Greetings, and welcome to the Construction Partners First Quarter 2024 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you, sir. You may begin.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners call to review first 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, February 9, 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 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 our 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. Reconciliations to the nearest GAAP measures can be found at the end of our earnings press 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.

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. We are off to a good start to our fiscal year, and I'd first like to thank our 4,400 employees throughout the Southeast for their hard work and professionalism that contributed to a successful first quarter. Revenue, net income, earnings per share, and adjusted EBITDA were all up significantly compared to Q1 last year. We are pleased to report a record backlog of $1.62 billion as of quarter end, reflecting a demand environment that remains strong for both public and private work. This first quarter, we experienced typical seasonal weather with October and November a bit drier than usual, while December was a bit wetter than usual. Our crews and teams were productive and delivered excellent results this quarter. Focusing more on the demand environment for construction services, there continues to be elevated demand for road repair, maintenance, and expansion projects across our markets as a result of our country's continued migration of soil. Each of our six states are well funded for this work, with the federal government's IIJA funding further supporting infrastructure investments from road projects to airports, ports, and rail lines. Because of the migration to the Sunbelt of both new residents and businesses, the commercial economic activity in our markets has remained steady with an active bidding environment. We anticipate that our work mix for FY '24 will remain very similar to last year and typical for CPI, with approximately 63% public projects and 37% private projects. Turning now to CPI's strategic growth model. In this fiscal year, we've so far completed four strategic acquisitions, entering new markets, expanding market share in existing markets, and adding capacity, services, and talented new team members to the CPI family. Most recently, we announced on January 3 the acquisitions of SJ&L General contractor, a hot mix asphalt and site work company headquartered in Huntsville, Alabama, and Littlefield Construction Company, a soil base, surface treatment, and site work company headquartered in Waycross, Georgia. As we discussed in detail during our Analyst Day, a key component of our growth strategy is to actively expand our relative market share and service capabilities within existing markets. Both the SJ&L and Littlefield acquisitions expand our service offerings in existing markets while also adding valuable crews and equipment. In the case of SJ&L in Huntsville, Alabama, we are integrating this team with our existing platform company in the state, Wiregrass Construction Company. The greater Huntsville metro area and interstate 65 corridor continue to experience tremendous growth, and as a combined organization, we can now offer turnkey services, spanning the construction value chain on both private and public project opportunities within this market. Likewise, our Georgia platform company, the Scrubs Company entered the Waycross market just a few months ago through the establishment of a greenfield hot mix asphalt plant. Now having acquired Littlefield, we are even better positioned to capitalize on the market that reaches from the Port of Brunswick into South Central Georgia. We are pleased to expand our presence in these crucial growth markets and proud to welcome the employees of SJ&L and Littlefield into our continually growing CPI family. We continue to have numerous and active conversations with potential sellers, both inside and outside of our current states. The universe of potential opportunities in our highly fragmented industry is substantial. However, we remain patient and focused on finding the best strategic acquisitions that expand our footprint, increase capacity, grow relative market share, and fit well within our CPI culture. We believe CPI is seen as the buyer of choice for many owners in the Southeast due to our reputation for treating sellers fairly, providing attractive career opportunities for their employees, and our track record for successfully integrating and growing companies. As we continually discuss with the market, CPI's founding strategy has three main components: first, to operate a high relative market share business in local markets, building low-risk, high-margin projects from repeat customers and generating strong free cash flow; second, to capitalize on the need for the nation and our states to invest in catching up on deferred infrastructure maintenance and capacity. And third, as our industry goes through a generational consolidation, to be the leader in building a scalable business by acquiring businesses in our industry. Our five-year strategic plan that we call ROAD-Map 2027 simply outlines our plan to continue implementing CPI strategy, with growth targets that represent annual revenue growth of 15% to 20% and EBITDA margins in the range of 13% to 14% by 2027. The foundation of our strategic plan remains our people. We plan to continue building a competitive advantage through our workforce, maintaining our organizational culture as a family of companies and providing superior benefits and career opportunities, which attract and retain the best construction professionals. At CPI, we are dedicated to building better lives and to building the infrastructure that keeps our communities connected. In summary, we are pleased after Q1 to be right on track with our plan. As we enter the second quarter of our seasonal business, where we are hard at work maintaining our fleet and asphalt plants and preparing for the busy work season ahead in the spring and the summer. I'd now like to turn the call over to Greg.

