Construction Partners, Inc. (ROAD) Q3 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to the Construction Partners, Inc. Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review third quarter fiscal year 2021 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, August 6, 2021. 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 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 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 net income, loss and adjusted EBITDA. 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 any forward-looking statements. And now I would like to turn the call over to Construction Partners' CEO, Jule Smith. Jule?

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. I'll begin today by talking about the third quarter, followed by a commentary about our recently announced acquisitions in Alabama and North Carolina. We'll then have Alan walk us through the financial results before Ned provides some closing comments prior to us opening up the call for your questions. I'm pleased with our performance in the quarter, which generated top line revenue growth of more than 20% year-over-year. Across our footprint in the Southeast, we continue to win new project work and grew backlog to a record high $823 million. This growth of backlog, combined with a bright outlook for infrastructure funding over multiple years at both the state and federal levels, has compelled us to invest this year in our people and technology to prepare for and support future growth. While this investment for future growth creates profitability headwinds in the short term, we see these investments as vital for the organization being prepared and ready. Customer demand, project funding and bidding activity remained strong throughout the quarter. However, similar to many construction and infrastructure businesses, we experienced project delays due to supply chain and labor constraints affecting CPI operations as well as our subcontractors and vendors. While CPI has a stable and experienced local workforce in our markets and strong purchasing power across our company, we are not immune to these current industry constraints. We believe supply chain disruptions will subside in the coming quarters as we move through fiscal 2022. Today, we have revised our fiscal 2021 financial outlook to reflect these transitory issues. However, our long-term growth strategy remains firmly intact. Let me say, we are very bullish on fiscal 2022 and beyond. Turning now to acquisitions. We announced 2 significant transactions earlier this week, expanding our geographic footprint in the Southeast and further enhancing CPI's vertical integration in Alabama and North Carolina. Not only did we acquire critical assets in growing markets, we also added significant talent to our teams. These acquisitions totaled approximately $113 million and added 4 hot-mix asphalt plants and 5 aggregate facilities. In Alabama, we acquired Good Hope Contracting and its related entities, all headquartered in Cullman, Alabama. In addition to the 4 hot-mix asphalt plants and 4 aggregate facilities, the transaction also included a diverse fleet of trucks and construction equipment. These assets will help to support and grow our operations in Central and Northern Alabama under the leadership of Senior Vice President, John Harper, the President of our Alabama Platform Company, Wiregrass Construction. The Good Hope acquisition substantially strengthens our capabilities, including project acquisition and execution, aggregate sourcing and transportation logistics with these added resources. We are excited to welcome more than 180 talented, hard-working employees to the CPI team. In North Carolina, we acquired Daurity Springs Quarry, a crush stone and aggregates facility located near Goldston, North Carolina. This transaction enhances our vertical integration strategy of construction materials to support our asphalt manufacturing operations. This aggregate facility is uniquely and strategically located in the rapidly growing Sandhills region of North Carolina. And we expect to use the aggregates mined from this facility to supply multiple asphalt plants we acquired last fall. The facility's proximity to our current operations enhances our project bidding opportunities, and we believe this will contribute to future growth in these markets. In the past 9 months, we have acquired a total of 17 hot-mix asphalt plants and added nearly 700 employees. Looking forward, the acquisition opportunities and the increased pipeline activity, especially in new markets, is considerable. This is the reason we've revised our capital structure, providing more financial flexibility, which Alan will discuss further in a few moments. We see the opportunities, we have the capital structure, and we have been investing in our organization for the future growth ahead. Our senior leadership team continues actively working to identify and engage companies that may fit well into our future growth plans as well as prepare the organization for growth in advance. As a consolidator in a fragmented industry, we continue to gain momentum through acquiring quality companies, assets and people to broaden CPI's relative market share and depth of service. Turning now to what we are seeing at the federal funding level in our industry. Like most of you, we are following the process closely in Washington, D.C., and we remain optimistic about the prospect for a significant infrastructure bill, including bipartisan support for infrastructure legislation. We are confident that our nation's infrastructure investing will continue to be a primary focus for our country, both as an economic driver and as a critical component for public safety. Regardless of the pathway to increase federal funding, all proposals provide for sizable increases in federal surface transportation funding over the FAST Act. In addition, we expect that the FAST Act reauthorization will be passed before its expiration in September. As a reminder, this surface transportation reauthorization, along with the bipartisan infrastructure bill proposal, totals to a greater than 50% increase over the current funding for the next 5 years. Such legislation would immediately stimulate economic growth and job creation while also driving meaningful project demand in late 2022 and beyond. Lastly, as we stated before, the most critical component of our success is our people. We are deeply committed to our more than 2,900 employees that are the key driver of our organization, and they are crucial for meeting our near- and long-term goals. I'd like to personally thank our entire CPI team for their hard work, dedication and commitment to maintaining safe work sites for themselves and teammates. As we head toward our fiscal 2022 that begins in October, it's an exciting time for CPI. We currently expect in the next 12 months for a potential upside of 20% overall year-over-year increase in infrastructure spending by our states, substantial federal funding increases for our industry and entry into new markets. I'd like now to turn the call over to Alan to discuss our financial results.

