Construction Partners, Inc. Q3 FY2021 Earnings Call

Greetings, and welcome to the Construction Partners, Inc. Third Quarter Earnings Conference Call. As a reminder, this conference is being recorded.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review third quarter fiscal year 2021 results. 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, August 6, 2021. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay. 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'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 the earnings press release that was issued today 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 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'll begin today by talking about the third quarter, followed by a commentary about our recently announced acquisitions in Alabama and North Carolina. We'll then have Alan walk us through the financial results before Ned provides some closing comments prior to us opening up the call for your questions. I'm pleased with our performance in the quarter, which generated top line revenue growth of more than 20% year-over-year. Across our footprint in the Southeast, we continue to win new project work and grew backlog to a record high $823 million. This growth of backlog, combined with a bright outlook for infrastructure funding over multiple years at both the state and federal levels, has compelled us to invest this year in our people and technology to prepare for and support future growth. While this investment for future growth creates profitability headwinds in the short term, we see these investments as vital for the organization being prepared and ready. Customer demand, project funding and bidding activity remained strong throughout the quarter. However, similar to many construction and infrastructure businesses, we experienced project delays due to supply chain and labor constraints affecting CPI operations as well as our subcontractors and vendors. While CPI has a stable and experienced local workforce in our markets and strong purchasing power across our company, we are not immune to these current industry constraints. We believe supply chain disruptions will subside in the coming quarters as we move through fiscal 2022. Today, we have revised our fiscal 2021 financial outlook to reflect these transitory issues. However, our long-term growth strategy remains firmly intact. Let me say, we are very bullish on fiscal 2022 and beyond. Turning now to acquisitions. We announced 2 significant transactions earlier this week, expanding our geographic footprint in the Southeast and further enhancing CPI's vertical integration in Alabama and North Carolina. Not only did we acquire critical assets in growing markets, we also added significant talent to our teams. These acquisitions totaled approximately $113 million and added 4 hot-mix asphalt plants and 5 aggregate facilities. In Alabama, we acquired Good Hope Contracting and its related entities, all headquartered in Cullman, Alabama. In addition to the 4 hot-mix asphalt plants and 4 aggregate facilities, the transaction also included a diverse fleet of trucks and construction equipment. These assets will help to support and grow our operations in Central and Northern Alabama under the leadership of Senior Vice President, John Harper, the President of our Alabama Platform Company, Wiregrass Construction. The Good Hope acquisition substantially strengthens our capabilities, including project acquisition and execution, aggregate sourcing and transportation logistics with these added resources. We are excited to welcome more than 180 talented, hard-working employees to the CPI team. In North Carolina, we acquired Daurity Springs Quarry, a crush stone and aggregates facility located near Goldston, North Carolina. This transaction enhances our vertical integration strategy of construction materials to support our asphalt manufacturing operations. This aggregate facility is uniquely and strategically located in the rapidly growing Sandhills region of North Carolina. And we expect to use the aggregates mined from this facility to supply multiple asphalt plants we acquired last fall. The facility's proximity to our current operations enhances our project bidding opportunities, and we believe this will contribute to future growth in these markets. In the past 9 months, we have acquired a total of 17 hot-mix asphalt plants and added nearly 700 employees. Looking forward, the acquisition opportunities and the increased pipeline activity, especially in new markets, is considerable. This is the reason we've revised our capital structure, providing more financial flexibility. We see the opportunities, we have the capital structure, and we have been investing in our organization for the future growth ahead. Our senior leadership team continues actively working to identify and engage companies that may fit well into our future growth plans as well as prepare the organization for growth in advance. As a consolidator in a fragmented industry, we continue to gain momentum through acquiring quality companies, assets and people to broaden CPI's relative market share and depth of service. Turning now to what we are seeing at the federal funding level in our industry. Like most of you, we are following the process closely in Washington, D.C., and we remain optimistic about the prospect for a significant infrastructure bill, including bipartisan support for infrastructure legislation. We are confident that our nation's infrastructure investing will continue to be a primary focus for our country, both as an economic driver and as a critical component for public safety. Regardless of the pathway to increase federal funding, all proposals provide for sizable increases in federal surface transportation funding over the FAST Act. In addition, we expect that the FAST Act reauthorization will be passed before its expiration in September. As a reminder, this surface transportation reauthorization, along with the bipartisan infrastructure bill proposal, totals to a greater than 50% increase over the current funding for the next 5 years. Such legislation would immediately stimulate economic growth and job creation while also driving meaningful project demand in late 2022 and beyond. Lastly, as we stated before, the most critical component of our success is our people. We are deeply committed to our more than 2,900 employees that are the key driver of our organization, and they are crucial for meeting our near- and long-term goals. I'd like to personally thank our entire CPI team for their hard work, dedication and commitment to maintaining safe work sites for themselves and teammates. As we head toward our fiscal 2022 that begins in October, it's an exciting time for CPI. We currently expect in the next 12 months for a potential upside of 20% overall year-over-year increase in infrastructure spending by our states, substantial federal funding increases for our industry and entry into new markets. I'd like now to turn the call over to Alan to discuss our financial results.

