Greetings and welcome to the Construction Partners Inc. Third 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 reminder, this conference is being recorded. It’s now my pleasure to introduce your host, Rick Black. Investor Relations. Thank you, Rick. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review third quarter fiscal 2022 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 5, 2022, so please be advised that any time sensitive information may no longer be accurate at the time of any replay or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or future events, or future financial performance are considered forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward- looking statements as part of today's call that by their nature are uncertain and outside of the company's control. Actual results may differ materially, please refer to the earnings press release that was issued today for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA, reconciliations to the nearest GAAP measures can be found at the end of our earnings 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, Palmer, our Chief Financial Officer, and Ned Fleming, our Executive Chairman, as well as other members of our senior management team. I'd like to start by recognizing a more than 3,800 CPI employees, including 200 new employees that we welcome to CPI and King Asphalt earlier this week through our acquisition of Southern Asphalt in South Carolina. I want to thank our employee’s commitment to safety at our job sites during a very busy work season in a challenging macro environment. We had a very good third quarter, we recorded record revenue, EBITDA and project backlog. Clearly, demand is strong. And our growth of 45% from last year is broad based and diverse. We grew through both organic and acquisitive revenue during the quarter. This is a result of our dual focus on growing relative market share in our existing markets and making good strategic acquisitions. Two additional factors that boosted the third quarter’s top line were favorable weather across our region, as well as an approximately $10 million of revenue from liquid asphalt index adjustments due to the large increase in asphalt prices during the three month period. Despite our strong performance in the third quarter, today's economic environment remains challenging into three years of labor, inflation and supply chain. The labor market continues to be tight and very competitive. However, we believe our model is prevailing by offering local and steady work that allows our employees to be at home every night, have great benefits and opportunities for advancement with that dynamic and growing company. On our last call, I discussed the inflation hitting the construction industry. We don't anticipate this inflation going away anytime soon. That said our model of shorter…

Thank you, Jule and good morning, everyone. I will begin with a review of our key financial metrics in the third quarter fiscal 2022. Revenue was $380.3 million, up 45% compared to the prior year. The increase included $53.1 million of revenue attributable to acquisitions completed subsequent to June 30, 2021. And an increase of approximately $65.5 million of revenue in our existing markets from contract work and sales of hot-mix asphalt and aggregates to third parties. Gross profit was $45.3 million, compared to $36.6 million in the same quarter last year. General and administrative expenses were $26.6 million, or 7% of total revenue, compared to $23.2 million, or 8.9% of total revenue in the prior year. Net income was $12.2 million for the third quarter compared to net income of $9.3 million for the same quarter last year. Adjusted EBITDA for the third quarter was $37.6 million, an increase of 30% compared to $29 million in the third quarter last year. You can find GAAP to non-GAAP reconciliations of adjusted EBITDA financial measures at the end of today's press release. Turning now to the balance sheet, at June 30th, 2022, we had $26.1 million of cash and $258.6 million of availability under our new amended credit facility after the reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12- months EBITDA ratio was 3.0. A new credit agreement that was entered into on June 30, 2022, provides additional liquidity and financial flexibility, allowing us to pursue organic and acquisitive growth opportunities. Capital expenditures for the third quarter of fiscal 2022 were $17.5 million. We expect capital expenditures for the fiscal year to be in the range of $60 million to $65 million. And finally, as Jule mentioned, we are reporting a record project backlog that was $1.33 billion at June 30, 2022, compared to $822.9 million at June 30, 2021, and $1.28 billion at March 31, 2022. And with that, we're now ready to take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Michael Feniger with Bank of America.

Yes. Hey, everyone, thanks for taking my questions. Good morning, everyone. If you don't do any other acquisitions going forward, and all else being equal, how much growth do we get in 2023? Just from acquisitions this year, that rollover?

