Construction Partners, Inc. (ROAD) Earnings Call Transcript

Greetings, and welcome to the Construction Partners Third Quarter Earnings Conference Call. [Operator Instructions] 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, sir.

Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review third 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, which is August 7, 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 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 our earnings press release for our 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, adjusted EBITDA and adjusted EBITDA margin. Reconciliations to the nearest GAAP measures can be found at the end of today's 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. 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 start today's call by addressing the approximately 7,200 employees of the CPI family of companies. Thank you all for daily bringing excellence to our operations. Your hard work, talent and unwavering commitment to work safely drove another outstanding in quarter building a record backlog and once again allowing us to raise our fiscal 2026 outlook. Simply put, CPI success begins with our people and the culture of a close-knit family of companies that we cultivate and maintain daily. Our core values, family, opportunity, respect and excellence are more than words. They guide how we operate every day. We are a family of companies, but more importantly, a company of families. We create opportunities for our employees to build better lives. We treat one another, our customers and our communities with respect. And finally, we strive daily to do ordinary things extraordinarily well for all of the communities that we serve. Our culture has become a meaningful competitive advantage. It enables us to attract develop and retain exceptional people across our more than 115 individual markets and also positions us as the acquirer of choice for sellers that want to take care of their employees. In the third quarter, we delivered another period of strong execution, growing revenue, net income, adjusted EBITDA and backlog, consistent with the momentum we've built throughout fiscal 2026. The -- during the quarter, our business remained resilient despite continued energy cost inflation and unusually wet weather across many of our markets in May. Our cost pass-through model and strong local market operating teams together with our disciplined operating strategy enabled us to execute at a high level and deliver another quarter of profitable growth. Before turning to the current demand environment, I'd like to briefly address federal transportation funding, a topic that has understandably raised questions among investors. As many of you know, a 5-year federal surface transportation funding bill is moving through the congressional authorization process. Let me begin with 3 key points. First, we believe that Congress will ultimately approve and increase the funding level of a new multiyear surface transportation bill that continues to support much-needed long-term investment in our nation's road and bridges. Second, while the timing of final passage remains uncertain, the possibility of operating under a continuing resolution is neither new nor concerning for our industry. Finally, based upon what we know today, we do not expect any disruption to federal funding or project activity in either fiscal 2026 or fiscal 2027. Now let's discuss where things stand today. Earlier this year, the Build America 250 Act was introduced in the House of Representatives and subsequently advanced out of committee with an overwhelming bipartisan support of a 62 to 2 vote. Positioning the legislation for consideration by the full house. While the bill must still pass both chambers of Congress and be signed by the President before becoming law, the House bill represents an important milestone in the reauthorization process. As currently drafted, Build America 250 Act provides approximately 7.2% more funding over the life of the build in the highway and public transportation funding included in the II JA. And when you dig into the details of the actual programs funded and compare where the money will be spent, the dollars targeted to hard infrastructure projects will have an even greater increase than the past 5 years. It's also worth noting that for 2 decades in each of the last 3 surface transportation reauthorizations, including I the FAST stack and MAP-21, the final enacted legislation ultimately provided higher funding levels than the initial house proposal. Given the long-standing bipartisan support for investing in America's transportation infrastructure, we are confident that Congress will ultimately approve a new bill. That said, the legislative calendar continues to tighten as the midterm elections approach, increasing the likelihood of a continuing resolution or CR, to temporarily extend current funding. Should that occur, federal highway funding would remain at fiscal 2026 levels, the highest annual funding levels in the program's history. Importantly, we do not believe a CR would have a meaningful impact on our business or industry activity in fiscal 2027. Approximately 45% of IGA funding has yet to be deployed. And we continue to see very healthy bid activity, project lettings and contract awards across our markets as reflected in our record backlog. Turning now to the demand for commercial development. As it relates to 1 of today's fastest-growing end markets, AI data centers, we have been serving data center projects across our footprint for many years. While activity in this segment has accelerated meaningfully our strategy remains unchanged. We will continue to pursue attractive opportunities in the local markets and states where we already operate. With an estimated 70% to 75% of new data center construction nationally expected to occur in our existing states, we believe CPI is well positioned to participate in this growth through disciplined bidding, established relationships with general contractors and a focus on projects that meet our commercial margin objectives. Today, our teams are actively bidding and building data center projects, including several notable examples. In Texas, Lone Star Pavan is actively working on a portfolio of data center projects in Central Texas and has a pipeline of opportunities exceeding $100 million in contract value. in Oklahoma, where we recently expanded our Overland platform to the addition of Elsewhere, we are building AI data center projects totaling approximately $100 million with the current pipeline of opportunities exceeding $130 million. Other newly won commercial projects range for construction for national retailers, to hospitals, to corporate campuses and manufacturing facilities. These examples represent only a portion of the more than 1,000 commercial sector projects we expect to build this year across our 8 states in over 115 local markets. On the public side, federal and state governments continue to invest in infrastructure to support the growing economies across the Sunbelt. From large market specific projects to recurring repair and maintenance work for state DOTs, cities and counties, as well as lane widenings and road expansion projects, publicly funded work remains robust. As examples of some of our recent public wins in just 1 of our states, Florida, we won a contract to reconstruct the existing airfield pavement apron at the main passenger terminal of Pensacola International Airport, involving demolition of existing payments new storm drainage and installation of subgrade and base courses, a multifaceted project that will begin in September and run through the fall of 2027. For the Florida DOT, we recently were awarded 2 contracts totaling $80 million to build new rest top areas along the I-4 corridor. These projects also strengthened our presence with a key transportation client while showcasing our ability to efficiently deliver large, complex infrastructure projects. In addition to these projects, we continue to win project awards across our 8 states for resurfacing and repair projects. This is our typical and sustainable work that drives our company forward. quarter after quarter and year after year. Overall, at the state funding level, we continue to see increased budgets and healthy project letting activity across our states. Turning to our growth strategy. Last month, we completed another strategic acquisition with a purchase of Ellsworth Construction, a leading asphalt manufacturing and construction company in Oklahoma. I'd like to welcome Nathan Ellsworth and his group of talented construction professionals to the CPI family of companies. Under our Oklahoma platform company, Overland Construction, Ellsworth expands our footprint in the state and significantly strengthens our presence in the rapidly growing Tulta and Oklahoma City metropolitan areas. The acquisition adds experienced employees strategically located facilities and a strong reputation for execution while further expanding our capabilities in the fast-growing data center construction market. Ellsworth established position in Oklahoma complements Overland's extensive data center portfolio in North Texas, creating additional opportunities to service this attractive and expanding end market. We continue to benefit from the ongoing generational transition occurring across our industry and maintain a robust pipeline of high-quality acquisition opportunities. throughout our existing footprint and adjacent Sunbelt states. We remain actively engaged in discussions with prospective sellers and encouraged by the opportunities ahead. Organic growth remains an equally important component of our long-term strategy, as evidenced by our strong organic growth, both in this quarter and for our entire fiscal year 2026. We continue to invest in our existing business by increasing capacity, broadening our geographic reach and enhancing our vertical integration network. As part of these efforts, we expect to bring several greenfield facilities online later this year, extending our reach into attractive high-growth markets that are currently underserved. Finally, I'd like to say that we're excited not only for the results of this quarter and expected for this fiscal year, but also for the outlook ahead for fiscal year 2027 that begins October 1. At CPI, our leadership team annually reads the book together. And several of these books we studied are by the renowned business author, Jim Collins. An important concept that we learned from Collins is the idea of the 20-mile march, having the discipline and planning to make consistent and steady progress towards your goal. Our ROAD 2030 5-year plan outlines our strategy to each year have a consistent march of controlled profitable growth as we execute on our strategy. Today, we are raising our fiscal 2021 guidance to reflect over 30% growth on both top line revenue and bottom line margins. And looking forward to fiscal year 2027, we anticipate strong organic growth again, and we already have approximately $140 million of acquisitive revenue carrying over from this year. So another typical CPI year of growth is developing. And we will continue to march forward with discipline to deliver long-term strategic value for our shareholders. And with that, I'd like now to turn the call over to Greg.

