Construction Partners Inc (ROAD) 2019 Q2 法說會逐字稿

Greetings, and welcome to the Construction Partners, Inc. First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard with Dennard Lascar Investor Relations. Thank you. Mr. Dennard, you may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review fiscal 2019 second quarter results.

This call is also being webcast and can be accessed through the audio link on the Events & Presentations page of the Investor Relations section of constructionpartners.net. Information recorded on this call speaks only as of today, May 10, 2019. So please be advised that any time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

I would also like to remind you that statements made in today's discussions that are not historical facts, including statements of expectations or future events or future financial performance, are forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that, by their nature, are uncertain and outside the company's control.

Actual results may differ materially. Please refer to the earnings press release that was issued yesterday for our disclosure on forward-looking statements. These factors and other risks and uncertainties are also described in detail in the company's filings with the Securities and Exchange Commission.

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

And now with that behind me, I'd like to turn the call over to Construction Partners' President and CEO, Mr. Charles Owens. Charles?

Thank you, Ken, and good morning, everyone. With me on the call today are Ned Fleming, our Executive Chairman; and Alan Palmer, our Chief Financial Officer. In my opening remarks, I will provide comments about our fiscal 2019 second quarter and give an update on our business. I will then turn the call over to Ned for a few additional comments. Finally, Alan will review our financial results and discuss our outlook.

We are pleased with our performance during the second fiscal quarter. Revenue for the quarter was $164.3 million, up 38.2% compared to last year. Gross profit and adjusted EBITDA were both up compared to the second quarter last year with gross profit of $19.8 million, up 44%, and adjusted EBITDA of $13.9 million, up 74.2%. We had favorable working conditions throughout our markets during the quarter. We also grew our backlog to $584.8 million at March 31, 2019, with approximately $380 million of that amount to be completed during our current fiscal year.

Project opportunities remain strong across our markets and we continue to pursue additional opportunities that can be completed both during the current fiscal year and beyond. We earned approximately 40% of our annual revenue though during the first half of the fiscal year. This was in line with our traditional seasonal pattern. We typically benefit in the second half of our fiscal year from more favorable working conditions due to normal weather patterns, longer working days and other factors.

In late February, we announced 2 strategic acquisitions: a liquid asphalt terminal in Panama City, Florida and an asphalt production and paving company in South Central Florida. These 2 companies are now fully integrated. The liquid asphalt terminal was part of our vertical integration strategy and allows us to supply liquid asphalt to a number of our plants in the southern portion of our geographic footprint, including Florida, Alabama and Georgia. We began shipments from the terminal in March.

The asphalt company we acquired in Okeechobee, Florida extends our ability to service new markets in Florida through an expansion of geographic presence in the state. And as we have discussed before, we drive growth through 3 primary levers in our business model: doing more work in our current market through strategic acquisitions and through greenfield expansions in which we establish a new plant to service a particular market.

Currently, project demand remains favorable in our markets and state funding continues to grow to support infrastructure projects. In March, Alabama lawmakers approved an increase in the state's gas tax. This is the first increase in Alabama's gas tax since 1992 and is expected to generate approximately $320 million in additional annual funding when fully implemented. This increase will be phased in over 3 years, starting in October 2019. Lastly, I'd like to welcome our new Board Director, Noreen Skelly. We are very pleased to have Noreen join the Board of Directors and chair the Audit Committee.

Before turning the call over to Ned, I'd like to take a moment to reflect on our recent 1-year anniversary as a public company. Over the past year, we have completed 3 acquisitions and continued to grow in our existing markets. As a result, revenue has increased 18.3% for the 6 months ended March 31, 2019, over the same period last year prior to our IPO. I would especially like to thank our senior management team for their leadership and our more than 2,100 employees for their dedication and hard work that enables us to execute our strategy.

Now I'd like to turn the call over to Ned Fleming, our Executive Chairman, for a few additional comments. Ned?

Thank you, Charles, and good morning to everyone. As the Chairman of the Board and behalf of all the directors, I, too, would like to welcome Noreen Skelly to our Board. We recognized that she adds leadership strength, financial acumen and diversity to our Board. And we are all looking forward to her participation and input.