Good question, Michael. I mean, couple of the acquisitions that we made this year were made at the beginning of the year. So they would not add any acquisitive revenue next year, because they're in this year, full year. But the additional acquisitions that we've made, including the one just announced would probably add $75 million to $100 million of additional revenue or acquisitive revenue in next year, you've got that one that would be pretty much a full year's worth of revenue. And then you've got some others that were made later in the year that would have about six months’ worth of revenue going into next year.

Great. And how do we think with the organic growth that you guys just reported improving backlog? How did the organic growth look into next year? Is there signs of deceleration? Or are we going to start to see some of the funding kind of pick up based on your regions? And how the DOT budgets look for 2023?

Yes, Michael, good morning, this is Jule. As we've said before, we are focused on organic growth and growing relative market share in our markets. Clearly, some of this year's numbers due to inflation, but it's also just due to us, growing relative market share. We anticipate moving forward into next year, that we're going to continue to see a healthy organic growth CPI has historically done, between 6% and 10%, we certainly see that continuing into the future. I think the demand from the southeastern economy, but also from the infrastructure bill start to come in, is going to, drive organic growth near Ned, do you have any thoughts on that?

Well, I mean, I think, Michael, how are you today? We've been watching this model over 20 plus years, it's really resilient. And really what you're seeing is the model working through and passing on the costs. And what's now getting converted is at higher backlog. And as you consolidate this market and you consolidate to different markets, and grow the relative market share, what we've seen over time is ultimately that drops margins. And we're going to continue to see that in our markets that we're in, continue to get better and they continue to grow. So when you think about organic growth, if you come to Raleigh Durham, you can't go anywhere where there's not road construction, same thing all throughout parts of Alabama and parts of Georgia and parts of Florida. So we're getting the benefit of that from inorganic growth. And historically, we've had about a 10% organic growth for almost 20 plus years.

And just lastly on that, are you hearing and seeing your competitors, the smaller players in the region having record backlogs as well? The point of the question is, with bidding work, potentially picking up, with infrastructure next year, if you feel like there's more disciplined pricing on that work going forward, thanks. And I'll pass it on.

Yes. Michael. So now, obviously, we don't know our competitors backlog, but we can see how the bidding environment is. And that tells us that people due to the demand in our areas, they have a full plate too. And so we've seen pricing reflect that. And that certainly, showing in our backlog, backlog typically, during the work season, historically, has sometimes shrunk. And so that would not surprise us at all next quarter. And so the fact that it's growing, while we're creating record revenue in a quarter, just shows the demand that's out there. And the fact that we're able to expand margins in the backlog, I think shows that, it's a healthy environment for a lot of contractors.

Our next question line of Andy Whitman with Baird.

Yes, great, thanks for taking my question, guys. And good morning. Yes, I just wanted to make sure that when you're talking about 250 to 300 basis points, higher margin implicit in your backlog today. That's inclusive of also factoring in the higher inflation from materials, labor and everything else. So it's really 250, 300 plus the difference in costs as well, is that the right way to think about that Jule?

It is Andy. And just to clarify, when, as I said last quarter, and this quarter, what we're seeing is in pricing over last summer, right a year ago, that is 250 to 300 basis points higher. As we move forward into the future, that trajectory may not always be that steep. But one of the things we're seeing is that pricing improving. But you're right, that's in the margin. In the cost assessment side of our bids, we're trying to cover inflation, we're trying to put escalators into our bids. We've raised our equipment prices due to the diesel that we're buying in the shops. So we're doing both, as we said last quarter, the cost estimate side of our bid is where we're trying to tackle inflation, the pricing in the margin, we hope that all falls to the bottom line. If we've done a good job on the cost side it will.

Yes. Okay. Just wanted to make sure. And then, I guess the comments on the list, the $10 million pickup from the liquid asphalt index adjustments, because we haven't heard you on a public conference call talked about that factor. And I was just wondering, specifically, are these index adjustments new? In other words, because inflation is high? You've put these clauses in and now you're benefiting from them as needed? Or have they always been in there, and we just haven't seen a spike in some of the input prices, for instance, in liquid asphalt. That's just different today.

