Construction Partners, Inc. (NASDAQ:ROAD) Q4 2022 Earnings Call Transcript

Construction Partners, Inc. (NASDAQ:ROAD) Q4 2022 Earnings Call Transcript November 22, 2022

Construction Partners, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $0.24.

Operator: Greetings, and welcome to the Construction Partners, Incorporated. Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Question-and-answer session will follow the formal presentation. As a reminder, this call is being recorded

Rick Black: I’d 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, by their nature, are uncertain and outside of the company’s control. Actual results may differ materially. Please refer to the earnings press release that was issued today for our disclosure on forward-looking statements. These statements as well as 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 today’s 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 stating how proud I am of the entire team of 3,800 dedicated employees throughout our five states in the Southeast for their continued commitment and hard work to produce a record year at CPI. With the acquisition announced yesterday, I’m excited to welcome our sixth state of Tennessee and the talented new teammates that live and work in the Nashville Metro area. In fiscal 2022, our team persevered through inflation that hit hard in the first half of the year and supply chain disruptions that persisted all year and continue to present numerous challenges to our productivity and profitability.

Even so, we were able to gain momentum and increase profitability in the second half of fiscal ’22, and we now look to carry that momentum into fiscal ’23. The company had a record fourth quarter for revenue, adjusted EBITDA and backlog. Compared to our fourth quarter last year, both revenue and adjusted EBITDA were up over 40%. I would highlight that this marks our first double-digit adjusted EBITDA margin in the last five quarters. This reflects that we have worked through most of our pre-inflationary backlog from one year ago, and we continue to manage through supply chain headwinds. Similar to our third quarter, abnormally high contract adjustments for liquid asphalt pricing, again inflated revenue by approximately $10 million. As a reminder, this is effectively a dollar-for-dollar cost reimbursement that has no impact on margin dollars.

As we communicated last month, in the last week of our quarter, Hurricane Ian impacted three of our states. While we were fortunate to not have had any loss of life or property, the main effect was the Florida DOT shutdown, all projects statewide most of that week to prepare for the storm’s arrival. We estimate the impact from Ian was approximately $8 million of revenue, which is not lost, but moves forward as part of a record backlog of $1.4 billion. In Q4, more than $400 million of new work was added to backlog. In FY ’22, we grew backlog sequentially for both quarters of our busy work season, which is not the historical norm at CPI. This reflects strong project demand and the added contribution of new markets entered this year. This new backlog continues to have both higher inflation factored in on the cost side, while also steadily increasing profitability on the margin side.

Using backlog as one indicator of our future, we began FY ’23 with a more resilient and profitable book of work on hand than we had one year ago. Demand remains strong in both the public and commercial sectors. Healthy funding programs at the state and federal levels are creating numerous public bidding opportunities, and we are beginning to see the funding from the IIJA work its way into project lettings. We still see healthy commercial project opportunities throughout our geographic footprint as migration to the Southeast United States continues to drive growth. As we begin 2023, our initial guidance is driven by three factors: first, a record backlog with strong project demand; second, higher margins in our backlog; and lastly, the continued economic uncertainty and potential productivity loss due to the supply chain challenges.

We expect that supply chain will begin to normalize over 2023. The midpoint year-over-year reflects revenue growth of approximately 13%, adjusted EBITDA growth of 33% and double-digit EBITDA margins. This fiscal year should have our typical seasonality of revenue being realized approximately 40% in the first half of the year and 60% in the second half, and our margins haven’t caused under recovery in the first half of the year and over recovery in the second half of the year during our busy work season. Turning now to acquisitions. During the past year, our record results were helped by the additional contributions of numerous new markets we acquired, including a platform company in a new state and several bolt-on acquisitions. Yesterday, we announced the first acquisition of FY ’23, adding three hot mix asphalt plants and a construction operation in the Nashville Metro area, purchased from Blue Water Industries.

