Greetings. Welcome to the Construction Partners, Inc. Fourth 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 is 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 fourth quarter and year-end results for fiscal 2023. This call is also being webcast and can be accessed through the audio link on the Events & Presentations page of the Investor Relations section of constructionpartners.net. Information recorded on this call speaks only as of today, November 29, 2023. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay 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 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 our earnings press release for our disclosures 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 Greg Hoffman, our Chief Financial Officer, and Ned Fleming, our Executive Chairman. I'll begin with an overview of the business followed by Greg reviewing our financials in more detail. We finished the year with a strong quarter that drove substantial year-over-year growth for both the fourth quarter and the year. Fiscal 2023 revenue was up 20% year-over-year and adjusted EBITDA was up 57% and net income was up over 129%. And consistent with our goal at the beginning of the year to return to double-digit margins, we achieved a full year adjusted EBITDA margin of 11.1%. We also returned to the normal CPI business model of generating strong cash flow. We ended the year with cash flow from operations of $157 million and lowered our leverage ratio, while continuing to drive both organic and acquisitive growth throughout the year. Today, we are reporting a record backlog of $1.6 billion. This is evidence that the demand environment is greater than at any time in our past, supported by healthy public funding programs, as well as strong commercial markets throughout our six southeastern states. And in regard to the IIJA, while the bill passed three years ago and the funding only began flowing to the states over the past two years, with construction project work starting in the past year, we are still in the early innings on the construction side of this generational investment in our nation's infrastructure. In the southeast, our states are growing, and they remain focused on maintaining and improving the quality of their roads as well as increasing capacity to handle the significant migration to the southeastern United States. Both of these types of projects are in the sweet spot for CPIs operational…

Thank you, Jule. And good morning, everyone. I'll begin with a review of our key performance metrics for the fiscal year before discussing our outlook for fiscal 2024. Revenue was $1.56 billion, an increase of 20% compared to last year. The mix of our total revenue growth for the year was 8.7% organic revenue and 11.4% from recent acquisitions. During the final quarter of the fiscal year, the weather across our states was better than seasonal averages and compared favorably to the fourth quarter last year. I'd also point out that the liquid asphalt index reimbursements we received this year in the fourth quarter were much lower than last year, as liquid asphalt has trended down for most of the year. Liquid asphalt prices were relatively flat in fiscal 2023. Consequently, we received $1.3 million for liquid asphalt index reimbursements in Q4 2023 compared to $10.7 million in Q4 last year. Excluding the impact of these reimbursements, the company's organic growth rate would be 9.6% and the overall revenue growth would be 21%. Gross profit in fiscal 2023 was $196.4 million, an increase of approximately 41% compared to last year. As a percentage of total revenues, gross profit was 12.6% in fiscal 2023 compared to 10.7% last year. General and administrative expenses as a percentage of total revenue in fiscal 2023 declined to 8.1% compared to 8.3% last year. Net income was $49 million, an increase of 129% compared to $21.4 million last year. Adjusted EBITDA was $174.1 million, an increase of 57% compared to last year. adjusted EBITDA margin for the year was 11.1% compared to 8.5% in fiscal 2022. You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today's earnings release. In addition, as Jule mentioned, we are…

[Operator Instructions]. Our first question is from Kathryn Thompson with Thompson Research Group.

It's actually Brian Biros on for Kathryn. First on the on the EBITDA guidance, top end gets you back to 12%. That'd be great. Low end is more about 20 basis points off of kind of where you ended the current year. Can you just touch on the low end scenario there and kind of what are the building blocks to get to that kind of 20 basis point margin growth there?

Brian, in our guidance and in our Roadmap 2027 that we talked about last month at the Analyst Day, we expect to have 50 basis points to 75 basis points of margin improvement each year. That's what our Roadmap 2027 calls for. But when we give guidance, we give a range to encompass different scenarios, but our guidance that we give, we assume normal weather, a stable economy, and good execution. And so, we're just getting the year started. And as we go through and see how the years going, we'll update that guidance. And as you saw last year, we'll tighten it and raise it accordingly.