Yes. And, Andy, good question. We specifically wanted to address that. These are not new indexes. They are they've been in our -- they're in our state DOT budgets. And they've been a part of our mechanism and model for a long time. They typically aren't this much, in a quarter it may be up a little bit, maybe a $1 million to $2 million or down $1 million to $2 million. What's happened this quarter is asphalt adjusted, just went up so much in the three months. We're finishing older work where the index in the bid was low. And so it just created this spike in revenue that we felt like was important to communicate. It doesn't add margin. It's just a dollar for dollar reimbursement, but it does add a lot of revenue. And so we don't see that moving forward being that high. Asphalts moderated in price to the month of July, but it was a big factor this quarter in the top line and we thought it was important to point it out.

Thanks for clarifying that. My final question, if you would, has to do with basically your guidance, obviously revenue guidance up, EBITDA guidance is not up, like you just mentioned there some of these could drive prices have fallen a decent amount since last quarter. I would think that would be somewhat beneficial here for your fiscal fourth quarter. Can you just maybe talk about the interplay as to maybe why the EBITDA wasn't able to get raised commensurately, with or at least slightly, at least with the raise in the revenue given that?

Yes. So, Andy, in the third quarter, what we saw, we had really favorable weather in April and June. And so that really was a tailwind on our revenue, as well as this liquid AC adjustment. And so that drove the top line. But our EBITDA was largely in line with the guidance, we gave it mid-year, the quarter largely played out like we thought it would. The third and fourth quarter, typically, they interact together. So we're like our first and second quarter, we now know, because we've gotten through the month of July, that it was a little wetter than normal, nothing like the historical precipitation we had last July, but it was wetter than normal. And we still have to see August and September. But we anticipate just like we said last quarter, just as Q3 was better than Q2, we're seeing that Q4 is going to be better margins than Q3. But we want to be reasonable in the ranges that we gave, especially in light of the, just unpredictability of the supply chain issues that are out there.

And, Andy, let me just mention one thing, because you let off that question by saying that crude oil is down. And certainly that we have seen that. But we have not seen that in the price of liquid asphalt yet. Liquid asphalt doesn't track exactly with the up and down of the crude price diesel tracks much closer. But that is a much smaller component of our costs than liquid asphalt. The liquid asphalt continued to rise throughout our third quarter, and is still at near record highs for this year.

Our next question comes from the line of Stanley Elliott with Stifel.

Hey, good morning, everyone. Thank you all for taking the question. Quick question. You guys mentioned favorable weather in the quarter. Could hazard a guess whether it stays or anything like that that might have kind of helped you out on a year-over-year basis.

No, Stan, we don't really figure that, as far as exactly how it compared to last year. We do know that April and June were a little drier than normal. It wasn't anything historic. But we were able to have some good productivity. May was a little wetter especially that last week of May was a wash out. But when we look at the revenue, we know that it helped a little bit. I would just say, the last three quarters, we've been growing. So we expected growth. That's why we raised our guidance to the mid-year. And so, I wouldn't say that weather was the major factor. I think the major factor was we're growing both organically and acquisitively. But we do want to when we have good weather, we want to point it out just like when we have bad weather we pointed out.

And Andy, I mean Stanley, I'm sorry, from a historical model, we've always talked about a 60:40 in the second half in the first half. And with what we have got it to for the full year, that's going to put about 59% of our revenue in the second half and 41% in the first half, which is actually slightly better for the second half than the percentage we had last year. Because last year, we had a very wet July, August and September. And we did not get up to that 60:40. But we had about 30%, if you go to the midpoint of our guidance, we did about 30% of that in the third quarter, and we're at the midpoint of our guidance, we're saying about 29% in the fourth quarter, which as you noted, if you take out the $10 million of the liquid asphalt, we're not going to be that far off from a 30:30

Yes, that's fair. I was really more curious than anything, with the tight labor market or you're having less of this broad end kind of help on job you're doing more work internally. Just curious and then even if you all are helping out, other firms with some contract work or things like that, just given that you all have the advantage from a larger labor force.

