Construction Partners, Inc. Q1 FY2026 Earnings Call

Greetings, and welcome to the Construction Partners First Quarter Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Rick Black, Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you for joining us for the Construction Partners conference call to review first quarter fiscal 2026 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, February 5, 2026. 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 forward-looking statements made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that, by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to our earnings press release for disclosure on forward-looking statements. These factors, as well as other risks and uncertainties, are described in detail in the company's filings with the Securities and Exchange Commission. Management will also refer to non-GAAP measures, including adjusted net income and adjusted EBITDA and adjusted EBITDA margin. 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 with that, I would now like to turn the call over to Construction Partners' CEO, Jule Smith. Jule?

Thank you, Rick, and good morning, everyone. We appreciate you joining us for today's call. With me this morning are Greg Hoffman, our Chief Financial Officer; and Ned Fleming, our Executive Chairman. I'd like to begin by thanking the approximately 7,000 employees across our family of companies for their hard work, expertise and dedication to both safety and operational excellence. Our people are at the heart of everything we do, and they are also the stewards of our unique and strong family of companies' culture, one of our key competitive advantages as we continue to grow throughout the Sunbelt. Thanks to their efforts, along with favorable weather during the quarter, we delivered a strong start to fiscal 2026, exceeding our expectations and prompting us to raise our outlook for the year. First quarter revenue increased 44%, while adjusted EBITDA increased 63% compared to the prior year. Adjusted EBITDA margin reached 13.9%, the highest first quarter margin in our history. We also closed the quarter with a project backlog of $3.09 billion, underscoring the robust demand across our markets. Project demand throughout our footprint remains strong. On the commercial side of the business, steady project bidding is supported by ongoing population migration to the Sunbelt, reshoring trends as more manufacturing and supply chain capacity move back to the United States, and the continued build-out of AI infrastructure. Our teams are actively bidding and building a wide range of commercial projects to reflect these macro trends. A few examples to highlight... In Southern Oklahoma, we are currently negotiating contracts to provide work for a large national retailer on a new distribution warehouse and a food manufacturing facility in Ardmore. In Central Texas, north of Austin, we're currently working on a facility to provide power to data centers in the area for one of the Magnificent 7. In Santa Rosa County in the panhandle of Florida, we have just completed work on a large distribution facility for a leading soft drink bottler. This new facility will bring in 350 to 400 new jobs to the area, fueling growth that will create more demand for our services. Finally, in York, South Carolina, we are currently working on a large site work contract for a new data center in the Greater Charlotte metro area. These are just a few examples of the approximately 1,000 commercial sector projects we will participate in building this year across our 8 states and over 110 local markets. On the public side, both the federal and state governments are continuing their investment in infrastructure to keep up with the growing economies in the Sunbelt. In Q1, we have seen strong public contract bidding throughout our 8 states and expect total federal, state and local contract awards in FY '26 to increase approximately 10% to 15% over FY '25. This is particularly true for the small- and medium-sized recurring maintenance projects for state DOTs, cities and counties that represent a majority of our work. On Capitol Hill, both houses of Congress continue to work with Secretary Duffy on completing a 5-year reauthorization of the Surface Transportation program by September 30. We expect the size and shape of this bill to be known this spring. From what we have heard so far, we expect the reauthorization to provide a significant increase in the annual funding amount going to the states by per capita formula, which is good news for CPI. Both the administration and many members of the Congressional Transportation Committees have stated that they believe the formula method to the states is the best means to prioritize hard infrastructure investments needed to support a growing economy and to ensure timeliness in building these projects. Turning to our growth strategy, we began fiscal 2026 with 2 large and strategically important acquisitions that were completed in October in Houston and in Daytona Beach, Florida. Both businesses now have been fully integrated and are operating well. Earlier this week, we announced another acquisition in Houston, GMJ Paving Company, a leading asphalt paving contractor focused on public infrastructure projects across the Greater Houston metro area. GMJ's hot mix asphalt plant located in Baytown on the east side of Houston expands our coverage of this major metropolitan market and complements our existing Houston assets exceptionally well. This acquisition represents our 12th hot mix plant in the Houston market, further strengthening our geographic footprint and providing incremental throughput opportunities at our nearby liquid asphalt terminal at the Houston port. Last August, we made our first entry into the Houston market with our acquisition of Derwood Greene Construction, and then we significantly expanded operations in October through the acquisition of Vulcan's asphalt construction assets in Houston. With the addition of GMJ, we are further strengthening our market position and expanding our team with highly skilled experienced operators who bring deep local market knowledge and strong customer relationships. This positions us well to serve one of the most dynamic and rapidly growing markets in the country. Expanding our footprint into new markets while gaining market share exemplifies our model and underscores a core element of our growth strategy: entering the right markets with the right partners. Currently, we see a very robust pipeline of acquisition opportunities across our existing footprint and surrounding states, and we continue to have dialogue with a number of sellers as they determine the best future for their businesses and their valuable workforce. We believe our model as a family of companies with a strong organizational culture makes us the acquirer of choice in our industry. We also remain focused on organic growth as a strong driver of building shareholder value. This quarter, we will bring online an HMA greenfield in Georgia. This new facility will serve the dynamic Brunswick, Georgia market with its port facility and migration to the Golden Isles regions of South Georgia. As a key part of our organic growth, there are several more greenfield facilities that we plan to bring online later this year and early next year. Before turning the call over to Greg, I want to reiterate the vision we shared last October regarding our Road 2030 growth plan. This plan outlines our path to again double the size of the company to revenue of more than $6 billion by 2030, utilizing the same strategy we have successfully executed for over 2 decades. The plan also targets EBITDA margin growth to approximately 17% and is expected to generate more than $1 billion EBITDA dollars annually. And finally, we're excited about the start of this fiscal year as we prepare for a busy work season, building on a record backlog. I'd like now to turn the call over to Greg.

