Q4 2023 Construction Partners Inc Earnings Call
Participants
Jule Smith; President & CEO; Construction Partners, Inc.
Ned Fleming; Executive Chairman of the Board; Construction Partners, Inc.
Greg Hoffman; CFO; Construction Partners, Inc.
Rick Black; IR; Dennard Lascar Associates, LLC
Brian Biros; Analyst; Thompson Research Group, LLC
Michael Feniger; Analyst; BofA Global Research
Adam Thalhimer; Analyst; Thompson, Davis & Company, Inc.
Brian Russo; Analyst; Sidoti & Company, LLC
Presentation
Operator
Greetings. Welcome to the Construction Partners Inc., fourth quarter earnings conference call. (Operator Instructions) (technical difficulty) this conference is being recorded.
It is now my pleasure to introduce your host, Rick Black, Investor Relations. Thank you, Rick, you may begin.
Rick Black
Thank you, operator. And good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review fourth quarter and year end 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, November 29, 2023. So please be advised that any time-sensitive information may no longer be accurate as of the date of any replay 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 for 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 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, Jule Smith. Jule?
Jule Smith
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. I'll begin with an overview of the business, followed by Greg reviewing our financials in more detail.
We finished the year with a strong quarter that drove substantial year-over-year growth for both the fourth quarter and the year. Fiscal 2023 revenue was up 20% year over year, and adjusted EBITDA was up 57% and net income was up over 129% and consistent with our goal at the beginning of the year to return to double digit margins, we achieved a full year adjusted EBITDA margin of 11.1%.
We also returned to the normal CPI business model of generating strong cash flow. We ended the year with cash flow from operations of $157 million and lowered our leverage ratio while continuing to drive both organic and acquisitive growth throughout the year.
Today, we are reporting a record backlog of $1.6 billion. This is evidence that the demand environment is greater than at any time in our past, supported by healthy public funding programs as well as strong commercial markets throughout our six southeastern states, and in regard to that IIJA.
While the bill passed three years ago and the funding only began flowing to the states over the past two years with construction project work starting in the past year. We are still in the early innings on the construction side of this generational investment in our nation's infrastructure.
In the southeast, our states are growing and they remain focused on maintaining and improving the quality of their roads as well as increasing capacity to handle the significant migration to the Southeastern United States.
Both of these types of projects are in the sweet spot for CPI's operational capabilities, along with other types of projects such as airports, ports and rail lines. After decades of falling behind and neglecting infrastructure maintenance needs, we believe that IIJA serves as a downpayment on the maintenance and new construction needed to support our country's infrastructure. After this initial down-payment, there will be remain a great deal of work needed in future years beyond the IIJA.
In addition, several states we operate in such as Tennessee, South Carolina, North Carolina, and Florida have also recently passed additional supplemental funding plans on top of their existing funding mechanisms to trying to keep pace with their rapid growth and the needs of their states.
Turning now to CPI strategic growth model, subsequent to the end of our fiscal year of September 30, we've completed two strategic acquisitions that enabled us to enter new growth markets and strengthen our market share in existing ones.
First, on October 2, we expanded operations in the upstate area of South Carolina by acquiring Hubbard Paving & Grading in Walhalla. The acquisition is hot-mix asphalt plant and related construction operations to our South Carolina platform company King Asphalt and expand that service market westward in the upstate region.
The second acquisition we announced on November first was the Reeves construction assets in the Charlotte Rockhill area that added three hot-mix asphalt plants and related construction operations in Concord, North Carolina, and Rock Hill and McConnell, South Carolina. We entered the Charlotte market last year through our acquisition of Fairview corporation in the upstate region of South Carolina two years ago through acquisition of King as well in both areas. We continue to experience a strong economic climate, favorable demographic trends and other tailwinds supporting the need for infrastructure services.
As we move into a new year, we continue to have numerous conversations with potential sellers both inside and outside of our current states. And we remain patient and focused on finding the best strategic acquisitions that expand our footprint and grow relative market share. We believe CPI has seen as the buyer of choice for many owners in the southeast through our reputation for treating sellers fairly providing career opportunities for their employees and our track record of successfully integrating and growing companies.
Last month, we were pleased to host our first-ever Analyst Day in New York. And as we said then the big news for CPI is there's no new news. Our plan is to continue to execute on the same strategy. The company was founded on to capitalize on the substantial need to invest in infrastructure in the growing Sunbelt region of the US.
Analyst Day allowed us to showcase our unique culture at CPI. as a family of companies and to highlight our operating company precedence. They are the industry leaders that drive CPI's differentiated strategy of operating in distinct local markets with local workforces and generating stable recurring revenue from repeat customers while continuing to build smaller size projects with lower risk profiles and higher margins.