Thank you, Jule, and good morning, everyone. Before I highlight our key performance metrics in the third quarter of fiscal 2021, I want to comment on our strategic acquisitions completed earlier this week. CPI acquired 2 businesses, both of which contribute to expanding our customer footprint and vertical integration efforts. The combined acquisition price was approximately $113 million, which was funded from our recently completed term loan and revolver credit facility. This new facility, after completion of these acquisitions, provides the company with $214 million of remaining capital for future acquisition opportunities. Turning to quarter 3 results compared to the third quarter of fiscal 2020. Revenue was $261.7 million, up 20.6%. Acquisitions completed subsequent to June 30, 2020, contributed $31.4 million of revenue, and we had an increase of $13.3 million of revenue in our existing markets. Gross profit was $36.6 million compared to $36.9 million in the third quarter last year. As we have stated before, acquisitions initially put pressure on operating margins. While the 4 acquisitions completed in the first fiscal quarter of this year in the North Carolina market showed significant improvement in this quarter compared to the second quarter, their gross profit contribution for the quarter was only 1% of revenue. General and administrative expenses were $23.2 million compared to $16.9 million in the same quarter last year. The increase in general and administrative expenses was primarily due to $3 million attributable to increased personnel and related compensation initiatives, $1 million attributable to acquisition-related costs subsequent to June 30, 2020, and $1.6 million attributable to information technology and increased professional fees. Net income was $9.3 million for the third fiscal quarter of 2021 compared to net income of $15.7 million in the third fiscal quarter of last year. Adjusted EBITDA for the third fiscal quarter of 2021 was $29 million compared to $32 million for the third fiscal quarter of last 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. Increases in liquid asphalt and diesel fuel prices during most of this quarter as well as lower-than-expected revenue impacted our overall gross profit in our existing markets. Our gross profit margin on jobs in our existing markets continued to exceed our prior year margins. Turning now to the balance sheet. At June 30, 2021, we had $134.5 million of cash and $214 million of future availability under our revolving credit facility after reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 1.86. This liquidity provides flexibility and capital capacity for potential near-term acquisitions, allowing us to respond to growth opportunities when they arise. Cash provided by operating activities was $9.3 million for the 9 months ended June 30, 2021, compared to $51.4 million for the same period last year. Capital expenditures through the first 9 months of 2021 were $39.6 million. We still anticipate total capital expenditures for the year of $47 million to $50 million. We are reporting a record project backlog at June 30, 2021, of $823 million compared to $650 million at June 30 of last year and $773.3 million at March 31, 2021. Approximately 35% of the backlog will be completed in the last 3 months of our fiscal year. And as Jule mentioned, we're revising our fiscal year 2021 outlook for the year with regard to revenue, adjusted net income and adjusted EBITDA. We now expect revenue in the range of $940 million to $960 million, adjusted net income in the range of $36.9 million to $38.4 million and adjusted EBITDA in the range of $105 million to $108.3 million. In summary, we are pleased with our third quarter results, the recent acquisitions and our project backlog. I'll now turn the call over to our Executive Chairman, Ned Fleming.