Thank you, Jule, and good morning, everyone. As Joel mentioned, we reported a strong third quarter, maintaining the outperformance we experienced in the first 6 months of the year. I will review the quarter in more detail before discussing our raised outlook. I'll start with a review of our key performance metrics for the third quarter of fiscal 2026. Revenue was $999.4 million, an increase of 28.2% and compared to last year. The breakdown of this revenue growth was 8.9% organic and 19.3% acquisitive. Gross profit in the third quarter was $168.4 million, an increase of approximately 28% compared to last year. As a percentage of total revenues, gross profit was 16.8% compared to 16.9% last year. General and administrative expenses as a percentage of total revenue in the third quarter decreased to 6.3% from 6.5% in Q3 2025. We Net income was $59.6 million and adjusted net income was $60.6 million. Earnings per diluted share for adjusted net income was $1.08. Adjusted EBITDA was $163 million, an increase of 24% compared to last year. Adjusted EBITDA margin for the quarter was 16.3%, and -- you can find GAAP to non-GAAP reconciliations at the end of today's earnings release. Turning now to the balance sheet. We had $95 million of cash and cash equivalents and $599 million available under our credit facility at June 30, net of a reduction for outstanding letters of credit. During the quarter, we amended our Term Loan A and revolver credit agreement as well as our Term Loan B credit agreement. First, we amended the existing revolving credit facility under the Term Loan A revolver credit agreement from $500 million to $700 million. In addition, we refinanced and replaced in full all outstanding term loans under the Term Loan B credit agreement to reduce the interest rate margins payable and provided for incremental term loans in the amount of $300 million. As of the end of the quarter, our debt to trailing 12 months EBITDA ratio decreased to 3.17x. We remain committed to our strategy of reducing the leverage ratio to approximately 2.5x to support sustained profitable growth. In the third quarter of fiscal 2026, cash flow from operations was $93.1 million, up from $83 million in Q3 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 are raising our fiscal 2026 outlet to reflect the outperformance of Q3 and to include the contribution of our newest acquisition, Elsewhere construction. Our new ranges are: revenue in the range of $3.64 billion to $3.68 billion, net income in the range of $165 million to $168 million. adjusted net income in the range of $177.6 million to $181.4 million; adjusted EBITDA in the range of $559 million to $569 million. an adjusted EBITDA margin in the range of $15.35 to 15.46%. Lastly, we had a record project backlog of $3.36 billion at June 30, 2026. 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. Operator?