Thank you, Jule, and good morning, everyone. I'll begin with a review of our key performance metrics for the first fiscal quarter compared to the fiscal first quarter in 2023. Revenue was $396.5 million, up 16%. The increase included $29.6 million of revenue attributable to acquisitions completed during and subsequent to the three months ended December 31, 2022, and an increase of approximately $25.1 million of revenue in the company's existing markets, contract work, and sales of hot mix asphalt (HMA) and aggregates to third parties. The mix of total revenue growth for the quarter was approximately 7.3% organic revenue and approximately 8.7% from recent acquisitions. Gross profit was $51.9 million or 13.1% of revenue compared to $30.5 million or 8.9% of revenue in Q1 2023. General and administrative expenses were $36 million and as a percentage of revenue, were 9.1% compared to 8.7% in the same period last year. Net income was $9.8 million and diluted earnings per share were $0.19, up from $1.9 million and diluted earnings per share of $0.04 in the same quarter last year. Adjusted EBITDA was $40.9 million, an increase of 50.4%. Adjusted EBITDA margin for the quarter was 10.3% compared to 8% in the first quarter last year. You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures in today's earnings release. In addition, as Jule mentioned, we are reporting a record project backlog at $1.62 billion at December 31, 2023, up from $1.6 billion at the end of our Q4 fiscal year 2023. Turning now to the balance sheet. We had $68.7 million of cash and cash equivalents and $154 million available under the credit facility, net of a reduction for outstanding letters of credit. In addition, we have the ability to establish an incremental revolving credit facility up to the greater of $200 million or total trailing 12 months adjusted EBITDA. We have $280 million of principal outstanding under the term loan and $163 million outstanding under the revolving credit facility. The availability on our credit facility and cash generation will continue to provide flexibility and capacity to allow for potential near-term acquisitions and high-value growth opportunities. As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 1.78 times. Our expectation is that the leverage ratio will maintain a range of 1.5 times to 2.5 times while continuing to add sustained profitable growth. Cash provided by operating activities was $60.4 million compared to the $28.9 million in the same quarter last year. Net capital expenditures in the first quarter were $24.3 million. We expect net capital expenditures for fiscal 2024 to be in the range of $90 million to $95 million, which includes maintenance CapEx of approximately 3.25% of revenue, with the remaining amount invested in high-return growth initiatives. Today, we are maintaining our previously disclosed fiscal year 2024 outlook. We expect revenue in the range of $1.75 billion to $1.825 billion, net income in the range of $63 million to $70 million; and adjusted EBITDA in the range of $197 million to $219 million, which reflects adjusted EBITDA margin in the range of 11.3% to 12%. And with that, we are now ready to take your questions.

Our first question comes from Kathryn Thompson with Thompson Research Group. Please proceed with your question.

I just wanted to focus into end markets. And first with the DOT work this quarter was 37% versus 33% in Q1 for the last two years. But the public contribution overall in Q1 was slightly lower than the previous quarters at 59% versus 61%. So it just seems that public non-DOT work was a lower contributor to this quarter. Is there anything to call out on the municipal level that could be driving this? Or any other color just to account for the delta?

No, Kathryn. I don't think so. We did a lot of public work that's city, counties, and DOTs, so the mix of what we're doing on public work in any one quarter can vary. But there's nothing particular that's changed about that. We do anticipate this year, as we said in the prepared remarks, that our mix of work will be about 63% public and 37% private. In the public work, cities, counties, DOT, and airports, different – they'll all play a part in that public mix.

And then on the private side, all our channel checks still point to manufacturing and heavy industrial still strong and some edges of weakness continuing for traditional office and shopping centers. Can you touch more on current trends you're seeing on the private side and how the type of work for heavy versus light is differing from any trends you're seeing in highway work?

Yes, I think you're exactly right with what you said, Kathryn. What we're seeing is that as businesses continue to migrate to the Southeast as they reshore, we're seeing a lot of manufacturing facilities get built, headquarters buildings, and pharmaceutical manufacturing sites. That's a lot more of what we're bidding on. We do continue to see residential stay very steady. But there's not as many office buildings and retail buildings in the mix, but there's a lot more of the, as you would say, the heavy commercial sites.

And then final question just is more on we've seen some abatement of raw materials, but there are other costs that are going up. What are you seeing from DOTs and other contractors in terms of bidding expectations around input costs, and are there any other type of costs like insurance that are preventing projects from moving forward?

I would say, Kathryn, clearly, inflation our DOTs have had to adjust their estimates to match the reality of the input costs that are out there in the marketplace. And I think they're doing that. We're seeing their estimates go up to where projects aren't getting held up. It has affected their purchasing power to some extent. But there's still a lot of things being bid, and I don't see projects getting held up by that. I think they're adjusting to the new world of input costs. I think that inflation continues to be steady. It's not out of hand like it was a couple of years ago. But I think the DOTs, by and large, are keeping up with that in their outlooks and their estimates.