Thank you, Jule, and good morning, everyone. As Jule mentioned, we had a strong start to our fiscal year, which I will review in more detail before discussing our raised outlook ranges, and then we will open the call to questions. I'll start with a review of our key performance metrics for the first quarter of fiscal 2026. Revenue was $809.5 million, an increase of 44% compared to last year. The breakdown of this revenue growth was 3.5% organic growth and 40.6% acquisitive. Gross profit in the first quarter was $121.5 million, an increase of approximately 58% compared to last year. As a percentage of total revenues, gross profit was 15% compared to 13.6% last year. General and administrative expenses as a percentage of total revenue in the first quarter decreased to 7.7% compared to 7.9% last year. Net income was $17.2 million, and adjusted net income was $26.4 million. Earnings per diluted share for adjusted net income was $0.47. Adjusted EBITDA was $112.2 million, an increase of 63% compared to last year. Adjusted EBITDA margin was 13.9% compared to 12.2% 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. Turning now to the balance sheet, we had $104 million of cash and cash equivalents and $163 million available under our credit facility at December 31, net of a reduction for outstanding letters of credit. As of the end of the quarter, our debt to trailing 12-month EBITDA ratio was 3.18x. We remain on pace with our strategy of reducing the leverage ratio to approximately 2.5x by late 2026 to support sustained profitable growth. To that end, we anticipate cash flow generated to effectively fund this week's GMJ paving acquisition without the need for additional long-term debt, demonstrating the strength of cash flow from our operating model. In the first quarter of fiscal 2026, cash flow from operations was $82.6 million, up from $40.7 million in Q1 of fiscal 2025. We expect to convert 75% to 85% of EBITDA to cash flow from operations in fiscal year '26. Turning now to our outlook. We have raised all of our ranges for fiscal year 2026: Revenue in the range of $3.48 billion to $3.56 billion, net income in the range of $154 million to $158 million, adjusted net income in the range of $163.5 million to $168.7 million, adjusted EBITDA in the range of $534 million to $550 million and adjusted EBITDA margin in the range of 15.34% to 15.45%. Our revenue outlook for fiscal 2026 continues to anticipate organic growth of approximately 7% to 8%. Consistent with historical seasonality, we anticipate the first half of the fiscal year to contribute approximately 42% of the annual revenue and approximately 34% of the adjusted EBITDA. In the second half of the year during our peak construction season, we expect to deliver the remaining 58% of revenue and approximately 66% of adjusted EBITDA. Lastly, as Jule mentioned, we had a project backlog of $3.09 billion at December 31, 2025. We have approximately 80% to 85% of the next 12 months contract revenue covered in backlog. And with that, we will open the call to questions.

