Greetings, and welcome to the Construction Partners Second Quarter Fiscal 2024 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Rick Black, with Investor Relations. Thank you. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review second quarter results for fiscal 2024. 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, May 10, 2024. Please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening 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 considered forward-looking statements made pursuant to the safe harbor's provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that, by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to our earnings press release for our disclosure on forward-looking statements. These factors as well as other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to certain non-GAAP measures, including adjusted EBITDA, and there are reconciliations to the nearest GAAP measures that 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 I would like to turn the call over to Construction Partners' CEO, Jule Smith. Jule?

Thank you, Rick, and good morning, everyone. Joining me on the call today are Greg Hoffman, our Chief Financial Officer; and Ned Fleming, our Executive Chairman. . I want to begin by thanking all of our 4,400 employees across the CPI family of companies for their hard work, dedication to safety and outstanding operational performance in the second quarter. While this winter quarter is the slowest financially in our seasonal business, it's a crucial time of preparation for the busy work season in the third and fourth quarters. The CPI team did an outstanding job of training our work crews repairing our fleet of construction equipment and preparing our asphalt plants to run both day and night, which now in early May is happening throughout the Southeast as we have now entered our heavy work season. Strong operational performance in our second quarter led to growth in revenue, gross profit, adjusted EBITDA and adjusted EBITDA margin that were all up substantially compared to last year, and we remain on pace for another strong year of growth. As we look to the balance of fiscal 2024, project demand remains extremely high. supported by elevated federal and state infrastructure funding as well as a healthy commercial market in our states. All of these factors taken together give us confidence at our midyear to raise guidance for FY 2024. Our backlog of $1.79 billion is a reflection of the continued strong demand environment for both public and private work. Some of the significant increase in backlog in the second quarter was simply due to the timing of each state's DOT lettings as larger lettings commonly occur in the winter months in advance of the summer work season. One benefit our strong backlog continues to give us is the ability to bid patiently and…

Thank you, Jule, and good morning, everyone. I'll begin with a review of our key performance metrics for the fiscal second quarter compared to the fiscal second quarter in 2023. Revenue was $371.4 million up 14.3%. The increase included $25.1 million of revenue from acquisitions completed during and subsequent to the 3 months ended March 31, 2023. And an increase of approximately $21.4 million of revenue in our existing markets from contract work and sales of HMA and aggregates to third parties. The mix of total revenue growth for the quarter was approximately 6.6% organic revenue and approximately 7.7% from these recent acquisitions. Gross profit was $38.8 million or 10.4% of revenue compared to $26.3 million or 8.1% of revenue in Q2 2023. General and administrative expenses were $36.7 million, and as a percentage of revenue were flat compared to the same period last year. We remain on pace for G&A expenses to end the fiscal year at approximately 8% of revenue. Net loss for the quarter was $1.1 million, compared to a net loss of $5.5 million in the same quarter last year. Adjusted EBITDA was $29.5 million, an increase of 45%. Adjusted EBITDA margin for the quarter was 7.9%, compared to 6.3% in the second quarter last year. You can find a reconciliation of net income to adjusted EBITDA financial measures in today's earnings release. In addition, we grew project backlog to $1.79 billion at March 31, up from $1.62 billion at the end of last quarter. We now estimate that we have 80% to 85% of the next 12 months contract revenue booked in backlog, which is up from 70% to 75% at this time last year. As a reminder, historically, CPI's backlog has declined sequentially during our heavy spring and summer work season. Turning now to…

[Operator Instructions] Our first question comes from the line of Adam Thalhimer with Thompson, Davis & Company.

Great quarter. Can you give us a little more detail on the Sunbelt acquisition, possibly the revenue contribution, but also would be helpful is maybe the mix just between HMA and construction for them.

