Construction Partners, Inc. (NASDAQ:ROAD) Q1 2023 Earnings Call Transcript

Construction Partners, Inc. (NASDAQ:ROAD) Q1 2023 Earnings Call Transcript February 10, 2023

Operator: Good morning. And welcome to Construction Partners, Incorporated First 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 . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you, sir. You may begin.

Rick Black: Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review the first quarter results for fiscal 2023. 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 constructionpartners.net. Information recorded on this call speaks only as of today, February 10, 2023. So please be advised that any time sensitive information may no longer be accurate as of the date of any replay or transcript reading. 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 1995.

We will be making forward-looking statements as part of today’s call that, that by their nature, are uncertain and outside of the company’s control. Actual results may differ materially. Please refer to yesterday’s earnings press release for our disclosures on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings press 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 Construction Partners’ CEO, Jule Smith.

Jule?

Jule Smith: 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, as well as other members of our senior management team. I’d like to start by thanking our approximately 4,000 dedicated employees throughout our now six states in the Southeast for their focus on safety and taking care of their teammates each day at our job sites and plant sites. I believe our talented workforce is our most valuable asset and will continue to create a competitive advantage for our company. CPI had a good first quarter to begin our fiscal year 2023, with revenue growth of 20% year-over-year, a positive sign that our efforts to capture inflation in new bids is working, and will continue throughout the year to positively impact the results.

This quarter, throughout our footprint, we experienced inclement weather for two thirds of the quarter with above average precipitation in November and December, resulting in a reduced number of productive work days. These weather impacts show up mainly in fixed cost recovery at our plants and fleet and create extra project costs. We approximate an abnormal weather impact in Q1 of approximately $4 million. However, weather impacts can go both ways, such as last year’s first quarter which have below average precipitation that allowed us to over recover our fixed assets. In our line of work, usually over the course of a full year, the weather tends to even out. Another factor this quarter that we did plan for was the completion of the majority of our remaining low gross margin projects from our pre-inflationary backlog that was bid prior to October 1, 2021.

Our customers typically need their projects to complete the final paving before winter. So as expected, most of these older projects wrapped up construction in our first quarter and then represented approximately $50 million of revenue with little or no gross profit. In our annual financial plan for FY23, the combination of completing these older projects in the first half of the year and then moving almost exclusively to higher margin backlog during the work season creates a margin profile more heavily weighted towards the second half than normal. Over the past five years, CPI’s average split of EBITDA has been 33% in the first half of the year and 67% in the second half of the year. In FY23, we anticipate this being close to 27% in the first half and 73% in the second half.

We are right on track with our plan for the year and our external environment is slowly but surely returning to normal. Both of these factors give us confidence today to revise our annual guidance and raise the midpoints for revenue, EBITDA and net income. We are pleased to report another record backlog this quarter of $1.47 billion, demonstrating that the demand environment remains strong in both the public and private sectors. Public infrastructure lettings are beginning to deploy the IIJA funding impacting each of our six states for their highway and bridge projects, airport renovations and expansions and other types of infrastructure. Over the last two years, CPI has focused on preparing our organization and workforce and we’re now ready to capitalize on this generational investment in infrastructure over the next six to eight years.

We continue to see a steady amount of commercial bid opportunities on both nonresidential and residential projects. We believe the private markets will continue to be bolstered in our Southeast footprint by the strong migration of new residents and businesses into these states. This month, a National Association of REALTORS study measured the top states in 2022 for net migration gains, and five of the top six were CPI states. This strong demand for our services not only continues to keep revenue backlog high, but also has allowed pricing in the new backlog to remain at the higher margins in line with backlog added the previous three quarters. We will continue to leverage this demand environment in our Southeastern footprint to add future work at attractive margins.

Photo by Tan Kaninthanond on Unsplash

During the first quarter, we also integrated two strategic acquisitions: a bolt-on company in Nashville, Tennessee, our first interest into that state; and a new platform company in North Carolina. Both of these expansions represent excellent new markets for CPI, adding six asphalt plants, while expanding our workforce. We welcome Ferebee Corporation and a 150 new teammates to the CPI family as the platform company in the Charlotte metro area and Western North Carolina. The Ferebee team is an impressive group of construction professionals and the company will continue to be led by Chris and David Ferebee. Throughout CPI’s history, a platform company once established, has served as a catalyst for dynamic growth throughout a state or region, as demonstrated last year with the addition of King asphalt in South Carolina.