Thank you, Alan. Before we open the call to your questions, I want to reiterate that the company is performing well. We continue to grow organically, coupled with an increased pace of acquisitive growth, both organic growth and recent acquisitions further enhance vertical integration across the organization. The result is relative market share increasing in our existing footprint, while the company is expanding geographically. The leadership team in conjunction with our Board continues to prudently invest in the right people, processes and technology to further strengthen and support a robust yet disciplined growth plan. We are very pleased with the acquisitions announced earlier this week, for which the future benefits will continue to be realized for many years. We're gaining scale and depth of service offerings, along with a long-term focus of capturing more margin from rock to road. These acquisitions bring new service offerings and the addition of 5 aggregate facilities, all of which enhance our vertical integration strategy. As a significant consolidator in a highly fragmented industry, we are maintaining momentum through important strategic acquisitions that provide us with quality companies and great people, just as we have done for the past 20 years through many different economic cycles. Despite short-term headwinds, there is a very positive long-term momentum in the industry and throughout the company. We expect to carry on with a successful execution of our long-term strategy of disciplined profitable growth to enhance shareholder value in our company.

Your first question comes from Andy Wittmann with Baird.

I have a series of questions related to the changes in the inflationary environment. My first question is about what you are currently doing in your model to address inflationary factors, especially in relation to the labor markets. Could you explain how the labor market is impacting your operations? Additionally, how are your competitors responding to these factors? Are they adjusting their prices, so you're all competing on a level playing field? Please start with that, and I will have more follow-up questions after. Jule, could you take this one?

Thank you. Inflation is a significant factor that the entire economy is facing. At CPI, we view inflation primarily as a cost that we pass through. As wages rise, we immediately incorporate those increases into our bids. This is an advantage for us given our project duration and size. We continue our operations as usual, applying the revised input costs to our bids. Our competitors are generally responding in the same way. However, larger projects that require fixed pricing and have longer durations tend to face more challenges due to inflation. Fortunately, this isn’t the typical nature of our projects at CPI, and as we’ve mentioned, we aim to pass inflation costs along effectively.

Okay. To elaborate further, it's clear that the quarter experienced cost pressures from the factors you mentioned. How much additional exposure exists in the backlog from contracts priced before the current cost inflation? Can you quantify that backlog amount or its duration? Will this continue to impact you in the fourth quarter? It seemed from the press release that this will affect you into '22. Could you provide more specific details on this? It's evident that it's having an effect, and I'm trying to understand when the contracts will align with the current dynamics you're facing.

In my prepared remarks, I spoke about our challenges with supply chain issues and labor shortages. It's not so much about rising costs. For instance, even though we have a steady number of trucks, the labor market is extremely tight. In one area, we typically operate 20 to 30 dump trucks, which are usually in constant use this time of year. This year, we find that perhaps only 2 of those trucks are operational at a time due to difficulties in finding drivers. Additionally, we had a site work job where our subcontracted utility crew had to wait a week for PVC pipe, something that wouldn't have been an issue in the past. Another example involves our milling subcontractor, who normally provides us with 3 crews throughout the season but has recently informed us that they only have 2 available, requiring us to decide which project can afford to wait. This situation is akin to running with ankle weights; we have record backlog and plenty of capacity, yet these constraints hinder our speed. We believe these issues will begin to normalize in the next couple of months, as we’re already seeing improvements in 3 of our 4 states where federal unemployment benefits have ended. Nevertheless, it does create a minor obstacle while we are trying to operate. Overall, the situation is less about increased costs and more about our ability to drive revenue amidst the supply chain challenges that many companies are facing, including our vendors and suppliers.

That's really helpful context. I have one final question before I turn the floor over. I was curious about the 17 asphalt plant acquisitions you mentioned in recent quarters. Do the legacy CPI business operations handle labor relations and related challenges differently compared to the recently acquired companies? Or perhaps you don't have full visibility on the staff differences? Are there notable distinctions between the recently acquired companies and the legacy business regarding the nature and management of these challenges?