These new assets and employees will be integrated as a bolt-on acquisition to our Alabama based platform company, Wiregrass Construction. Wiregrass maintains an outstanding and well-managed operation in North Alabama and Huntsville within close proximity to the Nashville Metro area. We expect to take advantage of the growth opportunities in one of the fastest-growing regions in the country. In connection with this transaction, we also received cash and transferred ownership of the Darty Springs quarry in North Carolina, to Blue Water Industries, one of the leading aggregate producers in the Southeast. We believe this strategic transaction with Blue Water strengthens both of our organizations by creating a partnership in two dynamic markets that retains aggregate sourcing rights and allows each company to focus on their core area of expertise.

As we move into a new year, we continue to have conversations with potential sellers, both inside and outside of our current states, and we remain patient and focused on finding the best strategic acquisitions that expand our footprint and relative market share. We strengthened our operations also through building greenfields, such as the HMA plant we recently opened in Vince, North Carolina. An additional example is a greenfield investment we are making to enhance our vertical integration strategy, a new liquid asphalt terminal under construction in Northern Alabama. It is expected to be operational this spring. The Hayneville facility will supply 10 hot mix asphalt plants in Alabama, as well as the three acquired Tennessee asphalt plants.

This new terminal captures the margin between wholesale and retail for liquid asphalt using our construction activities, just as we’ve done successfully at our first liquid asphalt terminal on the Gulf Coast in Panama City. These greenfields require an initial cash investment as does the double-digit real organic growth we have achieved in our existing markets. Before turning the call over to Alan to review the financials and 2023 outlook, I want to reiterate our optimism for the future of CPI. In 2022, the team successfully managed through numerous challenges and set the table for a new year of growth, all while not losing sight of CPI’s strategic model. At CPI we know who we are and what we do. Our company is well positioned for the numerous opportunities on the road ahead, and we are committed to staying focused and working hard to build value for all of our stakeholders.

I’d now like to turn the call over to Alan.

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Alan Palmer: Thank you, Jule, and good morning, everyone. I will begin with a review of our key performance metrics in fiscal 2022 before discussing our outlook for fiscal 2023. Revenue was $1.3 billion, up 43% compared to the prior year. Acquisitions completed during or subsequent to the fiscal year end of 2021 contributed $170.4 million of revenue, and we had an increase of $220.5 million of revenue in our existing markets. . The mix of our total revenue growth for the year was approximately 24.2% organic revenue and approximately 18.7% from recent acquisitions. Gross profit was $139.3 million, an increase of $19.4 million compared to the prior year due to the factors that Jule discussed during his remarks. General and administrative expenses were $107.6 million, an increase of $15.7 million or 17% compared to last year.

This increase was primarily $11.1 million of expenses associated with the operation of businesses acquired in fiscal 2022, equity-based compensation, professional fees and various other expenses. G&A as a percentage of total revenue was 8.3% in fiscal 2022 compared to 10.1% last year. In fiscal 2023, we expect general and administrative expenses as a percentage of revenue to be in the 8.3% to 8.5% range. Net income was $21.4 million, an increase of 5.9% compared to net income of $20.2 million in the prior year. Adjusted EBITDA for fiscal 2022 was $111.2 million, an increase of 23% compared to last year. You can find GAAP to non-GAAP reconciliations of adjusted net income and adjusted EBITDA financial measures at the end of today’s press release.

Turning now to the balance sheet. At September 30, 2022, we had $35.5 million of cash, $271.9 million of principal outstanding under the term loan and $105.1 million of principal outstanding under the revolving credit facility. We have availability of $208.6 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 2.79. This liquidity provides financial flexibility and capital capacity for potential near-term acquisitions allowing us to respond to growth opportunities when they arise. Cash provided by operating activities, net of acquisitions was $16.5 million for the 12 months ended September 30, 2022 compared to $48.5 million for the same period last year.