Thank you, Jule, and good morning, everyone. Before I highlight our key performance metrics in the third quarter of fiscal 2021, I want to comment on our strategic acquisitions completed earlier this week. CPI acquired 2 businesses, both of which contribute to expanding our customer footprint and vertical integration efforts. The combined acquisition price was approximately $113 million, which was funded from our recently completed term loan and revolver credit facility. This new facility, after completion of these acquisitions, provides the company with $214 million of remaining capital for future acquisition opportunities. Turning to quarter 3 results compared to the third quarter of fiscal 2020. Revenue was $261.7 million, up 20.6%. Acquisitions completed subsequent to June 30, 2020, contributed $31.4 million of revenue, and we had an increase of $13.3 million of revenue in our existing markets. Gross profit was $36.6 million compared to $36.9 million in the third quarter of last year. As we have stated before, acquisitions initially put pressure on operating margins. While the 4 acquisitions completed in the first fiscal quarter of this year in the North Carolina market showed significant improvement in this quarter compared to the second quarter, their gross profit contribution for the quarter was only 1% of revenue. General and administrative expenses were $23.2 million compared to $16.9 million in the same quarter last year. The increase in general and administrative expenses was primarily due to $3 million attributable to increased personnel and related compensation initiatives, $1 million attributable to acquisition-related costs subsequent to June 30, 2020, and $1.6 million attributable to information technology and increased professional fees. Net income was $9.3 million for the third fiscal quarter of 2021 compared to net income of $15.7 million in the third fiscal quarter of last year. Adjusted EBITDA for the third fiscal quarter of 2021 was $29 million compared to $32 million for the third fiscal quarter of 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. Increases in liquid asphalt and diesel fuel prices during most of this quarter as well as lower-than-expected revenue impacted our overall gross profit in our existing markets. Our gross profit margin on jobs in our existing markets continued to exceed our prior year margins. Turning now to the balance sheet. At June 30, 2021, we had $134.5 million of cash and $214 million of future availability under our revolving credit facility after reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 1.86. This liquidity provides flexibility and capital capacity for potential near-term acquisitions, allowing us to respond to growth opportunities when they arise. Cash provided by operating activities was $9.3 million for the 9 months ended June 30, 2021, compared to $51.4 million for the same period last year. Capital expenditures through the first 9 months of 2021 were $39.6 million. We still anticipate total capital expenditures for the year of $47 million to $50 million. We are reporting a record project backlog at June 30, 2021, of $823 million compared to $650 million at June 30 of last year and $773.3 million at March 31, 2021. Approximately 35% of the backlog will be completed in the last 3 months of our fiscal year. And as Jule mentioned, we're revising our fiscal year 2021 outlook for the year with regard to revenue, adjusted net income and adjusted EBITDA. We now expect revenue in the range of $940 million to $960 million, adjusted net income in the range of $36.9 million to $38.4 million and adjusted EBITDA in the range of $105 million to $108.3 million. In summary, we are pleased with our third quarter results, the recent acquisitions and our project backlog. I'll now turn the call over to our Executive Chairman, Ned Fleming. Ned?