Analyst Day also served as an opportunity to introduce our FY24 outlook as part of our five-year strategic plan that we call Roadmap 2027. This plan outlook outlines our growth targets that represent annual revenue growth of 15% to 20% and EBITDA margins in the range of 13% to 14% by 2027. Our topline growth strategy will continue to prioritize organic growth in our current markets as well as finding opportunities for greenfielding facilities and adjacent markets, and finally, our third growth lever of strategic acquisitions.
Margin expansion also has three levers. First, by building better local markets with increased market share as the number one or two player in each of our local markets and improving our market intelligence. Secondly, we want to use vertical integration to continue to gain more margin along the value chain on materials and services. And finally, as our business continues to grow, there will be additional benefits of scale that will steadily contribute to margin expansion.
Also crucial to our strategic plan is further widening a competitive advantage to our workforce by building on our strong organizational culture as a family of companies and providing superior benefits career opportunities which attract and retain the best construction professionals. At CPI, we're dedicated to building better lives and to building the infrastructure that keeps our communities connected.
As we wrap up a successful fiscal year, I'd like to thank our hard-working Board of Directors, many of whom have been serving as Director since the founding of the company 24 years ago. Their expertise and experience continued provide wise counsel to the company's leadership team.
I want to conclude by also thanking the more than 4,200 employees at CPI for their hard work and professionalism in delivering a strong fiscal year 2023 and being prepared for dynamic growth in our new fiscal year 2020. For most importantly, thank you for watching out for your teammates and keeping each other safe each and every day in our worksites. I'd now like to turn the call over to Greg.
Greg Hoffman
Thank you, Jule, and good morning, everyone. I'll begin with a review of our key performance metrics for the fiscal year. Before discussing our outlook for fiscal 2024. Revenue was $1.56 billion, an increase of 20% compared to last year. The mix of our total revenue growth for the year was 8.7% organic revenue and 11.4% from recent acquisitions.
During the final quarter of the fiscal year, the weather across our states was better than seasonal averages and compared favorably to the fourth quarter last year. I'd also point out that the liquid asphalt index reimbursements we received this year. The fourth quarter were much lower than last year as liquid asphalt has trended down for most of the year.
Liquid asphalt prices were relatively flat in fiscal 2023. Consequently, we received $1.3 million for liquid asphalt index reimbursements in Q4 2023 compared to $10.7 million in Q4 last year. Excluding the impact of these reimbursements, the company's organic growth rate would be 9.6% and the overall revenue growth would be 21%.
Gross profit in fiscal 2023 was $196.4 million, an increase of approximately 41% compared to last year. As a percentage of total revenues. Gross profit was 12.6% in fiscal '23 compared to 10.7% last year. General and administrative expenses as a percentage of total revenue in fiscal 2023 declined to 8.1% compared to 8.3% last year. Net income was $49 million, an increase of 129% compared to $21.4 million last year.
Adjusted EBITDA was $174.1 million, an increase of 57% compared to last year. Adjusted EBITDA margin for the year was 11.1% compared to 8.5% in fiscal 2022. You can find GAAP to non-GAAP reconciliations of net income and adjusted EBITDA financial measures at the end of today's earnings release. In addition, as Jule mentioned, we are reporting a record project backlog of $1.6 billion at September 30, 2023.
Turning now to the balance sheet, we had $48.2 million of cash and cash equivalents and $222.1 million available under the credit facility net of a reduction for outstanding letters of credit. We have $283.8 million of principal outstanding under the term loan and $93.1 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 a reminder, the company entered into an interest rate swap agreement that fixes SOFR at 1.85%, which results in an interest rate on $300 million of term debt of 3.1%. This is a reduction of 50 basis points from [930 22]. The maturity date of this swap is June 30, 2027.
As of the end of the quarter, our debt to trailing 12 months EBITDA ratio was 1.72. As Jule mentioned, we also reduced our leverage year leverage ratio year over year from 2.78 while continuing to grow organically and acquisitively. Our expectation is the leverage ratio will maintain a range of 1.5 to 2.5 while continuing to add sustained profitable growth.
Cash provided by operating activities was $157.2 million compared to the $16.5 million in fiscal 2022. Net capital expenditures for fiscal 2023 were $80.1 million, consisting of $97.8 million in capital purchases and $17.7 million of proceeds from the sale of property, plant and equipment. We expect net capital expenditures for fiscal 2024 to be in the range of $90 million to $95 million. This includes maintenance CapEx of approximately 3.25% of revenue, with the remaining amount invested in high-return growth initiatives.
Today, we are maintaining the fiscal year 2024 outlook that was introduced at our annual analyst day event last month on October 4, 2023. 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. Operator?
Question and Answer Session
Operator
(Operator Instructions) Kathryn Thompson, Thompson Research Group.
Brian Biros
Hey, good morning. This is actually Brian Biros for Kathryn. Thank you for taking my questions.
