Greetings, and welcome to the Construction Partners, Inc. first 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, Ken Dennard, with Dennard Lascar Investor Relations. Thank you, Mr. Dennard. You may begin.
Thank you, operator, and good morning, everyone. We appreciate you joining us for the Construction Partners conference call to review fiscal 2019 second quarter results. This call is also being webcast and can be accessed through the audio link on the Events and Presentation page of the Investor Relations section of constructionpartners.net. Information recorded on this call speaks only as of today, May 10th, 2019. 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 discussions 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 the company's control. Actual results may differ materially. Please refer to the earnings press release that was issued yesterday for our disclosure on forward-looking statements. These factors and other risks and uncertainties are also 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. Reconciliation to the nearest GAAP measures can be found at the end of the earnings release. Construction Partners assumes no obligation to publicly update or revise any forward-looking statements. Now with that behind me, I'd like to turn the call over to Construction Partners President and CEO, Mr. Charles Owens. Charles.
Thank you, Ken, and good morning, everyone. With me on the call today are Ned Fleming, our Executive Chairman, and Alan Palmer, our Chief Financial Officer. In my opening remarks, I will provide comments about our fiscal 2019 second quarter and give an update on our business. I will turn the call over to Ned for a few additional comments. Finally, Alan will review our financial results and discuss our outlook. We are pleased with our performance during the second fiscal quarter. Revenue for the quarter was $164.3 million, up 38.2% compared to last year. Gross profit and adjusted EBITDA were both up compared to the second quarter last year, with gross profit of $19.8 million, up 44%, and adjusted EBITDA of $13.9 million, up 74.2%. We had favorable working conditions throughout our markets during the quarter.
We also grew our backlog to $584.8 million at March 31, 2019, with approximately $380 million of that amount to be completed during our current fiscal year. Project opportunities remain strong across our markets, and we continue to pursue additional opportunities that can be completed both during the current fiscal year and beyond. We earned approximately 40% of our annual revenue during the first half of the fiscal year. This was in line with our traditional seasonal pattern. We typically benefit in the second half of our fiscal year from more favorable working conditions due to normal weather patterns, longer working days, and other factors. In late February, we announced two strategic acquisitions, a liquid asphalt terminal in Panama City, Florida, and an asphalt production and paving company in South Central Florida. These two companies are now fully integrated.
The liquid asphalt terminal was part of our vertical integration strategy and allows us to supply liquid asphalt to a number of our plants in the southern portion of our geographic footprint, including Florida, Alabama, and Georgia. We began shipments from the terminal in March. The asphalt company we acquired in Okeechobee, Florida, extends our ability to service new markets in Florida through an expansion geographic presence in the state. As we have discussed before, we drive growth through three primary levers in our business model. Doing more work in our current market through strategic acquisitions and through greenfield expansions, in which we establish a new plant to service a particular market. Currently, project demand remains favorable in our markets, and state funding continues to grow to support infrastructure projects. In March, Alabama lawmakers approved an increase in the state's gas tax.
This is the first increase in Alabama's gas tax since 1992, and is expected to generate approximately $320 million in additional annual funding when fully implemented. This increase will be phased in over three years, starting in October 2019. Lastly, I'd like to welcome our new board director, Noreen Skelly. We are very pleased to have Noreen join the board of directors and chair the audit committee. Before turning the call over to Ned, I'd like to take a moment to reflect on our recent one-year anniversary as a public company. Over the past year, we have completed three acquisitions and continued to grow in our existing markets. As a result, revenue has increased 18.3% for the six months ended March 31, 2019, over the same period last year, prior to our IPO.
I would especially like to thank our senior management team for their leadership, and our more than 2,100 employees for their dedication and hard work that enables us to execute our strategy. I'd like to turn the call over to Ned Fleming, our Executive Chairman, for a few additional comments. Ned?
Thank you, Charles, and good morning to everyone. As the chairman of the board, on behalf of all the directors, I too would like to welcome Noreen Skelly to our board. We recognize that she adds leadership strength, financial acumen, and diversity to our board, and we are all looking forward to her participation and input. I'd like to reiterate some of Charles' comments. This quarter's performance is a direct result of the efficiency, experience, and hard work of each employee at CPI. They are doing an excellent job on a daily basis executing the strategy Charles, Alan, and the entire leadership team has driven throughout the entire organization. The company is strategically positioned in all our markets to compound double digits top line growth, generate excellent margins in the industry, and with a strong balance sheet, is prepared to execute acquisitions.
This business is geographically located to benefit from operating in the fast-growing Southeastern states, where both the demand for ongoing road repair projects is coupled with increased public funding to pay for the work. This demand and funding continue to grow in our markets, as evidenced by Alabama's recent gas tax increase. With strong demand and solid funding, coupled with a track record of results and a strong growth outlook, we believe Construction Partners represents a compelling investment. As our team continues to consistently execute, we believe it will be apparent to the market that CPI represents a unique model for public infrastructure companies. The nature of our recurring publicly funded maintenance projects with shorter durations and lower volatility risk from input costs distinguishes our business model.