Your first question comes from Adam Thalhimer with Thompson, Davis & Company.

Jule, can you give some more color on the acquisition pipeline? You said it was robust. I'm just curious what the mix there is between potential platform deals and potential tuck-ins.

Yes, Adam, as you know, we talk to a lot of folks all the time, and we look at a lot of things. And I would say we're continuing to be busy with that. We did 3 platform acquisitions last year, and so that's created a lot of new opportunities in Texas, Oklahoma, and Tennessee now that we have a great management team in each state. So we're busy. But at the same time, we pass on a lot of things that aren't a good strategic cultural fit. So you're going to see us continue to make acquisitions that we think are compelling and great strategic fits. Adam, why don't I let Ned weigh in on the big picture as we look toward our strategic growth model?

Adam, I would say over the last 25 years, it's as active now as it's ever been. I think what you're really starting to see both on the platform side as well as the tuck-ins. I mean, obviously, when you do 3 platforms in a year, it gives you a lot of opportunities for organic growth as well as tuck-in acquisitions. But the generational transfer continues to give us opportunities to do acquisitions, both what I would call tuck-ins as well as platforms. But obviously, given last year with the 3 platforms, we've got a lot of tuck-in acquisitions in those states as well as a lot of organic growth opportunities in those states. So I would say it's as robust as it's been in 25 years, maybe even to some extent because we did 3 platforms in 1 year, I see we've got more opportunities.

Awesome. Jule, I wanted to ask you about what you mentioned in your prepared remarks regarding a site preparation job for data centers. I'm curious if you could provide more details about the size of that project and your potential scope.

Yes, Adam, we wanted to highlight just a few of the commercial projects we were doing currently because we talked about that there are several macro trends that are driving the commercial markets now... migration to the Sunbelt, but also the reshoring, which is creating a lot of manufacturing facilities moving back to America and people wanting to build in America. And so I just thought let's give a few highlights of these. And there's a long list to choose from. But data centers are part of that. And we're building more data centers than I had the time to list in the remarks, but it's one part of what we do, factories, distribution centers; there's a pretty strong demand for those things in our Southern and Southeastern markets. So we don't travel around and specialize in data centers, but they're a big part of what we do. And sometimes, like in South Carolina, we're participating more in the site work, and it's a larger contract. And sometimes we're doing the paving for a data center, just like we would do for an Amazon warehouse or a school project. So we did want to highlight just some of the commercial projects that are getting bid and built now.

Next question, Kathryn Thompson with Thompson Research Group.

Just first, I want to focus on organic growth, just reconfirm that you had kind of low to mid-single around 3.5% organic growth in the quarter, but you also gave guidance for a 7% to 8% organic growth range for the full year. Could you help us bridge what you're seeing today and also how much adverse weather in Q1 may impact or may have impacted the quarter?

Yes, Kathryn, that's a great question. Our expectations for organic growth this fiscal year remain at 7% to 8%, as is typical for us. In the first quarter, the gap between our organic growth and that 7% to 8% range was approximately $19 million. There were two main factors contributing to this. Firstly, in North Carolina, we encountered delays with about three projects we planned to start in Q1 because the customer wasn't ready, but those projects are now in progress. Secondly, as you might expect, we face varying competitive dynamics across our 110 local markets. Some markets are performing well, while others are more competitive. In one particular market experiencing irrational competition, we decided to relocate equipment and focus on higher-margin work in nearby markets. Coincidentally, these were areas where we had made acquisitions in the past year, so that revenue was categorized as acquisitive growth. Such situations can happen occasionally, but we still expect our organic growth to align with our usual range for the year.