Thank you, Alan. Before we open the call to your questions, I want to reiterate that the company is performing well. We continue to grow organically, coupled with an increased pace of acquisitive growth, both organic growth and recent acquisitions further enhance vertical integration across the organization. The result is relative market share is increasing in our existing footprint, while the company is expanding geographically. The leadership team in conjunction with our Board continues to prudently invest in the right people, processes and technology to further strengthen and support a robust yet disciplined growth plan. We are very pleased with the acquisitions announced earlier this week, for which the future benefits will continue to be realized for many years. We're gaining scale and depth of service offerings, along with a long-term focus of capturing more margin from rock to road. These acquisitions bring new service offering and the addition of 5 aggregate facilities, all of which enhance our vertical integration strategy. As a significant consolidator in a highly fragmented industry, we are maintaining momentum through important strategic acquisitions that provide us with quality companies and great people, just as we have done for the past 20 years through many different economic cycles. Despite short-term headwinds, there is a very positive long-term momentum in the industry and throughout the company. We expect to carry on with a successful execution of our long-term strategy of disciplined profitable growth to enhance shareholder value in our company. With that, we'll now take questions. Operator?

[Operator Instructions] Your first question comes from Andy Wittmann with Baird.

I guess kind of a series of questions here, just all kind of based around some of the changes in the inflationary environment that you -- as discussed, here are my questions. And I guess -- where do I want to start. I guess the first question is what are you doing today in the model to address the inflationary factors and particularly those around the labor markets? Could you talk maybe a little bit about how the labor market is affecting you? I guess maybe a follow-up to that would also include how are your competitors reacting to these factors? Are they adjusting presumably their prices so that you're all kind of competing on the same footing? Maybe you could start there. I'm going to keep going with a follow-up from there. But Jule, why don't you see what you can do with those.

Okay. Thank you. Well, so inflation is a real thing in the economy, the entire economy is dealing with. At CPI, one of the things we've talked about is inflation is mainly a pass-through cost for us. So as wages increase, we are immediately putting those back into the bids that we then put out. And so that's something that our project duration, our project size, that's an advantage, I would say. So it's business as usual for us. We take the revised input costs and put them into our bids. As far as our competitors, they're largely doing the same thing. I would say those larger projects, projects with a longer duration, projects that you have to give a fixed price for. Those are things where inflation becomes more of a challenge. And -- but that's not really the typical nature of our projects at CPI. And so as we've always said, inflation, we just -- we try to pass that along very effectively.

Okay. So just to drill into that a little bit more. I mean, clearly, the quarter saw cost pressures here from these factors. You called them out. So how much more exposure is in the backlog, I guess, from contracts that were priced prior to the cost inflation that you're seeing today? And therefore, is that risk -- maybe the amount of backlog, if you could quantify that or the duration? I mean this sounds like -- is this going to impact you again in the fourth quarter? Sounded like, I think in the press release, you said that it was going to affect you into '22. So maybe you could just kind of address that a little bit more specifically. Because clearly, I mean, it's having an effect. And just trying to understand when the contracts catch up to the dynamics that you're seeing out there today?

