Greetings and welcome to the Construction Partners, Inc. 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 with 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 to review the second quarter 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, May 5, 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 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 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 refer to this morning’s earnings press release for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company’s filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted EBITDA and 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 these 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’d like to start the call by welcoming Greg to his new role in his first conference call as CFO. Greg and I have worked together at CPI for many years, while I was President of Fred Smith Company in North Carolina, and he was CFO of Wiregrass, our Alabama Platform Company. Alan Palmer hired Greg in 2009 and he has been part of CPI’s growth story for well over a decade. He has executed our strategy. He knows our people and our culture and he deeply understands our financial systems at both the operating company and corporate level. Over the past 2 years, Greg has been working closely with me in Raleigh on this planned transition and we both feel it has been a tremendous honor to work with Alan. I am extremely thankful for Alan’s wisdom and hard work in building CPI into one of the leading infrastructure services companies in the nation. Before I provide an overview of our Q2 results, I’d like to thank our nearly 4,000 dedicated employees that move our company forward everyday. In our business, safety on job sites and plant sites is a daily commitment and their vigilance to stay alert and their dedication to their teammates’ health and well-being is impressive and greatly appreciated. CPI had an excellent second quarter, which is historically a slower winter period in our seasonal business and we are right on track with our annual plan for FY ‘23. The second quarter played out just as we had discussed on our last conference call, with strong performance from each of our operating companies in all 6 states. We also had…

Thank you, Jule, and good morning, everyone. I’m proud and honored to join my first seek call as CFO, and I’m also very thankful to Alan Palmer for his assistant guidance throughout our transition process. He has been instrumental in the success of CPI and has developed and led a strong financial organization that is ready to continue to execute our growth strategy. I’ll begin with a review of our key performance metrics in the second quarter of fiscal 2023 before discussing our raised outlook ranges. Q2 revenue was $324.9 million, up 33.5% compared to the prior year quarter. The mix of our total revenue growth for the quarter was approximately 17.1% organic revenue and approximately 16.4% from recent acquisitions. Gross profit was $26.3 million in the second quarter, an increase of 110% compared to $12.5 million in the same quarter last year. General and administrative expenses as a percentage of total revenue in the quarter decreased to 9.9% compared to 10.3% in the same quarter last year. In Q2, we had a net loss of $5.5 million, an improvement compared to a net loss of $9.4 million in the same quarter last year. Adjusted EBITDA in the second quarter was $20.8 million, an increase of 165% compared to the same quarter last year. You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today’s earnings release. And finally, as Jule mentioned, we are reporting a record project backlog of $1.52 billion at March 31, 2023. Turning now to the balance sheet. We had $30.6 million of cash, $280.6 million of principal outstanding under the term loan and $143.1 million outstanding under the revolving credit facility. We have availability of $182 million under the credit facility, net of a reduction for…

Thank you. [Operator Instructions] And our first question is from Andy Wittmann with Baird. Please proceed with your question.

Great. And good morning, thank you for taking my question this morning, gentlemen.

Good morning, Andy.

Good morning, Andy.

I want to start first. I guess maybe I’ll start bigger picture. State and local budgets with tax receipts having last year and the year before that have been very strong, and they have gotten supplementary funding from the federal government over the last couple of years. Stuff not coming back here for 2023. I heard all of the comments in your prepared remarks about the funding environment in IIJA and I totally understand that. But I’m just wondering if kind of behind the scenes, the conversations any of your customers might be having about the concerns about their budget outlook against lower tax receipts and the capital gains. Even consumer spending has been pretty good. But you get the point of what I’m trying to go here. So I was just wondering, Jule, if you could comment on any of the specific DOTs, which are your bigger customers and what you’re hearing from any of them that might be relevant to that topic.

Hey, Andy, good question. Good morning. I would say we haven’t heard any concern from our DOTs about lower tax receipts and DOTs are typically pretty conservative in their outlooks. But frankly, most of what we see from our 6 DOTs that we work for is they are trying to do a good job of spending the IIJA money. They all have healthy gas taxes in their states. I don’t think they have seen a slowdown because the economies in the Southeast really haven’t slowed down. But with the funding that they are getting from Washington with IIJA, they are just trying to do a good job of spending that. So we haven’t heard any talk about lower tax receipts. Clearly, some of the IIJA money is going to higher inflation. So cost per lane miles up a little bit, but it’s still a healthy increase. And so that’s really what we see the DOT is focusing on.