Well, I'll start with just telling you a little bit about Sunbelt then I'll let Greg give you the specifics on how much revenue we think we'll get. This is just a great private company. We've gotten to know these guys for a couple of years now. And so they really just have a great market north of Atlanta, in Auburn, right along I-85 and just -- a really great addition to be in North Georgia with them. They have a great young management team led by Jeremy Heidl, who's staying on as the President of Sunbelt. And -- so we're just excited. They really just benefit from the growth M&A out from Atlanta and moving up along that I-85 corridor. So we're really excited. They're going to contribute some to this year. I'm going to let Greg give you what he thanks for the specifics there, Greg.

Yes. So they're going to contribute approximately $20 million in revenue for the remainder of the year. And they're a typical bolt-on, Adam, conducting business, winning work, the same and similar to what we already are doing ourselves. So a good fit for us and a good real addition to that particular area of our market.

Great. And then just as I'm trying to think through the comp for next year, you guys probably had a little bit of a weather hit in the second quarter. I mean I know it's a solid beat but that was with the weather impact, I think.

Yes, Adam, this quarter, we really experienced 2 -- both extremes with weather. January was really tough. March was wet somewhat, but February was great. And we talk about weather evening out, and we saw that this quarter. We had just had a historically dry February, and we're able to work and be productive. So yes, probably all in all, when you add in, there might have been some weather impact this quarter. And -- but we saw weather really impacts us at fixed cost recovery at our plants and at our fleet. And so there was some of that. But what we really like to see and what we did see was that our guys, our crews throughout the Southeast in a lot of markets had great performance on projects. So we were able to really make some gains with them beating their budgets and productions on projects. And so that really helped offset the impact of the fixed cost recovery. And that's typical for CPI. As we've gotten into backlog that's -- as we've talked about now for almost a year, and we're -- it's really good to see that.

Our next question comes from the line of Tyler Brown with Raymond James.

So Jule, you noted the M&A pipeline looks good, both inside and outside your states. I thought the comments about outside your states was quite interesting. Would you be looking at more of a larger platform outside those core states? Just trying to understand what you're signaling there?

Yes. Tyler, I'll give you just a little bit of color with the current acquisition strategy. Now, I'd love for Ned to just weigh in with just some thoughts on overall growth strategy. We continue to have a lot of conversations with sellers, both inside our states and outside our states. And we say that, but it's really true. We just continue to build relationships. We're not in a hurry to necessarily go to another state if the opportunity presents itself to find a good platform company in a new state, that -- we're going to take that opportunity. But at the same time, there's a lot of just great white space, as you know, from your heat map in many of the states we're already in. So we're just as happy to -- we're looking for good profitable growth wherever it is. Ned, would you like to add just some color on that?

Sure, Jule. Thank you very much. Tyler, the plan all along has been to grow both our relative market share in the states we're in, but also to grow and expand geographically with geographic expansion, it opens up a lot more opportunities. So we're always looking to move down in through -- throughout the whole Sunbelt in here, areas where we can continue to build roads 12 months out of the year. So if I think about it, we are better suited today organizationally, financially, strategically to take advantage of this opportunity to kind of boil it down. We've got the people, the money and the plan to take advantage of this opportunity, and we want to continue to grow geographically as well as increase our relative market share. When we grow geographically, we have the first business in a new state that is -- has to be a platform that we can continue to do bolt-ons and add-ons. So when you ask that question, that is correct, we would be looking for a company that has a history of success as an understanding of growth, has the capacity to do bolt-ons. So we think that opportunity is throughout the Sunbelt. And we will continue to take advantage of the opportunities to grow geographically where we can with the right people.

Okay. Yes. No, that's extremely helpful. Greg, real quick. Correct me if I'm wrong, but was weather a really -- was weather really tough last Q3, I believe it was. And can you help us shape the expectations for the second half, maybe just from a simple revenue perspective? Would we expect the year-over-year growth to accelerate in Q3 and then step back down in Q4? I mean basically, would we expect both Q3 and Q4 to kind of be equal in terms of revenue roughly based on the guidance?

Yes. So Q3 and Q4 of last year were both really good month -- a really good quarter. So it's going to be an interesting comp compared to those 2 quarters. We're, again, as we always do, when we think of our business looking at the first half of the year and the second half of the year. And we have to, since we play an outside game, I think that we just have to accept the normal weather patterns, and that's how we think through it. So I guess then -- from what we think the -- Q3 and Q4 to play out is very similar to '23 as it relates to the step-up in revenue and EBITDA from Q3 to Q4.

