Construction Partners Inc (ROAD) 2018 Q2 法說會逐字稿

Greetings and welcome to the Construction Partners second-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, Mr. Black. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call and webcast to review second-quarter and first-half fiscal 2018 results.

This call is also being webcast and can be accessed through the audio link on the events and presentations page of the IR section of constructionpartners.net. Information recorded on this call speaks only as of today, June 4, 2018, so please be advised that any time-sensitive information may no longer be accurate as of the date of any replay.

I would like to remind you that the statements made in today's discussion that are not historical facts, including statements with respect to revenues, earnings, performance, strategies, prospects, and other aspects of the business of Construction Partners, are forward-looking statements made pursuant to the Safe Harbor provisions 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 read the cautionary note regarding forward-looking statements contained in today's earnings press release and the factors set forth under the risk factors in Construction Partners' registration statement on Form S-1.

Management will also refer to non-GAAP measures, including adjusted EBITDA and adjusted EBITDA margins. Reconciliations to the nearest GAAP measures can be found at the end of today's earnings release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements.

And now I would like to turn this call over to CPI's President and CEO, Charles Owens. Charles?

Thank you, Rick, and good morning, everyone. I'd like to thank you for joining us today on our first conference call as a public company. I'm here with several other members of our senior management team: Ned Fleming, our Executive Chairman of the Board, and Alan Palmer, our Chief Financial Officer.

In my remarks today, I will provide an overview of our Company, our business operations and strategy, and our corporate culture. I then turn the call over to Ned to talk about the original investment thesis for CPI and how that looks today 17 years later. Finally, Alan will review the financial strategy and our financial results for the first half of fiscal 2018. After that, I take your questions.

For those of you who are new to the CPI story, our business is pretty simple: we get work, we do work, and we keep score. We are a vertically integrated civil infrastructure company. We provide construction products and services to both public and private sector projects, with an emphasis on highways, roads, airports, paving, as well as site work for commercial and residential projects in the Southeastern United States.

Roadbuilding is a very local business, meaning the roadwork is generally done close to one of our asphalt plants to ensure the temperature of the asphalt mix for laydown as optimal for a high-quality application. We are able to internally source the hot mix asphalt, or HMA, for our projects from our 30 HMA plants. And we internally source approximately 35% of the aggregate used in the production of the hot mix asphalt.

About 70% of our business comes from publicly funded projects, including local and state roadways, interstate highways, and airport runways. The majority of our public projects are maintenance-related, such as resurfacing of an existing roadway, but we also do construction projects in our local markets.

Private sector projects include roadwork for residential subdivisions, site work and paving for office and industrial parks, shopping centers, and local businesses. Plus building and maintaining roadways and other infrastructure for these private developments.

Let's talk about how our vertically integration strategy works and gives us an advantage over smaller competitors. We have the capabilities to do all the major components of the project we bid, from clearing and grading roadway base, the hot mix asphalt paving, constructed bridges and other concrete structures, and storm drains. For the other miscellaneous items like signage, lighting, grassing, striping, we subcontract those out. And then we have a finished project.

The hot mix asphalt manufacturing plant is really the key driver to our vertically integrated model. Approximately 94% of the US roadways are asphalt pavement. Asphalt pavement is 100% recyclable and is America's number one recycled product.

The product, along with sand, rock, and liquid asphalt cement, are mixed together at each of our 30 hot mix asphalt plants we have. These hot mix plants strategically located across our local markets in the Southeast. So the hot mix asphalt that we can supply to our local markets drives the work that we bid.

Our controlled profitable growth strategy was created when we founded this business in 2001. There are four primary components to our growth strategy. The first is implementing a management information system that is robust and scalable enough to take care of the Company needs as we continue to grow. We integrate all the companies we acquire into our enterprise IT system.

The second is maintaining a deleveraged balance sheet to position us to take advantage of acquisitions and new greenfield opportunities. Acquisitions of all sizes will drive our growth, but we never want to get too far out over our skis from a balance sheet standpoint. Currently, our leverage is less than 1 times debt to EBITDA.

