Construction Partners Inc

NASDAQ:ROAD

Earnings Call Transcript 2019-Q3

[Operator]

Greetings and welcome to the Construction Partners' Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

It is now my pleasure to introduce your host, Rick Black with Investor Relations. Thank you, sir. You may begin.

[Rick Black, Investor Relations]

Thank you, operator, and good morning everyone. We appreciate you joining us for the Construction Partners conference call to review fiscal 2019 third quarter results. This call is also being webcast and can be accessed through the audio link on the Events and Presentation page of the Investor Relations section of constructionpartners.net. Information recorded on this call speaks only as of today August 9, 2019, so please be advised that any time-sensitive information may no longer be accurate as of the date of any replay.

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’s provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of the Company’s call that by their nature are uncertain and outside of the Company’s control. Actual results may differ materially. Please refer to the Company’s earnings press release for disclosure 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. Reconciliation 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 any forward-looking statements. And now, I would like to turn the call over to Construction Partners' President and CEO, Mr. Charles Owens. Charles?

[Charles Owens, President and Chief Executive Officer]

Thank you, Rick, and good morning everyone. With me on the call today are Ned Fleming, our Executive Chairman; and Alan Palmer, our Chief Financial Officer. In my opening remarks, I will provide comments about our fiscal 2019 third quarter and give an update on our business. I will then turn the call over to Ned for a few additional comments. Finally, Alan will review our financial results before we take your questions.

We are pleased with our performance during the third fiscal quarter. This reporting period marks our sixth consecutive quarter of revenue growth since our IPO last year. This success has been attributable to solid and consistent execution of our business model and growth strategy. Revenue for the quarter was $227.3 million, up 16.5% compared to last year and led to strong growth in adjusted EBITDA, which grew to $31.3 million, up 37.9% from the same quarter last year. In the third quarter, our adjusted EBITDA margin increased to 13.8% compared to 11.6% in the third quarter last year.

Our growth in the quarter was fueled by strong operational performance and effective project execution by our workforce throughout our markets, consistent with our strong historical execution and with favorable working conditions, we effectively utilized hot mix asphalt plants and equipment which contributed to higher profitability in the quarter. In addition, I’m very pleased with our backlog at quarter end and with the opportunities available for to be it in the remainder of the fiscal year and beyond.

As we have mentioned before, historically, we have earned approximately 40% of our annual revenue during our first half of our fiscal year and 60% during the second half. We typically benefit in the second half of our fiscal year for a more favorable working conditions due to normal weather patterns, longer working days and other factors. In line with our expectations, we benefited from these factors in the third quarter and were able to improve margins.

In mid-July, we announced our 19th acquisition since our founding with a hot mix asphalt manufacturing plant and paving company in northeast Alabama. With this acquisition complete and fully integrated, we have now completed four successful acquisitions since our initial public offering in May of last year. Today we operate 32 hot mix asphalt plants across the five southeastern states in which we operate. Since the founding, we have maintained a consistent strategy of controlled probable growth through three primary levers by doing more work in our current markets by making strategic acquisitions and by expanding through greenfields, where we establish a new market and a hot mix asphalt plant.

Clearly, the pipeline of acquisition opportunities look robust, and we will continue to evaluate the prospects that best fit the Company and our strategy. We are patient with acquisition opportunities and place high importance on finding a good fit.

Before turning the call over to Ned, I would like to thank our senior management team for their leadership, and I would also like to thank more than 2,200 employees for their dedication and hard work that enables us to execute our strategy.

Now I’ll turn the call over to Ned for a few additional comments. Ned?

[Ned Fleming, Executive Chairman]

Thank you, Charles, and good morning everyone. This was a very good quarter. The entire team continued to operate at a very high level throughout the organization, and as I’ve seen for nearly two decades, they continue to deliver consistent results. Based on our proven strategy of sustainable growth, this team is enhancing the financial performance of the Company and maintaining market share across all our markets. In addition, they are doing this with the support of an incredible corporate culture that has fostered success at CPI since its inception.

There is an important and deliberate focus on people. We provide continuous training and mentoring to support a growing and talented workforce. The Company needs emphasis on proper training, coupled with consistent growth, creates opportunities for mobility and advancement for the workforce. This quarter’s success again marks a great point of differentiation for CPI compared to others in this sector.