I'd like to reiterate some of Charles' comments. This quarter's performance is a direct result of the efficiency, experience and hard work of each employee at CPI. They are doing an excellent job on a daily basis executing the strategy Charles, Alan and the entire leadership team has driven throughout the entire organization.

The company is strategically positioned in all our markets to compound double-digit top line growth, generate excellent margins in the industry and with a strong balance sheet is prepared to execute acquisitions. This business is geographically located to benefit from operating in the fast-growing Southeastern states, where both the demand for ongoing road repair projects is coupled with increased public funding to pay for the work. This demand and funding continue to grow in our markets as evidenced by the Alabama's recent gas tax increase.

With strong demand and solid funding, coupled with a track record of results and a strong growth outlook, we believe Construction Partners represents a compelling investment. As our team continues to consistently execute, we believe it will be apparent to the market that CPI represents a unique model for public infrastructure companies. The nature of our recurring publicly funded maintenance projects with shorter durations and lower volatility risk from input costs distinguishes our business model.

Through the leadership of our highly experienced team both here in Dothan and throughout our platform companies, Construction Partners is well positioned to execute our plan and grow the business. One of the most compelling aspects of CPI is its consistency. We've seen it over the past 20 years as we continue to meet with investors and tell our story. We believe the market will appreciate the opportunity that CPI represents. I believe we are well positioned for continued growth in 2019 and beyond.

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

Thank you, Ned, and good morning, everyone. I want to start by quickly highlighting our key metric performance in the second quarter. From a financial standpoint, as we've discussed, favorable working conditions in the quarter improved compared to the first fiscal quarter and led to increases year-over-year for our second fiscal quarter.

Revenue for the quarter increased $45.4 million over the same quarter last year. Revenue attributable to Scruggs, which we acquired subsequent to March 31, 2018, was $18.3 million. And we were also able to complete work on our projects that were delayed in our first quarter ended December 31, 2018. Gross profit increased approximately $6.1 million primarily due to higher revenue. The higher gross profit percentage revenue was a result of increased HMA production and equipment utilization, resulting in an increase of fixed cost absorption during the quarter.

Net income was $4.2 million, down from the same period last year. However, excluding the impact of a nonrecurring after-tax settlement of $10.6 million in the second quarter of 2018, net income was up $3.7 million. Earnings per share were $0.08, down from $0.27, which was also impacted by the legal settlement last year. Adjusted EBITDA was up $5.9 million resulting in an adjusted EBITDA margin of 8.5% compared to 6.7% for the same period in the prior year. The higher adjusted EBITDA margin was a combination of higher gross profit margin and a lower general and administrative expense percentage.

Looking at our input costs, we have seen some recent increase in asphalt cement pricing, but currently, we do not anticipate changes to have a significant impact in 2019. In late March, we began shipments from our newly acquired liquid asphalt terminal in Florida. We believe over the coming year that we can achieve between 20 and 30 basis points in margin improvement through the use of this terminal.

G&A expenses in the quarter were consistent with our expectations and included an increase of $800,000 due to Scruggs and $700,000 due to public company costs that we did not have in the same quarter last year. The increase was partially offset by a $600,000 decrease in equity-based compensation expense.

We will continue to diligently manage margin. To do this, we must also be active in understanding exactly what we're seeing in our markets. Our business is very competitive. And as with most industries, hotspots of competition can move around. We continue to successfully navigate the competitive environment, maintaining our market position, while also steering revenue to stronger markets as opportunities present themselves. Strategically, our organization maximizes efficiencies through scale and flexibility to move crews and equipment to take advantage of favorable margins and to maintain EBITDA.

Backlog provides CPI with significant visibility into next 12 to 18 months. We define backlog as projects for which we either have an executed contract or are currently working on that contract or where we are the low bidder on a public project and we have commitment from the customer, but not an executed contract. Backlog does not include any future external sales of hot mix asphalt or aggregates.