Maybe follow-up just then on the mix between public and private. Public, as you mentioned on the call, even on the private side, both good tailwinds going into the next year. Multi-year tailwinds. Do you see the mix between the two changing at all going forward? Perhaps strength between the two came a little bit different? Public maybe a little bit stronger. [indiscernible] states in the southeast that are seeing good trends on the private side, too. So just wondering how that that mix shift looks for you guys, if any mix shift going forward?

Actually, I think what you'll see, if you look at our filing, the mix has changed a little bit in 2023 overall from, basically, 60/40 in prior years to roughly 63 public/37 private in 2023. So I think that shows quite a bit of demand in the public environment, both state and federal levels, as Jule discussed. So, that could go up potentially in the public side based on what the demand provides in the marketplace. But I think we're comfortable with that mix going forward.

Our next question is from Michael Feniger with Bank of America.

Just following up on the conversation between public and private, I'm just curious, on the on the private side, can you just tell us what you're actually seeing with activity there in recent months? That business on the private side, are you expecting that to be up in 2024 high single digit? You guys have given great color on the public side. It seems like there's nice tailwinds there. I'm just curious. There's some concerns in the market around private seeing higher rates, potentially impacting some private construction activity. Just curious what you guys are seeing, given your geographical footprint?

Michael, that's a great question and one that we've been getting and it's something that I watch very closely, look at the bid sheet each week to see any – in all of our local markets, what opportunities we're seeing. And the surprising thing for us this past year, and especially the last six months, things on the commercial and private side have held up very well. And as I said at our Analyst Day, the mix, I think, has evolved over the last year. Housing has remained steady, even though that's not a big part of what we do. I think the fact that so many people are not selling their existing homes, the customers we do support from a residential standpoint, the builders are experiencing good demand for their products. But what we've really seen, in addition to the residential migration to the southeast, is business migration to the southeast. And I think you've heard that from other customers or other companies in our industry. There's just a lot of heavy duty industrial demand where businesses are building manufacturing facilities, labs, and headquarters. And so, that continues to just be a steady demand for the commercial environment. Ned, do you want to weigh in on that?

Michael, it's interesting. We're in a relative market share business. So in the markets that we compete in – and we see this because SunTx invests really in the sunbelts of the country. There continues to be a lot of growth, the demographic trends are driving that. Number one. And number two, the business trends are driving that. So in a relative market your business, what we're worried about is the growth in Raleigh, Durham, the growth in Huntsville, Alabama. And in each of these 70 plus distinct markets, we continue to see growth commercially, residentially, everything. In fact, in most of the places we're doing business, there is a housing shortage, there's a supply problem. And that supply problem isn't going to get solved for somewhere between 6 and 10 years.

Good to hear, guys. And just my follow-up. We're still seeing pretty high price increases on aggregates and rocks. And I'm curious what you're seeing in terms of your input and your costs, your competitors, and basically how you feel the environment is to still pass that along. I know you kind of referenced what you're seeing out there in terms of the bids and the prices, just curious how you're kind of thinking with some of the inflation, even though inflation is coming down, but you're still seeing some high price increases in some of these more material spots, material input, just curious how you feel like you guys and the competitors' ability to kind of pass it along in 2024.

Michael, our model is just to pass-through the inputs through our bids. And so, you're right, we are continuing to see price increases in our input costs, and we believe that construction inflation is going to continue to be higher than what you might see CPI or consumer inflation be because of the demand environment that the IIJA and just the commercial economy is creating. So, you're right, I think that we'll continue to have inflation and our model just passes that through to the customers.

I would add to that, that part of the sharp spike in inflation that occurred 18 months ago is difficult for anybody to absorb. But whatever level inflation is at, as long as it's relatively stable, we can pass that along.

Our next question is from Adam Thalhimer with Thompson Davis & Co.

Jules, are you fully past the supply chain issues now?