Yes, when we acquire a company, our ability to provide benefits and opportunities for growth and advancement is a positive factor. We've noticed this with our past acquisitions. As a result, CPI's expansion into new markets has contributed to maintaining our labor force. However, in these new markets, we are facing similar challenges as in our traditional markets. Throughout the Southeast, the situation is generally consistent, with challenges present in various forms but not stemming from any single dramatic issue or market shutdown. It's more of a general drag that we're encountering. We believe that the markets will eventually stabilize, but currently, like many companies, we are navigating through these short-term difficulties.

Your next question, Michael Feniger with Bank of America.

You have a few weeks left to finish the year. When we look at the low end of your range right now, we're still talking about over 35% revenue growth year-over-year, and I think 20% growth on the EBITDA line. In the last two quarters, your sales have been up double digits while EBITDA has been down. So please help us understand your confidence level, even with the guidance in the fourth quarter, that we're going to see that type of revenue growth acceleration along with some leverage to the bottom line. Is there anything in July that you can share that gives you confidence in your ability to achieve that?

Yes, that's a great question, Michael. I'll take that one while Jule takes a moment. What gives us confidence is the noteworthy improvement in the factors that contributed to margin compression in the previous quarter and into this one. When we acquired our North Carolina assets, they had minimal backlog. Most of those acquisitions were in a market focused significantly on public and DOT work, and we all recognize the challenges the North Carolina DOT faced last year and in the first quarter of this year. Therefore, the backlog we initially inherited was below typical levels for both acquisitions and the market. There has been a significant turnaround between the second and third quarters in the performance of those acquisitions. We expect this positive momentum to carry into the fourth quarter. The substantial drag we felt in the second quarter has diminished considerably—we're seeing our gross profit for that revenue at around 1% this quarter, but it's quickly bouncing back to more standard levels. Regarding our existing operations, the organic growth we saw in the third quarter was over 6% year-over-year, with margins in line with our original projections, reflecting about 1% decline from last year due to cost factors like liquid asphalt and diesel fuel. We're seeing the acquisitions align well again. Typically, it takes about 12 to 18 months to fully integrate them, but the first nine months of this year were less than expected. We are getting them up to where they should be since the acquisition. For the fourth quarter, just over half of the growth you mentioned, the 35%, will stem from those acquisitions, alongside a bit from the two we announced earlier this week. The remainder, nearly half, is from organic growth. Although we may not reach the full 11% to 12% growth we anticipated at the start of the year, we are moving closer to 8% to 9% organic growth year-over-year. This is what is instilling confidence in us for the fourth quarter.

Okay. Based on some earlier comments about transitory issues, it seems they may persist for the next few quarters. Your stock is down 9% today because investors are concerned that these challenges will impact 2022. While everyone acknowledges that your geographic mix is ideal and that you are well positioned for infrastructure, the question remains: if we look ahead to 2022 and you achieve top-line growth of 20% to 25%, what can investors expect for bottom-line growth? Do you anticipate being able to expand margins in 2022? Providing clarity on this would help investors currently understand how much of the situation is transitory and how much will affect the first half of 2022.

Our expectation is that much of the margin pressure this year has stemmed from acquisitions, and we anticipate those acquisitions will return to a more typical state by 2022. This situation is unrelated to labor issues. Our backlog has increased, and the margins on our backlog have improved compared to previous levels. We have successfully completed many low-margin projects, and we've raised our volume since the drag has primarily come from different markets, including those we acquired. As we added 13 asphalt plants, we faced fixed costs that we couldn't cover through jobs in the second quarter and to a lesser extent in the third quarter. However, I can say that our job performance in our existing markets, prior to acquisitions, has shown an increase in profit margins compared to last year. Once we address some of the acquired backlog and the early backlog we needed to book to maintain operations, that will not continue into 2022.