A third principle of our strategy is making platform acquisitions that function as a regional hub that we can grow and expand through bolt-on acquisitions and organic growth initiatives, including new greenfield developments. Since 2001, we have made a total of 16 acquisitions and established 7 new greenfields.

And a fourth principle is maintaining our cost competitiveness and bidding discipline with focus on growing margin and not just revenue. Our culture is to hire, train, and retain our most valuable asset: our employees. Our organization works to develop employee opportunities for career advancements and growth.

We have a talented leadership team, including Senior Vice Presidents with experience in operations, acquisitions, integration process, and executing our strategy. We also have a very experienced operation personnel working for these Senior Vice Presidents.

With the completion last month of our IPO, which provides additional financial capacity for growth, we are going to continue to execute on our same strategy. And our target is in excess of $1 billion in revenue in 2022. However, it is important to understand that we are going to continue to stay disciplined and focused within the strategy. Again, our goal is profitable growth.

Because of the relative mild climates in the markets where we operate in the Southeast, we do work year-round. Predictable weather impacts do create some seasonality that drives approximately 60% of our revenue into the second half of our fiscal year, which is April through September, and 40% of our revenue into the first half of the fiscal year, which is October through March.

Margins are also higher in the second half of our year as we typically have greater utilization of our assets during the warmer weather. We are continuing to perform as expected with a record first-half fiscal 2018 revenue and gross profit. Alan will review these with you later.

We are very pleased with the acquisition we completed in May of The Scruggs Company, which serves new markets in Georgia and is a great complement to our existing business. This acquisition is immediately accretive to earnings per share.

We believe this platform acquisition will provide a strong anchor for additional growth through bolt-on acquisitions and organic expansion in Georgia and further go to expand our vertically integration operation.

As part of the closing, we are very happy to welcome President Ferrell Scruggs, Jr to the CPI organization as well as more than 200 Scruggs employees. The Scruggs Company is a great company that is a leader in this market. Ferrell and the entire Scruggs organization brings an excellent reputation in the industry and we are very glad to have them on our team.

Before I turn the call over to our Chairman, Ned Fleming, I want to thank our more than 2,000 employees for their hard work and dedication in helping Construction Partners become one of the fastest-growing civil infrastructure companies in the US. We believe we are well positioned for continued growth.

Ned?

Thank you, Charles, and good morning to everyone. We are excited to have completed our IPO last month. This gives the Company a flexible capital structure with access to the public capital markets and organizational certainty for continued possible growth.

CPI is well positioned to continue its strong record of growth in the Southeastern United States. This area of growth continues to outpace the rest of the country's growth, which we believe benefits the Company. Our unique business model and strategic growth plan, we believe we present a very compelling investment opportunity to the market that is not directly comparable to other publicly traded civil infrastructure companies.

As Charles mentioned, we founded this business over 17 years ago. We developed a well-thought-out plan for continued growth and profitability. We saw a large and growing market that was highly fragmented with no technological obsolescence and high barriers to entry.

Charles, Alan, and the team had previously grown a similar business which was twice the asset size that CPI is today. As a result, we knew they were the right team with the experience, expertise, drive, and an excellent industry reputation to build CPI.

As we step back today and look at our original investment thesis, it may be more true today than it was back in 2000. Infrastructure continues to be a growing and fragmented industry. Today, CPI is better strategically positioned to take advantage of the opportunity, as it has increased scale, has substantially more assets, defined synergies, and a talented team driving the Company.

We have very strong industry tailwinds that are driving our bullish outlook for growth over the next several years as citizens and politicians have recognized the need to build and rebuild our country's infrastructure. Billions of dollars have been earmarked by local, state, and federal governments to repair and upgrade a road network that has fallen into disrepair.

The Southeastern United States is one of the fastest-growing areas of the country. And our five primary states have a significant backlog of projects and these states continue to increase investment in transportation infrastructure funding through increased gasoline taxes and other measures.

