Construction Partners, Inc. (ROAD) Earnings Call Transcript & Summary

Hi, everyone. Thanks for joining us. Today, we have Construction Partners at our conference. Construction partners has one of the best stock tickers, R-O-A-D, ROAD, which really describes this unique infrastructure play. There's really no other public company like it in the market. Management will provide a presentation on the company to help give us a background and summary of its markets. We will then launch into a Q&A that should serve more as a dialogue. Feel free to e-mail me questions at michael.feniger, F as in Frank, E-N-I-G-E-R @bofa.com I'm going to hand the call over to Ned Fleming, the Co-Founder and Chairman of Construction Partners. Ned, over to you.

Thank you, Michael. We certainly appreciate everybody's time to listen in on this. I want to begin by saying that Charles and Alan lead a team that has implemented excellent protocol and safety processes during the COVID-19 crisis. We are doing everything we can to support the health and safety of our employees and to assist with the recovery of our communities during this crisis. We are especially grateful for all the hard work of the first responders and health care workers. We're also fortunate that our company has experienced only minor disruptions, and we expect it to remain resilient through this crisis. This is a business that is in a large, growing market. It continues to grow. It is a highly fragmented market. There is no technological obsolescence. There are high barriers to entry. CPI is well positioned to take advantage of all of these opportunities. We will -- you will learn, we have a well thought out plan for continued growth with a deep bench of young managers and leaders that know how to navigate and prepare for the issues of growth both organizationally, with good process controls, and strategically. CPI has the knowledge and experience to do every phase of the construction process in the material side as well as the service aspect. We believe this vertical integration gives us a competitive advantage as we continue to grow and build a company that today is the leader in growth, a leader in margin percentage, a leader in the technological utilization to become more efficient and a leader in consolidation. It is my pleasure to introduce Charles Owens, one of the Founders and CEOs of this business. Charles is very strategic and thoughtful and has built a wonderful team and has been a real pleasure to work with for me throughout the years. Charles?

Thank you, Ned, and thank you, everyone, for joining us on the call today. First, we'll reference to Page 4, and we'll talk a little bit about what we do. We are a vertical-integrated growth company by teaming up and acquiring smaller hot mix asphalt companies that are looking for an exit strategy that enhances our growth strategy. And our 35 hot mix asphalt plants is the driver of our business model, and we'll talk about that on Slide 4. As you see on the left-hand side, the middle, that is a photo of one of our hot mix asphalt manufacturing plants, and we have 35 of these plants, and this is the driver for our business. And talking about vertical integration of the manufacturing process, we have some aggregate facilities that we supply a portion of our aggregate to our plants. And then we also supply recycled asphalt pavement aggregates in our plant. And then several of our plants, we will supply the liquid asphalt that goes into the manufacturing of the hot mix asphalt. So you have rock going into the plant, and then you have liquid asphalt, which is the black stuff, which kind of serves as the glue for holding everything together. So then we go to the service side of our business. We're capable of doing the clearing and grading the roadway base, the hot mix asphalt pavement. And we do portion of the bridge work and bridge concrete structures, storm drain and miscellaneous concrete. So from a service vertical integration company that -- it helps our business because we do not have to rely on a lot of other subcontractors, and we are able to control our own schedule and more efficient when we have everything under one section. And then on the next side of the column, we do show about portion of our work like signage and roadway markers, guardrail, barriers, striping on our projects. And then that equals, when you get finished, we have a finished roadway. Even though a majority of our business is maintenance work is where we just go in mainly and mill up that existing roadway and come back and put back down another thinner lift of the asphalt. And then if we'll turn to Page 5, we talk about where we are today. As you can see, the -- where we -- our hot mix asphalt plants are located and where our liquid asphalt terminal is located. And the -- in our area, we're a market leader. We have over 2,300 employees. And of the 35 hot mix asphalt plants that we have, which is our driver to where we bid work is in that area, we are the #1 or #2 player in each one of those markets. There's a -- we have a strong momentum for our business, and it's mainly the -- caused by the deteriorating of the roads. So