Greetings, and welcome to Construction Partners, Inc. First (sic) [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. [Operator Instructions] As a remainder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard with Dennard Lascar Investor Relations. Thank you. Mr. Dennard, you may begin.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Construction Partners' conference call to review fiscal 2019 second quarter results. 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 May 10, 2019, so please be advised that any time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. I would also like to remind you that 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 yesterday for our disclosure on forward-looking statements. These factors and other risks and uncertainties are also 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 with that behind me, I'd like to turn the call over to Construction Partners', President and CEO, Mr. Charles Owens. Charles?

Thank you, Ken, and good morning, everyone. With me on the call is 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 second 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 and discuss our outlook. We are pleased with our performance during the second fiscal quarter. Revenue for the quarter was $164.3 million, up 38.2%, compared to last year. Gross profit and adjusted EBITDA were both up, compared to the second quarter last year with gross profit of $19.8 million, up 44% and adjusted EBITDA of $13.9 million, up 74.2%. We had favorable working conditions throughout our markets during the quarter. We also grew our backlog to $584.8 million at March 31, 2019 with approximately $380 million of that amount to be completed during our current fiscal year. Project opportunities remain strong across our markets. And we continue to pursue additional opportunities that can be completed both during the current fiscal year and beyond. We earned approximately 40% of our annual revenue though during the first half of the fiscal year. This was in line with our additional seasonal pattern. We typically benefit in the second half of our fiscal year for more favorable working conditions due to normal weather patterns, longer working days and other factors. In late February, we announced two strategic acquisitions; a liquid asphalt terminal in Panama City, Florida and an asphalt production and paving company in South Central, Florida. These two companies are now fully integrated. The liquid asphalt terminal was part of our vertical integration strategy and allows us to supply liquid asphalt to a number…

Thank you, Charles and good morning to everyone. As the Chairman of the Board, in behalf of all the directors, I too would like to welcome Noreen Skelly to our Board to recognize that she has leadership strength, financial acumen and diversity to our Board, and we are all looking forward to her participation and input. I'd like to reiterate some of Charles' comments. This quarter's performance is a direct result of the efficiency, experience and hard work of each employee at CPI. They are doing an excellent job on a daily basis executing the strategy Charles, Alan and the entire leadership team has driven throughout the entire organization. The company is strategically positioned in our all our markets to compound double-digit top line growth, generate excellent margins in the industry and with a strong balance sheet is prepared to execute acquisitions. This business is geographically located to benefit from operating in the fast-growing southeastern states where both the demand for ongoing road repair projects is coupled with increased public funding to pay for the work. This demand and funding continue to grow in our market as evidenced by the Alabama's recent gas tax increase. With strong demand and solid funding coupled with the track record of results and a strong growth outlook, we believe Construction Partners represents a compelling investment. As our team continues to consistently execute, we believe it will be apparent to the market that CPI represents a unique model for public infrastructure companies. The nature of our recurring publicly funded maintenance projects with shorter durations and lower volatility risk from input costs distinguishes our business model. Through the leadership of our highly experienced team both here in Dothan and throughout our platform companies, Construction Partners is well positioned to execute our plan and grow the business. One of the most compelling aspects of CPI is its consistency. We've seen it over the past 20 years as we continue to meet with investors and tell our story. We believe the market will appreciate the opportunity that CPI represents. I believe we are well positioned for continued growth in 2019 and beyond. And with that, I'd like to turn the call over to our CFO Alan Palmer. Alan?

Thank you, Ned, and good morning, everyone. I want to start by quickly highlighting our key metric performance in the second quarter. From a financial standpoint as we've discussed, favorable working conditions in the quarter improved compared to the first fiscal quarter and led to increases year-over-year for our second fiscal quarter. Revenue for the quarter increased $45.4 million over the same quarter last year. Revenue attributable to Scruggs which we acquired subsequent to March 31 2018 was $18.3 million. And we were also able to complete work on our projects that were delayed in our first quarter end of December 31 2018. Gross profit increased approximately $6.1 million primarily due to higher revenue. The higher gross profit percentage revenue was a result of increased HMA production and equipment utilization resulting in an increase of fixed cost absorption during the quarter. Net income was $4.2 million down from the same period last year. However, excluding the impact of a nonrecurring after-tax settlement of $10.6 million in the second quarter of 2018, net income was up $3.7 million. Earnings per share were $0.08 down from $0.27 which was also impacted by the legal settlement last year. Adjusted EBITDA was up $5.9 million resulting in an adjusted EBITDA margin of 8.5% compared to 6.7% for the same period in the prior year. The higher adjusted EBITDA margin was a combination of higher gross profit margin and a lower general and administrative expense percentage. Looking at our input costs. We have seen some recent increase in asphalt cement pricing. But currently we do not anticipate changes to have a significant impact in 2019. In late March we began shipments from our newly acquired liquid asphalt terminal in Florida. We believe over the coming year that we can achieve between 20 and 30 basis…