Okay. Okay. That's helpful. And then my last one here. So Jule, it looks like you raised the midpoint of the margins by, say, 30 basis points. Curious just what you're seeing there, what's the key driver? Are you seeing some easing cost pressures maybe in labor are you having success bidding better given some of the analytical tools you're implementing? Just any color would be helpful there. And more specifically, where you are in that analytics journey. I know that was something you talked about at the Analyst Day.

Tyler, great question. There's a couple of different facets there. First, I think our annual EBITDA margin is going to benefit from just the first 2 quarters -- just being normal quarters, building post inflationary backlog, and we've seen that now. And so we move into the third and fourth quarter, we really see our business just operating as normal. We really had a great third and fourth quarter last year, and we don't see anything different ahead of us. We're continuing to add backlog at healthy margins. So -- and we're just passing through our models -- our pass-through model, and so we're seeing that. We are hard at work just trying to use technology in a lot of our different facets of our business, but certainly, analytics as to what -- how we bid and how we approach pricing is something we're hard at work on. So we did raise the midpoint. And like Greg said, we're expecting a good third and fourth quarter, and we're growing. So that's reflected in the updated guidance. We're in more markets, and we're experiencing real organic growth. So I think all that factors in.

Our next question comes from the line of Kathryn Thompson with Thompson Research Group.

Just going to see if you could clarify the balance of price versus volumes in the quarter? And then along with that, how that plays into your outlook for 2024?

Yes, Kathryn, as I just said, with Tyler, and I'll get Greg to give a little more specifics with it. We are growing. And we talk about 15% to 20% annual growth. And typically, it's split about evenly between acquisitive and organic. Some years organic or acquisitive could be a little higher. But typically, it's about roughly half and half. And so we are seeing real organic growth. Clearly, our model passes through prices. So as prices go up in the construction industry, whether it be from materials, aggregates, we just reflect that in our price. But -- so I would say of our organic growth, part of it is just price increases and part of it is real organic growth. I'll let Greg give some just some numbers to help show you what we're seeing there. Greg?

Yes. So if we're thinking about the guidance as it relates to the midpoint, I think I addressed a little bit of this a minute ago in terms of the acquisitive side, [ like if ] I could give you that. Just -- we said last quarter that were $120 million, $125 million through that particular quarter, added another 20%. That's going to be in the neighborhood of 9.3%, 9.6% acquisitive growth. And then Jule talking about organic growth, that's going to be in the neighborhood of 7.5% to 7.8%. So yes, as we're getting the price increases that we're seeing throughout our space, we're passing those along. And at the same time, we're raising our margins.

Okay. In your prepared commentary, you said that you have 80% to 85% backlog booked versus 70% to 75% last year. Maybe -- how much of that is driven by some of the larger private work that you outlined versus your traditional public? And what is really driving this delta overall in that percentage balance?

Kathryn, we've always said that our backlog -- we don't want to be at 100% of the next 12 months revenue on backlog. We want to be able to take care of customers that have book and burn work. But our backlog has trended up, which we see as a good thing. It gives us a lot of visibility allows us to bid patiently. And so -- but as far as what's driving it, we're still adding to backlog projects that are very typical for us. Working with the same customers doing a lot of recurring work in our markets. We're not seeing any real big shift in our project sizes. Every now and then we add a larger project, but that's typical for us. But we really still see we're adding projects on average between $3 million and $5 million and a duration of 6 to 9 months. I do think because of the strong demand environment that the customers that our industry and companies like us work for are more patient. And so we're able to bid and have more flexible schedules to do it. That gives us comfort to add work to the backlog. So that's really why it's a little higher percentage than normal. But we're going to continue to be patient and add work that's profitable. We're not trying -- we're not chasing backlog. We're looking at our crews and equipment. As I said, we're growing in our capacity to do work, which is just a normal part of our organization growing. But we would rather get the right projects and just get -- just add backlog [ to add ] it.