Andy, let me just say, in my prepared remarks, I addressed dealing with supply chain issues and labor constraints. It's really not cost increases. Let me give you a few examples just to help you see. So while we have a steady workforce, the labor market is so tight right now, we in any one market may have 20 to 30 dump trucks, and on a normal basis, they're running wide open this time of year. This year, we're seeing that maybe 2 of those trucks at any one time may be sitting still because of just the need to find drivers. Or we recently had a site work job where the utility crew that's subcontracted out had to wait a week to get pipe, PVC pipe. Those are -- that's normally not even an issue in normal times, just the supply chain of getting PVC pipe. The last example I would give you, we have a milling subcontractor that normally we count on having 3 crews all work season. And recently, they let us know, look, we just have 2 crews right now. And so you need to tell us which job can wait until one of those crews gets finished. So that's just an example. I would say. For us, I used the example of -- it's like running with ankle weights. We've got a record backlog. We've got plenty of open running room, and we're running. We're running as fast as we can, as hard as we can. But these supply constraints, these labor market constraints, it's like having ankle weights on your ankles. You're just not going to run quite as fast. We see those normalizing. We see the labor markets normalizing over the next couple of months. We're already starting to see it normalize in 3 of our 4 states where the federal unemployment benefit has been stopped. But it does have an effect. It's a little bit of a headwind while you're running. So that's really it. It's not as much cost increases as it's just our ability to generate top line revenue when the supply chain issues that a lot of companies are experiencing -- you know, CPI and our vendors and suppliers are dealing with those same things.

That's really helpful context. Just one last one on this one, and then I'll yield the floor. But I was just wondering, having done so any acquisitions, I think you said 17 asphalt plants in the last few quarters here, I was just wondering if what I would call the more legacy CPI business is managing their labor relations or ability to deal with some of these challenges differently from the companies that are more recently acquired? Or maybe you don't know the full staff as well. Are there differences between kind of what you bought recently and the legacy company in terms of the significance -- propensity of these challenges and how you're dealing with them?

Yes, Andy, I would say when we acquire a company, one of the things that really helps is that our benefits and ability to offer growth and advancement, that's a positive. And we've seen that with acquisitions we've made. And so in a sense, I think that CPI getting and being able to acquire those new markets has helped keep that labor force intact. But in the new markets, we're dealing with the same issues as we are in our traditional markets. This is one thing that I can look across the entire Southeast and it's pretty much the same everywhere. It's just -- it's ankle weights everywhere. And it's not any one thing that's dramatic. It's not any market that gets shut down. It's just a little bit of drag across the board. And we see that those -- the markets are going to normalize. We know that, but it's just something that we just -- like a lot of companies, are having to work through in the short term.

Your next question, Michael Feniger with Bank of America.

You have a few weeks left to finish the year. When we look at -- given the low end of your range right now, we're still talking about over 35% revenue growth year-over-year, and I think 20% growth on the EBITDA line. In the last 2 quarters, your sales have been up double digits and EBITDA has been down. So just help us understand on the call, like your confidence level, even with the guide in the fourth quarter, in the next few weeks that we're going to see that type of revenue growth acceleration on top of seeing some type of leverage to the bottom line. Is there anything in [ July ] that you can tell us that kind of gives you confidence on your ability to hit that?

Yes, good question, Michael. And I'll take that one and give Jule just a breather. What I would say is what gives us confidence is that there was a significant improvement in what was causing some of that margin compression in the prior quarter and then left still into here. And the situation was the acquisitions that we made in North Carolina had virtually no backlog when we acquired them. They were in a market where 3 of those 4 acquisitions primarily did public and a large percentage DOT work, and we all know the status of where the North Carolina DOT was last year and in the first quarter of this year. So the backlog that we acquired there, the early backlog that we added there was not at typical levels for an acquisition and for a market. So there was -- there's been a dramatic improvement between the second quarter and the third quarter in how those acquisitions have performed. And so we see that momentum and that improvement flowing into the fourth quarter. So where that was a big drag in the second quarter, a much smaller drag -- I mean our gross profit on that revenue was about 1% in this quarter, but it's quickly returning to more normal. Our existing operations, to the growth that you talked about, our organic growth in the third quarter was over 6% year-over-year. And that -- the margins on that work are very much in line with what our original guidance provided, about 1% down from last year because of the cost things with liquid asphalt and diesel fuel and the other things that we've talked about many times before. But we see the acquisitions getting in shape. And kind of how I would say it is that typically, we say it takes about 12 to 18 months to kind of get them going. And I would say, the first 9 months of this year, they've been well below that. And so we're getting them back to where they typically would have been on acquisition date. So in the fourth quarter, we've got about half of that -- a little over half of that growth percentage that you talked about, the 35%, is coming from those acquisitions and a little bit from the 2 that we announced earlier this week. And then the remainder of that, almost half of it is organic growth. And we see that while not hitting the full 11% to 12% that we thought at the beginning of the year, to getting closer to the 8% to 9% organic growth year-over-year this year. So that's what's really given us confidence about that fourth quarter.