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Trey Grooms with Stephens. Please proceed with your question.

Hey, good morning, gentlemen.

Good morning.

So I've got a couple questions here. First, where were you guys seeing the upside in the quarter? Any specific geography or geographic markets that stand out to you versus kind of your expectations going into the quarter?

No, we didn't have any markets in particular. They were all very favorable working conditions. And our team just got out and performed.

And on the public side that clearly looks pretty good. But what are you guys seeing right now on the private side of the business? And remind us, is that still about 30% of the business?

Yes it is. And we're still seeing from a backlog standpoint, a very good backlog in private work primarily commercial. We've lowered our residential portion of our private work on purpose. But we still have a very strong commercial private work backlog.

And so when you say commercial, can you give us some examples on the private side? Are these large kind of projects on the non-res side or more some of the commercial that follows residential? Just what do you guys generally see on the private side, what type of work you're doing there?

Some of it could be the schools that's being built. And then we have different shopping areas that's being built and office complexes and developments like that.

I got you. Okay. And with your public business, so can you help us kind of dissect that piece just a little bit? I know most of what you guys do on the public side is -- I guess would be considered more maintenance. But can you kind of give us that breakdown and what you're seeing on the more maintenance side of things versus what you would be seeing on maybe lane expansions or something like that, that would be considered may be new public construction?

There's not really much of a change in that. We participate in the larger projects when they are in our market and we have an opportunity. But our core businesses are those maintenance type projects that just continue to reoccur. And we've seen, with the increased tax revenue that's come into the states, they're really trying to make sure that they get those roads that there are in poor repair back in good condition, so not really a change there. There are no big large projects that we've added to backlog that would skew it different from what we've had in the past.

Okay. And then -- and last one for me is, just around some of the cost there. What are you guys seeing? Or maybe your outlook for labor and freight costs from where we stand today?

Our labor cost is pretty steady. I think, I've shared before, generally we're -- we make payroll adjustments annually. So throughout the year, we don't have swings in our labor costs. Typically, we've got a very stable workforce and we're employing people that are in these markets and they're always in those markets. So we're not seeing much of a change there. That's been built in to our bids and our cost, so not any real fluctuation there. We do put certain a percentage of our own trucking. So that helps us to mitigate any things that are happening out in the market. But, clearly, trucking is tight. But being in these local markets, where we've got a steady revenue and a steady utilization of outside truckers, we don't see any big problem there that we cannot price into our bids.

Our next question comes from the line of Andrew Wittmann with Robert W. Baird & Company. Please proceed with your question.

Great. Good morning. I was -- I guess, I had some questions here on, maybe -- I guess, you call it the guidance. I was just doing some math and I wanted to get your thoughts, Alan, on this one. But it looks like organic growth here in the March quarter was around 20%, given that you gave the Scruggs information there, which is obviously very good. And it looks like the growth rate for the back end of the year is just pretty high. Maybe not quite that high, but something probably in the teens growth rate. The backlog is not up that -- it's up, but it's not up that much. I guess, a question for you is, the level of visibility that you have into the work that you need to book in the year that's going to be burned for the year. And it looks like, there's about $100 million delta between what you mentioned as already booked and which you still need to book to get there. That's a long way of saying is, how much -- how does the $100 million that you still need to book for this year compared to the past? And how confident are you in capturing that work level?

Yes. Good question. I mean, first, we're very confident, because actually our contract backlog that is booked, compared to what we have to complete, is very comparable to what we normally see at March. The difference between what we still have to do in contract backlog is about 40% of the number you mentioned. So that remaining $100 million is the typical FOB that we would have for our hot mix asphalt and things like that. So that contract backlog is more in the $40 million to $50 million range, not the $100 million range. And that's very comparable percentage-wise to what it's been in the prior years.