[Operator Instructions] Our first question comes from Tyler Brown with Raymond James.

Greg, a couple of quick modeling clarifications, if I could. So one, can you kind of size what the asphalt pass-through revenue impact to growth was? And is that in organic growth Two, what is the expected total M&A contribution in the '26 guidance? And then three, did I hear it right, Joel, that 140 million rolls into next year? Sorry, I know there's a lot there, but I appreciate that.

Yes, no problem. Yes. So as you know, we're indexed on liquid AC and certainly, there was an impact there in this fiscal quarter. We're probably $8 million to $10 million of additional revenue for the quarter. And -- but that spread kind of both on the acquisitive side and the organic side, right, because it depends where in the geographical footprint it came. So I think your next question was what's the acquisitive in the next quarter?

Tyler. The midpoint of our guidance growth is around 30% now for overall growth for the year. And if you take out 8% organic growth, and that leaves about 22% from acquisitive, which I think at the midpoint of our guidance is somewhere around $780 million to $790 million, if I'm doing my math right. And you're right Yes. Well, I was just going to say you're right. We've got about $140 million of those acquisitions. So that revenue carrying over now into FY '27.

Okay. Perfect. Okay. So Jule, obviously, it's a really strong quarter. You called out May, it was very wet. So maybe you can help us just understand a bit how the business works a little bit better. So when we see the weather data, what are some things that we should consider, let's call it, regarding your operational flexibility. For example, does the timing of the rain matter if you guys -- because I think typically, you're working late at night early in the morning. So maybe afternoonsowers don't impact you as much? Or do you push workdays into the weekend, if you miss -- or do you just run double time when it's nice outside. But maybe you can just kind of help us understand how you navigate weather in what is clearly an outdoor sport.

Right. That's a good question, Tyler. And you're right in some of what you said. Obviously, when it rains, we cannot work when it's wet. In our work season, it's hot, and so it drives out pretty quick. But those days that we miss do create the need to be more productive to make up because our customers still want their projects delivered. So when it rains during the 1 day, we might make up for it on the weekend. And so when it drives out, we can make a lot of time up. I would just continue to say, as you've heard me say before, weather for us almost always evens out. We had some good weather quarters in the first and second quarter. This quarter was a little better than normal. So it's -- it can be part of the narrative quarter-to-quarter. But for the year, it almost never is part of the story.

Okay. Okay. Fair. Good. And then my last 1 here. I appreciate all the color on IGA replacement and obviously continuing resolution, et cetera. But kind of a bigger picture question. But let's call it in times of more funding uncertainty, if we want to call it that, -- could there be more of a shift towards those $2 million to $3 million resurfacing projects versus, call it, larger multiyear projects. Is that what happens at the state DOT level? Or am I just kind of overthinking that?