Okay. And based on some of the comments about transitory, yet -- and this goes back to, I think, Andy's questions earlier. I mean it's transitory yet it could bleed for the next few quarters. So just to put a fine point on it, I mean your stock is down 9% today because investors are worrying that these headwinds are going to eat into 2022. Everyone recognizes you guys have an ideal geographic mix, well positioned for infrastructure. That's understood. I guess the question is, if we fast-forward to 2022 and you're growing your top line 20%, 25%, how much should investors expect the bottom line to grow off that? Do you guys expect to be able to expand margins in 2022? Any way to frame that, I think, would help investors in the market right now understand how much of this is transitory, how much really bleeds into the first half of 2022.

Well, I'll answer, by our expectations is that a lot of the margin drag this year -- the facts are that a lot of the margin drag this year have been acquisitions, and we certainly see those acquisitions returning to a more normal situation, so in 2022. Nothing -- it has nothing to do with the issues with labor or those type things, revenue. Our backlog is up, our margin on our backlog is up compared to what it was. We've worked through a lot of those very low margin jobs that we've been able to complete, and we've also gotten the volume up because a lot of the drag has just been, again, in different markets, including the ones that we acquired when you have that lower volume and you've added 13 asphalt plants, there's a lot of fixed cost that in the second quarter and to a much lesser degree in the third quarter, we didn't recover through those jobs. But our job performance -- if I can say one thing, our job performance in our existing pre-acquisition markets, the profit margin is actually up on those compared to the prior year. And again, once you work through some of that acquired backlog, some of that early backlog that we had to book to keep those operations going, that's not going to carry over into 2022.

Okay. And is there any view internally as management? You guys have done a lot of these acquisitions right now. We're seeing some of these constraints. Is there any view to hold back a little bit on the M&A strategy right now, digest some of these acquisitions and just get our ducks in a row for hopefully, this infrastructure package? Is there -- I'm curious how you guys are feeling? You guys did a lot of acquisitions so far and you're working through it. Is there any view internally to maybe pause on the pace of M&A so far?

Yes, Michael, I would just say this, on the North Carolina acquisitions we made, we took the long-term view. These are great markets. But clearly, we always say in acquisitions, we inherit issues with acquisitions. That's a constant. But all acquisitions are different. And these acquisitions we knew would be coming in with very little backlog, as Alan said. The North Carolina team has done a great job integrating them. They are now part of adding to this record backlog. We're adding backlog in these markets at good margins. So I would just -- I would say that we know that acquisitions are always going to take time to get our hands around. But with this federal funding bill, one of the things that we are -- we're investing in our organization. We are trying to get prepared for the growth ahead so that we can continue to integrate these acquisitions in. We see a lot of opportunity out there. We clearly don't want to get out over our skis too much. We want to be prudent and the pace we grow. But that's one of the reasons you see us investing in our organization and our people and our technology is to prepare to be able to handle future growth.

Michael, let me just make one statement there. We've got a long history and proven history of being able to integrate multiple acquisitions. And the challenges in North Carolina were not [Audio Gap] To what had happened with North Carolina DOT. So our concern about integrating future acquisitions, there is no concern there because, as Jule said, the team up here in North Carolina has done an excellent job of doing that and working through conditions that had nothing to do with the integration -- had to do with the abnormal market when those were acquired.

Understood. And Jule, now my last question and I'll yield it is, with the acquisitions that have been completed today, Alan, how much of that -- what's the number that kind of goes into 2022 that would be incremental? So not asking for, obviously, your 2022 guidance, but just based on the acquisitions that have been done through this year, when we think about 2022, how much incremental is that on top of -- for next year?