First on the EBITDA guidance, top end gets back to 12%. That'd be great. Low ends more about 20 basis points off of where you ended the current year. Can you just touch on the low end scenario there and what are the building blocks to get to that kind of 20 basis point margin growth?
Jule Smith
Yeah, Brian, in our guidance and in our Roadmap 2027 we talked about last month at the Analyst Day, we expect to have 50 to 75 basis points of margin improvement each year, and that's what our Roadmap 2027 calls for. And but when we give guidance we give a range right to encompass different scenarios.
But our guidance on that we give we assume normal weather, a stable economy and some good execution. And so we're just getting the year started. And as we go through and see how the year is going, we'll update that guidance. And as you saw last year, we tightened it and raise it accordingly.
Brian Biros
Thank you. Follow up just then on the mix between public and private basis, the product is mentioned in the call, even the private side, both good tailwinds going into the next year and most multiyear tailwinds. Do you see the the mix between the two changing at all going forward?
And you've had strength between the two in a little bit different public, maybe a little bit stronger, but you had bigger in good states in the Southeast that are seeing good trends on the private side, too. So just wondering how that, that mix shift looks for you guys, if if any mix shift going forward? Thank you.
Greg Hoffman
Yes, sure, Brian. Yes, on actually, I think what you'll see we look at our filing that the mix has changed a little bit in 2023 overall from basically 60, 40 in prior years to roughly 63 public, 37 private in 2023.
So I think that's a that shows quite a bit of demand in the public environment, both both state and federal levels, as we've discussed and Joel discussed, and so that number could go up some potentially in the public side based on what the what the demand provides in the marketplace. But I think we're comfortable with that mix going forward.
Operator
Michael Feniger, Bank of America.
Michael Feniger
Hi, everyone. Thanks for taking my question. Just following up on on the conversation between public and private. And I'm just curious on the on the private side, can you just tell us what your what you're actually seeing with activity there in recent months.
And do you still expect that that business on the private side, are you expecting that to be off in 2024, you know, high single digit. You guys have given great color on the public side, it seems like there's nice tailwinds there. I'm just curious, there's some concerns in the market around private see higher rates potentially impacting some some private construction activity. Just curious what you guys are seeing given your geographical footprint.
Jule Smith
Michael, that's a great question and one that we've been getting in. It's something that I watch very closely the look at the bid sheet each week to see any and all of our local markets, what opportunities we're seeing and some of the surprising thing for us, this past year and especially the last six months of things on the commercial and private side have held up very well.
And as I said at our Analyst Day, the mix I think has evolved over the last year on housing is remained steady, even though that's not a big part of what we do. I think the fact that so many people are not selling their existing homes. But customers we do support from a residential standpoint from the builders are experiencing good demand for their products.
But what we've really seen in addition to the residential migration to the Southeast is business migration to the southeast. And I think you've heard that from other customers or other companies in our industry. There's just a lot of heavy duty industrial demand where businesses are building manufacturing, facilities, labs and headquarters. And so that continues to just be a steady demand for the commercial environment. Ned, you want to weigh in on that?
Ned Fleming
Michael, it's interesting. We're in a relative market share business. So in the markets that we compete in and we see this because Suntec's invest really in the sunbelt of the country. There's are continues to be a lot of growth. The demographic trends are driving that number one.
And number two, the business trends are driving that So in a relative market share business, what we're worried about is the growth in Raleigh-Durham, the growth in Huntsville, Alabama. And in each of these 70 plus distinct markets, we continue to see growth commercially residentially, everything.
In fact, in most of the places we're doing business, there is a housing shortage. There's a supply problem and that supply problem isn't going to get solved for somewhere between 6 and 10 years.
Michael Feniger
Good to hear guys. And just my follow-up. We're still seeing pretty high price increases on aggregates and rocks. And I'm curious what you're seeing all of in terms of your input and your costs, your competitors and basically how you feel the environment is to still pass that along.
I know you referenced what you're seeing out there in terms of the bids and the prices. Just curious how you're kind of thinking with some of the inflation, even though inflation is coming down but you're still seeing some high price increases in some of these more material thoughts on material inputs. Just curious how you feel like you guys and the competitors' ability to pass that along in '24? Thank you.
Jule Smith
Well, Michael, CPI's -- our model is just to pass through the inputs to our bids. And so you're right, we are continuing to see price increases in our input costs. And we believe that construction inflation is going to continue to be higher than what you might see CPI or consumer inflation be because of the demand environment with the IIJA and just the commercial economies creating. So you're right, I think that will continue to have inflation. And we're just -- our model just passes that through to the customers.
Greg Hoffman
Yeah, I would add to that, that part of the sharp spike in inflation that occurred 18 months ago, it is difficult for anybody to absorb, but whatever level of inflation is at as long as it's relatively stable, we can pass that along.