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

So it sounds like in Q1, weather was fairly normal. Just any thoughts here on Q2 for weather? I know it's been off to maybe a rough start here in Q2. Just anything to think about there.

Well, January has been cold, at least the first couple of weeks with the polar vortex. But the reality is, Tyler, we have expectations in our seasonal business. Q1, we expect October to be great, and it was. We expect December to be wet, and it was. And so it was typical. We expect January to not be great weather. That's when we're fixing our equipment, as I said. And so we're just getting ready for the work season. So we were able to work where we could in January, but it definitely was pretty cold in a lot of places.

And then, Greg, just so I have it for modeling, but at the midpoint of the revenue guide, I think it's calling for something like a mid-teens revenue growth. But just can you remind us how much of that is from expected M&A?

Yes, you're right. It's 15% with the projected midpoint from last year. It's going to be typical to what it was in the first quarter, about half and half equal percentage of organic and inorganic, and that's probably in the range of $125 million, $130 million of acquisitive revenue.

And then, Joel, so I know that M&A has been a driver since we're talking about it. But you seem to have had a lot of success with greenfields. And I'm just curious if that will become a bigger part of, call it, the external growth story in coming years. And if we just take Waycross as an example, how does establishing a greenfield hot mix plant in a new market drive discussions around additional M&A?

Tyler, good question. Greenfields have always been one of our growth strategies where we see an opportunity to go to an adjacent market. And Waycross was just a perfect example of seeing an opportunity in an adjacent market for the Scrubs company to go put a hot mix asphalt plant. And that really led to the discussion with the Littlefield company about acquiring their business and bringing their workers and their equipment into that area, that Waycross area. So once we establish a greenfield and we're in an area that does provide opportunities for us to try to build market share in that market. And you're right, Waycross was a perfect example of that. So greenfields are sometimes the answer, sometimes an acquisition to move into an area of the answer, but we're studying all of them.

Just real quickly, Jule, kind of conceptually backlogs are strong. It feels like work is picking up on the public side. You look at a lot of private companies. I'm assuming they are effectively full as well. So I'm just curious if your internal metrics, however you measure them. Are you seeing fewer bidders or more rational bidding for public work given that, let's say, the market is just generally full?

Well, I would say, Tyler, yes, to a certain degree, people have good backlogs and the construction industry has a lot of work. Still a competitive bidding environment, but I would say, yes, there's probably due to everyone having a lot of work. There's probably fewer bidders, and I think that's the sign of a healthy market.

My last one here, Greg, just kind of coming back to the model. I know that there was a gain on the Bluewater Facility Exchange last Q1. But just any broad thoughts just from a modeling perspective, how we should think about gains on sale per quarter? Is it maybe $1 million or something like that? Just any help would be there?

Yes, I believe that's correct from a modeling perspective, yes. That was definitely an isolated incident. Each year, the gain on sale of equipment is part of our strategy involving ownership, operation, and acquisition of replacements. So yes, I would consider that a solid number.

Our next question comes from the line of Andy Wittman with Baird. Please go ahead.

I guess I was going to start out just by digging into the margins in the quarter a little bit. Maybe I'll start with the G&A margins here. The raw number was up a decent amount, about $3 million or so above kind of where the run rate has been in the last few quarters. And so Greg, I was wondering if you could just comment on that. Is there anything in that number that makes it unusually high or low? You kind of did some more acquisitions, so I thought maybe there's some deal costs in there or something else. But you tell us, is this the new run rate? Or is there something different from that we should expect?

I think this is about what we would expect. If you compare to last year, we mentioned there was still some $50 million worth of low gross margin work that we needed to complete. Now that we're in fiscal '24, we don't see those anymore. However, in terms of overhead and acquisitions, we were slightly up this quarter compared to last year. What you're seeing are individual expenses that may have been out of period, but we still expect the year to turn out as we anticipated.

Can you just remind us what it was that you expected for the year in G&A?

Yes, 8%.

And then just on gross margins. Obviously, you're starting to get some of the recovery with your backlog now being better priced and inflation coming down, Jule. Can you maybe talk about how this quarter reflects. Are we now at the run rate where you kind of feel like the price/cost dynamics are kind of fully behind you and you're operating at the gross margins that you expect? And maybe if you could just expand on that also by talking about how the expectations of the gross margins in the backlog that you've recently won compared to what you've been putting up here this quarter and the last few quarters?