We primarily focus on recurring maintenance projects for public roadway. Two important elements set us apart with this model. We have smaller overall project sizes as well as shorter project duration. Our models provide our crews and equipment with consistent work in our local markets and the Company with more recurring revenue and consistent financial results. We do not bid mega projects outside of our markets.

The Company is strategically positioned in all the markets to continue to deliver industry leading top line growth and margins, as well as strengthening its balance sheet. Our business is located in fast growing south eastern states with both demand for ongoing road repair projects and increasing public funding that will continue to fuel growth. This built-in demand, as well as the funding expansion will continue to grow in our markets.

As our team continues to consistently execute, we believe the market will understand that CPI represents a unique model for public infrastructure companies. We are confident that the business will continue to generate significant financial results in cash generation and maximize value for our shareholders.

And with that, I’d like to turn the call over to our CFO, Alan Palmer. Alan?

[Alan Palmer, Chief Financial Officer]

Thank you, Ned, and good morning everyone. I want to start by quickly highlighting our key performance metrics in the third quarter. From a financial standpoint, as Charles mentioned, favorable working conditions, strong operational performance and effective project execution by our workforce throughout all markets led to year-over-year increases in the quarter. Revenue for the quarter increased to $227.3 million, up $32.2 million over the June 30th 2018 quarter. Revenues in our existing markets increased approximately $21.3 million as a result of growing demand in both the private and public sector. The increases also includes approximately $10.9 million of revenue attributable to acquisitions that were completed during or subsequent to the quarter ended June 30th, 2018.

Gross profit increased to $38.1 million, up approximately $8.6 million over last year, primarily due to the higher revenue. The higher gross profit percentage of revenue was a result of the strong operational performance and effective project execution by our workforce in addition to increase HMA production and equipment utilization during the quarter. Net income increased to $17.2 million, up from $13.4 million compared to the same period last year. Earnings per share were $0.33 compared to $0.29 in the same quarter last year.

Adjusted EBITDA increased $8.6 million, resulting in an adjusted EBITDA margin of 13.8% compared to 11.6% for the same period in the prior year. The higher adjusted EBITDA margin was a combination of higher gross profit margin and also a lower general and administrative expense percentage.

During the quarter, we were able to increase our shipments from our newly acquired liquid asphalt terminal in Florida. This contributed to our margin improvement and we continue to believe that we can achieve between 20 basis points and 30 basis points in overall margin improvements through the use of this terminal.

General and administrative expenses were $15.9 million in the third quarter or approximately 7% of revenue, compared to the same quarter last year of $14.8 million or 7.5% of revenue. As of June 30th, our construction backlog – project backlog was $581 million. Of this amount, approximately 38% or $221 million is expected to be completed during the fiscal 2019 year. The remainder representing approximately 62% of project backlog is expected to be completed in future years. This is consistent with our historical backlog for this quarter. Based on our strong backlog and continued operational performance, we are maintaining our outlook for fiscal year 2019 with regard to revenue, net income and adjusted EBITDA.

Turning now to the balance sheet. At June 30th, we have $59.7 million of cash and $14.4 million of availability under our $30 million revolving credit facility after deducting outstanding letters of credit. Our debt to trailing 12 month EBITDA ratio was 0.74. We have a very strong balance sheet to support the growth opportunities we are seeing. Cash provided by operating activities was $17.9 million for the nine months ended June 30th, compared to $23.7 million for the nine months ended June 30th, 2018.

The decrease is due to higher accounts receivable and work in progress balances on significantly higher quarterly revenue, and an $8 million increase in inventory related to the operation of our new liquid asphalt terminal. Capex in the third quarter was $11.9 million compared to $11.4 million in the same quarter last year. For fiscal 2019, we expect our capital expenditures to be in the range of $38 million to $42 million, which compares to $42.8 million in fiscal 2018.

Lastly, I’d like to echo Charles’s comments that we had a very good third quarter. We’re also pleased with our current backlog. As I’ve mentioned before, we will continue to be diligent to manage across our 32 local markets. We do this by understanding exactly what is – occurring in each market and taking action. This is a highly competitive business that requires constant overview and internal communication, which is exactly what we discuss with our senior management team on a weekly basis.

We continue to successfully maintain our market position in this competitive environment while also steering revenue to stronger markets as opportunities present themselves. Strategically, our organization maximizes efficiencies through scale and flexibility to move crews and equipment to take advantage of favorable margins and to maintain EBITDA.

With that, we’ll now take questions. Operator?

