year price increase from the aggregate companies.

They honor their quotes on our backlog and so that's not an issue there and so our model is if they go up mid year is simply to put that in our estimates and pass that along.

So that's really not something that would impact our margins it would just impact our pricing moving forward.

Great guys. Thanks, so much and best of luck.

Alright Stanley. Thank you.

Thank you. Our next question is from Brian Russo with Sidoti <unk> Company. Please proceed with your question.

Hi, good morning.

Hey, Brian .

Just real quickly strategically.

Are you comfortable with the six state footprint that Youre in now.

Where do you see maybe opportunities out there or is there still.

More vertical integration to be done in that six to eight and then.

Are you biased towards one stage.

Of the six states based on D O cheap funding.

Relative to the IHA, a funds et cetera.

Yes, Brian good morning.

That's a good question, we get that a lot and I would just say, we're really happy to be in the six states. We're in and when you look at some of the heat maps that.

People have produced about where CPI is.

And where there are opportunities through the southeast there are a lot of opportunities in these six states.

We really don't.

One state over the other there are certain markets within each state that are really good that we'd like to be in.

It's probably a safe assumption that we're talking to people in those markets and get building relationships there.

As far as other states. We've always said, we look in adjacent states and talking to potential sellers, there and we're going to be a more than six states at some point I can't tell you when but we really like the leverage the organization, we have and continue to fill in the six states where we're in now.

Okay, Great and then just a follow up on the organic growth question I think.

Historically, correct me, if I'm wrong, but you were kind of a high single digit organic growth and that was obviously.

Complemented by.

The M&A star.

Strategy.

But with what looks like close to 10% organic growth.

By.

At the end of this year.

Or are we just seeing kind of a.

A step up in organic growth going forward because of the public funding environment.

Yes, Brian .

Last year, our organic growth was over 24% and you know while.

While it is hard to get exact we said maybe half of that was pricing and half of that was just a real organic growth and this quarter, we had 17% organic growth.

Again, we would say, it's probably roughly half pricing and have real organic growth our volumes are up.

And overall.

Just volume of asphalt tons.

This quarter over last year was 27% equipment hours in our fleet were 20% higher this quarter than a year ago. So our volumes are going up and we're growing in real organic growth in addition to price.

As Greg said by the end of the year, we envision that 20% overall growth being roughly half and half organic too acquisitive.

Okay very helpful. Thank you.

Hi, Bryan Thank you.

Thank you.

Mr. <unk> there are no further questions at this time I would like to turn the floor back over to management for closing comments.

Okay. Thanks, everyone for being on the call. We look forward to a busy second half and a busy work season and look forward to talking to you next time. Thank you.

Thank you ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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