The good news for CPI is the local nature of the roadbuilding business that Charles described earlier. As a result, we are the number one or the number two player in all the markets where we compete primarily with smaller local companies on projects we bid and pursue. CPI's growth has been local, controlled, steady, and profitable, which is exactly what we plan to continue.

Through a disciplined growth strategy that includes both acquisitions and organic growth, we have grown CPI to almost $700 million in revenue with double-digit EBITDA margins. We are a leader in growth and margin percentages and we believe we are a leader in the utilization of technology as we integrate acquisitions.

Our team has an average of 30 years of experience in this industry, and over the years they have built an excellent reputation based on strong character, meeting fairly with the companies they acquire, and retaining and developing senior management employees wherever possible. They have demonstrated success in running and growing this business.

Beyond growing organically, they have demonstrated great skill and expertise in acquiring and integrating 16 companies since CPI was founded. Roadbuilding is a fragmented industry and traditionally has been served by family businesses. This creates an excellent opportunity for CPI in the M&A area.

For many of these family businesses in and outside of our geographic footprint, CPI is a trusted acquirer. As such, when owners are ready to retire or sell their businesses for estate planning or other purposes, we are often the first call they make because of our experience and reputation in navigating the unique dynamics of buying and integrating family businesses.

I've had the pleasure to work with Charles and Alan and the rest of the CPI management team for many years. They are strategic thinkers, they are continual learners, and they understand how to build an organization and attract and retain good people.

They are terrific at working with and developing young people and have built an outstanding team to continue to execute our strategic plan. We believe the future is brighter than the past.

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

Thank you, Ned, and good morning, everyone. I will begin by providing an overview of how we look at operational efficiency and our capital structure. And then I will discuss our recent financial results.

One of the principles that Charles alluded to earlier is to enhance operational efficiencies and increase profitability, both from businesses that we acquire and those we've owned for quite a while. That requires timely and accurate information.

We have incorporated the best available information technology to provide performance data on a daily basis to each of the crews executing various phases of work so that they can make real-time adjustments to improve their results.

That information is also provided to management at various levels in the organization so they can provide oversight and accountability. We have to know our cost to measure improvement in project execution. Small incremental changes can mean improved overall results.

In the prior business that Charles and I built for a Danish publicly traded company, we inherited four separate companies with different systems and processes and were given the charge to grow them significantly. By moving all of the companies to the same IT platform and implementing the same operating policies and procedures, we were able to achieve substantial growth while increasing profitability.

Each acquisition CPI makes is fully integrated into our strategic plan, our technology systems, and our operating processes. While that organization is being integrated into our system as we work through their backlog and bid new projects, there is usually a drain on overall margins in the short term.

However, we have consistently been able to improve those margins and grow the businesses we acquire over the long term. That is a hallmark of our business model.

A strong balance sheet is also a hallmark of our business model. By minimizing debt, we are better positioned to take advantage of opportunities when they arise, such as increasing capacity by adding equipment and crews, adding greenfield developments in contiguous markets, or making acquisitions.

Through the IPO, we raised approximately $104 million net of offering fees. We used approximately $29 million to fund the acquisition of The Scruggs Company. And we intend to use the balance for capital growth to fund acquisitions and for general corporate purposes, which may include the repayment of debt from time to time.

With a current debt to adjusted EBITDA ratio of less than 1 times and new access to equity capital following our IPO, we feel very good about our capital structure.

Now I'd like to spend a few minutes discussing one of the components of our operations that impacts our financial performance. Backlog is a key metric in the construction industry and backlog provides CPI with significant visibility into the next 12 to 18 months. At March 31, our backlog totaled $564 million, which is up about $16 million from fiscal-year 2017 levels.

By way of background, we define backlog as projects for which the Company either has an executed contract and is currently working on that contract or where it has the current low bid on a public project or has a commitment from the customer and has not executed the final contract or began the actual work on the contract. Our backlog does not include any future external sales of hot mix asphalt or aggregates.