We’re excited that with Ferebee Corporation, we now have a well run platform company with a great reputation in one of the fastest growing regions in the country. Right before Thanksgiving in our last earnings call, CPI entered the Nashville metro area with a purchase of three HMA plants and the construction operation from Blue Water Industries. I’m pleased to report that the initial integration led by our Wiregrass Construction team and nearby Huntsville has grown very well. The construction operation is staffed with experienced and talented personnel, and we will be entering the first heavy work season in Tennessee with a full backlog of good work. And as you would expect in the fast growing Nashville suburbs, we are pleased with the amount of bidding opportunities and potential for future organic growth.

Turning now to growth initiatives. We continue to evaluate attractive investment opportunities in all three of our levers for growth. First, organic growth in our existing markets, such as last year’s 24% organic growth and 8.7% in our first quarter. Secondly, greenfield investments in new asphalt plants and vertical integration facilities, such as the new asphalt terminal in Alabama we announced last quarter. And finally, strategic acquisitions in new markets such as our recent entry into Charlotte, Nashville. CPI will continue to carefully evaluate each opportunity and to use all three of these types of growth in making smart long term investments that continue to grow the company. To fund these growth investments, we will continue to generate strong cash flow from ongoing operations.

CPI, throughout its history, has generated strong free cash flow with a typical free cash flow conversion rate in the range of 50% to 60% of adjusted EBITDA. Over the last two years, CPI has invested this cash flow into numerous attractive long term investments, which have generated 22% adjusted EBITDA growth 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 expands its footprint and continues to consolidate markets, margins will increase, growth will continue and shareholder value will compound. As CPI grows, we benefit from scale in our fixed costs. After significant investments in our organization to prepare for growth over the last two years, we now anticipate in our revised outlook that general and administrative expense will be in the range of 8% to 8.2% or 20 to 30 basis points lower than last year.

As a growth company, we must stay ahead of the curve in preparing and investing for future growth as we did in FY21 and FY22. This will allow us to capitalize on efficiencies of scale at CPI over time and expand bottom line margins. Finally, this fiscal year should have our typical seasonality, revenue being realized approximately 40% in the first half of the year and 60% in the second half and our fixed asset recovery, having our normal under recovery in the first half of the year and over recovery in the second half of the year during our busy work season. We are excited for the year ahead and we expect to achieve significant top line and bottom line growth, supported by strong customer demand and project funding. I’d now like to turn the call over to Alan.

Alan Palmer: Thank you, Jule, and good morning, everyone. I will begin with a review of our key performance metrics in the first quarter of fiscal 2023 before discussing our revised 2023 outlook. Revenue was $341.8 million, up 20% compared to the prior year quarter. The mix of our total revenue growth for the quarter was approximately 8.7% organic revenue and approximately 11.3% from recent acquisitions. Gross profit was $30.5 million in the first quarter compared to $33 million in the same quarter last year due to the factors that Jule discussed during his remarks. General and administrative expense as a percentage of total revenue in the quarter was 8.7% compared to 8.8% in the same quarter last year. Net income was $1.9 million in the first quarter compared to $5.5 million in the same quarter last year.

Adjusted EBITDA in the first quarter was $27.6 million, an increase of 4.7% 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 press release. Turning now to the balance sheet. At December 31, 2022, we had $43.5 million of cash, $269 million of principal outstanding under the term loan and $158 of principle outstanding under the revolving credit facility. We have availability of $182 million under the credit facility, net of a reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 2.96. This liquidity provides financial flexibility and capital capacity for potential near term acquisitions allowing us to respond to growth opportunities when they arise.