Super helpful, on that one, the next question has to do around kind of the opportunities that you're seeing in our markets for, future growth specifically, where you can put some capital to work, either through acquisition or greenfield. How are those opportunities trending? Charles, as you're looking around there, do you feel like, there is an opportunity to plant another greenfield here this fiscal year still or tuck in another acquisition? Just kind of want to get your latest on that.

Yeah. We're seeing quite a bit of activity in -- and we've been real selective on making sure that, it's strategic for us and the culture, and the management team that were looking at. But we obviously see a little bit of pickup of movements going around. And we would hope to get the right candidate and get another one under our belt would be nice.

Okay. And then, I think my last question is going to be for Ned. Ned, during the quarter there was an announcement from the company where a number of the Class B shares were converted into Class A shares. And I just wanted to get your perspective, on the rationale, the reasoning behind that, so that at least we as investors know why that happened. Certainly, I think there was at least a couple of calls that we took that suggested like -- asking if there was potential shareholders that were looking on selling or if there's any other ramifications that might be applicable to your desire or ability to be included in various indices.

Andy, thank you for that question, and first and foremost, we probably see and continue to believe it's in the best interest of the company and all the stakeholders for us to converting enough shares that as a result of doing that the company will qualify for key several -- for several key indexes as well as some other smaller indexes we believe. And we think it's important in today's market to be qualified for those indexes. Those were the really -- that's really the key reason.

So basically, there are, some threshold or something that you need to have a certain what voting power or something available to public market investors, to be able to be included into those indices? Is that what you're saying?

Correct. So there are…

Okay.

…certain vendors to be included in those indices and as we took a step back, and reviewed and tried to figure out from a capital structure standpoint what was in the best interest of the company to move forward. And you see how many companies. And how many shares on daily basis trade as a result of the indexes. We wanted to make sure that this was a company that was qualified for as many indexes as we can be qualified for.

Okay. That makes sense and going to leave it there. Thank you very much.

Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.

Hey, thanks. Good morning, great quarter.

Good morning.

Thank you, Brent.

Hi. Maybe first one for Alan, just kind of a clarification, it looks like the DSO is prepped up a little higher than usual this quarter, anything to be aware of there, just sort of timing of collections?

No the -- they really haven't. What happens is, if the timing of when we get our revenue is really the driver of that. And our March revenue was significantly higher than January and February. So, when you look at it on a comparison of the accounts receivable to the revenue -- the most recent revenue, it's right in line. But what happens is, when you measure that at the end of -- the receivables at the end of the quarter, for last quarter, our December sales were way down, so our receivables at that moment -- because generally we collect the majority of our receivables within the 30 days other than the retainage which is included in those receivables. But, we've not had any decline in the average length of receivables. But when you have a high revenue month, than the receivables if that happens to be the last month of the quarter it's going to look like it's been an increase in the average days of sales. And that same thing flows over to the cash flow statement. When you look at the timing within the quarter of when that revenue is you can -- when our revenue ramps up naturally our receivables ramp-up in that month. And because we had such a strong second quarter, especially, the March period which is kind of the beginning of our heavy season then that's what you get with that.

Okay. That's helpful, Alan. I appreciate that. I guess the next one would be for any and all of you. The balance sheet is in great shape. I guess, just sort of considering the need to maintain a little liquidity from a working capital perspective and then I guess also bonding capacity perspective. Can you just update us on what sort of dry powder you think you have to do a transaction or transactions right now?

Yes. We've said before that our debt ratio could go as high as 2.0 to EBITDA so that -- we're below one now we're at 0.88 so we could easily incur another $50 million -- $50 million, $60 million worth of debt and still be below that two threshold. And then as far as the cash on the balance sheet, we're entering the period of the year where that will begin to grow again because we've kind of hit that bulge as I mentioned with March in that ramp-up of the receivables so -- but even without that we would have probably about $50 million there. So easily $100 million would be available if we were to deploy that and need to deploy that for acquisitions. And we are a positive generator of cash over the course of the year. And we also have the flexibility. We've not in the last 18 months financed any of our capital expenditures, but we also have that ability. And then we've got the money available under our line of credit so substantial dry powder.

