Greetings. And 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 from Investor Relations. And thank you, Rick Black. 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 fiscal -- and fiscal year end results for fiscal year 2021. 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, November 23, 2021, 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 the statements made in today’s discussion that are not historical facts, including statements of expectations or future events or future financial performance are forward-looking statements, made pursuant to the Safe Harbor 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 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 net income, loss and adjusted EBITDA. Reconciliations to the nearest GAAP measures can be found at the end of our earnings release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. And now, I would like to turn the call over to Construction Partners’ CEO, Jule Smith. Jule?

Thank you, Rick, and good morning, everyone. With me on the call today are Alan Palmer, our Chief Financial Officer; and Ned Fleming, our Executive Chairman. I’d like to begin today by thanking the over 3,000 employees of Construction Partners throughout the Southeast for their hard work and dedication in making fiscal year 2021 a successful and safe year in a challenging environment. I would also like to welcome all the town employees of two October acquisition, King Asphalt and J. Miller Construction. Welcome to the CPI family. I’ll begin my remarks today with an overview of the fourth quarter and fiscal year 2021, before commenting on the current state of our business and expectations for fiscal year 2022, as well as some thoughts on the impact of the new Federal Infrastructure Bill recently signed into law. Alan will then review the financial results in more detail. In the fourth quarter, Construction Partners achieved a record quarterly revenue of $279 million, a 24% increase compared to the same quarter last year, despite an excessive number of lost workdays due to abnormally wet weather throughout all of our markets in the Southeast. Revenue for fiscal year 2021 overall grew approximately 16% compared to fiscal year 2020, consisting of approximately 5% organic growth and 11% acquisitive growth. Last quarter, we revised our FY 2021 outlook due to the labor market and supply chain constraints, which I described as ankle weights on our construction operations that suppressed topline revenue. While our adjustment largely covered those effects on our business in Q4, we could not proceed the extremely wet months that were to follow. In each of our states precipitation was approximately 30% from July to September, compared to typical rainfall levels for these months. This weather significantly impacted our fourth quarter and delayed…

Thank you, Jule, and good morning, everyone. I will begin with a review of our key performance metrics in fiscal 2021 before discussing our outlook for fiscal 2022. Revenue was $910.7 million, up 15.9% compared to the prior year. Acquisitions completed or subsequent to the fiscal year ended September 30, 2020 contributed $87.4 million of revenue and we had an increase of $37.6 million of revenue in our existing markets. Gross profit was $119.9 million, a decrease compared to $122.2 million in the prior year due to the factors that Jule discussed during his remarks. General and administrative expenses were $91.9 million, compared to $68.6 million in the prior year. Approximately $17 million of the increase was related to management personnel payroll and benefits, legal settlement and related fees, and other professional fees primarily driven by business acquisition expenses, information technology expenses, and increased accounting and consulting fees. In fiscal year 2022, we expect general and administrative expenses as a percentage of revenue to return to 8.5% to 9%. Net income was $20.2 million for fiscal 2021, compared to net income of $40.3 million in the prior year. Adjusted net income in fiscal 2021 was $24 million after an adjustment of $3.8 million for the legal settlement and legal fees previously discussed. Adjusted EBITDA for fiscal 2021 was $90.1 million, compared to $98.8 million for the prior year. You can find GAAP to non-GAAP reconciliations of adjusted net income and adjusted EBITDA financial measures at the end of today’s press release. Turning now to the balance sheet. At September 30, 2021, we had $57 million of cash and $197.5 million of availability under our revolving 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…

Thank you, Alan. In summary, we are often running in our new fiscal year with a full plate of work on hand, a transformative investment in our industry and margin expansion opportunities ahead of us. Our team is prepared to execute on the bright future we see ahead to continue growing the company and delivering value for our stakeholders. With that, we will now take questions. Operator?

Thank you. [Operator Instructions] And our first question comes from the line of Stanley Elliott with Stifel. Please proceed with your question.

Hey. Good morning, everyone. Thank you all for taking the question. In the release…

Good morning, Stanley.

In the release, you guys mentioned, profit margins and the backlog can continue to grow, pardon me, with bidding. What exactly did you guys mean by that? Are you all re-pricing contracts? Do you have material escalators, just curious how to think about that dynamic?