At March 31, 2019, backlog was $584.8 million. Of this amount, 65% or approximately $380.8 million is expected to be completed during 2019 fiscal year. In addition, as Charles mentioned, opportunities for future projects in our markets remains favorable as we will bid on a number of construction projects that we would expect to complete both during the current fiscal year and beyond.

Turning now to the balance sheet. At March 31, 2019, we had $61.9 million of cash and $14.3 million of availability under our $30 million revolving credit facility after deducting outstanding letters of credit. Our debt-to-trailing 12 months' EBITDA ratio was less than 1x at 0.88. We have a very strong balance sheet to support the growth opportunities we are seeing.

Cash provided by operating activities was $5.3 million for the 6 months ended March 31, 2019, compared to $28.1 million for the 6 months ended March 31, 2018. This decrease is due to higher accounts receivable and work-in-progress balances on significantly higher quarterly revenue and a $4.6 million increase in inventory related to the operation of our new liquid asphalt terminal. CapEx in the second quarter was $12.4 million compared to $12.5 million in the same quarter last year. For fiscal 2019, we expect our capital expenditures to be in the range of $38 million to $42 million, which compares to $42.8 million in fiscal 2018.

Before we turn the call over for your questions, I'd like to review our financial outlook for the full fiscal year 2019, which ends September 30, 2019. We have raised the outlook with regard to revenue, net income and adjusted EBITDA. Our 2019 outlook now calls for a revenue in the range of $790 million to $810 million compared to $680.1 million in fiscal 2018; net income in the range of $40.75 million to $44 million compared to $50.8 million in fiscal 2018, as a reminder, net income in fiscal 2018 included a nonrecurring $10.6 million after-tax settlement; adjusted EBITDA in the range of $88.9 million (sic) [$88.5 million] to $92.5 million compared to $75.5 million in fiscal 2018.

And finally, our fiscal year 2019 outlook does not take into account any future acquisitions or greenfield expansions that may occur during the remainder of the year. The outlook also does not include the potential impact of any new federal or state infrastructure or highway-related legislation that could be passed in 2019. From a modeling perspective, I'd also like to mention that our effective tax rate in 2019 will be approximately 25% compared to 17.2% in our prior fiscal year.

With that, we'll now take questions. Operator?

(Operator Instructions) Our first question comes from the line of Trey Grooms with Stephens.

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

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

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

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

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

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

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

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

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

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

Our next question comes from the line of Andrew Wittmann with Robert W. Baird & Co.

I was -- I guess I had some questions here on maybe I guess you call it the guidance. I was just doing some math and I wanted to get your thoughts, Alan, on this one. But it looks like organic growth here in the March quarter was around 20%, given that you gave the Scruggs information there, which is obviously very good. And it looks like the growth rate for the back end of the year is pretty high, maybe not quite that high, but something probably in the teens growth rate.

The backlog is not -- it's up but is not up that much. I guess a question for you is the level of visibility that you have into the work that you need to book in the year that's going to be burned for the year. And it looks like there's about $100 million delta between what you mentioned as already booked and which you still need to book to get there. That's a long way of saying is how much -- how does the $100 million that you still need to book for this year compare to the past? And how confident are you in capturing that work level?

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

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

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

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

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

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

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

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

Great quarter. Maybe first one for Alan, just kind of a clarification. It looks like the DSO has crept up a little higher than usual this quarter. Anything to be aware of there, just sort of timing of collections?

No, the -- they really haven't. What happens is that the timing of when we get our revenue is really the driver of that. And our March revenue was significantly higher than January and February. So when you look at it on a comparison of the accounts receivable to the revenue -- the most recent revenue, it's right in line. But what happens is when you measure that at the end of -- the receivables at the end of a quarter, where last quarter, our December sales were way down so are receivables at that moment because generally we collect the majority of our receivables within the 30 days other than the retainage, which is included in those receivables. But we've not had any decline in the average length of receivables.

