Greetings and welcome to the Construction Partners, Inc. Second Quarter Earnings Conference Call. 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 two 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 every day. 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 six states. We also had the added tailwinds of better-than-expected weather and lower energy and liquid asphalt costs across our geographic footprint. First, warmer and drier than normal weather this winter allowed us to complete more of our higher margin backlog and over-recover on our fixed cost. As I said last quarter, when the weather had a negative effect on our fixed cost recovery, usually over the course of a full year, the weather tends to even out. The second tailwind in the quarter was due to lower energy prices in several areas of operation. In our fleet and at our asphalt plants, we have seen diesel fuel and natural gas prices steadily moderate down providing a sooner-than-expected boost to margins as we work on more project backlog with inflation-adjusted estimates and higher input costs. Lower energy costs also provide better economics at our liquid asphalt terminal in the Gulf Coast as we filled our tanks with lower-priced liquid asphalt. This facility is a significant part of our vertical integration strategy to capture more margin along the value chain and we look forward to our new liquid asphalt terminal in North Alabama being online later this summer. As we move into the busy work season, our view of the second half of the fiscal year remains the same as last quarter, positive and focused on accomplishing a full plate of work. Overall, the construction industry’s labor market and supply chain continue to normalize throughout our Southeastern footprint. At CPI, we moved into Q3 as expected with almost all of our record backlog now containing inflation-adjusted cost estimates and escalators. Accounting for the outperformance in Q2 and our positive expectations for the second half of the fiscal year, we have raised and tightened the ranges in our FY ‘23 outlook. The second quarter also represented another solid period of winning new work and adding to the backlog, which is now at a record $1.52 billion. The demand environment continues to remain robust with continuing migration into the Southeast, supporting the private sector and the IIJA fully engaged and funding investments in roads, bridges, and airports. I now want to turn to CPI’s strategic model on our three levers for growth. As we continue to consolidate and grow relative market share throughout our footprint, our business scales and margins expand. Our core business generates strong cash flow, and we continually evaluate attractive opportunities throughout the Southeast to make wise investments that compound and grow shareholder value. Our first lever and primary focus is organic growth in our existing markets as evidenced by this quarter’s organic growth of 17.1%. Secondly, we have greenfield investments in new asphalt plants and vertical integration facilities such as the new asphalt terminal we’re building in Alabama. And finally, strategic acquisitions in new markets to expand our geographic footprint and grow our market share. In early April, we expanded further into the Greater Greenville, South Carolina metro area. Our acquisition of Pickens Construction headquartered in Anderson, South Carolina, added one Hot-mix Asphalt plant and related construction operations with approximately 20 employees. This bolt-on acquisition for our platform company, King Asphalt, expands our reach within the dynamic upstate region of South Carolina along the I-85 growth corridor between Greenville and Atlanta. Earlier this week, we announced an acquisition in Huntsville, Alabama for the operations of Southern Site Contractors, an excavation grading and utilities contractor. This strategic acquisition further enhances our vertical integration of construction services in the dynamic Huntsville market. We welcomed a talented team of construction professionals whose skills and experience allows us to better serve both public and private customers with a wide range of turnkey development services. We also continue to be very pleased with the beginning of operations for acquisitions made in the first quarter that brought us into two vibrant growth markets, the Greater Nashville region and the rapidly growing Charlotte Rock Hill metro market with the acquisition of Ferebee Corporation. Both of these acquisitions will provide opportunities to execute all aspects of CPI strategy moving forward from organic growth, adjacent greenfields, bolt-on acquisitions, and capturing more margin through vertical integration. This is the same strategy our company was founded on more than two decades ago and today it’s more relevant and effective than ever in building the infrastructure of the Southeast and growing shareholder value. Now having entered our busy work season, our local teams are building a record high backlog in a more normalized construction economy. We continue to prepare for long-term growth by investing in our workforce, attracting and retaining the very best construction professionals to strengthen CPI with a durable and sustainable competitive advantage as we continue to execute on our strategy and deliver top line and bottom line growth in ‘23 and beyond. I’d now like to turn the call over to Greg.

Thank you, Jule, and good morning, everyone. I’m proud and honored to join my first earnings call as CFO, and I’m also very thankful to Alan Palmer for his assistance and 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 outstanding letters of credit. This liquidity provides financial flexibility and capital capacity for potential near-term acquisitions, allowing us to respond to growth opportunities when they arise. As a reminder, the company previously entered into an interest rate swap agreement, which fixes SOFR at 1.85% and results in a fixed interest rate to the company of 3.6% on $300 million of our term debt. The maturity date of this swap is June 30, 2027. As of the end of the quarter, our debt trailing 12-month EBITDA ratio was 2.92. Our expectation is the leverage ratio will trend downward to the low 2s by the fiscal year-end. Cash provided by operating activities was $17.1 million for the quarter compared to $3.9 million for the same period last year. For the first half of fiscal 2023, we have generated $45.7 million of cash flow from operations. Capital expenditures were $28.7 million for the quarter. We continue to expect capital expenditures for fiscal 2023 to be in the range of $85 million to $90 million. This includes maintenance CapEx of approximately 3.25% of revenue with the remaining amount invested in high-return growth initiatives. Historically, we have converted free cash flow in the range of 50% to 60% of adjusted EBITDA after subtracting interest expense and taxes. Over the past two years, CPI has invested this cash flow into numerous attractive long-term investments, which generated 22% adjusted EBITDA growth in the last fiscal year despite a challenging macro environment. This year is on track to generate 35% to 40% growth in adjusted EBITDA. As CPI expands its footprint, we expect margins to increase, organic growth to continue, and shareholder value to compound. Today, we are revising our fiscal year 2023 outlook by raising and tightening our estimate ranges. We expect revenue in the range of $1.53 billion to $1.58 billion, net income in the range of $34 million to $42 million, and adjusted EBITDA in the range of $153 million to $165 million. And with that, we are now ready to take your questions.

Thank you. 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 get at 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 six 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 is up a little bit, but it’s still a healthy increase. And so that’s really what we see the DOTs 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 with 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 significant headwinds or any big tailwinds. We’re assuming energy costs will remain relatively flat. But it’s a pretty positive outlook and a substantial increase in 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 I-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 averaged 15% to 20% revenue growth each year over the course of 20 years, 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 the phone. I think if you look at this from a historical perspective, when you have times like this where – let’s face it, there are banking issues all over. 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 two 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 two years in Pensacola and in Wilson, North Carolina. And they have just been great acquisitions. Five years or ten years ago, you may have said we are going to vertically integrate 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 and 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 clean stone, a 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 states? 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 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. 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 the 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 and acquisitive. 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.