Our small average project size with an average completion time of eight months gives us greater stability and profitability than other companies that focus on large, lengthy, often lower-margin projects to build their backlog. Our focus is on growing margins, not revenue or backlog.

Our backlog will fluctuate during the year as we win and complete a significant number of projects within the same year. We also like to have some backlog that will be completed beyond 12 months as part of a balanced portfolio of projects.

Another component that is critical to our long-term success is our capital expenditures. We look at CapEx in two categories: growth CapEx includes new equipment to support additional personnel for future project opportunities in our existing local markets and establishing greenfield developments in contiguous markets, like the one we completed in May in North Carolina. Our replacement CapEx includes adding new technology to existing equipment and replacing older equipment with more efficient equipment, both of which enhance our productivity and profitability.

Because our older equipment is well maintained, we consistently achieve gains when we dispose of it. The timing on the sale of this equipment during the year can vary, but it generally occurs during the second or third quarters of our fiscal year.

For the 6 months of fiscal 2018, CapEx outlays totaled $22 million versus $12 million for the same period a year ago, reflecting both the normal variation and timing of our capital expenditures and our outlook for project growth.

Next, let's review our recent financial results for the first six months of fiscal 2018 that ended on March 31. As Charles pointed out moments ago, we really look at our financial results comparing first half to second half rather than quarter to quarter.

That is because the most meaningful comparison is how we perform year over year during our six-month busy season. And separately, how we perform during our slower six-month period in the fall and winter versus the year before. I would direct you to the news release and the 10-Q for quarterly data and discussions.

As we stated in our earnings news release, we achieved record results in the first half for revenue and gross profit. Revenue was $269.3 million, up 15% compared to $232.5 million in the first half last year. Gross profit was $36.5 million, up 10% compared to $33.1 million in the first half last year. And our net income was $22 million compared to $7.4 million in the first half last year. If you exclude the settlement we received in the second quarter, first-half income would have been $11.6 million compared to $7.4 million the prior year.

Our adjusted EBITDA was $24.5 million, down slightly compared to $25.2 million last year. Additional overhead cost of $4.3 million for personnel and other general expenses to support our growth and our transition to a public company are the primary reasons for this slight decline in adjusted EBITDA. These investments in the future as well as the recent acquisitions, two greenfields, and additional equity capital have strengthened and enhanced the foundation on which we can build a future.

Finally, before we turn the call over for your questions, I'd like to quickly review our financial outlook for the year. Our long-term targets continue to be annual revenue growth of single to low double-digits and to maintain a double-digit adjusted EBITDA margin.

For fiscal 2018, we expect revenue to be in the range of $690 million to $710 million versus $568 million in fiscal year 2017. Our net income, including settlement income, for the second quarter to be in the range of $47 million to $50 million versus $26 million in fiscal year 2017. And our adjusted EBITDA to be in the range of $75 million to $80 million versus $69 million in fiscal year 2017.

With that, we will now take questions. Operator?

(Operator Instructions) Andy Wittmann, Baird.

Trey Grooms, Stephens.

Good morning, everyone. So first one for me is on the sales guide for fiscal 2018. It's a bit higher than at least what we were looking for initially, but the EBITDA outlook is basically in line with what we were thinking, which of course implies a little bit lower margin this year than what we were maybe expecting a month or two ago.

Can you talk about the moving pieces there for the higher sales? And then just kind of with a little bit less margin there, just any moving pieces we need to be aware of that would be behind that?

Yes, this is Alan. What we're seeing is that there is a strong demand for projects and work to be bid. So we are seeing an increase in the number of projects that are available for us to bid. That is the primary driver for the revenue increase.

We are also -- we've got the acquisition that we did at the end of last year and the two greenfields that we've completed. And we are seeing that getting those integrated and up, we are having some drag on the margins that we would typically see. But we see that we will be able to get those up further into the future. So that's really the primary drivers for those higher revenue and the average gross profit being down.