Capital expenditures for fiscal 2022 were $68.9 million. We expect capital expenditures for fiscal 2023 to be in the range of $75 million to $80 million. This includes maintenance CapEx of approximately 3.25% to 3.5% of revenue. So the remaining cash is invested in funding growth initiatives. Today, we are announcing our fiscal year 2023 outlook. We expect revenue in the range of $1.4 billion to $1.55 billion, net income in the range of $24.6 million to $38.4 million and adjusted EBITDA in the range of $135 million to $160 million. And finally, as Jule mentioned, we are reporting a record project backlog that was $1.4 billion at September 30, 2022, compared to $966 million at September 30, 2021 and $1.3 billion at June 30, 2022. And with that, we are now ready to take your questions.

Operator?

Operator: Thank you. We will now be conducting a question-and-answer session . Our first questions come from the line of Tyler Brown with Raymond James. Please proceed with your questions

Q&A Session

Tyler Brown: Hey, good morning, guys.

Jule Smith: Good morning, Tyler.

Tyler Brown: I just wanted to start with the guidance. So it seems that the $25 million range for EBITDA is fairly wide. I think that’s certainly understandable given the environment. But just curious, if you could talk about what are some of the key factors that kind of get you to the high end? What gets you to the low end when we think about the scenarios, and for example, are you assuming on the high end that there’s additional M&A or diesel coming off? Just any color there would be helpful.

Jule Smith: Yes, Tyler, the guidance that we gave, it’s wider because we’re in an uncertain environment. That’s for sure. So the low end of the guidance assumes we have some uncertainty out there. Supply chain. The first two articles I read today were about a potential railroad strike and a potential diesel fuel allocation. So that’s the world we’re operating in. But the upper end assumes things go well, that we avoid some of those scenarios. We operate well. We have good organic growth and a reasonably good weather. We don’t put any speculative M&A in our guidance. If there’s a deal that’s pending, that’s imminent that we’re very sure of, we may include that in the upper end of the range, but we don’t just put speculative opportunities in the guidance.

Tyler Brown: Okay. Perfect. Yes. That’s super helpful. And since we’re on that, Alan, just more of a modeling question. But just based on all the deals that have been done today, is that $75 million to $100 million of rollover benefit from M&A, I think you mentioned that last quarter. Is that right? Or does that pick up inclusive of the Blue Water transaction?

Alan Palmer: Yes. That would be inclusive of Blue Water. That was baked in because we knew we were going to close it. So any additional pickup. But the $75 million to $100 million would be our — continue to be our estimate of acquisitions because with Blue Water, we’re actually losing some revenue with the quarry that we traded, but we’re picking up more revenue in Tennessee.

Tyler Brown: Right. Okay. Okay. That’s helpful. And then just kind of maybe talking about the balance sheet and sort of talking a little bit about deals. I think you ended trailing EBITDA maybe around 3 times. You talked a little bit about the capacity on the balance sheet, but I am curious about your approach, just given the interest rate environment, do you feel somewhat restricted gain deals with just free cash flow? Or are you willing to temporarily lever up for the right type of deal?

Alan Palmer: Yes. I mean, we certainly are willing to. I mean our credit facility allows us to go as high as 3.5 and even higher for a larger deal for, I think, nine months. But we’re comfortable at being at a 3 times leverage, but one thing that’s not reflected in the number you gave because of that acquisition activity, we get credit for pro forma EBITDA because of the number of deals that we’re doing. So our actual calculation under our bank covenant is 2.79, a little bit lower than what you are. And then the transaction that we just completed, we received $28 million of cash in that net transaction. So that would be available to be redeployed for future acquisitions. So the Blue Water one, we swapped assets and we received $28 million worth of cash out of that.

Tyler Brown: Okay. Perfect. Thank you for the $28 million, that’s helpful. I will

Jule Smith: All right. Thank you Tyler

Operator: Thank you. Our next questions come from the line of Stanley Elliott with Stifel. Please proceed with your questions