Okay, great. Could you provide some additional insight into your strategy regarding M&A activity in calendar 2025 and early 2026, as well as how the integration process has progressed over the past 12 to 15 months?

Yes. Kathryn, we've done 7 acquisitions since the Lone Star acquisition last fall. And integration is a big part of what we do. As Ned has said on these calls before, it's a core competency that CPI has developed over 2 decades. And so we have to be good at integrating these companies. I would say, for example, in Houston, Derwood Greene has done a great job of integrating with Lone Star, our platform company since August. But then those guys have done a great job of integrating the Vulcan assets in October, and they just had a great Day One earlier this week with GMJ. And so as we can integrate these companies in, we start to create organic growth opportunities in the future. And when you have a great management team in that market, you can continue to add, that's where we start to compound both the top line and the bottom line and start to make 1 plus 1 equal 2.5. And that's part of our strategy. And I would say it's gone well.

Next question is Andrew Wittmann with Baird.

I guess maybe for Greg, I wanted to ask about the seasonality of the business. We heard your comments here about the first half and second half revenue and EBITDA splits here. And obviously, the first quarter came in very strong and ahead of at least the Street's expectations. But the ramification of that means that the second quarter guidance actually looks a little bit light. And so I was just wondering if there's something we need to understand there. Certainly, the weather here in the last couple of weeks in the South has been particularly notable. I'm wondering if that's a factor or if there's something else that explains the second quarter implied guidance there.

Yes, Andy. I believe our first half of the year and the second half are quite similar when we compare them year-over-year. The weather within each half tends to even out, featuring both good and bad weather. Essentially, we are reiterating our initial message that this year is expected to follow a standard pattern, consistent with the expectations shared with the market. There is no negative implication here; we are simply restating what we communicated at the start of the year.

Yes. I just want to say we don't try to overthink things like that. Yes, weather was good in the first quarter. We don't know what the second quarter will be. Certainly, the last 2 weeks throughout the Southeast and Texas, we've had some ice and snow. And so you think, well, that should affect January. But when you look, the first 2 weeks of January were really good. So we're right on kind of plan. And we expect winter weather in January. If you remember, last January, we had a lot of snow. We even had snow on the beaches in Pensacola. But by the end of the quarter, it turned out to be a really good quarter. So I would just say we don't really try to overthink it. We're not in any way trying to communicate something about the second quarter. We're just sort of trying to say that's our normal revenue and EBITDA split in the course of a normal year.

Okay. That makes sense. I appreciate that. And then I guess you had a comment on your view on the public sector bidding. I think you said that you expected the awards to be up 10% to 15%. I don't know that you had a similar comment on commercial. Certainly, it sounded like the projects that you're doing are keeping you positive there as well. But did you have a view on where the awards could be or the increase in backlog could be on the commercial side? Is it the same level of strength? Is the public stronger? Just maybe some context around how you're seeing that developing as the year plays out.

Yes. Andy, I would say the commercial market, we've continued to use the word steady. I would say, if anything, we feel like this spring and summer could be stronger on the commercial market. But the reality is when we look at our backlog, it stayed pretty steady. If anything, it's gone up, Greg, I think a couple of percent to public. But the reality is that could be just that the acquisitions we made last spring and summer with Overland and PRI focus a little more on the public side of things. What we do have is good data on the public awards from ARPDA, which says, look, the state, local and federal, when you look at the overall contract awards, it's going to be up 10% to 15% this year. And that's the data we really go by and what we see.

I have one last cleanup question. Greg, could you quantify how much revenue shifted in that competitive market when you moved the crews to the acquired market? Is there a measurable amount of revenue? I'm curious to gain a better understanding of the quarter.