Yes, Andy, I think that's exactly right. As mentioned in the summer, we're really back to normal for CPI, which is what you observed this quarter. Last year in the first quarter, we were finishing up a lot of the pre-inflationary backlog because many projects wrap up in the October, November, December timeframe with final paving. So, last year's first quarter mostly involved completing that work. What you're seeing this quarter is us returning to normal operations, where the costs are already accounted for. We're adding to our backlog at healthy margins, and our teams in all areas are finding ways to succeed on projects, which aligns with the typical dynamics of CPI, where more projects are completing at margins better than those originally bid. To us, it's really just a return to the standard operating model of CPI.

Just one last final question, probably for Greg, I'm guessing. I was just kind of curious, when you think about revenues of HMA or aggregates to third parties this first quarter in '24 versus the first quarter in '23. Greg, can you talk about how that changed and the impact that had on margins, maybe like total dollars sold to third parties. Just so we can understand how much of a component of your revenue mix, that part of your business was?

Yes, absolutely. So I guess, first of all, let me say that particular area of sales revenue for us is focused more in the commercial private market. So like internally, we noticed that that was still a very strong component of our business. So it's really good to see. I think just another internal indicator for us that activity is still strong. We are typically in the 10% to 12%. I think we've talked about before of third-party sales of both aggregate and hot mix asphalt each year in our revenue. Still pretty consistent, yes.

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

Just I think you might have touched on it a little bit maybe with weather in January. Just curious with such a strong start to the year, any reason to not raise the full year outlook? Was there anything that kind of stuck out to you? Is there anything we should be aware of that you're implying maybe just with margins maybe in the last the next nine months that changed your expectations from coming into the year?

No, Michael. Not at all. I'm glad you asked that question. We typically look at our business as two halves of the year. And so that's why we talk about our revenue as 40-60 of our EBITDA is typically 30-70. We just try to just get through the first two quarters and then assess our business at midyear. And so we feel good about our guidance. There's nothing we're doing other than just saying we're reaffirming that. We'll take a good hard look at it after the second quarter in our mid-year.

And just regarding the quarter, could you comment on the margin? We observed lower diesel and possibly liquid asphalt. Did that positively impact the margin in Q1? Additionally, how do you view current prices and their implications for the next three quarters if they remain at this level?

Yes, Michael. We always mention that when energy costs decrease, we benefit slightly, and when they rise, we face some challenges. This trend hasn't changed. If you examine the past 12 to 18 months, diesel and natural gas prices have mostly remained in a stable range, especially compared to the spikes we saw in early 2022. Overall, we have been operating within a fairly stable range and are certainly taking advantage of any slight benefits when they arise.

And just my last one. Obviously, we're going into an election year. I'm curious if you can share if there is any uncertainty surrounding your business this time or if it's less of a concern compared to previous election years because the Infrastructure Investment and Jobs Act was passed. I'm interested to understand how we should think about this election year with respect to funding and if it's different from what you've experienced in past election cycles.

Michael, good question. The good thing for us is in Washington, D.C. certainly has a lot of things they argue about, but infrastructure funding is probably the most bipartisan thing in Washington. And so both parties see the need to invest in the nation's infrastructure; they always have. And so we really don't see the election, however it turns out, really affecting the funding for the IIJA or the surface transportation funding overall. So clearly, we want the economy to remain strong and stable, and we really don't think the election is going to have a big impact on our business.

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

Talk about like when you all would expect your backlog logs to normalize? I mean, it looks like you've got covered for the rest of the year. Curious if we should see some improvement on the organic side. How can you flex the labor component to maybe to add above the seven-plus percent sort of numbers you guys are looking at on the organic side?

I'll start with the backlog and then discuss organic growth. We set another record for our backlog this quarter, marking the 13th consecutive quarter of growth, which is unusual for CPI since we typically see a decrease in backlog during busy seasons when we are working through it. This suggests two things: first, we are growing, and second, there is a healthy bidding environment. However, we can only sell so much ahead of our resources, so it's not surprising if our backlog decreases sequentially at some point. Still, it provides us good visibility and allows us to remain patient during the bidding process, which are positive aspects. Regarding organic growth, we are concentrating on it significantly. You are correct that we need to hire more labor, and we are doing so by adding staff and equipment to support our organic growth initiatives. As Greg mentioned, in addition to maintenance capital expenditures, we are investing in equipment and hiring to pursue high-value growth opportunities on the organic front.

And then in terms of kind of the backlog or the pipeline of work, any kind of drill down color you guys could share on maybe some of the states that you guys are seeing the most activity? I'm just curious to try to get a little sense within the portfolio there.

