Construction Partners, Inc.

Greetings and welcome to the Construction Partners Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rick Black, with Investor Relations. Please go ahead.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the construction partners conference call to review third quarter results for fiscal 2023. 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 2nd, 2023. So please be advised that any time sensitive information may no longer be accurate as of the time of any replay, listening, or transcript reading. I would also like to remind you that 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 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 today's earnings press release for our disclosures 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 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, Jewel Smith. Jewel?

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. We are pleased to report an excellent quarter. In fact, it was a record quarter for CPI in numerous ways. I want to thank our over 4,000 employees for their hard work and expertise in delivering this record quarter despite battling wetter than normal conditions. Our employees are the key to our success at CPI. Not only did they deliver a great quarter, they also continued to set the table for future growth and success by adding strong backlogs, throughout our six states and establishing several growth initiatives, which we will cover on the call today before Greg reviews our financial information. Q3 represented the single highest revenue quarter in our history at $422 million. As evidenced by our gross margins of more than 15%, our teams throughout 67 local markets were productive and efficient. When comparing year-over-year revenue, It's important not only to take into account the above-normal precipitation this quarter, but also the abnormally high liquid asphalt index adjustment last year that produced $10 million of additional revenue. CPI continues to produce strong organic and acquisitive growth, and our revised guidance announced today reflects an anticipated annual growth of over 18% in FY23. As anticipated, in the third quarter, substantially all of our work came from post-inflationary backlog. Additionally, the company benefited from lower energy costs. The result of the hard work, backlog conversion, and some lower costs was strong gross margins, net income, adjusted EBITDA, and cash generation. Gross margins were 355 basis points higher than a year ago. and adjusted EBITDA margin was 13.4%, a high single quarter margin in over two years. Cash flow from operations continues to be strong as CPI's model has historically generated free cash conversion of over 50% that is available to invest in growth initiatives and compound shareholder value. In addition, we've made significant progress in lowering our leverage ratio during the quarter. As we stated last quarter, our business is normalizing and we are now experiencing operational performance typical for CPI. We continue to pursue healthy sources of recurring revenue in a much more stable and normal cost environment. The expectation is for the business to maintain this performance trajectory. A great indicator of future growth is our growing backlog, even in a record revenue quarter. While historically CPI's backlog might shrink in the busy work season, the fact that our teams produced a record backlog for the 10th quarter in a row is evidence of growing relative market share in our local markets and continued strong demand in both the public and private markets. The IIJA's investment in public infrastructure is now in effect throughout our states and creating opportunities for road widenings and resurfacing bridge replacements, airport taxiways, and many other types of bid opportunities for CPI. In the private markets, migration to the Southeast United States continues to produce demand for our services in industrial, non-residential, and residential projects. Our record backlog gives us great visibility into the future and allows us to remain patient in adding high-quality new work at attractive margins. Turning now to CPI's strategic growth model, we announced this week two growth initiatives. First, we acquired a hot mix asphalt plant and related operations in Myrtle Beach, South Carolina from C.R. Jackson. Since we entered this market a year ago, we've been very impressed with the dynamic growth and opportunities in the second fastest growing metro area of South Carolina. This acquisition gives our local team additional resources to capitalize on those opportunities and grow our relative market share. Second, as we continue to focus on organic growth, we announced this week a new hot mix asphalt greenfield in Waycross, Georgia, a strategic location adjacent to our current South Georgia markets. This greenfield will allow us to extend our reach eastward toward the rapid growth emanating from the large port in Brunswick, Georgia. And finally, one of our key levers of margin expansion is vertical integration. And I'm pleased to announce that our new liquid asphalt terminal in North Alabama is now operational. This terminal will capture the margin dollars between wholesale and retail while servicing over 12 asphalt plants in Alabama and Tennessee. just as we have been successfully executing for four years with our Gulf Coast terminal in the panhandle of Florida. Before I turn the call over to Greg, I want to conclude by reiterating how pleased we are with the quarter and the outlook for the remainder of FY23, as demonstrated by our raising of net income and adjusted EBITDA ranges. As we look to FY24 and beyond, It's great to see the resilience and quick recovery of the CPI model operating effectively. The company is ready for and benefiting from opportunities afforded by generational investment and infrastructure, a booming economy in the Southeast, and numerous growth opportunities as we consolidate and strengthen our industry. We are indeed incited for the road ahead.