Operator
Adam Thalhimer, Thompson Davis & Co.
Adam Thalhimer
Jules, are you fully pass the supply chain issues now?
Jule Smith
I would say, Adam, the supply chain -- yes, I mean, is it like it was in 2019 or 2020? No. But I would say we've just gotten to where we can do business in a normal way in the new world. So it's not a it's not something we talk about at all now. So I guess the answer to your question is yes.
Adam Thalhimer
Okay. I'm curious on the large project side where you guys would be part of a JV just to do the paving work? Are you seeing more of those types of opportunities with the IIJA?
Jule Smith
Well, you know, Adam, I was recently at a conference and I heard an industry economist break down the the use of the IIJA funds in the different states and regions. And I was really -- it was interesting to see and it's really encouraging for me that in the Southeast, most of the money for the IIJA funds are going either maintenance or capacity increase to existing infrastructure.
And so and that's exactly, as I said in my prepared remarks, that's exactly what CPI -- that's our specialty. And so you know, maybe in future years, there might be some bigger projects. But right now, we're seeing a lot of the states that we're in, use it to do maintenance and capacity increase and so that's up. That's what we're bidding on.
Adam Thalhimer
And it sounds like that's what you prefer.
Jule Smith
Well, it's -- I mean, in certainly on larger projects, you know, we'll participate as a subcontractor as a JV partner. But you know, our specialties to do smaller projects with higher margins and so maintenance and capacity and widening of roads, those are the projects that are right now in our wheelhouse.
Adam Thalhimer
Great. And then, Greg, just real quick for you. The SG&A leverage was particularly strong in Q4. Was there anything unusual in there?
Greg Hoffman
No, I think it's just a normal trend that we talked about about the 15, 20 basis points year over year. Of course, on the fourth quarter was certainly better than last year, 6.9%, I believe is what it was this year. So which is the normal normal trend, I think we're going to continue to see.
Operator
Brian Russo, Sidoti & Company.
Brian Russo
Maybe you could just elaborate on the September backlog of $1.6 billion still showing a lot of resilience despite the DOT lettings, a seasonality, and just the overall on construction seasonality of the business. Just just curious how that triangulates to your reaffirmed 2024 guidance? Just any insight there would be great.
Jule Smith
Brian, I'm glad you asked that. You know, our backlog has grown now for 12 straight quarters and you've heard me say this and also I want to I'm glad you gave me the opportunity to say it again, it is not a typical CPI for our backlog to go down sequentially, especially in the busy work season.
And so at some point that's going to happen and that's not going to surprise us at all because the DOT lettings are not you know, in a steady state, they are coming at different times of the year and that we do work at different levels. We're seasonal business.
I think the backlog being off at the level, it shows the demand that we have, but we've sold a large percentage of our capacity. And we've said, our next 12 month revenue is a lot of its own backlog and that gives us good visibility. But we can only we can only book so much of our capacity at any one time. So we feel good about our backlog. But at some point in time, it's going to go down sequentially and that's not going to be a thing that surprises us.
Greg Hoffman
Yes, Brian, I would say that we're still on 75% of the next 12 months' revenue is covered by backlog. That hasn't changed.
Brian Russo
Okay, great. And you mentioned earlier about the business model and repeat customers. Could you possibly like quantify what percent of the overall business is considered recurring revenue? Is it just the public market of 63% or is the kind of that strong relationships you have on the commercial side? And what's all the economic development? Does that also create another level of recurring revenue for construction partners?
Jule Smith
Yes, Brian, absolutely. So the public revenue, virtually all of that's repeat customers. But on the commercial side, a large part of that is repeat customers and long-standing relationships where we do work, whether it be in the Panhandle of Florida for St. Joe's or poultry corporation in Raleigh, North Carolina. There's just customers that you build relationships with and provide good service. And and those are repeat customers year after year.
Brian Russo
And then just lastly on the CapEx for at $90 million, $95 million in 2024, is any of that growth CapEx earmarked for any specific projects at this point? Or is that still kind of being evaluated?
Greg Hoffman
No, it is earmarked. We go through that process during our budget time. And so yeah, there was a process of evaluating various projects for future growth, and that has now been identified and put in the books, but we're not prepared to announce anything specifically at this time.
Jule Smith
And Brian, I would just say Greg does a great job of leading that process. But that's that's just really just where we highlight organic growth. We want to prioritize organic growth. And so each of our local markets submits their initiatives for what they what they see is organic growth and that we fund the best initiatives there. And so that's up it's one of our growth levers, and that's the process that will make it happen.
Operator
(Operator Instructions) There are no further questions at this time. I would like to hand the conference back over to management for closing comments.
Jule Smith
I'd just like to thank everyone for joining us today. and we look forward to having a good fiscal year 2024. Thank you.
Operator
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