we have a good tailwind, and we've had seen increase in funding on both the private and the public side. We have a very successful record of expansion, and we'll talk a little bit more about that. But since the beginning, we've done 21 acquisitions and 7 greenfields. One of the key to our success has been our IT system. We have a standardized IT system, which improves the bidding of our projects, the execution and the financial controls. And then if we'll go to the next page, we'll talk about the compelling investment thesis. We are a proven growth company, and our strategy has worked. It has been consistent. And if you look at our top line growth, we've been consistent in double-digit increases, and our EBITDA margins have also been in the double-digit numbers. And this has been consistent since we entered our company. Our senior VPs is the key to one of our growth acquisition roles because they're involved in not only hitting the target potential acquisitions but also close the deals and getting them fully integrated. If you look at our different model, we are a vertical integrated company from a material side going into a hot mix side and also on the service side. And geographic synergies, we have the ability to shift equipment from one profit center to another profit center if we have one that might be down or we have one that may be expanding at a little bit rapid pace. And local presence does matter. The deteriorating roadways exist in any one of our 5 states that we operate, and we have a local home-based workforce, which is the key to our success, we feel, because every day they get up in the same location and they go to work in the same market and then they're home and they're sleeping at night. And we have 3 levers for growth: acquisitions, greenfield and organic. And there's been no change in our growth strategy since the beginning when we started the company. And then we could go to Slide 7, and we'll expand a little bit further on the 3 levers of growth. The organic growth is where we just do more work in a market. And the demand to fix the roads is tremendous because our system right now, our road system is basically graded at a C or D. So there is a pent-up demand. And we're dealing with the COVID-19 right now, but that has not done anything but increase the demand because of the little bit of a shortage in funding that -- where work has not been as readily as it has been before, and we'll talk about that a little bit later on. And then the greenfield opportunities we have is when we strategically locate a hot mix asphalt plant in a market and we use our synergies by -- when we first do those greenfields, we use our people in adjacent of those markets to help in the bidding and the getting the greenfield up and running until it has its full capabilities of management and operations all at that place, and it expands our market area. And on acquisition side, in the states that we operate today, there's about 155 hot mix companies in our market. And of those, about 70% are privately owned. So as you can see, the pipeline, it could be very good. And the -- keep in mind that the roads is a key asset for the U.S., and there's no choice about what's going to have to be done, they're going to have to be fixed. And then if we look at Page 8, and this page I kind of demonstrate our proven strategy of how we've operated since the beginning. Our strategy has always been to buy a platform company. And then once the platform company is purchased and we get it fully integrated and then that company does bolt-on acquisitions, plus the company will also look at strategic locations and do greenfields and then, of course, we have organic growth once we get all this stuff in place. Of course, a key success factor of our business is our people and our senior VPs and our workforce. And the IT system is a very important part of the organization, which we've already touched on. But we try to simplify our business and say we do 3 things: we get work, we do work and we keep score. And our people, our senior management team and our workforce, they have done an excellent job in executing this strategy since day 1. And if we look at Page 9, we'll talk about the -- some competitive advantages. On a scale, first of all, we have 35 different markets, and we have over 2,300 employees. And that's a huge factor for us because we can take different equipment and different people in our organization and move them from one market to another and still basically stay at home at night and work in a local geographic area. The vertical integration, of course, is a big advantage for us because we do supply part of our aggregate at all of our asphalt plants, and then we also have the capability of supplying liquid asphalt to part of our plants. And then the construction services, where we're vertically integrated, where we're not depending on other people to perform work for us, and we could control our schedule better. And from a -- this is a very good competitive advantage over a smaller -- a family-owned operation because they do not have the capabilities of moving equipment or people from one market to another