Stanley, I think the labor force continues to be tight. And there are some cases where we're self-performing work that our subs can't get to, I think, we're just continuing to just use our model to give us an advantage in labor, because if you don't have labor, you can't bid. And in this demand environment, the ability to get workers, and the ability to have a workforce is what allows you to grow the top line and to generate revenue. And so we're pressing our advantage with having a local workforce with having opportunities to grow. And so I think that's, and we don't see that changing anytime soon, because of the demand. Ned, do you have any thoughts?

Well, I think, Stanley, y the other thing, I think, gets lost in the numbers with acquisitions as with each of these acquisitions, we've gotten some terrific people. And so we've been able to grow our workforce in a way that we have revenues coming in, we have profitability coming in. And we've got great people. And I think in most of our communities, we are the employer of choice, our healthcare and how we treat people and the ability for advancement is higher. So, I think actually, overall, the whole business, we see the labor market better today than it was six months ago. We expect it to be better six months from now, but don't lose sight of the fact that in each of these acquisitions, the most recent one, we've got several 100 terrific employees that are excited about being part of CPI, excited about the opportunities.

Yes, that makes sense. And one just kind of on housekeeping side. How do we think about CaPex in the next year given the inflation? It sounds like some of the OEMs are slow in delivering equipment, probably it would have taken more if you could would be my guess. Just how do we balance that? And was a percent of sales or anything, any sort of guardrails to be helpful?

Stanley, so our CapEx we envision next year being like it typically is about 5% of our sales. But one thing that I think doesn't show through in the financials, is the difference in our maintenance CaPex and our growth CaPex, to maintain our business, we typically are 3.25% to 3.50% of sales, this year, it's going to be on the low end of that around 3%. Because a lot of our CapEx that we're spending right now, is going toward growth initiatives that are going to create revenue and margin in the future. We have several greenfields going off. And so I think that's one thing that gets lost is, when we're looking at CaPex is we really get buy on pretty lean maintenance capex budget, but we're investing in the company.

Our next question comes from the line of Adam Thalhimer with Thompson Davis.

Hey, good morning, guys. Congrats on the strong Q3. Alan, first one for you. What are your thoughts on Q4 cash flow?

Well, with the revenue growth moderating from Q3 to Q4, we should have a very strong cash growth from operations. Part of what hit us obviously, in the third quarter is when you grow revenue, quarter-over-quarter basically a $100 million then, even though our average days in networking capital went down, that $100 million revenue growth quarter-over-quarter is going to chew up a lot of working capital. But with the fourth quarter being relatively flat, or at midpoint down slightly from the third quarter that should generate a very positive cash flow from operations because you're not having to finance that revenue growth quarter-over-quarter.

That's what I was hoping you're going to say. And then, Jule, do you have any line of sight to these headwinds, particularly on the supply chain starting to abate?

Adam, I wish I could answer that. We are not counting on it, abating, what we're trying to do is just get good at adapting to this environment, right. It's struggle, as we said in our prepared remarks daily just to be productive. I mean, we've got a great backlog. We've got good margin in our backlog. At some point in time in the future is going to normalize. But we're not counting on that happening anytime soon.

Adam, this is an opportunity for me to brag on this management team. But the supply disruptions aren't going away, with the way that they have been able to utilize the workforce, move it synergies from one place to another, when they ran out of pipe in one spot, they could move and continue to work and continue to keep good productivity up has really been dynamic, and it came through in the numbers. Jule, Alan, the whole management team has done a terrific job of learning how to be flexible in an environment that you have to be flexible to continue to grow this business. It is a real credit to all the way down to the people that are working every day on every project that are sometimes working on two projects in one day. So the synergies that we've gained, I believe, as we've put together and continue to consolidate this company from market to market has given us a competitive advantage and what is a very disruptive supply chain.