Perfect. And then just one clarification. Just given the dynamic nature of cost and pricing in that backlog, do you have -- I mean, what -- how do you approach pricing and managing inflation?

Yes. So we learned a couple of years ago when inflation hit that -- even though our model had always been a pass-through model. When inflation hit, we simply had to speed up and increase the input updates. And so all of our 70-plus markets and area managers and their estimators adapted very well. But we certainly learned a valuable lesson. I'll give Ned credit. He -- there's one thing he reminds me all the time. It's inflation is not going away, especially in our industry with the demand out there. And so that keeps us on our toes to just -- we're still -- even though it's moderated from what it was certainly not out of hand, but we make sure that we're passing through the costs. And -- so that's reflected in our backlog. The bids that we have, the projects we have on backlog now still have the same escalators, assumptions of labor and material increases that we started adding in the summer of 2021 when the inflation hits. So tough times make good habits. And I think certainly, we learned from that and our pass-through model is more effective now.

Our next question comes from the line of Michael Feniger with Bank of America.

I'm just curious, I know it was a really strong Q3, Q4. I was kind of just looking at the guidance. Is there -- are we kind of implying no margin expansion in the second half? Is that because of mix, a little bit more M&A? Is it anything with diesel or liquid asphalt. Just curious, you're seeing strong growth in the back half. Just curious on that flow through to EBITDA and the margins there?

Yes, Michael, good question. And we thought about that and looked at it because, as you know, the last 4 quarters, at least, we've seen really good gross margin expansion. And so -- and frankly, we're still seeing that. One of the things that we see in the third and fourth quarter this year that was different than last year, is, we've been very active on the M&A front. And we've done 5 acquisitions and there can be more between now and the end of the year. And so -- but certainly, when you do acquisitions, as we've always said, you're acquiring backlog. And you're acquiring backlog that you didn't bid that you're inheriting. And so while we certainly don't see any problems in the backlog that we've inherited, we know that we're going to have to build that and get our hands around it. And so we're just trying to account for that in our guidance is that we're going to be working through that. And just as we've always said, these acquisitions, we certainly come in and put in the technology and the bidding mechanisms. And so those margins quickly get to what CPI historically has. But I think our guidance is just a reflection, we've been busy on the M&A front.

That makes sense. And it seems like you guys reiterated the CapEx. But your cash from ops -- operations is up really strongly in the first half. I think it's up over 70% year-over-year in the first half. you're really converting a lot of that EBITDA to cash flow. Just -- is that sustainable? What are you kind of thinking in the back half there? With the raise in the EBITDA, is there a similar raise we should be thinking on the cash flow side? Just any thoughts there would be helpful.

Yes. I think there's a relationship, sure. We've talked about 75% to 80% conversion of EBITDA to cash flow from operations, still expect that. So the math there shows another 95 -- potentially $95 million in the back half. The -- Jule was talking a minute ago about kind of year-over-year and the guidance. So last -- the fourth quarter was extremely strong. And because of that strength, we certainly carried a lot of cash collection into the first quarter of '24 from that really strong quarter. So I think that's what set the year off really well. But yes, I think we're still expecting that traditional conversion that I just discussed.

Great. And I'm just -- I'd like to squeeze one more in there. Just -- there is a concern out there that inflation's a little bit higher for longer -- rates could be higher for longer. I guess, 6, 12 months ago, I think we'd be surprised to see the private market holding up as they have, and that could just be a phenomenon to Southeast. I'm just curious how you guys are thinking into '25, if we don't get relief from the Fed on rates, what you guys are hearing on the ground on the private side? Will the private side start to slow? Or are there certain structural dynamics that you feel like are still holding up that part of the market and that business activity for you?