Is there any internal perspective on potentially slowing down the M&A strategy given the recent acquisitions? Are you considering pausing for a while to better assimilate these acquisitions and prepare for the infrastructure package? I'm interested in your thoughts, especially since you've made several acquisitions and are currently managing them.

Yes, Michael, regarding the North Carolina acquisitions, we took a long-term approach. These markets are strong. However, we recognize that with acquisitions, there are always challenges to address. Each acquisition is unique. We anticipated that these would come with minimal backlog, as Alan mentioned. The North Carolina team has done an excellent job of integrating them, contributing to our record backlog. We are seeing good margins in these markets. We understand that it takes time to fully manage acquisitions. With the federal funding bill, we are investing in our organization to prepare for future growth and to continue the integration of these acquisitions. There is significant opportunity ahead, and while we want to grow carefully, we are committed to investing in our organization, our workforce, and our technology to effectively manage future growth.

Michael, I want to emphasize that we have a strong and proven track record of successfully integrating multiple acquisitions. The challenges we faced in North Carolina were unrelated to the North Carolina DOT. Therefore, we have no concerns about integrating future acquisitions. As Jule mentioned, the team in North Carolina has done an exceptional job managing integration amid conditions that were unrelated to the integration and stemmed from the abnormal market conditions at the time of acquisition.

Understood. Jule, I have one last question before I pass it on. With the acquisitions completed to date, Alan, what is the incremental number that will be included in 2022? I’m not asking for your guidance for 2022, but based on the acquisitions made this year, how much will that contribute to next year?

Well, the 4 that were made in North Carolina, we will have 9 months' worth of revenue in 2021. So those incrementally are probably I mean, though the remaining portion of their first year and the new acquisitions, we're probably talking somewhere between $90 million and $100 million additional revenue all in. Because most of those 4 acquisitions, they would have had revenue for 10 months this year.

And your next question, Josh Wilson with Raymond James.

Just want to clarify a little more, just what's the moving pieces are on the margins? So presumably, you would have seen and known a lot of the margin headwinds from the North Carolina acquisition. So can you just give us a little more color on to what extent the change in guidance was due to any differences versus expectations in the acquisitions versus the broader market headwinds that you talked about on the labor side?

Yes, Josh, I take responsibility for that. When we make acquisitions, we create projections and models based on their history and any potential synergies we identify. Due to the timing of these acquisitions, we incorporated them into our 2021 budget based on those models, which assumed normal conditions. I failed to recognize that we were not making those four acquisitions during normal times. As a result, the margin we experienced was affected. While we were aware of the backlog and had some optimism that the margins in North Carolina would improve more quickly than they did, the lack of work volume also impacted the margins. Ultimately, it was a forecasting issue for the first year rather than being based on the actual conditions in the market. Our existing operations, excluding those acquisitions, have performed very close to our expectations.

And Josh, this is Jule. I just would say a large part of our revised guidance is simply dealing with the transitory issues I talked about at the beginning, which is headwind. And we largely see that working its way through in the next few months. But that's the main part of it. I would just say, on acquisitions, some of our best markets today in CPI were acquisitions where we had to work through issues in the first 12 months. So we've done this for a long time and some of our best performing markets right now are no different than what we've had to deal with in North Carolina in the last 9 months.

And regarding the growth in the backlog, can you give us a sense of how much of that was due to the North Carolina acquisitions? And how much was in the legacy business?

The North Carolina acquisitions have been part of our backlog since we obtained them, so any growth this quarter won't significantly impact the results. As Jule mentioned earlier, we've started adding to the backlog for those acquisitions, similar to our existing markets. Typically, we aim for about nine months of backlog. If you compare the revenue from last year to this year, that would likely fall in the $50 million to $75 million backlog range. In comparison to last quarter, that backlog was already accounted for.

And last one for me. Peers have called out margin headwinds from asphalt and diesel. Can you give us a sense as to what commodity costs and timing had on yours?