All six states have active bidding environments, and there's no state that raises any concerns. Florida, Tennessee, and South Carolina have excellent funding programs and are very active. Florida is experiencing significant migration, and so are Tennessee and South Carolina. North Carolina has a strong funding mechanism, and Georgia is performing well. All our platform companies are increasing their backlog and bidding for a lot of work. We feel fortunate in that aspect.

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

I got to be honest, Stanley stole all my questions. Maybe I'll just double up. I was curious on kind of your expectations for DOT bidding in the next few months.

Well, we've got quite a bit to bid on. The DOT, as you know, doesn't bid evenly throughout the year. A lot of their work does bid in the next few months in some of our states. And so we've got a pretty big letting in North Carolina this month and South Carolina here next week. So there the winter time they let a lot of work that they want to do in the spring and summer. And so it's pretty active.

And then, Jule, any of the ankle weights still hanging around? I was curious if labor is getting a little bit better.

I would say things have returned to normal, Adam. The generational retirement of our workforce makes it more challenging to find skilled operators, but I see that as an opportunity for us because we are committed to attracting and retaining talent. We consider this a benefit that we intend to leverage. In terms of finding labor to fill our crews, the annual increases in labor costs have returned to a manageable state, and it's no longer out of control as it was immediately after COVID and during the economic reopening. So, I definitely feel that we are no longer burdened.

Our next question comes from Brent Thielman with D.A. Davidson. Please proceed with your question.

Lot coverage or, I guess, just a couple here, Joel. Joel, the fact that your markets are so good impacting your ability to do deals as fast as you like. Your results are solid. I assume many of the potential targets are, too. Just wondering if that's have an impact on sales or expectations reasonable?

Yes, Brent, that's a great question that we hear frequently. The solid market conditions really don't influence our sellers' thinking; they are focused on the long-term benefits for their families. They are involved in generational family planning, and they have built significant wealth in this industry over many years. Therefore, they aren't fixated on short-term market fluctuations. I haven't noticed any shifts in their expectations or any hesitance to sell due to current funding situations. We are actively engaged in numerous discussions across the Southeast and the Sunbelt with potential sellers, and our pipeline remains strong. The health of the markets isn't a primary factor for them; what's most important is the overall well-being of their businesses and families in the long run.

And then, Greg, this one might be for you. I apologize if you mentioned this in the script, but the first quarter cash flow was unusually high. I'm curious, do we see the typical pattern through the rest of the year? Or will this year be different in terms of cash flow?

No, I think it was a good first quarter. First of all, margins helped, and year-over-year, we certainly have more revenue going up quarter-over-quarter. Both of these factors created great cash flow opportunities to convert that revenue into cash. In terms of the rest of the year, I expect we will return to a more traditional cash flow perspective that we have experienced over the years. The last couple of years were unusual, but I anticipate a return to more normal cash flow for 2024.

Our next question comes from Brian Russo with Sidoti. Please proceed with your question.

Just to follow up on the DOT letting activity, how would you compare it to last year? Is it accelerating because the DOTs are eager to access the IIJA matching funds, or is it more about their state programs? I'm just curious.

Yes, Brian, I agree with your observations. The IIJA funds are allocated through the usual federal programs that provide money to the states during the federal fiscal year, requiring states to either spend or commit those funds. The states' approach is quite similar to last year. However, many states, including Florida, Tennessee, South Carolina, North Carolina, and recently Georgia, have decided to use their own funds to enhance infrastructure financing in response to population growth. Overall, we observe that the Department of Transportation's activity is comparable to last year, perhaps even more active. We are still at the beginning stages of the IIJA funds being allocated to projects, so there is much progress still to be made.

And then just on the backlog, obviously, another strong quarter despite the seasonality of the business. I mean, how would you characterize the projects on the public side and then maybe the private side? I mean is it still similar size and duration on the public side? And then is there a heavier concentration in manufacturing or industrial on the commercial side?

Yes, Brian, I think an analysis of our backlog, obviously, dictates kind of what we say going to do in terms of the mix of revenue going forward. I think Jule said a minute ago, 63-37 is kind of what we expect public to private. And that's pretty normal; it is what it was last year. So I think the makeup is very similar. And then in terms of duration of project, size of project is also very similar. We track that and want to understand that because we've talked before that there's a sweet spot that we're trying to achieve, and it has not changed.

We have no further questions at this time. I would like to turn the floor back over to management for comments.

Yes, we'd just like to thank everyone for joining us this morning. We look forward to speaking with you again next quarter.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.