Yes, Michael, that's really the question that -- for over a year now, we've been watching. As we said, we watch the private markets and the commercial markets closely. And this year, we could see it actually be 1% higher than it was last year. And I think that reflects that our markets continue to have a lot of commercial activity or what's driving that, I think as we've said, we're -- our states are attracting a lot of residents migrating there, but it's also attracting a lot of businesses, whether that's businesses moving for the tax-friendly environment or reshoring. We're building a lot of data centers, corporate campuses, manufacturing facilities. And so that continues to just create a lot of commercial opportunities. We certainly haven't seen any slowdown really taken hold yet. But as we've always said, our resources are flexible. And so to the extent the commercial market were to slow down in '25, we would simply just might move over and do more public work because with the demand on the public side, we can't get to all the work that's out there now anyway. And so the split has held constant for the last couple of years. If anything, the private side is a little stronger. But should something slow down on that side in a year or 2, we would simply just do more public work.

Our next question comes from the line of Stanley Elliott with Stifel.

Could you guys comment on, I guess, earlier last month, you guys had the share repurchase announcement out. Are you all looking to be active in the market? Is it more to just offset dilution. Just trying to think about how you're thinking about that? And then weighing that repurchase piece versus what sounds like a pretty healthy M&A pipeline.

Yes. Stanley, I think Ned should answer that. And so I'm going to let him answer that and then I'll give a little more color as to sort of the strategic reasons for that. Ned?

Yes, Stanley, we are really trying to circumvent the dilution that's coming from the management stock incentive plan. And we think the management stock incentive plan is important for us to motivate, retain talent throughout the organization. And we really would like to utilize this simply to make sure that in that process, we're not diluting our current shareholders beyond what we think is normal and ordinary course. So for us, it's really a program designed simply to allow us to continue without diluting the shareholders to continue to motivate management and everybody in the organization. We have pushed the stock plan pretty far down in the organization. And I think Jule will tell you, it is a very motivating tool that we have, and we don't want that to dilute the shareholders, we want that to enhance the shareholder value.

Yes. So Stanley, I would just add to that, just as Ned said, for us to deliver on this ROAD-Map 2027 and the growth targets we have, both on the top line and bottom line, our organization is the key to that. It's not the equipment. It's not the asphalt plant. It's the people. And we've talked about now for almost 3 years that CPIC, it is a competitive advantage, our ability to attract and retain the workforce. And so these stock awards are a huge part of that and it's been extremely effective since we've started but we want to do it in a way that doesn't hurt our existing shareholders.

Great. And then in terms of the margin piece, it's been very strong. And you had some comments earlier about your performance and beating some of the budget. I mean, have you all changed -- I know you have more pass-throughs going through the model right now. But has there been any other change in how you're approaching the bidding environment? Just looking at how nice the margins have been really kind of over the past 12 months.

Yes, Stanley, nothing's changed. Our model is a pass-through model. We estimate jobs today just like we did 5 and 10 years ago. we simply have adjusted what we assume for inflation and escalators and contingencies. So -- but we still have to be competitive on bid day. And so we put those what we think could happen in the bids. The fact that we're able to add work at healthy margins tells us our competitors are doing the same thing. And so that's really just running our model the way it's intended to run. And when we do that, and we give our crews and our different parts of the organization, the folks out in the field when we give them a fair shot with a budget that covers their cost that's when we see that as they beat their budgets throughout the Southeast -- we build a lot of projects. But when they do that, when we give them a fair budget, historically, we've seen at CPI that more projects had not finished ahead of budget. And that's what creates these gains.

And Jule, do you think that -- does this help you guys track towards the '27 targets maybe a bit ahead of the 50 to 75 basis point target you guys outlined at the Analyst Day? Or is this just kind of more timing?

Well, I would say we're on track, Stanley. Certainly, our guidance. We've got a busy second half of the year to do. We feel good about our updated guidance and that we're right on track. We'll see how the second half of the year plays out.

Congrats and best of luck.

Our next question comes from the line of Andy Wittmann with Baird.

So I guess, Greg, I wanted to start with you. And this question has been kind of touched on, but I'm going to ask it in a little bit different way. Can you just talk about the guidance increase to the revenue line? And just help us understand how much of that increase was just from really good year-to-date performance or its quarterly performance versus the contribution from M&A? I know you always kind of factor in some amount of M&A. I just don't know if you're running ahead of plan. If this seems like a larger deal that you did in the quarter is a source of that rate. I'm just trying to understand really what drove that.