I would say, Adam, that the supply chain, yes, is it like it was in 2019 or 2020? No. But I would say we've just gotten to where we can do business in a normal way in the new world. So it's not something we've talked about at all now. So I guess the answer to the question is yes.

I'm curious on the large project side where you guys would be part of a JV just to do the paving work, are you seeing more of those types of opportunities with the IIJA?

Adam, I was recently at a conference and I heard an industry economist break down the use of the IIJA funds in the different states and regions. Just it was interesting to see and really encouraging for me that, in the southeast, most of the money for the IIJA funds are going to either maintenance or capacity increase to existing infrastructure. And as I said, my prepared remarks, that's exactly what CPI – that's our specialty. And so, maybe in future years, there might be some bigger projects, but, right now, we're seeing a lot of the states that we're in use it to do maintenance and capacity increase. And so, that's what we're bidding on.

And it sounds like that's what you prefer.

Certainly on larger projects, we'll participate as a subcontract or as a JV partner. But our specialty is to do smaller projects with higher margins. And so, maintenance and capacity and widening of roads, those are the projects that – they're right in our wheelhouse.

Greg, just real quick for you. The SG&A leverage was particularly strong in Q4. Was there anything unusual in there?

No, I think it's just a normal trend that we talked about, 15 basis points, 20 basis points year-over-year. Of course, the fourth quarter was certainly better than last year. 6.9%, I believe, is what it was this year. So it's just a normal trend, I think we're going to continue to see.

Our next question is from Brian Russo with Sidoti & Company.

Maybe you could just elaborate on the September backlog of $1.6 billion still showing a lot of resilience despite DOT lettings, seasonality and just the overall construction seasonality of the business. Just curious how that triangulates to your reaffirmed 2024 guidance, just any insight there would be great.

Brian, I'm glad you asked that. Our backlog has grown now for 12 straight quarters. And you've heard me say this, and I'm glad you gave me the opportunity to say it again. It is not atypical as CPI for our backlog to go down sequentially, especially in the busy work season. And so, at some point, that's going to happen, and that's not going to surprise us at all because the DOT lettings are not in a steady state. They come in at different times of the year, and we do work at different levels. We're a seasonal business. I think the backlog being at the level it is shows the demand that we have. But we've sold a large percentage of our capacity – as we've said, our next 12-month revenue, a lot of it is own backlog. And that gives us good visibility. But we can only book so much of our capacity at any one time. So we feel good about our backlog. But at some point in time, it's going to go down sequentially, and that's not going to be anything that surprises us.

Brian, I would say that we still think that 75% of the next 12 months' revenue is covered by our backlog. That hasn't changed.

And you mentioned earlier about the business model and the repeat customers. Could you possibly, like, quantify what percent of the overall business is considered recurring revenue? Is it just the public market of 63%? Or is the kind of the strong relationships you have on the commercial side? And with all the economic development, does that also create another level of recurring revenue for construction perhaps?

Brian, absolutely. So, the public revenue, virtually all of that is repeat customers. But on the commercial side, a large part of that is repeat customers and long-standing relationships where we do – whether it be in the panhandle of Florida for St. Joe's or Pulte Corporation in Raleigh, North Carolina. There's just customers that you build relationships with and provide good service and those are repeat customers year after year.

Just lastly, on the CapEx, the $90 million to $95 million in 2024. Is any of that growth CapEx earmarked for any specific projects at this point? Or is that still kind of being evaluated?

No, it is earmarked. We go through that process during our budget time. And so, yeah, there was a process of evaluating various projects for future growth and that has now been identified and put in the books, but we're not prepared to announce anything specifically at this time.

Brian, I would just say Greg does a great job of leading that process. But that's just really just where we highlight organic growth. We want to prioritize organic growth. And so, each of our local markets submits their initiatives for what they what they see as organic growth and we find the best initiatives there. So that's one of our growth levers and that's the process that we make it happen.

[Operator Instructions]. There are no further questions at this time. I would like to hand the conference back over to management for closing comments.

I'd just like to thank everyone for joining us today. We look forward to having a good fiscal year 2024. Thank you.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.