I got you. Okay. And then with that, the expectation is to see something kind of -- you guys get back on the margins, as you mentioned now. But what is generally the timing when you do a greenfield or you do an acquisition like this -- Scruggs, including the one you did late last year? What is generally the timing of seeing those get back up to Company average type margin?

Historically, we have seen that timeline to be about 18 to 24 months. When we are acquiring a construction company, we've got to work through the backlog and then get our systems in place. So 18 to 24 months would be a typical timeline.

Okay. And this one is just more as a follow-up, more kind of bigger picture. But with Scruggs, how do we think about that Georgia market that you are getting into here, how it compares to some of the other markets you are in?

And just with that, getting into a newer market and then with M&A focus obviously part of this longer-term story, should we be -- as we look at just geographically, are you expecting to kind of stay in the wheelhouse where you are? Is there any markets, new markets that could be of interest to you guys? Just how to think about it geographically as you look at M&A?

Trey, this is Charles. From the market standpoint, we see there is going to be a good funding for the state of Georgia. And we anticipate several projects to come out that we have opportunities to bid on.

And as far as the M&A, we are taking in the integration of The Scruggs Company, which is a great company, and we are very fortunate to have them on board. But we do see opportunities in that market and we will continue to look at all of our levers that we talked about from a growth drive side, from organic growth to greenfields and bolt-on acquisitions. So with that, we are very positive in this acquisition that we just made.

Right. And I guess on the markets, just to -- for clarity from me is as we are looking out, I mean, are you guys generally thinking about staying in your wheelhouse of that Southeast market? Or is there -- should we not be surprised to see you move outside of that market? Or just the game plan for geographic M&A just broadly? It doesn't have to be anything exact.

No, that's a great question. No, we plan to kind of stay in this Southeast market and we are doing work now in five states and we see plenty of opportunities. But we continue to have discussions with companies that's contiguous to our operations and our areas. And we will continue those, but we see a lot of opportunity in our back door right now. But obviously, we are still having conversations with other people also.

Great. I will turn it over and jump back in queue. Thanks a lot for taking my questions.

Andy Wittmann, Baird.

All right, we are going to try again. Sorry about the confusion earlier; sorry about that. All right, so I just want to try again on kind of that first question there on the revenue.

I guess at the IPO time, you guys were talking about somewhere around $670 million of revenue for this year. And obviously, the revenue is a little bit higher here. So was there something that changed? Was there an incremental greenfield that you planned? Is maybe -- is The Scruggs contribution for this fiscal year a little higher than you thought because of seasonality? I just want to try to drill in on that one one more time.

Yes, there is not anything else as far as a greenfield or acquisition built-in any different than what we were expressing on the roadshow. What we have looked at is the backlog that we actually have and what's the timeline for completing that work.

And that's really the driver to it, Andy, is that in our backlog has continued to be strong and we just see an opportunity to have more work to complete now and in future years. So it's not really a change in anything other than that. That's the primary driver.

Okay. Then just looking at the greenfields, I guess in the press release you kind of talked about the fact that you had the one that you launched earlier this year that's ramping. It sounds like it's on track.

I guess I wanted to understand your outlook for other greenfields, including greenfields that you are potentially eyeing at The Scruggs Company. How many more do you think are realistic here in the next six, nine months to start putting capital into?

You know, Andy, this is Charles. We are always looking at these opportunities and we want to make sure that we do them at the right time and in the right spaces. And as you know, we already have some greenfield sites, but we have not determined when those will come online that we will actually start moving in those areas.

But we will continue to evaluate our markets and we will continue to look at greenfield sites in the future. And so, you know, with that, I wouldn't anticipate right now that anything comes on in the next three to six months.

Okay, that's helpful. And then I'm just going to drill on a couple of more technical question here. But I think the first one to just address here is Tropical Storm Alberto. I guess that one came through just a few weeks ago. I am wondering if that was any material impact to your results so far in the quarter? Or how that factored into your guidance, if at all.