During three months ended December 31, 2022, cash used in investing activities was $70.7 million, of which $77.2 million related to acquisitions completed in the period and $31.6 million was invested in property, plant and equipment, partially offset by $1.6 million of proceeds from the sale of the property, plant and equipment and $36.4 million of net proceeds from the facility exchange. The company’s interest rate swap contract is at a SOFR rate of 1.85%, which expects the company’s interest rate during the quarter at 3.7% on $300 million of our debt. The maturity date of this swap is June 30, 2027. During the three months ended December 31, 2022, cash provided by financing activities was $49.7 million. We received $53 million of proceeds from our revolving credit facility, primarily used for acquisitions completed in the period.

This cash flow was offset by $3.1 million of principal payments on long term debt. Cash provided by operating activities, net of acquisitions, was $28.9 million for the three months ended December 31, 2022 compared to a use of $0.6 million for the same period last year. Capital expenditures were $31.6 million. We expect capital expenditures for fiscal 2023 to be in the range of $85 million to $90 million. This includes maintenance CapEx of approximately 3.25% of revenue. So the remaining cash invested is funding growth initiatives. Today, we are revising our fiscal year 2023 outlook by raising the lower ends of our estimates. We expect revenue in the range of $1.47 billion to $1.55 billion, net income in the range of $30 million to $40 million and adjusted EBITDA in the range of $145 million to $160 million.

And finally as Jule mentioned, we’re reporting a record project backlog of $1.47 billion at December 31, 2022. And with that, we are ready to take your questions. Operator?

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Q&A Session

Operator: Our first question is from Stanley Elliott with Stifel.

Stanley Elliott: Can you talk about — and I apologize if you mentioned upfront, I’ve had a bunch of things juggling this morning. Some of the material shortages that the industry has seen kind of last year, does that seem like that that’s going to be another headwind for you guys in the coming year, or any sort of update on that would be great?

Jule Smith: Stanley, I did mention that our external environment is normalizing, and that’s part of it. We see that slowly, but surely, a lot of supply chain issues that kinks are starting to get worked out. It’s nowhere near normal yet, but it’s getting better. We’ve mentioned in the past, cement in South Carolina and rock in Georgia and Florida and pipe, all of those — these suppliers want to sell their products. So the market forces that you would expect to solve those, they’re working. It just takes time. But I would say we see things getting better and we don’t anticipate those being a headwind this year.

Stanley Elliott: And then in terms of like bidding activity, I mean, you still see pretty normal bidding activity across the market. I was just curious if maybe some of the softness in the headline numbers we see in the residential market is causing increased bidding activity in some of your core like highway and some of the commercial work?

Jule Smith: Stanley, no, bidding is still very busy, let’s take the public markets. The Infrastructure Act is in full swing now. And so we’re seeing very healthy public lettings at the DOT level and with airports, just a lot of infrastructure on the public side. And that’s good and we’ve been expecting that, and it’s now hitting. On the private side, you’re seeing a lot of industrial and retail bids as as we have. I’ve been watching the residential market and thinking, okay, is it going to fall off? And we just haven’t really seen a big fall off. We’ve seen maybe where two years ago, a developer would say, we want to build this whole subdivision and bring on hundreds of lots upfront. What we’re seeing now is they say, we want to start and build Phase 1 and bring on 50 lots and just take it in more bite sized pieces.

But I think I mentioned the migration to the south. I think that that’s helping the residential market, maybe just go from white hot to good and steady. But we really haven’t seen a big drop off in residential in our markets yet.

Operator: Our next question is from Andy Wittmann with Baird.

Andy Wittmann: I guess just a point of clarification. When you mentioned that weather was a $4 million impact, I’m guessing that’s EBITDA, not revenue. Is that right?

Jule Smith: Yes, that’s correct.

Andy Wittmann: Do you know — can you estimate what the revenue hit was from that as well, or maybe any more detail on that?

Jule Smith: I’ll let Alan take a stab at that, Andy.

Alan Palmer: Andy, I mean, you can see on the revenue, we’d be — I think where weather hurt us is our internal production of like asphalt tons and our own equipment use. So if we had, had those weather days that were impacted, we probably would have seen $10 million to $15 million more of actual top line revenue. But the bigger impact was on the number of tonnes we ran through our asphalt plants and the equipment usage utilization that we got. So that $4 million we’re talking about is under absorption of fixed costs at our asphalt plants and our own equipment use. So it’s not as much revenue as it is that utilization of those hot mix asphalt plants and that fixed cost recovery.