But when you have a high revenue month, then the receivables, if that happens to be the last month of the quarter, is going to look like it's been an increase in the average days of sales. And that same thing flows over to the cash flow statement. When you look at the timing within the quarter of when that revenue is, you can -- when our revenue ramps up, naturally our receivables ramp up in that month. And because we had such a strong second quarter, especially the March period, which is kind of the beginning of our heavy season, then that's what you get with that.

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

Yes. We've said before that our debt ratio could go as high as 2.0 to EBITDA, so that -- we're below 1 now, we're at 0.88, so we could easily incur another $50 million -- $50 million, $60 million worth of debt and still be below that 2 threshold. And then as far as the cash on the balance sheet, we're entering the period of the year where that will begin to grow again because we've kind of hit that bulge, as I mentioned, with March in that ramp-up of the receivables, so -- but even without that, we would have probably about $50 million there. So easily $100 million would be available if we were to deploy that and need to deploy that for acquisitions. And we are a positive generator of cash over the course of the year. And we also have the flexibility. We've not, in the last 18 months, financed any of our capital expenditures, but we also have that ability. And then we've got the money available under our line of credit, so substantial dry powder.

Okay, great. And my last one -- actually 2 parts. But one, it sounds like Alabama would be a nice opportunity as that funding starts flowing. But are there other kind of state legislative initiatives you're tracking right now in some your key markets that could be meaningful? And then I guess as the dialogue goes on in Washington around federal funding for infrastructure, and who knows what ultimately happens there, I guess I'm curious between the markets you play in, how dependent are they now on federal dollars versus these state initiatives for infrastructure spending that have moved forward in recent years?

Yes. Well, first, all of the states that we operate in within the last 3 or 4 years have passed tax increases or other funding increases. And several of those are -- just like Alabama, are being phased in over a period of time. So we're seeing -- even though there's no new legislation in those other states, the program that they put in place in the last 3 or 4 years has built-in step-ups in that over the next 3 or 4 years. And so you've got that. Several of them are also tied to population inflation. So they've got built-in escalators. And we see that increase in those states continuing for several more years. The percentage of work that we do that's tied to federal dollars has decreased over the years just because the states have stepped up and taken more of a lead.

If the federal program were to be enhanced, then the states that we are in are in great shape to be able to take a federal dollar and turn it into $10 because they only have to provide a percentage of -- a small percentage of the matching. And so they have their matching funds available. And so if something is done at the federal level, a lot of other states will have to be scrambling to pass legislation to increase their funding in order to get those federal dollars or else they get reallocated to the 5 states we're in. So there's a lot of strong positive things whether the federal does anything or not. And historically, we have seen that as a minimum, they maintain the current levels.

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

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

I don't have exactly what it is. But I would be fairly certain that it has not moved hardly at all from that because we've not booked any megaprojects. So we're still seeing that in the acquisitions that we've made in the last 2 years that are construction-related have had similar revenue characteristics to ours, so -- but it's a mix from $200,000 to $35 million, $40 million all throughout that band, but that's not really changed.

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

If you're talking about the 2 recent acquisitions, the terminal does not have contract revenue. And primarily of all those sales will be internal to us. So it had no backlog and had very minimal impact, almost negligible because it's -- we didn't get the tanks filled until the last week of March and just began shipping. The acquisition in Central Florida in Okeechobee, it had very negligible because just due to the size of it, so -- and then of course, we gave the Scruggs information. Its sales this quarter was $18.3 million and had 0 last -- the same quarter last year because we've not acquired it. So very negligible impact on revenue or margin.

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

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

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

In the most of the year, this would be probably the majority of the impact. One of the benefits of the terminal is having storage capacity to be able to fill the tanks in the winter, when generally the cost of asphalt cement is lower than in the prime market at subsequent times. So in the winter, we could actually put 2x that amount of inventory or even more into those tanks if the pricing is favorable for doing that.

So you could see that in the winter months, December, January, February along in there, we could have $10 million or $12 million worth of inventory stored because we can buy at a very favorable price. But other than that, typically we would have, at any one time, $4 million to $6 million of inventory in those tanks. The good thing is as soon as we sell it, we collected the money because we're selling it to ourselves.

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

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

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