Yes. Jule, when he addressed that earlier, talked about $19 million of maybe moved in or addressed in different markets. I'd say it's about half and half.

Next question, Ethan Trollinger with Raymond James.

This is Ethan on for Tyler. Yes. So Greg, I know not a ton has changed on the M&A front. But just from a modeling perspective, could you update us on what the M&A rollover impact to revenue is in fiscal '26 based on the guidance?

Yes, absolutely, Ethan. About $260 million to $280 million in the remaining 3 quarters are from acquisitions. Ethan, I'm sorry, that does include GMJ, the acquisition we just made recently.

Okay. Great. And then, Jule, this is...

Ethan, I'm sorry, that does include GMJ, the acquisition we just made recently.

Yes, Ethan, I love to talk about Houston. Houston, we're very pleased with how Brad, Greene, and his management team, Jonathan, Daniel Green, those guys are third-generation Houston contractors. And so that management team, combined with the Lone Star management team, Houston has started off great. They've made a meaningful contribution to this quarter. Those guys did a great job of integrating the Vulcan workforce into their operation. And then with GMJ, the acquisition we made this week, that's an example of where not only is their asphalt plant geographically helps us more on the east side of Houston, but Lupe Munoz and his family and his business, they really have a strong niche in the public infrastructure paving. They have great relationships with public grading contractors that do work in Texas. And so that's really very complementary to what Derwood Greene has historically done. And so this is an example of just adding not only management team and workforce, but it's also adding market share in Houston.

Okay. That's great color. And then just one last one. Obviously, Houston is uniquely big compared to some of your other markets. But are there other big metros that you aren't in today that could come together like Houston? Or did just the stars kind of align there? Could you maybe talk a little bit more about that?

This is Ned. As a Board and as a company, we are consistently seeking out metropolitan areas like Houston. For the past 25 years, we have invested in growth areas. Houston is currently one of the fastest-growing cities in the nation. We have also identified other metropolitan areas with similar potential where we will continue to seek the right companies, particularly on the platform side, to invest in those regions. Historically, we have been successful in operating in areas where demographic growth stimulates organic growth for the country.

Next question, Nandita Nayar with Bank of America.

This is Nandita Nayar on for Mike Feniger. So you mentioned leverage is currently around 3.18x, and you plan to delever to around 2.5-ish by the end of the year. Could you just talk a bit more about your confidence in hitting that target? And also, just could we see you guys doing more M&A this year? And I mean, I think the answer to that would probably be yes, just given the strong pipeline. But just curious, would those also mostly be funded by cash from ops just like GMJ?

Yes, we're currently at 3.18. We are optimistic about reaching our goal of getting closer to 2.5x by the end of the calendar year. Our cash flow shows that we've had $215 million in purchase price while borrowing only $140 million. We expect that the purchase price will also be covered in cash. As long as the business continues to generate cash as it has historically, we should be able to meet that guidance.

Nandita, I want to emphasize that we will keep exploring opportunities. We will avoid those that do not align strategically. However, GMJ is a prime example of an opportunity we found attractive. Therefore, we will continue to pursue acquisitions and increasingly use cash to finance them. As we see the EBITDA growth, the leverage ratio will decrease.

Got you. That's super helpful. And just another one, guys. We've been hearing a slight change in the tone regarding the reauthorization bill with some conversations around the continuing resolution potentially entering the discussion. Just curious what the latest on the ground is that you guys have been hearing regarding the reauthorization?

We are optimistic about both houses of Congress, as both transportation committees are working on the reauthorization and are expected to finish by September 30. We appreciate the information regarding the scale and focus, particularly on hard infrastructure and the funding method for states. While we have experienced continuing resolutions in the past, this is essentially an extension of our current situation. Historically, over the past two decades, they have always reauthorized the 5-year plan at a higher funding level than before. We believe this trend will continue, leading to a new surface transportation bill with increased funding for the next 5 years.

I would like to turn the floor over to management for closing remarks.

Right. We want to thank everyone for being with us today. We look forward to speaking again in the future.

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