Yes. If you look at our original guidance for this year, we expected the cost increases in asphalt and diesel, and those expectations have largely matched what we experienced. Compared to last year, we had a tailwind from decreasing costs, while this year we are facing a headwind due to these rising costs. However, the impact has not deviated significantly from our forecasts. From a margin perspective, the effect this year is likely between $1 million and $1.5 million compared to last year, but it aligns closely with our expectations.

The next question, Adam Thalhimer with Thompson Davis.

On the Good Hope acquisition, can you characterize that for us from the standpoint of, does it feel like what you did in North Carolina? Or does it feel like they're coming in with a healthier backlog and better momentum?

Yes, Adam. We are enthusiastic about the Good Hope acquisition. It’s something we have been considering for quite a while, and it’s an excellent company. Looking at the numbers, it aligns almost perfectly with our current operations between Birmingham and Huntsville, and we are very excited about it. It provides us with four new markets for hot-mix asphalt and the capacity to operate in those regions, along with four aggregate facilities that support that work. They have a strong backlog. Unlike the situations we faced in North Carolina in 2019 and 2020, there are no unusual issues here. Overall, it feels like a standard acquisition. It’s a significant acquisition, the largest in CPI’s history, and we are eager about it. We are integrating them and moving ahead, and we are already securing work in those areas with the new assets.

All right, Jule. I appreciate your comment about ankle weights. As you were discussing that, I was wondering if the industry can navigate this situation without experiencing a decline in demand.

I see that there are currently 7 million fewer workers than before the pandemic, which significantly affects the labor markets. This impacts industries like restaurants, services, and construction. However, I believe things will normalize as we return to normalcy, and we're already observing that. I don't think this will affect demand at all. There are many bidding opportunities available, especially in the Southeast where economies are expanding. As for funding, I indicated last quarter that states will experience a 20% year-over-year increase in project lettings due to strong budgets and COVID relief funds. We're witnessing this in the current lettings we're bidding on. Additionally, discussions in Washington about reauthorizing the surface transportation bill indicate potential for a positive impact. Even without passing the bipartisan infrastructure bill, just the surface transportation bill will provide stability for our industry over the next five years. Thus, while demand remains steady, it may influence our ability to generate revenue and return to normalcy.

The next question, Andy Wittmann, Baird.

It would be good to hear a little bit more about some of the investments, Jule, that you're making. You talked about it at the top of the script. Your company has obviously grown a lot, and you're putting some resources behind it. What kind of resources? Do they show up in SG&A or in the project level? And maybe for you, Alan, what's a good new run rate for SG&A, recognizing that there have been some deal costs and other things in SG&A historically? So maybe you can just help us with our models on that front?

Andy, I would say, as we look at the healthy Southeastern economies and increased infrastructure spending, but also really just the chance to enter new markets in adjacent states, it is prudent for us to invest in our people and technology right now. It would be negligent for us not to get ready for the growth that's coming. So we are investing in our staff, in our infrastructure technology and our ability to manage a higher-level workforce, a bigger workforce. We're in the middle right now of investing in an entire new ERP system. So those type of things, that's planting now for the harvest to come. And it is an investment, but we really don't look at this quarter-to-quarter. We're managing for the long term, and we see that now is the time to get ready for that. And so it does show up in a higher SG&A cost right now, but that's the prudent thing to do.

Yes, Andy, a lot of the cost and there's deal cost, if you will, in this third quarter that if we don't make deals and due diligence on acquisitions would not be in future quarters. But as you've heard Jule say, we're not putting the brakes on that. So those will be in there. As far as the fourth quarter of this year, I think the third quarter run rate is plenty adequate to model out for the fourth quarter. There will be a little bit of increase there because of the 2 acquisitions that have been made since then, they will have some, but it won't be significant. It won't be a significant change in the fourth quarter. They will be in there pretty much for 2 out of those 3 months. So going into the future, we will continue as we have opportunities to make acquisitions to do those, and that will obviously impact the G&A. But a lot of the kind of surge in it, if you will, has happened at the same percentage.