[Operator]

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Wittmann with Robert W. Baird. Please proceed with your question.

[Andrew Wittmann, Robert W. Baird]

Great. Thanks for taking my questions guys. I guess, the question I just had here is just – you touched on this in some of your prepared remarks, just in the backlog. You’ve mentioned kind of seasonal trends in that and how the amount that you’ve got for this year and next year is not different from historical trends. But as you look at the backlog trials, can you just talk about how you evaluate it as you head into the next fiscal year and do you believe that the backlog that you have in place together with the trends in your markets and the activity levels in your markets can continue to deliver another year of the types of organic growth that you guys have talked about since your IPO roadshow?

[Charles Owens, President and Chief Executive Officer]

Yes, thank you for the question, Andy. Yes, we think that we have a lot of opportunities in front of us to be at work and we’re really satisfied with where we are in the backlog. And as for our growth, you know as we’ve stated before, we’re going to be in the high-single digits to double-digits from a growth that – and that we’re not changing, kind of, our strategy in any way other than that.

[Andrew Wittmann, Robert W. Baird]

Got it. Great. And then, I guess, my second – my follow-up question here is for Alan. And kind of a similar question is, just kind of your evaluation here of the cash flow for the year-to-date so far. I’ve got free cash flow here being negative year-to-year, and so, I guess, as we look at the fourth quarter, are you expecting some of the receivables or working capital to come out of the business? I know it’s another busy quarter for revenue burn. So I just want to get a sense of, kind of, how you evaluate the year-to-date cash flow position that you’re in if there’s timing factor or other factors that are going into this that are maybe holding you back a little bit so far?

[Alan Palmer, Chief Financial Officer]

Yes, Andy. As I said in the comments, about $8 million of that is the result of inventory that we put in at the asphalt terminal that we did not have last year, and then we made one other acquisition that increased the inventory some, and then of course the volume of sales in this quarter compared to last year has added to the accounts receivable. But as a percentage of sales, there’s really not any change in the receivables, but as we enter into the fourth quarter, we should see more cash generation, because a lot of the growth, if you will, and the receivables should flatten out in that fourth quarter.

So we expect and – it just so happen on the inventory that we had two large shipments that came in at the very end of June and that most all of that inventory would be shipped out in the fourth quarter and it would most likely be October before we reload the terminal. So that should generate a substantial amount of change between June 30th and September 30th.

[Andrew Wittmann, Robert W. Baird]

Okay. That’s helpful. Can you just to – sorry to jump in here, can you – are you able to quantify or willing to quantify those shipments since we have a little context around those shipments that you cited there?

[Alan Palmer, Chief Financial Officer]

Yes, I mean –

[Andrew Wittmann, Robert W. Baird]

In terms of the impact on inventory?

[Alan Palmer, Chief Financial Officer]

Yes, a single tow was about $3.5 million worth of inventory. So we got two tows on the last week of June, and so that put our tanks at a pretty high capacity for this time of the year, but it is just the timing and the flow of, you know, when the materials comes in and goes out. But I mean, that inventory, it was $8 million, and typically, other than in the winter field, which we’ve talked about before, we would not have that much inventory at any one-time.

[Andrew Wittmann, Robert W. Baird]

Okay. That’s helpful context. Thank you very much.

[Operator]

Thank you. The next question comes from Trey Grooms with Stephens. Please proceed with your question.

[Trey Grooms, Stephens]

One, I guess, my first question is on the margins, you know, great performance there. Just – I know you mentioned the new terminal impacted, but if you could maybe quantify that, maybe how much of the, you know, the terminal impacted margins in the quarter and then – and then thinking about other moving pieces there that may have – you may have benefited from and kind of as we look into the little bit longer term here, I know, you know, from a top line perspective, you guys are kind of looking still for that high single-digit, double-digit type top line growth, kind of as a follow on question on the margins. How are you thinking now with the terminal in play and kind of what your footprint looks like today? How you’re thinking about longer term EBITDA flow through?

[Charles Owens, President and Chief Executive Officer]

Yes, with regard to the terminal, we did have a positive impact from it. We were able to get our shipments close to what we would want to be doing on a quarterly basis and it made approximately a 20 basis point impact on the quarter. So it was in service for the full quarter and we had good outflow from it. So as I’ve said before, on an annual basis, when we’ve got a full year, we expect between 20 basis points and 30 basis points improvement in our overall margins. So that quarter was right in line with that and our volume should increase in the future.