Well, the 4 that were made in North Carolina, we will have 9 months worth of revenue in 2021. So those incrementally are probably I mean, though the remaining portion of their first year and the new acquisitions, we're probably talking somewhere between $90 million and $100 million additional revenue all in. Because most of those 4 acquisitions, they would have had revenue for 10 months this year.

And your next question, Josh Wilson with Raymond James.

Just want to clarify a little more, just what's the moving pieces are on the margins? So presumably, you would have seen and known a lot of the margin headwinds from the North Carolina acquisition. So can you just give us a little more color on to what extent the change in guidance was due to any differences versus expectations in the acquisitions versus the broader market headwinds that you talked about on the labor side?

Yes, Josh, I'll take responsibility for that. When we make acquisitions, we put together projections and models of what we expect them to do based on their history, but also what -- we see any synergies or whatever. Because of the timing of these acquisitions, they were added into our 2021 budget, if you will, based on those models, which were modeling normal times. What we -- what I fail to recognize is that we were not making those 4 acquisitions in normal times. And so the margin that we've experienced. And we had optimism that the -- we knew what the backlog was, we were assuming, but we had some optimism that the DOT in North Carolina, that the margins would pick up quicker than they did. And then also just the lack of volume of work in those impacted the margin. So it really was more of a forecasting of what they would do in the first year and not basing it on the actual facts that existed in this market. Our existing operations, absent that, have come in very, very close to what we expected.

And Josh, this is Jule. I just would say a large part of our revised guidance is simply dealing with the transitory issues I talked about at the beginning, which is headwind. And we largely see that working its way through in the next few months. But that's the main part of it. I would just say, on acquisitions, some of our best markets today in CPI were acquisitions where we had to work through issues in the first 12 months. So we've done this for a long time and some of our best performing markets right now are no different than what we've had to deal with in North Carolina in the last 9 months.

And regarding the growth in the backlog, can you give us a sense of how much of that was due to the North Carolina acquisitions? And how much was in the legacy business?

Well, the North Carolina acquisitions, I guess, have been in the backlog since we acquired them. So any growth in this quarter would not be -- would not really have a factor that much. I mean we started -- as Jule said earlier, we started adding backlog to those, just like we have our existing markets. But we typically say that normally, we would have 9 months of backlog is what we would shoot for. And if you took their revenue, if you're comparing backlog last year to this year, then that probably would be in the $50 million to $75 million range of backlog. If you're comparing to last quarter, it was already in last quarter.

And last one for me. Peers have called out margin headwinds from asphalt and diesel. Can you give us a sense as to what commodity costs and timing had on yours?

Yes. The first I'd say is that if you go back to our original guidance this year, we anticipated these cost increases in asphalt and diesel, and that really has played out very close to what we expected for the year. If you're comparing to last year, then this year, we had -- last year, we had -- those things were dropping and gave us a tailwind. This year, they're giving us a headwind. But really, they have not been significantly different than what we anticipated this year. So -- but from a margin standpoint compared to last year, it's probably somewhere between $1 million and $1.5 million of impact this year that we didn't have last year. But from what we anticipated, it really is very little difference.

The next question, Adam Thalhimer with Thompson Davis.

On the Good Hope acquisition, can you characterize that for us from the standpoint of, does it feel like what you did in North Carolina? Or does it feel like they're coming in with a healthier backlog and better momentum?

Yes, Adam. We're excited about the Good Hope acquisition. It's one we've been looking at for a long time. And it's a great company. If you look at the math, it's almost a perfect fit with our existing operations between Birmingham and Huntsville, and so we're excited about it. It gives us 4 new markets for hot-mix asphalt and the ability to do work in those areas and 4 aggregate facilities that support that. They came in with a healthy backlog. There's been no -- there was no abnormal issues like there were in North Carolina in 2019 and 2020. So I would say it just feels more like a normal acquisition. It's a large acquisition. It's the largest one in CPI history. We're excited about it. And so we're integrating them, and we'll be moving forward. We're already winning work in those areas with the new assets.