This is Alan, Andy. It didn't factor into our guidance. Obviously, as you know, we had rain, but we have that every year. So it has not affected our full-year guidance that we've -- and outlook.

Okay. Great. And then just maybe for modeling purposes here, Alan, could you help us with the basic share count here that we are going to see at the end of the third quarter as well as the diluted share count. Just so we the number right. Do you have that handy by any chance?

I do not, Andy, but I can get that for you and provide that to you separately. I mean, the share count -- the overall share count should not change for the remainder of the year. But I know the weighted average that is what you use for coming up with these calculations, that may be slightly impacted. But the total shares outstanding should not change.

Okay, fine. We can estimate it; it probably will be pretty close and maybe we will follow up with you off-line. We just noticed that you had a new line pop on your income statement as well. There is an unconsolidated joint venture that's flowing through here, Alan. How long is that joint venture supposed to last, just so we can kind of pin that one down as well?

Yes, the contract has got a three-year completion date. We expect to complete it probably in 2 to 2.5 years, so it will continue on there. We started -- we entered that joint venture, which is for a single contract, and we've begun the work on that contract. It will be in there for this fiscal year and probably two more.

And is that quarterly run rate that you put up posted this quarter fairly indicative of the work level that you expect out of that job?

It will increase because we only had I think part of two months -- one full month and part of another. So we are in the early stages of that. But that should increase [the amount] of that job as we get fully underway.

All right, cool. I think I will leave it there. I might jump back in, but I will yield the floor for now. Thank you very much.

Joshua Wilson, Raymond James.

Good morning and thanks for taking my questions. I wanted to dig into Scruggs a little more. Any surprises there since you've closed on it?

Josh, this is Charles. We haven't had any surprises. It was just like we had anticipated in our due diligence. We have got a great operating management team and we've got a great workforce and good equipment. So everything has turned out just like we thought it was going to turn out and we are very excited to have that group on board.

And can you give me a sense of what their current EBITDA margins are?

No, not at this time. We don't give out those margins by those different operations.

Okay. And can you say what you are baking into the fiscal 2018 guidance for it?

We wouldn't give the specifics of that, but the 2018 guidance does have 4 1/2 months because we closed on May 15. Specific revenue and EBITDA, we would not be sharing that.

Okay. And then can you give us an update on the average size of the contracts in your backlog?

That hasn't changed. That's really been approximately the same for 10 years.

Good. Okay. Good luck with the next quarter.

Okay, thank you, Josh.

Bill Newby, D.A. Davidson.

Good morning, guys. Bill Newby on for Brent Thielman today. Congrats on a nice quarter. Just had a couple of more follow-ups on Scruggs. I guess have you given the amount of backlog that they will be bringing over?

We have not provided that.

Okay. And can you give us an idea of how that business -- that standalone business has been growing in the last couple years or the last 12 months?

Will you repeat that?

Just on the growth rate for Scruggs as a standalone, I guess how has that growth rate been trending in like recent years or last 12 months?

It's been, I would say, consistent with what we've seen in our own operations.

Okay. And then is there anything in Scruggs' backlog that I guess differs from what you guys have in your legacy business in terms of project type or size or complexity? Or is it pretty similar to what you guys do?

Bill, this is Charles. It's very similar to what we do. I mean, the way they approach jobs and the way they build jobs and look at things is very similar to all of our businesses throughout our geographic market.

Okay, perfect. And then Alan, you mentioned a pickup here in the bid activity here in the next, I guess call it 6 to 12 months. Is that concentrated in any specific quarter or is it well balanced over, I guess call it calendar 3 and 4Q?

Good question. We are seeing it out across all of our markets.

Okay. I think that's all I got. Thanks, guys, and I will jump back in queue.

There are no further questions at this time. I would like to turn the floor back to CEO Charles Owens for closing comments.

Okay, thank you. And thank you once again for your interest in Construction Partners and we look forward to talking to you next quarter. Thank you very much.

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