Through the leadership of our highly experienced team, both here in Dothan and throughout our platform companies, Construction Partners is well positioned to execute our plan and grow the business. One of the most compelling aspects of CPI is its consistency. We've seen it over the past 20 years as we continue to meet with investors and tell our story. We believe the market will appreciate the opportunity that CPI represents. I believe we are well positioned for continued growth in 2019 and beyond. With that, I'd like to turn the call over to our CFO, Alan Palmer. Alan?
Thank you, Ned, and good morning, everyone. I want to start by quickly highlighting our key metric performance in the second quarter. From a financial standpoint, as we've discussed, favorable working conditions in the quarter improved compared to the first fiscal quarter and led to increases year-over-year for our second fiscal quarter. Revenue for the quarter increased $45.4 million over the same quarter last year. Revenue attributable to Scruggs, which we acquired subsequent to March 31st, 2018, was $18.3 million, and we were also able to complete work on our projects that were delayed in our first quarter into December 31st, 2018. Gross profit increased approximately $6.1 million, primarily due to higher revenue. The higher gross profit percentage of revenue was a result of increased HMA production and equipment utilization, resulting in an increase of fixed cost absorption during the quarter.
Net income was $4.2 million, down from the same period last year. However, excluding the impact of a non-recurring after-tax settlement of $10.6 million in the second quarter of 2018, net income was up $3.7 million. Earnings per share were $0.08, down from $0.27, which was also impacted by the legal settlement last year. Adjusted EBITDA was up $5.9 million, resulting in an adjusted EBITDA margin of 8.5% compared to 6.7% for the same period in the prior year. The higher adjusted EBITDA margin was a combination of a higher gross profit margin and a lower general and administrative expense percentage. Looking at our input cost, we have seen some recent increase in asphalt cement pricing, but currently, we do not anticipate changes to have a significant impact in 2019. In late March, we began shipments from our newly acquired liquid asphalt terminal in Florida.
We believe over the coming year that we can achieve between 20 and 30 basis points in margin improvement through the use of this terminal. G&A expenses in the quarter were consistent with our expectations and included an increase of $800,000 due to Scruggs and $700,000 due to public company costs that we did not have in the same quarter last year. The increase was partially offset by a $600,000 decrease in equity-based compensation expense. We will continue to diligently manage margin. To do this, we must also be active in understanding exactly what we're seeing in our markets. Our business is very competitive, and as with most industries, hot spots of competition can move around. We continue to successfully navigate the competitive environment, maintaining our market position while also steering revenue to stronger markets as opportunities present themselves.
Strategically, our organization maximizes efficiencies through scale and flexibility to move crews and equipment to take advantage of favorable margins and to maintain EBITDA. Backlog provides CPI with significant visibility into the next 12 to 18 months. We define backlog as projects for which we either have an executed contract or are currently working on that contract, or where we are the low bidder on a public project and we have commitment from the customer, but not an executed contract. Backlog does not include any future external sales of hot mix asphalt or aggregates. At March 31st, 2019, backlog was $584.8 million. Of this amount, 65%, or approximately $380.8 million, is expected to be completed during the 2019 fiscal year.
In addition, as Charles mentioned, opportunities for future projects in our markets remains favorable as we will bid on a number of construction projects that we would expect to complete, both during the current fiscal year and beyond. Turning now to the balance sheet. At March 31st, 2019, we had $61.9 million of cash and $14.3 million of availability under our $30 million revolving credit facility after deducting outstanding letters of credit. Our debt to trailing 12 months EBITDA ratio was less than one time at 0.88. We have a very strong balance sheet to support the growth opportunities we are seeing. Cash provided by operating activities was $5.3 million for the six months ended March 31st, 2019, compared to $28.1 million for the six months ended March 31st, 2018.
The decrease is due to higher accounts receivable and work in progress balances on significantly higher quarterly revenue and a $4.6 million increase in inventory related to the operation of our new liquid asphalt terminal. CapEx in the second quarter was $12.4 million compared to $12.5 million in the same quarter last year. For fiscal 2019, we expect our capital expenditures to be in the range of $38 million-$42 million, which compares to $42.8 million in fiscal 2018. Before we turn the call over for your questions, I'd like to review our financial outlook for the full fiscal year 2019, which ends September 30th, 2019. We have raised the outlook with regard to revenue, net income and adjusted EBITDA. Our 2019 outlook now calls for revenue in the range of $790 million-$810 million, compared to $680.1 million in fiscal 2018.