Yes. So first of all, Andy, I just know that there is no M&A in the guidance for the third and fourth quarter. That hasn't closed yet, okay? I think that's a little bit interesting to think through because when we had the Analyst Day, in order to bridge the ROAD-Map 2024, we included some M&A, which we usually never do when we do initial guidance in that number. So we have now achieved those targets by converting those candidates to acquire. So that got us to our initial M&A -- I'm sorry, our initial guidance, center of our guidance, okay? So now we've added one additional acquisition candidate of $20 million. So that is baked in. And that is what I was talking about a minute ago about the $145 million, $150 million of acquisitive revenue and it's about $120 million of organic revenue.

Okay. All right. And then I just -- was wondering, so you called out here explicitly the amount of revenue from third-party sales in the quarter. And -- first of all, I appreciate that. That's helpful. And I'm just wondering if you're giving that this quarter because it was unusually high or low? Or if this is just new disclosure that you plan to give on a regular basis so that we can understand that business's mix on your margins? And if it is that, could you just tell us what it was last year so we could jot that down and compare it on a year-over-year basis?

Yes. Andy, I'm not sure that -- what number you got, but we typically don't necessarily call out any third-party sales, but I will give you the color. We continue to have good third-party sales. It's been normal. There's nothing abnormal, nothing we meant to call out new. But it continues to be part of our business. It's not the major part of our business, but on the aggregate and asphalt side, we continue to have good FOB sales. And I think the FOB asphalt sales, as you know, is mainly the commercial [ pavement ] contractors. And so for us, the fact that those continue to be healthy as further evidence that the commercial markets in our -- and throughout the Southeast where we are continue to be healthy.

Yes. Andy, I think last quarter, we did talk about -- a little bit about FOB sales, third-party sales, if you will. And we did mention that it's annually and typically 10% to 12% of total.

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

Great quarter as well, and just a couple here. Jule, just with this really strong period of lettings and ultimately bookings during fiscal 2Q. Any sense that there's sort of a pull forward from schedules or the second half of the year? What -- just is active from a bid perspective?

Yes, Brent, good question. And that's why I said that in the prepared remarks. The first thing I'd say is we're pleased with the work we added in this quarter on the backlog. And we're going to continue to add work every quarter. We're going to add work in the third quarter. We're going to add work in the fourth quarter to backlog. But our work doesn't burn off at an even rate. we do a lot of work in the third and fourth quarter. That's why CPI historically has had sequentially backlog go down in the busy summer work season. The fact that it hasn't done that in a few years is actually atypical. And so we just -- Greg and I feel like we need to keep reminding folks, if this -- if our backlog was to reduce sequentially in the summer. It's not going to concern us at all, but we want to keep reminding folks of that. But to your question, you're right. Our customers don't let work in an even pace throughout the year also. And each state does it a little differently, but several of our states have heavy lettings in the winter to prepare -- for the contractors to be able to prepare for the work season and that's what they've historically done. And we were able to pick up some good work in those heavy lettings this quarter.

Yes. Okay. Understood. And then just a follow-up. Jule, you sort of mentioned something along the lines of kind of keeping an eye on inflation and staying in front of it. which I think you're doing. When you look at the industry, the competitive environment, the individual bids, however you sort of evaluate it, Is the competitive environment in your opinion, adjusted effectively for that? Do you see irrational things happening out there still with competition? Or is the environment just so good in your area of the country, everybody is kind of getting fatter.

Yes. Yes. Brent, I -- we do see a rational bid environment. I think the fact that we're able to add work at healthy bid margins and be patient at the bid table tells us that our competitors, we presume, have healthy backlogs also. And so I certainly think with the demand environment, bidders in our industry are also being patient and rational bidders. And so yes, I would say you're right. It's a good bid environment, a good demand environment now.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for any closing comments.

I'd like to thank everyone for joining us today, and we look forward to talking again next quarter.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.