As for as long-term expectations, we have said before we expect to be able to increase our overall margin, EBITDA margin, part of that through some improvement in our gross profit, but also part of it through an improvement in our – lowering our overhead as a percentage of revenue because of the steep increases we had related to some of our growth and going public. We saw that in this quarter.

I think it was about a 30 to 40 basis points lower than the same quarter last year. And of course, as we get into the busy times, a big contributor to the increasing margin is the utilization of our equipment and the throughput that goes to the asphalt plants. So that certainly was a driver in this quarter in a recovery of some of the lower margin because of the offset of that in the previous quarters.

[Trey Grooms, Stephens]

Okay. So, I guess, kind of looking into 2020 or even it’s not just necessarily just next fiscal year, but just as a general role, is there a kind of a bogey now range of that you could give us on – the way to kind of think about? I know it ebbs and flows from quarter-to-quarter given that your ability to do more or less work given weather and other factors, but just didn’t know if there was some kind of way we could be thinking about kind of that incremental margin flow through as we look into next year, but it sounds like it could be at least as good as what we’ve seen if not little better given the terminal?

[Charles Owens, President and Chief Executive Officer]

Yes, I mean, when we have the terminal in there for the full year, in your nine months or your 12 months, there’s going to be more in the 20 basis points to 30 basis points. And so that will be there ongoing. And then, I think with no other changes other than just the revenue level we’re at now, there’s about 20 basis points probably on the G&A and then if we make acquisitions or the organic growth stays up as high as it is – has been this last year to, then we could pick up a little bit more on the margin there just because that cost us a percentage of revenue is declining and we would expect that to continue as we grow.

[Trey Grooms, Stephens]

All right. That’s helpful. And then last one from me is on M&A pipeline. You said it was robust. Are you guys seeing any opportunities out there for larger M&A and what is your appetite for doing something of size from an M&A standpoint or should we kind of expect continued, kind of, tuck-in type acquisitions that you guys have done such a good job at executing on in the past?

[Charles Owens, President and Chief Executive Officer]

Yes, Trey, this is Charles. We – obviously, we’d like the bolt-on acquisitions though we also looked at some larger acquisitions that’s out there that really just didn’t fit our profile, the way that we would really like for it to fit. But obviously, if acquisition comes along that does fit the profile, really we’re not limiting our acquisition strategy to a certain level of revenue that we take in or anything like that. So we’re open to anything that make strategic fit and fits our culture and we will contribute to bottom line immediately.

[Trey Grooms, Stephens]

Are you totally against, because geographically you guys have kind of stuck to your wheel house. Would it be totally unreasonable to see you guys looking at something outside of the current footprint that you have now?

[Charles Owens, President and Chief Executive Officer]

We’re always looking outside of the footprint and we’re evaluating things. We get outside of our footprint, then we want to make sure we’ve got the right acquisition that has the personnel and the ability to grow the Company and expand and right now we have lot of, as you know privately held companies in the markets that we’re in, but we’re based – we’re looking in other areas also, but it’s got to be a good fit for us to move into another platform situation.

[Trey Grooms, Stephens]

Okay. Thanks for taking my questions. Good luck.

[Operator]

Thank you. The next question comes from the line of Josh Wilson with Raymond James. Please proceed with your question.

[Josh Wilson, Raymond James]

Good morning, Charles, Alan and Ned. Congrats on the quarter.

[Charles Owens, President and Chief Executive Officer]

Thanks, Josh.

[Ned Fleming, Executive Chairman]

Thank you, Josh.

[Josh Wilson, Raymond James]

I wanted to peel back the layers a little more on gross margin in the quarter. The utilization benefits that you talked about, was that more of a comment seasonally or was that referring to unusually favorable weather that maybe is not sustainable or repeatable?

[Alan Palmer, Chief Financial Officer]

No, it was strictly the seasonality. When we did 40% in the first six months, both of those quarters are going to be negatively impacted margin wise by the lower utilization of the equipment in the plants and then in the higher utilization quarters like the third and the fourth, that margin is going to expand and that’s what we saw in this quarter and it was not really anything that’s not unusual that have occurred in the quarter. It’s just the seasonality of the first six months compared to the second six months.

[Josh Wilson, Raymond James]

Got it. And as I look at the implication for margins in the September quarter, it looks like there – it may step down some in your guidance. What would the drivers be there?