Okay. Alright. Great. And then just it kind of feels like – obviously, the weather sounds like it was to your advantage, but you also mentioned some of the following commodity prices. Just the way these things work in your business. Some of the backlog that you’re working off here in the second quarter and we will be working off in the third year and fourth quarters, probably bid when inflation or the prices of some of these inputs were even higher than they are today. So while that certainly has been a headwind over the last couple of years. It kind of feels like the setup for the rest of this fiscal year is the opposite is really favorable. I guess the question is, would you agree with that assessment now that some of the really low-price backlog is essentially gone. And if that’s the case, I guess the implication would be that maybe the margin guidance here, which is up a little bit, but still really not at even what I would call your historical level, which what I would say is at least 11 plus. So I guess that’s the question, like if, in fact, you’re getting the benefit now of commodities against higher-priced backlog, Why isn’t the margin closer to that 11-plus rate that you’ve put up historically?

Yes. Andy, our guidance for the second half of the year, when you look at it, is assuming a pretty substantial EBITDA growth in the percentages of EBITDA to revenue being 12 plus. And so averaging out for the full year, you’ve got that first quarter in there. But clearly, our guidance moving forward is pretty positive. And we’re assuming that the backlog that we’ve worked hard to sell at higher prices. That’s the margin – that’s the backlog we’re going to be converting. And so we don’t anticipate in our guidance any headwind, significant or any big tailwinds. We’re assuming energy costs relatively flat. But it’s a pretty positive outlook and a pretty significant increase, both top line and bottom line in the second half. Clearly, the commodities falling has been a good thing for our margins, as I said.

Okay, I have one more. But I want to make sure that I am courteous to the other people who are in the queue, who will probably ask the question and that will yield. Have a good day.

Okay, Andy. Thank you.

Thank you. Our next question is from Adam Thalhimer with Thompson, Davis & Company. Please proceed with your question.

Hi. Good morning guys. Great quarter.

Hey Adam. Good morning. Thank you.

Can you guys comment – I guess a question for both on the M&A outlook, kind of the M&A pipeline and is Greg trying to yank the checkbook away from you, or do you guys feel good about your capacity for deals here?

No, Adam. We continue to be very busy talking to potential sellers. I have been on the road a lot this last quarter. We continue to have good conversations. And these things take time, and they happen when the timing is right for both the seller and us. We feel like we have got substantial dry powder. If a deal makes sense, you saw us just do two small deals here in the last 30 days that we are really excited about both in Anderson, South Carolina, to give King further reach down 85. And then in Huntsville, to get some good vertical integration of services where Huntsville has got a lot of growth. And so that just shows you, we are talking to a variety of potential targets. And we are excited about that, and you are going to continue to see us make deals.

And then – as we think about – I wanted to pivot a little bit to the extent you are going to talk about it this early to fiscal ‘24. And I guess the question is, you had 17% organic growth in the quarter. You have continued to do acquisitions, you probably got more coming, I mean is it too early to think that double-digit revenue growth is possible next year?

Well, Adam, I would say double-digit revenue growth, if you look back over the history of CPI, we have – each year, over the course of 20 years, have averaged 15% to 20% revenue growth. And we don’t see that really changing. We anticipate next year being very much like historical norms, and we envision it being a good mix of organic growth, which, as I have said, we focus on a lot and acquisitive growth. So, no, I wouldn’t – we are already looking out into the future as we plan, and we don’t really see any change from what the history of CPI has been. I will call on Ned to give you a little bit of his take on the future.

No, Adam, it’s nice to have you on phone. I think if you look at this from a historical perspective, when you have times like this where – let’s face it, there is a banking issues all over. We have got – we are in a very good spot. We would anticipate as we move into the future, continuing to do acquisitions. Historically, after ‘08, and ‘09, we did more acquisitions in the next 2 years than we have done previously. So, I think it really – the environment, both with the growth and the demographics as well as the fact that we are a well-capitalized public company is going to create opportunities for us as we move forward.

Alright. Thanks guys. Look forward to see you in Q3 and Q4. Talk to you soon.

Thank you.

Thank you. Our next question comes from Stanley Elliott with Stifel. Please proceed with your question.

Hi. Good morning everyone and welcome, Greg.

Thank you, Stanley.

Quick housekeeping, of the 20% growth you guys are forecasting this year, what is the split between organic and inorganic roughly?