All right, Jule. And then I like your ankle weight comment. But I was thinking as you were going through that, as an industry, can you guys -- can the industry work its way out of that without seeing a tail off in demand?

Well, I really just see it, Adam, I just -- I read somewhere where there's 7 million fewer workers right now than there were pre-pandemic. And that's a huge impact on the labor markets. And whether you're in restaurants or service industries or in the construction industry, that has an impact. And -- but I think those are going to normalize as we get back to normal. We're already seeing that. So I don't think that it really will affect demand at all. We're seeing a lot of bidding opportunities. The Southeast has expanding economies. And when you talk about the funding, I mentioned last quarter, our states are going to have 20% year-over-year increases in project lettings due to healthy budgets and the COVID relief funds. We're seeing that in the lettings that we're bidding now and then with what they're talking about in Washington with reauthorizing the surface transportation bill, that's going to be a nice increase. Even if they don't get this bipartisan infrastructure bill through, just the surface transportation bill alone is going to provide a lot of stability for our industry for the next 5 years. So I think that it's not going to really affect demand. I think what it is going to affect is our ability to generate revenue and get us back to normal.

The next question, Andy Wittmann, Baird.

It would be good to hear a little bit more about some of the investments, Jule, that you're making. You talked about it at the top of the script. Your company has obviously grown a lot, and you're putting some resources behind it. What kind of resources? Do they show up in SG&A or in the project level? And maybe for you, Alan, what's a good new run rate for SG&A, recognizing that there have been some deal costs and other things in SG&A historically? So maybe you can just help us with our models on that front?

Andy, I would say, as we look at the healthy Southeastern economies and increased infrastructure spending, but also really just the chance to enter new markets in adjacent states, it is prudent for us to invest in our people and technology right now. It would be negligent for us not to get ready for the growth that's coming. So we are investing in our staff, in our infrastructure technology and our ability to manage a higher-level workforce, a bigger workforce. We're in the middle right now of investing in an entire new ERP system. So those type of things, that's planting now for the harvest to come. And it is an investment, but we really don't look at this quarter-to-quarter. We're managing for the long term, and we see that now is the time to get ready for that. And so it does show up in a higher SG&A cost right now, but that's the prudent thing to do. I'll let Alan go over the numbers, but that's what we're really doing.

Yes, Andy, a lot of the cost and there's deal cost, if you will, in this third quarter that if we don't make deals and due diligence on acquisitions would not be in future quarters. But as you've heard Jule say, we're not putting the brakes on that. So those will be in there. As far as the fourth quarter of this year, I think the third quarter run rate is plenty adequate to model out for the fourth quarter. There will be a little bit of increase there because of the 2 acquisitions that have been made since then, they will have some, but it won't be significant. It won't be a significant change in the fourth quarter. They will be in there pretty much for 2 out of those 3 months. So going into the future, we will continue as we have opportunities to make acquisitions to do those, and that will obviously impact the G&A. But a lot of the kind of surge in it, if you will, has happened at the same percentage.

Yes. Okay. And then maybe just 1 final question here. Just on the cash flow, CFO, so far this year. I mean last year was actually good first 9 months, to be sure. But this year is a lot weaker. And I thought maybe you could talk about some of the -- a lot of your working capital accounts [ are a use ] of capital and certainly, the business has got good growth characteristics. But I was just wondering is there anything else there that we should be thinking about or that you're thinking about as you look at these working capital accounts in terms of opportunity to get some of the cash back out of the business?