No, you're not overthinking it. We've been discussing that in the last month or so and Ned is older than me. He's seen a lot more. So I'm going to speak to the history of continuing resolutions and how that's affected the business

I guess, Tyler, what we really just learned is experience does have its benefits from time to time. Thank you, Juel. I think the easy answer to your question is yes. But if we take a historical perspective, first and foremost, we're at an all-time funding high from a federal level. Number 2 is the states continue to find ways to create capital for their own projects as well as to match the federal funding. The third thing that we learned is it does not really affect operations. Capital continues to flow. During the Obama administration, about 4.5 years of it, we live through a continuing resolution. It's just a fact. You can go Google it, use any of the AI you want. And what we learned is there were no disruptions -- there were more maintenance and short-term projects because people are waiting on the longer-term funding to make big project decisions -- number 3 is the states really stepped up and create funding. And I'm talking about local governments and municipalities. The last piece, which has always been real interesting to me that we figured out is we continue to have very strong opportunities for our acquisition growth. So from a historical perspective, I would say those 4.5 years were some of the best years the company has.

Our next question comes from Andrew Wittman with Baird.

Yes. I guess, I don't know, I just want to talk about the fourth quarter implied margin here. Obviously, it's another step-up. I guess implying around flat year-over-year despite some of the inflation in your commodity. So obviously, you're getting that pass-through and discussed that already. Is there anything more to it than that, Greg? Is just really the seasonal cost leverage that gives you the 3Q to 4Q bump? Is there a help from Ellsworth in terms of the margin up or down in terms of the mix that, that brings in with the backlog that they bring to you? Just kind of curious about some of the other puts and takes into that fourth quarter.

Yes, certainly, Ellsworth is a help. Other acquisitions we've made throughout the year are a help and become fully integrated in the fourth quarter and start turning on the revenue and the margin. I would also say that just like every fourth quarter as you start over absorbing all that fixed cost that just really starts the engine moving and starts generating more profit, more and more EBITDA.

Got it. And then I guess just bigger picture besides the crude complex. Are there any other inflationary or deflationary factors that you're seeing in your cost structure right now. The 1 that I always like to check in and is on labor. But maybe anything else, Joel, that you'd make a comment on there?

Andy, I don't -- I can't think of anything that's out of the ordinary. We're experiencing normal cost adjustments with labor, concrete pipe. And we have a pass-through model. And so as you know, every day, our estimators are turning in bids and they're putting the current input cost in with some contingency factors in there. So there's really nothing that's affecting our business in an outsized way -- and even the energy costs, we started immediately putting that in our pass-through model, and that's what you're seeing now reflected in our guidance.

Our next question comes from Kathryn Thompson with the Thompson Research Group.

Thank you for taking questions today. I know you focused a bit on the guidance and the raise. But even -- I guess stepping back and look at the force for the trees, you have the obvious top line add -- but for the companies that you have acquired, let's just say, within the past 6 to 12 months. How much of overall margin improvement or operational improvement is adding to this raised momentum and earnings growth as we go to the balance of the year. Because it's understandable like you've acquired companies, but -- you're also seeing some margin improvement on top of it. It helps us connect the dots on that because...

Thank you, Catherine. I think obviously, in 2025, when we added Lone Star Pavan, that was a transformational acquisition. It took us from 12% to 15% EBITDA margins. And then you've seen this year us take another step kind of along our path. And clearly, the new acquisitions we've made are helping that. Der wood Green, GMG, F-star Pavan in Tennessee and now Elsewhere, they all are really good companies that have good margin in their backlogs, or well-run operations. And so we are -- the acquisitions that we're adding are helping us become more profitable.

Okay. And then we focused a little bit on the the federal side for the new highway bill reauthorization, but we had a few meetings with TxDOT in June -- and they were pretty optimistic, I mean, even with CRs. What are your other state DoTs telling you about what they are or not doing at the overall perspective on this federal highway bill reauthorization, and importantly, how they're planning in and around that journey?

Yes. Katherine, I've heard what the Texas DOT said at that meeting in June. And I think the other states would largely say the same thing. They don't expect any interruption in their planning obviously, everybody would like to get the 5-year bill passed, and we think it will happen late this fall. And so the DOTs may do a little more short-term projects at the very beginning. But once the 5-year bill passes, they'll start planning longer-term projects, but there should be really no interruption to the state's programs.

Our next question comes from Michael Feniger with Bank of America.

Thanks for letting me jump on. Gentlemen, just on the data centers, I mean, maybe for you jewels, -- is there anything different on how you guys are tackling this opportunity or going after it? Is it more than just your normal type of work and services? Are there other ways you can deploy the team and get a couple more bites out of the apple -- is the pricing or project length a little different than what you normally look after. Just kind of curious how -- as you guys have built out in some of these geographies and you look at this pipeline on data center work, like is there other things that Road can do here that maybe we don't see you guys do on a typical project?