Okay, great. And my last one -- actually two parts. But one it sounds like Alabama would be a nice opportunity as that funding starts flowing. But are there other kind of state legislative initiatives you're tracking right now in some your key markets that could be meaningful? And then I guess as the dialogue goes on in Washington around federal funding for infrastructure and who knows what ultimately happens there I guess I'm curious between the markets you play in how dependent are they now on federal dollars versus these state initiatives or infrastructure spending that move forward in recent years?

Yes. Well first, all of the states that we operate in within the last three or four years have passed tax increases or other funding increases. And several of those are -- just like Alabama are being phased in over a period of time. So we're seeing -- even though there's no new legislation in those other states the program that they put in place in the last three or four years has built-in step-ups in that over the next three or four years. And so you've got that. Several of them are also tied to population inflation. So they've got built-in escalators. And we see that increase in those states continuing for several more years. The percentage of work that we do that's tied to federal dollars has decreased over the years just because the states have stepped up and taken more of a lead. If the federal program were to be enhanced then the states that we are in are in great shape to be able to take a federal dollar and turn it into $10 because they only have to provide a percentage of -- a small percentage of the matching. And so they have their matching funds available. And so if something is done at the federal level a lot of other states will have to be scrambling to pass legislation to increase their funding in order to get those federal dollars or else they get reallocated to the five states we're in. So there's a lot of strong positive things whether the federal does anything or not. And historically we have seen that as a minimum they maintain the current levels.

Okay. I will leave there. Thank you.

Thank you.

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

Thanks. Good morning, and congratulations on the quarter.

Good morning.

Could you talk about what the average size of the projects are in your backlog in terms of -- is it still around that $1 million to $2 million?

I don't have exactly what it is. But I would be fairly certain that it has not moved hardly at all from that, because we've not booked any megaprojects. So, we're still seeing that in the acquisitions that we've made in the last two years that are construction-related have had similar revenue characteristics to ours so -- but it's a mix from $200,000 to $35 million, $40 million all throughout that band where that's not really changed.

Got it. And then regarding the acquisitions, what was the impact of the acquired sales on gross margin in the quarter? And what's the timing of getting through backlog that maybe has lower margins than you normally would operate at?

If you're talking about the two recent acquisitions, the terminal does not have contract revenue. And primarily of all those sales will be internal to us. So, it had no backlog and had very minimal impact almost negligible, because it's -- we didn't get the tanks filled until the last week of March and just began shipping. The acquisition in Central Florida, in Okeechobee, it had very negligible, because just due to the size of it so -- and then, of course, we gave the Scruggs information. Its sales this quarter was $18.3 million and had zero last -- the same quarter last year because we've not acquired it. So, very negligible impact on revenue or margin.

I was trying to get at, is there any margin impact from Scruggs that -- maybe any of their backlog that can eventually roll through at higher margins?

There would be some impact, but it's fairly small when it's about 10% of the total revenue. And those jobs that we acquired there have performed at or better -- slightly better than what we had on the backlog, because of some of the initiatives that we implemented being able to get daily data out to the operations and all. So we're seeing good results from it.

That's good to hear. And then last one for me. You mentioned a step-up in inventory related to the asphalt terminal. Are there any further ramp-ups in inventory, or have we typically reached sort of the new normal with the asphalt terminal in your business?

In the most of the year this would be probably the majority of the impact. One of the benefits of the terminal is having storage capacity to be able to fill the tanks in the winter when generally the cost of asphalt cement is lower than in the prime market at subsequent times. So, in the winter we could actually put two times that amount of inventory or even more into those tanks if the pricing is favorable for doing that. So, you could see that in the winter months, December, January, February, along in there we could have $10 million or $12 million worth of inventory stored, because we can buy at a very favorable price. But other than that, typically we would have at any one time $4 million to $6 million of inventory in those tanks. The good thing is as soon as we sell it, we collect the money, because we're selling it to ourselves.

Great. Good luck with the next quarter.

Thank you.

Ladies and gentlemen, there are no further questions at this time. And I would like to turn the floor back over to management for closing comments.

Okay. Thank you. And this is Charles. And I just want to thank everyone for joining us today and we look forward to speaking to you on the next conference call. And I can assure you that we will remain sharply focused on executing our strategy. And thanks again.

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