market depending on what markets are being -- work is being led in. So from a geographic standpoint, that is a huge opportunity to us because we do have the flexibility to better utilize our equipment and our workforce and increase our profitability. And we've already touched on the IT and how important it is to our organization. And keep in mind that from a relative market share, our primary local competitors are the local, mostly family-owned companies. And it is very important to recognize that this gives us a competitive advantage because we do have people in these markets that understands the market, understands the people and from -- and decisions are made a lot on those local levels and not pushed down and from a corporate level all decisions as long as we stay within our strategy. On Page 10 is just an illustration of the states that we operate in, and I guess the point there is that we have seen the increase in gas tax in every one of the states. And so that's a good sign that the people are -- want good, safe roads, and they're willing to pay the price at the pumps. On Page 11, we talk about the strategic acquisitions that we made this year. One is in Palm City. And if you can see it, in Florida is the one -- the farthest south, and that acquisition was a great expansion because, just several months before, we bought a company over a little bit to the west of it, so that gave us an opportunity to shift people and equipment back and forth, and so there's a lot of synergies recognized there. And then up in the panhandle Florida, just south of the Alabama line, as you can see that we purchased 2 asphalt plants there, and that was a great opportunity for us for -- to recognize some synergies there. One is locations. We bought out a person that we competed with, so we're eliminating one competitor. And then it expanded the operation over into another new market area. And one of the things it did also, it increased our sales to ourselves from our liquid asphalt terminal that you can see that's in the panhandle there, that kind of the green box looking deal. So we have an asphalt terminal there that we service our liquid asphalt at several of our southern plants. And that was just 2 more plants that we can service out of our terminal. And then on Page 12, we talk about the COVID-19 response. All I can tell you is that we had -- our people responded great during this time. And from a safety priority standpoint, it was all about making sure our employees were safe, our customers were safe and the general public that we worked around were safe, and there was no shortcuts taken. We've complied with the CDC. We made sure that we had all of the suppliers and our supply chain was opened up with what we needed to keep our people. And so we worked between our states when we had supply issues to make sure that everyone worked safely. And of course, we went through all of the protocols to make sure that our workforce was put in the best position to remain safe during this process. And the work impact, we had minimum disruption in the work impact. In fact, in some areas, while the stay-at-home was in place, we were actually able to move some night work to day work because of the less traffic. And of course, productivity remained good even though we were complying with all of the compliance of the CDC, and it worked out very well. And then on Page 13, this will give you a little snapshot of the experience and the management depth that we have. As you can see, a lot of us on this page had worked for a company called Superfos. That was a company that we worked with before it was sold, and it was a company in Copenhagen, Denmark. And we had a strategy very similar to the strategy that we have today. So as you can see, we have several members that had worked and has built a company like we have it built today. And then you see in the other areas that we have picked up some excellent people like at Wiregrass. John Harper, for example, was one of the owners of Wiregrass Construction. He's done an outstanding job in building our Alabama operation along with Jule Smith, which was a platform company that we did in North Carolina. Jule was one of the owners and continuing on and he's done an outstanding job in building our North Carolina operation. So the key to this whole organization is our -- basically our 2,300 -- over 2,300 employees, great, hard-working people, and these people was the key to executing our strategy on a year-in and year-out basis. And this is the key page here that sets the culture for the company to make sure that we can get good people, keep good people and make sure that we can try to promote within our organization. So a lot of people enjoy coming to work for us because they do see the opportunity of a growing company, and they do see the opportunity to continue to expand in their career. On the next page, we'll start talking about the financials, and I'm going to turn the page over -- this section over to Alan Palmer, our CFO, which Alan and I have worked together for several years, and he has done an excellent job in making sure that our company is financially sound. So Alan?