We are looking at by the end of the year, 11% acquisitive and about 10% organic.

And it looks like some of the recent deals, some of the smaller deals you mentioned, Jule, have been more on kind of the services side, on the paving side. Is that a way – have you all become I guess with labor being challenged in the construction market, is this becoming more of a focus for you all to be able to get these jobs, if one? And then two, when you are picking up these contractor groups, do they tend to be customers of CPI or maybe are they buying their hot-mix from someplace else?

Stanley, that’s a great question. You are exactly right. What we did in Huntsville in acquiring Southern site contractors is something we have done twice in the last 2 years in Pensacola and in Wilson, North Carolina. And they have just been great acquisitions. 5 years or 10 years ago, you may have said we are going to vertically integrating the services, and we will just do it organically. We will just hire the crews and buy the equipment. That’s a lot tougher to do that. And so to be able to buy experienced crews that already are working together have market share is just, those have been home runs for us. And so we envision the same thing for Wiregrass in Huntsville with that market growing so much and Wiregrass just does a great job there. Now, getting these crews and this equipment and being able to do a wider range of services, from turnkey roadways to commercial projects, you are exactly right. It’s just – that’s an easier, better way to do it now. Yes, in some cases, they are customers of our companies and buy their asphalt. And so we have good relationships with these companies. And so by adding their crews and capacity, it just allows us to vertically integrate and do more work in that market.

Perfect. And then lastly, maybe talk about – certainly, the margins have improved. You guys have done a nice job of working up the backlog. But on the other hand, we heard from some of the aggregate producers yesterday about mid-teens sort of Cleanstone, big input for you guys. What are – what exactly are you all doing to make sure that you guys can maintain the margins and continue to drive that higher, hopefully, into next year?

Yes. Stanley, the aggregate guys, they do a really good job of raising prices, and we are trying to do the same thing with us bidding higher bids on the cost side and the margin side, as I have said for a year, we are just – we are doing the same thing. As far as any midyear price increase from the aggregate companies, they honor their quotes on our backlog. And so that’s not an issue there. And so our model is if they go up midyear is simply to put that in our estimates and pass that along. And so that’s really not something that would impact our margins. It would just impact our pricing moving forward.

Great guys. Thanks so much and best of luck.

Thank you.

Thank you. Our next question is from Brian Russo with Sidoti & Company. Please proceed with your question.

Hi. Good morning.

Hi Brian.

Just real quickly, strategically, are you comfortable with the six-state footprint that you are in now, or do you see maybe opportunities out there, or is there still more vertical integration to be done in that six-state? And then are you biased towards one state or of the six states based on DOT funding relative to the IIJA funds, etcetera?

Yes. Brian, good morning. That’s a good question. We get that a lot. And I would just say we are really happy to be in the six states we are in. And when you look at some of the heat maps that people have produced about where CPI is and where there are opportunities to the Southeast, there are a lot of opportunities in these six states. We really don’t favor one state over the other. There are certain markets within each state that are really good that we would like to be in. It’s probably a safe assumption that we are talking to people in those markets and get building relationships there. As far as other states, we have always said we look in adjacent states and talk to potential sellers there. And we are going to be in more than six states at some point. I can’t tell you when, but we really like to leverage the organization we have and continue to fill in the six states we are in now.

Okay. Great. And then just a follow-up on the organic growth question. I think historically, correct me if I am wrong, but you were kind of a high-single digit organic growth, and that was obviously complemented by the M&A strategy. But with what looks like close to 10% organic growth by the end of this year. I mean are we just seeing kind of a step-up in organic growth going forward because of the public funding environment?

Yes, Brian, I would – last year, our organic growth was over 24%. And while it’s hard to get exact, we said maybe half of that was pricing and half of that was just real organic growth. And this quarter, we had 17% organic growth. And again, we would say it’s probably roughly half pricing and half real organic growth. Our volumes are up over just volume of asphalt tons this quarter over last year was 27%. Equipment hours in our fleet were 20% higher this quarter than a year ago. So, our volumes are going up. And we are growing in real organic growth in addition to price. As Greg said, by the end of the year, we envision that 20% overall growth being roughly half and half organic to acquisitive.

Okay. Very helpful. Thank you.

Thank you.

Thank you. Mr. Black, there are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Okay. Thanks everyone for being on the call. We look forward to a busy second half and a busy work season and look forward to talking to you next time. Thank you.

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