And it was nice to see that come through in Q3. And then last one for me, I guess for Jule, how would you characterize overall the bidding environment today?

I think the bidding environment right now Adam is still strong. We really haven't seen any change. We frankly can't bid everything that comes in. We think that, as the IIJA the infrastructure bill starts to come into full force, that we may bid more public jobs, and a few less private jobs just because of the number of opportunities that bill will create. But we really haven't seen anything from a number of bids drop off, we've continued to see good pricing in the bids we're getting. So it really hasn't changed a lot from the last quarter.

And our next question comes from the line of Brian Russo with Sidoti.

Hi, good morning. Yes, thank you. Just to follow up on the bidding activity, is there any reason to believe that the bidding environment or activity will change with IIJA funding? Meaning, it seems like there's going to be a lot of money, especially flowing to the states and DOTs, that you operate in? And, I'm just curious, if you sense margins are going to be pressured, because there's just going to be a lot of work out there for -- in such a fragmented industry for other players to just capture the top line.

Yes, Brian. Good morning. We envision that the bidding environments going to continue to be strong, and the IIJA is going to continue really, what we've been experienced in the last 12-months, the states we're in all have healthy state budgets, the COVID relief money this past year, has given them extra money. And so we really have been projecting in our seeing that the infrastructure bill, just going to continue that, we do think there's going to be some increase in project funding. And so it is going to continue to be a lot of demand on the public side, as our nation, is making a really big investment in infrastructure that we see is going to last, six to eight years, by the time these projects get done. So we're prepared for it. Last year, we said we saw growth coming, and we needed to invest in our organization. And we did. And I think that's happening now. And we're continuing to get prepared to have the workforce and the resources available to take advantage of this infrastructure bill.

Okay, great. And then I think you mentioned your current leverage is at 3x, remind me is that the max leverage ratio allowed in your credit facilities? Or is this new facility you mentioned, gives you more flexibility or the max is about three times, just trying to get a sense of the balance sheet capacity under the credit agreement, to pursue acquisitions, maybe more aggressively or larger in size?

Yes, great question. Yes, the new credit facility puts that max at 3.5, it also allows, if we were to make a larger acquisition that for, I believe, three quarters it can actually flex up as high as 4. I don't think it's going to change our plans. It's not really providing us -- one that provides us with more total availability, it gives us some cushion, our leverage ratio should come down, if we hit our event he midpoint of our guidance, it should come down into 2.6 to 2.7. Because we're bringing on a very good quarter from an EBITDA standpoint, and enrolling off a much lower quarter from last year. So even with the acquisition and the borrowing we made earlier this week for the southern acquisition, we should be back down around that 2.6 or 2.7. And then as we see the 2023 playing out, that should come home back down. So even though we've got a higher top line of what that leverage can be, we don't see that changing our strategy as far as being patient with acquisitions, doing ones that make sense, and taking advantage of also the organic growth opportunities, because that's really a focus for us. And Jule mentioned earlier, we've spent a lot of our CapEx money this year to support organic growth. And we see that is a good utilization of capital also. Brian, I think one of the things I will say is Alan and the whole finance team in conjunction with Jule has done a great job of creating a very flexible capital structure for us. From our standpoint, we liked that leverage ratio to continue to come down. We've historically been levered at two or less. So we anticipate continuing to have that focus as we grow this business. But one of the things that Alan, the team have done, if you pull the credit agreement is we have a very flexible credit agreement that allows us to continue to grow the business and really not have to be concerned as we do acquisitions, which is a huge benefit. They did a terrific job. I don't think we could have hit the timing any better from a pricing standpoint or a flexibility standpoint. But from our standpoint, as a board and as a management team, we'd like to see that continue to go come down overtime.

And we have reached the end of the question and answer session. Therefore, I will turn the floor back to management for closing comments.

Yes, we just like to thank everyone for being with us today. And we look forward to talking to you on the next call. Have a good weekend.

And ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines. And have a wonderful day.