Thank you, Charles. If you will, on Page 15, you can see on this page that we have been able to consistently grow our revenue, our adjusted EBITDA and net income by utilizing the 3 levers of growth that Charles mentioned earlier. In fiscal year ended 9/30/18, our revenue growth was 19.7%, and it was approximately 9% acquisitive growth and 10% organic growth. And part of the 2018 organic growth was a result, an asphalt plant greenfield that was completed in September of 2017 and another asphalt plant greenfield that was completed in March 2018. Both of those are considered organic growth. And in fiscal year ended 9/30/19, our 15.1% growth was approximately 7.6% acquisitive growth and 7.5% organic growth. And we consider any revenue growth at an acquired company after its first 12 months of ownership to be organic growth. If you look at the net income, our net income for the last 12 months ended March 31, 2020, it was impacted by a $1.5 million charge on our interest rate swaps and a $0.8 million noncash charge non -- expense related to fuel swaps that we entered into in March to hedge our future diesel fuel costs through December 2021. And in that lower left side, you can see, in 2018, we had a spike up in net income, and that was primarily a result of a $14.8 million settlement claim that we had that was booked in 2018. So with that netted out, you'll see it's just been more of a consistent growth in net income also. On Page 16, I want to talk a little bit about our seasonality. Historically, CPI generates approximately 40% of its annual revenue in the first 6 months of its fiscal year and 60% of its revenue in the last 6 months. And you can see from the chart of 2018 and 2019, there's very little difference between the first 6 months. But what you can see is that between the first and second quarter, there can be some fluctuation from one year to the next. And all of our work is outside, so we're subject to the weather conditions. And in all of our markets, we are able to work 12 months a year. But due to greater rain and colder temperatures in certain months of the year, we experience seasonality in our operations. One thing I would like to emphasize is that if we experience a delay due to inclement weather or any other factor, the backlog of work we have to complete does not go away. So we have not lost that revenue, it's typically just delayed until later in the year. So if a delay happens earlier in the year or even earlier in the quarter, we are able to complete more work in later periods. And that's one of the things I would point out about fiscal year-end 2019, we had the unusual situation where, due to sustained and widespread inclement weather, in our first quarter, we were behind our normal first quarter revenue volumes. And you can see there was almost no growth between 2018 and 2019 first quarter. But however, we were able to make up that shortfall in the second quarter due to our flexibility of working longer hours and a more favorable weather pattern in that quarter than usual. So we have that ability, if it happens early enough in the year, to be able to make that up. Our public work is primarily recurring maintenance-type projects of shorter duration than the multiyear megaprojects that many of our other public companies -- the other public companies perform. And we normally like to have about 6 to 9 months of backlog in each of our markets. And as a result, our backlog will look fairly consistent, with some spikes when we book a couple of multiyear jobs in a particular quarter. And due to the volume of work we completed in the last 60 -- 6 months, which is normally 60%, compared to the first 6 months, and the timing of when the various states' departments of transportation bid their annual asphalt resurfacing projects, it is typical that we burn more backlog than we book in the second half of the year, and we tend to build more backlog in the February to May months. And the seasonality, due to a portion of our expenses at the asphalt plants and our equipment fleets and our overhead being fixed, does impact our quarterly gross profit and adjusted EBITDA margins. The job profit margins don't vary significantly from quarter-to-quarter, but the under absorption of fixed costs in the first half of the year and the over absorption in the second half cause fluctuations in those margins. Then if you look on Page 17, our revenues for the 3 months ended March 31, 2020, increased $4 million or 2.7% compared to the 3 months ended March 31, 2019. If you remember, I've said on the previous slide that we had an unusually high level of revenue in our second quarter 2019 due to the shortfall from the first quarter. So you're comparing a quarter where we were trying to make up for lost revenue to one where it was a more typical amount of revenue that we would do. But we continue to execute our strategy of both organic and acquisitive growth. And our 6 months revenue increased 8% year-over-year, so we had a more typical first quarter compared to an atypical in the prior year and a more typical second quarter. But overall, for the 6 months, we were up 8% year-over-year in the same period prior year. We recently updated our full year 2020 outlook ranges for revenue, net income and adjusted EBITDA. We typically provide annual guidance, and then we provide an update to our annual look -- outlook after our second and third fiscal quarters, which our second one is March 31, and that's what we did last year. So we were -- we felt like we had information in the outlook with our backlog and everything to be able to continue to provide guidance for this year. I would just point out that in the appendix, there are some disclosures regarding the reconciliation of EBITDA, which is a non-GAAP measure, as well as our disclosures on press releases and SEC filings. I want to thank you for your interest in Construction Partners. And I also want to thank Michael and Bank of America Securities for giving us the opportunity to present at this conference. And Michael, I think we'll be able to answer some questions at this time.

Yes. Thank you, guys, for the -- thank you, Ned, Charles and Alan for the detailed presentation. Certainly have some questions. If anyone has questions for Construction Partners or want to learn more, feel free to reach out to me, and I'm happy to pass you along to the management team. I actually believe we actually are out of time. I think it was a 30-minute session. So we will -- we're going to probably wrap up as I believe there's a lunch break right now, and then the next session should start to start after. If you have any questions, again, for me in terms of our initiation, some detailed work we've done or any detailed questions for the management team, feel free to reach out. Thank you, everybody, and be safe.

Thank you, Michael.