Yes, Andy, great question. And we've said this before, when -- because of the nature of the acquisitions that we make, which are asset purchases, our purchase price does not include working capital that we're going to need for those in the future. Those receivables and payables are staying with the sellers. And so then we have to basically fund that working capital post acquisition. So with the number that we've made this year and the revenue, you've got -- part of that is happening there. The other thing is, with inventory cost, whether it be rock, but specifically liquid asphalt, we've got the large facility with the terminal. And when we fill those tanks this year, it's virtually -- it's basically twice the inventory. So our -- just at the liquid asphalt terminal, there's over $8 million worth of more inventories sitting in there than there was last year. A large part of that is price, but also we're feeling because prices are rising, we're trying to keep the tanks fuller. What I'd say as far as the basics of days in receivables and days in payables, which can be a big driver of that, that is not changed. Our receivables are not any different or aging. Our payables are not really different. Another thing that impacts that is the fact that our private work is up from a year ago and private work, we have retainage on those. So if you look at the contract retainage, it is up. And that's just a function of when you do public work and it's bonded, they don't withhold part of the payment. So it's really those factors that are driving it. But at some point, that stabilizes if you're not growing 20%, 20-something percent in a year or so.

The next question, Zane Karimi, D.A. Davidson.

So first off, I know you guys touched upon the inflation dynamics at play over the quarter. But to what degree and how would you quantify the project delays and the supply and labor constraints?

Yes, Zane, we -- I thought about that, and it's hard to quantify exactly. I saw somewhere where some other companies said it was about a 5% revenue headwind. And I thought about that, and that sounds about right. That's about what we adjusted our guidance for the third and fourth quarter. So it's hard to get it exact, but that feels about like what the ankle weights create in the short term -- is that. But I would just say, we have grown 20% year-over-year. And so we're growing in this environment. We're running hard. It's just with these ankle weights, we're not running as hard as we have the opportunity to. Our backlog gives us ability to run even faster than we are right now. So in terms of quantifying it, that's probably a good range, anywhere between 5% to 7%.

And Zane, this is Alan. The good thing is, as we've said, when we talked about other types of delays, whether it be weather or whatever, that backlog doesn't go away. No one cancels their contract or anything. Typically, this time of the year, our backlog, if you went back the last 8 or 10 years, other than if we made an acquisition in this quarter, our backlog would go down because we're completing 60% of our work in the last 2 quarters. But that backlog, it went this year. Part of that is the shortfall in completing revenue. But over half of that was -- that increase was just because of the amount of work that's out there. And that backlog continues out there to be done, and delays aren't changing the margin profile of that work either. That's another big factor. And at some point, when that additional volume goes through our asphalt plants and go through our equipment usage, we'll regain some of that margin that was lost on those fixed costs that impact us in the part of the year that we only do 40% of our revenue. So...

And that kind of leads me right into the next question on backlog. You guys are pushing all-time highs, $823 million, I believe it was. But can you talk maybe a little bit more about the composition of this backlog, either from a geographic standpoint, a margin standpoint or whatever you find most compelling with the current backlog composition?

Yes. The good news is that backlog is growing in virtually all of our markets. And we look at our markets not as just a state, but we look at all, I guess, 52 markets now that we're in as far as our hot-mix asphalt plants. So we're seeing strong demand in all of those where -- across our entire footprint. Certainly, there are some that are stronger than others. And the recovery of the DOT in North Carolina has been a big factor in the places in North Carolina being able to grow theirs. And that's why it was important that we made the acquisitions when we did it because it gave us 13 new markets in North Carolina to bid in. So -- but it's really across our entire footprint because all the states that we're in have very strong state DOT budgets, not just the money that's coming from federal, but their -- they pass gas taxes, some of those that have been indexed and that are phased in or kicking in. So it really is a strong demand across all of our markets. And as Jule mentioned earlier, fortunately, our competitors are seeing that they've got cost increases, so they're raising their cost, and we're not seeing any kind of margin compression at the bid table. We've seen that begin to come up as a percentage in our backlog, not just because we're completing some of the low-margin work that we've completed in these last 6 months, but also because the margin that we're bidding on new work is improving some.

I will now turn the floor over to management for closing remarks.

Okay. Thank you, operator. Just want to thank everybody for joining today's call. We look forward to speaking to you again. We're excited about the growth opportunities for the future, and we look forward to speaking to you next quarter. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.