Yeah, Stanley. So what we mean by that is, as we continue to bid work and we see bidding opportunities ahead, and we have a lot of bidding opportunities. We feel like we’re going to continue to expand the margins as we put on new work. Our current work, we do have contingencies built in our bids now just dealing with a supply chain issues and inflation. But what we really mean by that is, due to the short duration of our projects, we’re constantly turning over and putting new work on to our books and finishing old work and so we just see the economy and the bidding opportunities and the funding allowing us to expand margins just consistently over time.

Perfect. And then, thinking about the M&A plans for the coming year, you’ve done two acquisitions, I guess, since the quarter close. You’re right around two times not including those. How should we think about the M&A activity into next year, with the kind of the premise you guys are tracking above 2 times EBITDA right now? Do you want to be aggressive in this market? I am curious just kind of where your head’s at there?

Yeah. Stanley, I would say, we’re going to continue to execute our strategy. Acquisitions are a large part of our DNA at CPI. We -- but we want to just have controlled profitable growth. And so we’re going to continue to build relationships with potential sellers, we’re going to talk to them, we’re going to look for bolt-on acquisitions that help us build relative market share in the states we’re in and we’re going to continue to talk to folks in adjacent states and get to know them. But we’re not going to go too fast. But acquisitions are going to continue to be a big part of what we do moving forward.

Great, guys. Thank you very much.

And our next question comes from the line of Andy Wittmann with Baird. Please proceed with your questions.

Thank you, and good morning, everyone. I guess, let me start, I’ll start with some the cash flow, Alan. $48 million of cash flow from ops is not a huge number this year. But I know that when you guys do acquisitions, correct me if I’m wrong, you guys typically do not buy the working capital associated with those acquisitions, and therefore, you have to fund entire working capital from the day when you acquire it. Given that, can you tell us what the drag on working capital was as it was reported in your financial statements, so that we could get a better sense of kind of what the underlying cash flow of the business might be?

Yeah. Andy, good question. Of course, one of the big drivers of the decline was lower profit, that was about $20 million of the plan from last year. So going into 2022 we expect to be able to significantly improve that number. But as you mentioned, when we make acquisitions, typically other than if it’s a platform acquisition, we’re not acquiring in the purchase price, the receivables, payables and a lot of the working capital. So we have to fund those from day one out of our immediate operations. The two largest items besides the profit that caused the decline in the cash flow this year were accounts receivable, which is one of those items that we have to build from the acquisitions and then our work in progress and both of those are really a function somewhat of the shift. We change the percentage of work that we’re doing private work, compared to public work over the last couple of years to take advantage of the opportunities and that generally stretches out your receivables. You also have retainage on non-public jobs. So those are the things that this year and then, of course, we’ve had inflation just like everyone else in our material costs. So to have the same quantity of inventory on hand, we’ve got a lot more invested in inventory. So those are really the two or three things that have contributed. We feel like with the acquisitions, working capital behind us, 2022 should return to a much better cash flow from operations.

And Andy, I just would add, as we said in our remarks, the fourth quarter was extremely wet and so $30 million to $35 million of revenue and some fixed costs recovery were impacted, but that revenue moves into Q1 of this year.

Yeah. Right. That makes sense. Just kind of, I guess, along that, I wanted to follow up with this question, which is trying to get a little bit better sense about the underlying organic growth rate that’s baked into this 2022 outlook? I guess, I heard you guys say that, clearly here, which was great, that the guidance does not include any acquisitions that have not yet been closed as of today. So that’s clear. But there’s obviously these two deals that you closed in October, which are contributing to revenue. So, Alan, can you talk about what the low end and the high end of your revenue range implies for the organic growth rate in the business?

Andy I will take a stab at that. First the…

Okay.

… our range, we are focused on organic growth and in our outlook range, our organic growth has a range there of 5% to 10%. And so and then acquisitively -- the acquisitive growth is a range of 13% to 16% in our range. So we’re focused on both of them. The two new acquisitions, we did add that backlog to the $966 million on September 30th, because we felt like that’s really a more accurate reflection of the backlog that we’re going to be taking into the year to accomplish this outlook. Andy…

And is that…

Andy, do you need any follow up on that?

I’ll queue back in. I’m happy to keep going here. But I was doing one question, one follow up. So I’ll queue back in and if you take me later, that’d be fine.

Okay, Andy. Thank you.

And our next question comes from the line of Adam Thalhimer with Thompson Davis. Please proceed with your questions.

Hey. Good morning, guys.

Good morning, Adam.

Good morning, Adam.