[Alan Palmer, Chief Financial Officer]

Well, I’m not sure and that there’s not a substantial change in what – we do a quarterly update in our guidance or considering that guidance is based on that. So what I’m looking at that we put together is not less than 0.5% difference, if you will, and the margin in the third quarter and the fourth quarter. So I’m not sure what implies that it would be down unless it’s comparing maybe to the midpoint of the previous guidance. Other than that, there’s nothing in the – our expectation for the fourth quarter that would have implicated a decline in the margin in that quarter compared to the current one.

[Josh Wilson, Raymond James]

Okay, got it. And then last one for me. Your burn rate, the amount of sales you’ve had relative to the backlog going into the quarter has been running a little higher than last year. Should we expect that to continue going forward and what might some of the drivers of that be?

[Alan Palmer, Chief Financial Officer]

Well, I’m not sure of the question. I mean, our – we expect our revenue to continue to grow, as we’ve said, as Charles said, both through acquisitions and organic at the high single, low double digits. We expect that to continue. Generally in the third and fourth quarter, the burn rate is sometimes can be 10% or 15% higher than what we replace just because of the timing of when the smaller or the recurring maintenance type contracts or less Phonetic.

So that’s pretty common. And our backlog as a percent of what we expect to do next year with our existing operations is pretty much in line with what we’ve seen in the past years. So, I don’t know if that answer your question, but it would be something. But our – typically our burn rate in the third and fourth quarters is greater than what we add in the third and fourth quarter. That’s been the historical norm. We’re in the first and second quarter, especially the second quarter. Our add is usually a good bit more than our burn rate because we’re adding a lot of that work that we’ll complete in the next – within that same fiscal year.

[Josh Wilson, Raymond James]

Got it. Thanks for taking my questions.

[Operator]

Thank you. The next question is from Brent Thielman with D.A. Davidson. Please proceed with your question.

[Brent Thielman, D.A. Davidson]

Thanks. Good morning. Great quarter.

[Alan Palmer, Chief Financial Officer]

Good morning. Thank you, Brent.

[Brent Thielman, D.A. Davidson]

Hey, Charles, if you look at the backlog or just kind of the run rate of business you’re taken on today, are you seeing any shift toward more work or you more of a subcontractor versus the prime contractor? I’m thinking about some of these larger jobs that have been hitting the market. I think historically you’ve kind of been in that 70% prime range. Is that changing at all?

[Charles Owens, President and Chief Executive Officer]

No, we really haven’t seen that much of a shift. You know, a lot of the large projects are not really in all of our 32 different markets and we’ve been still pretty consistent as far as the prime versus the sub and we really haven’t seen that big of a shift going in that direction.

[Brent Thielman, D.A. Davidson]

Okay, great. And in this favorable legislation in Alabama, when do you think that start – when do you think you start to see some opportunities materialize from that for you?

[Charles Owens, President and Chief Executive Officer]

I think we’ll start seeing that in fiscal 2020.

[Alan Palmer, Chief Financial Officer]

Typically – this is Alan. Typically, it’s about nine to 12 months before – after that becomes effective before you really start working on some of those. But we expect them because it goes in effect October 1st. We expect some of the spring lettings to include projects that are funded with that, especially some of the county and city projects, because part of that tax increase is going to the cities and counties and they have a strong appetite to get some of their roads done and those typically are not ones that have a long lead time.

[Brent Thielman, D.A. Davidson]

Okay. In the private side of the business – if I could just sneak one more – any updates in terms of what you’re seeing in there within your geographies?

[Alan Palmer, Chief Financial Officer]

In the areas that we operate, we really haven’t seen very little slowdown in the commercial and the private sector is still seen to be strong and we don’t see anything out there to be fit they just can’t slow it down.

[Brent Thielman, D.A. Davidson]

That’s great to hear. All right. Thanks for taking the questions.

[Alan Palmer, Chief Financial Officer]

Thank you.

[Charles Owens, President and Chief Executive Officer]

Thank you.

[Operator]

Thank you. Mr. Owens, there are no further questions at this time. So I’d like to pass the floor back over to you for an additional concluding comments.

[Charles Owens, President and Chief Executive Officer]

Okay. Well, I’d like to thank everyone for joining the call today, and I just want to let you know that we’ll be focused on executing our strategy and we look forward to our next conversation in the next update. Thank you everyone.