Yes. Okay. And then maybe just one final question here. Just on the cash flow, CFO, so far this year. I mean last year was actually good for the first nine months, but this year is a lot weaker. I thought maybe you could talk about some of your working capital accounts that are using capital, and certainly, the business has good growth characteristics. I was just wondering if there is anything else we should consider or that you're thinking about regarding these working capital accounts in terms of the opportunity to recover some of the cash from the business?

Yes, Andy, that's a great question. As we've mentioned before, due to the nature of our acquisitions, which are asset purchases, our purchase price does not include the working capital that we will need in the future. The receivables and payables remain with the sellers, so we have to fund that working capital after the acquisition. With the numbers we've achieved this year and the revenue, part of that is related to this situation. Additionally, with inventory costs, particularly for liquid asphalt, we have a large terminal facility, and when we fill those tanks this year, it's essentially double the inventory. Just at the liquid asphalt terminal, there is over $8 million more in inventory compared to last year. A significant portion of this is due to price increases, and since prices are rising, we're trying to keep the tanks fuller. Regarding days in receivables and payables, which can significantly impact this matter, there has been no change. Our receivables are not aging differently, nor are our payables. Another aspect is that our private work has increased from a year ago, and with private work, we have retainage on contracts. If you look at the contract retainage, it has risen. This is simply because when we do public work with bonds, they do not withhold part of the payment. These factors are driving the situation, but at some point, it will stabilize if we're not growing at 20% or more in a year or two.

The next question, Zane Karimi, D.A. Davidson.

So first off, I know you guys touched upon the inflation dynamics at play over the quarter. But to what degree and how would you quantify the project delays and the supply and labor constraints?

Yes, I considered that, and it's challenging to determine an exact figure. I came across some statements from other companies indicating a revenue headwind of around 5%, and that estimate seems reasonable. It's similar to the adjustment we've made to our guidance for the third and fourth quarters. While it's difficult to pinpoint it precisely, that figure aligns with the impact we're experiencing in the short term. However, I would note that we have achieved 20% year-over-year growth. We're making progress in this environment, and while we're working hard, these challenges are limiting our potential. Our backlog positions us well to accelerate our efforts, so in terms of quantifying it, a range of 5% to 7% seems appropriate.

And Zane, this is Alan. The positive aspect is that, as we've mentioned before regarding various delays, such as weather, the backlog remains intact. No contracts are canceled. Typically, during this time of year, our backlog would decrease due to the completion of around 60% of our work in the last two quarters, unless we made an acquisition during this period. However, this year, the backlog has actually increased. Part of that increase is due to a shortfall in completing revenue, but more than half of it stems from the volume of work available. The backlog still exists and delays aren't affecting the profit margins of that work. This is a significant point. Eventually, as the additional volume moves through our asphalt plants and equipment, we will recover some of the margins that were affected by fixed costs during the period when we generate only 40% of our revenue. So...

And that kind of leads me right into the next question on backlog. You guys are pushing all-time highs, $823 million, I believe it was. But can you talk maybe a little bit more about the composition of this backlog, either from a geographic standpoint, a margin standpoint or whatever you find most compelling with the current backlog composition?

Yes. The positive development is that our backlog is increasing in nearly all of our markets. We consider our markets not just at the state level but across all 52 areas where we operate our hot-mix asphalt plants. Demand is robust throughout our entire footprint, with varying strengths among regions. The recovery of the Department of Transportation in North Carolina has significantly contributed to the growth in that area. This highlights the importance of our acquisitions, which allowed us to enter 13 new markets in North Carolina for bidding. Overall, we are experiencing strong demand in all our markets, bolstered by substantial state DOT budgets, along with federal funding and various gas tax measures that are being implemented. Importantly, our competitors are facing cost increases, which means they are raising their prices, and we are not experiencing any margin compression at the bidding stage. We have observed an improvement in our backlog margins, not only due to the completion of some lower-margin projects in the past six months but also because we are bidding on new work with improved margins.

I will now turn the floor over to management for closing remarks.

Okay. Thank you, operator. Just want to thank everybody for joining today's call. We look forward to speaking to you again. We're excited about the growth opportunities for the future, and we look forward to speaking to you next quarter. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.