Can you help us a little bit on the how you see the cadence of EBITDA playing out in fiscal 2022?

Adam, do you mean just from a how it spread out over the year. We typically say…

Yeah. I mean, I guess, I don’t want to -- I know you don’t get quarterly guidance, but since we do have this projects deferred specifically into Q1. Just kind of curious kind of how you see starting the year versus finishing the year?

Yeah. Well, we do see -- and I will let Alan give specifics in a minute. But we do see in 2022 our typical 40% of revenue in the first half of the year and 60% in the second half of the year is pretty normal and we anticipate that. As far as the EBITDA, obviously, in the winter, we don’t get as much recovery on our fixed assets as we do in the summer. So that tends to be more rear loaded to our busy seasons.

Yeah. This is Alan. I’ll add to what Jule said, this year we had -- the year that just finished, we had a slightly higher percentage of revenue in the first six months, primarily as a result of just not being able to get the revenue in the last half. But next year we do see least from our budget standpoint pretty much a 40/60 split. As Jule said, the fixed cost recovery is not full in the first six months, because you’re only doing 40% of that revenue. So we see a higher EBITDA margin in the second half of the year, but pretty much a return to normal there when you look at it over a 40/60 split for the year.

Okay. That’s perfect. And then, as a follow up, I just wanted to ask about EBITDA margins and I’m just curious, I guess, on the path back to, because you had about a 12% average margin in 2019 and 2020. I’m just curious on the -- and I know you’re not going to do that in 2022, which you’re not committed to that today. But what will be your the path back to those kinds of margins?

I mean, I’ll -- I think in 2020, as we shared last year and as we shared going into this year, we had some items in 2020 with the declining oil prices, significant changes, some of the shutdowns related to COVID that gave us higher productivity, because there was no one on the roads that made that spike up and we knew coming into this year there would be decline. I think, what Jule just talked about the challenges for 2022, we’ve kind of reset our expectations and our job pricing and we feel like we can start moving back to that approximately 12% or better EBITDA margin, part of that is, as he said and I said, we’re kind of with that higher revenue it lowers our G&A expense as a percentage and if we get to that higher end of the revenue that drops from about 9% on the lower end to about 8.5%. So that adds 0.5% to that EBITDA margin. But our guidance for this year gets us substantially back to that -- on the high end back to that 12% range that we’ve been in before.

And Adam, I would just add to that, as we execute on our strategy and we build relative market share in the states we’re in, it gives us an opportunity, not only to bid at higher margins, but we get to take advantage of the vertical integration we have and -- just like the Gulf Coast terminal and the aggregate facilities we have and that just gives us a chance to expand margin. So we do feel like moving forward, we’re going to return to those EBITDA margins and just back executing the strategy we have.

Okay. Good color. Thanks, guys.

All right. Thank you, Adam.

Our next question comes from the line of Zane Karimi with D.A. Davidson. Please proceed with your question.

Hey. Good morning, gentlemen.

Good morning, Zane.

Regarding the record backlog here, from a margin perspective, what sort of gap are you seeing between the new acquisitions and a normalized level? And what portion of the backlog is new from acquisitions and when do you think that will be completely work through by?

Zane, acquisitions always come with a low lower backlog margin and typically it takes about 12 months to normalize those to CPI margins. We have been able to expand our backlog margin as we go into this year and it’s something we see will continue that trend into 2022. We think that the healthy economy in the Southeast and funding situations is going to allow us to continue to expand backlog margin. But the acquisition backlog does get work through and we’re putting new work in those -- on the books in those markets and we take about 12 months and get those margins up to normal.

Okay. Thank you. And I know you guys talked about atypical inflation, but are you guys able to quantify the impact that it had on your quarterly results?

It’s hard to quantify exactly, Zane. As I said in my remarks, there’s three things that really affected margins for the quarter, part of its weather and the fixed costs recovery that the abnormal precipitation caused. Part of it is inflation, inflation normally as a pass-through cost for us and nothing’s changed there. It’s just we’re dealing with atypical inflation that the supply chain and the labor market causes. And so we’ve had to adjust our pass-through mechanisms and speed it up to adjust for that atypical inflation. We’ve had to start adding contingencies in our bids to deal with the uncertainty. So we really see once those -- once these economic realities smooth out in the future and we don’t know exactly when that’s going to be, inflation will continue to be a pass-through costs for us. But it has definitely been an atypical environment the last six months and that does affect margins.

Appreciate the color.

Our next question comes from the line…

All right. Thanks, Zane.

I am sorry. Next question comes from the line of Andy Wittmann with Baird. Please proceed with your question.

Yeah. Just kind of want to build on the last thing, and obviously, labor was something you guys mentioned last quarter, and you guys even said that, this is going to be something that’s probably going to stick into your fiscal 2022. And so I was just wondering, if you’re able, how you are on the staffing levels here, have you been able to at least get the number of people and the quality of the people that you need to execute the plan or are you having to dip into overtime for the people that you already have to do the work? I was just wondering kind of what your outlook is on this front specifically in 2022 as it relates to your profit margin?

Yeah, Andy. Good question. Labor is a definitely a challenge for -- throughout the economy now and at CPI we are continuing to fight to retain our workforce. I will say -- and we anticipate that it will get better over time, we just don’t know when. But one of the things I will say that, on labor, I feel like CPIs model is faring better in this environment. And what I mean by that is, our local workforce model allows people to spend every night at home with their families, reoccurring work and the nature of our work is steady, so people have a steady paycheck. Our scale allows us to offer great benefits and that’s helping us compete in this labor market. And then the fact that we’re a growing company, the thing I hear and the thing we’re focused on is showing people that this is not just a job, but they can make it a career. And so the labor market is definitely tight. We are competing for workers. But we’re going to continue to press those advantages as we go through 2022.

Very helpful. And Jule, just follow up here too, much has been said and made about the North Carolina Department of Transportation and how it was kind of shutdown for a while and coming back. And this -- last quarter this was a big factor in kind of how 2021 played out and the expectation for 2022 was that North Carolina was going to come back and there’s pretty material way, frankly, that the acquisitions that you did there, which were probably a little bit below plan to start out that they were going to kind of resurge and deliver much a lot of the growth that’s in 2022. So my question is, here today, as you said now in 2022, have the North Carolina acquisitions, are they delivering, do they have the backlog to deliver the growth that was kind of expected coming out of last quarter?

Yeah. Andy, you said that just right. I mean, when we bought those four acquisitions, it was abnormal times in North Carolina, but we took the long-term view. And as you said, North Carolina has really returned, not only to normal, but to a very robust program. I’m very pleased with the backlog that we’ve been able to build in those 13 new markets and the outlook for them. Even though it’s not in the backlog we announced just last week in the highway letting we won two really nice projects in those markets. So, it was definitely last year a very abnormal time throughout North Carolina with the DOT’s issues, but they have rebounded strongly. They’ve got a very healthy program. This Infrastructure Act is going to even add more to that and I just saw a presentation last week that the NCDOT is really planning well for how they’re going to not only use the funded the allocated money, but to apply for the grants available in Infrastructure Act. So we’re very bullish on North Carolina moving forward.

Okay. Great. Thank you for that update. Have a good day.

All right. Thank you, Andy.

Thank you, Andy.

And our next question comes from the line of Adam Thalhimer with Thompson Davis. Please proceed with your questions.

Oh! Thanks. Just one more, I was just curious guys how, I’m still trying to figure out how are DOT is reacting to inflation, because you talked about some things you’re doing with your contracts to help protect you. Is it harder to do that with DOT customers versus private customers?

Well, Adam, inflation for the DOT, where we really see them having to adjust is in their estimates and making sure that their estimates are keeping up with inflation. And that’s been a challenge for them, as well as the contractors. And then also you see when they’re looking out and they’re programming, they’re having to adjust that, the projects in their program are going to cost more and so they’re having to plan that. But inflation is a very real thing for all of us. We certainly anticipate that inflation is going to continue and we’ve had to start and really adjust our mechanisms to pass it through to the customers. And in our outlook for 2022, we’ve assumed that inflation is going to happen and that we are going to continue to pass it through. Liquid and diesel fuel, the DOT have an index. So as liquid and energy costs go up, we’re covered on that. But the DOT’s end up spending more money, just as if it drops, they save money. So inflation is definitely an issue for our DOTs.

Well, the good news is, they’ve got more money to spend now, if it’s all right…

That’s right.

Okay. Thanks, guys.

Thank you.

And Mr. Jule Smith, we have no further questions at this time. I’d like to turn the floor back over to you for any closing comments.

I’d just like to thank everyone for taking the time to be on our call today and I wish you and your family a happy and safe Thanksgiving.

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