Net income in the range of $40.75 million-$44 million, compared to $50.8 million in fiscal 2018. As a reminder, net income in fiscal 2018 included a non-recurring $10.6 million after-tax settlement. Adjusted EBITDA in the range of $88.9 million-$92.5 million compared to $75.5 million in fiscal 2018. Finally, our fiscal year 2019 outlook does not take into account any future acquisitions or greenfield expansions that may occur during the remainder of the year. The outlook also does not include the potential impact of any new federal or state infrastructure or highway-related legislation that could be passed in 2019. From modeling perspective, I'd also like to mention that our effective tax rate in 2019 will be approximately 25% compared to 17.2% in our prior fiscal year. With that, we'll now take questions. Operator?
Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Trey Grooms with Stephens. Please proceed with your question.
Hey, good morning, gentlemen.
Good morning.
I've got a couple questions here. First, where were you guys seeing the upside in the quarter? Any specific geography or geographic markets that stand out to you, versus kind of your expectations going into the quarter?
No, we didn't have any markets that, in particular. They were all very favorable working conditions, and our team just got out and performed.
On the public side, that clearly looks pretty good. What are you guys seeing right now on the private side of the business? Remind us, is that still about 30% of the business?
Yes, it is. We're still seeing from a backlog standpoint, a very good backlog in private work, primarily commercial. We've lowered our residential portion of our private work on purpose, but we still have a very strong commercial private work backlog.
When you say commercial, can you give us some examples on the private side? Are these large kind of projects on the non-res side or more some of the commercial that follows residential? Just what do you guys generally see on the private side? What type of work are you doing there?
Some of it could be the schools that's being built, and then we have different shopping areas that's being built and office complexes and developments like that.
I've got you. Okay. With your public business, so can you help us kind of dissect that piece just a little bit? I know most of what you guys do on the public side is, I guess would be considered more maintenance. Can you kind of give us that breakdown and what you're seeing on the more maintenance side of things versus what you would be seeing on maybe lane expansions or something like that would be considered maybe new public construction?
There's not really much of a change in that. We participate in the larger projects when they're in our market, and we have an opportunity, but our core businesses are those maintenance type projects that just continue to reoccur. We've seen with the increased tax revenue that's come into the states, they're really trying to make sure that they get those roads that are in poor repair back in good condition. Not really a change there. There are no big, large projects that we've added to backlog that would skew it different from what we've had in the past.
Okay. Last one from me is just around some of the costs there. What are you guys seeing or maybe your outlook for labor and freight costs from where we stand today?
Our labor cost is pretty steady. I think I've shared before, generally we make payroll adjustments annually. Throughout the year, we don't have swings in our labor cost. Typically, we've got a very stable workforce and because we're employing people that are in these markets, and they're always in those markets, so we're not seeing much of a change there. That's been built in to our bids and our cost. Not any real fluctuation there. We do a certain percentage of our own trucking, so that helps us to mitigate any things that are happening out in the market. Clearly trucking is tight. Being in these local markets, where we've got a steady revenue and a steady utilization of outside truckers, we don't see any big problem there that we've not priced into our bids.
Our next question comes from the line of Andrew Wittmann with Robert W. Baird & Co.. Please proceed with your question.
Great. Good morning. I guess I had some questions here on maybe, I guess you'd call it the guidance. I was just doing some math and wanted to get your thoughts, Alan, on this one. It looks like organic growth here in the March quarter was around 20%, given that you gave The Scruggs information there, which is obviously very good. It looks like the growth rate for the back end of the year is pretty high, maybe not quite that high, but something probably in the teens growth rate. It's up, but it's not up that much. I guess the question for you is the level of visibility that you have into the work that you need to book in the year that's going to be burned for the year.
It looks like there's about $100 million delta between what you mentioned is already booked and what you still need to book to get there. That's a long way of saying is how does the $100 million that you still need to book for this year compare to the past, and how confident are you in capturing that work level?
We're very confident because actually our contract backlog that is booked compared to what we have to complete is very comparable to what we normally see at March. The difference between what we still have to do in contract backlog is about 40% of the number you mentioned. That remaining $100 million is the typical FOB that we would have for our hot mix asphalt and things like that. That contract backlog is more in the $40 million to $50 million range, not the $100 million range. That's very comparable percentage wise to what it's been in the prior years.
Super helpful on that one. My next question has to do around kind of the opportunities that you're seeing in your markets for future growth, specifically where you could put some capital to work, either through acquisition or greenfield. How are those opportunities trending, Charles, as you're looking around there? Do you feel like there's an opportunity to plant another greenfield here this fiscal year still or tuck in another acquisition? Just kind of want to get your latest on that.
We're seeing quite a bit of activity, and we've been real selective on making sure that it's strategic for us and the culture and the management team that we're looking at. We're obviously seeing a little bit of pickup of movements going around, and we would hope to get the right candidate and get another one under our belt. Would be nice.
I think my last question's going to be for Ned. Ned, during the quarter, there was an announcement from the company where a number of the Class B shares were converted into Class A shares. I just wanted to get your perspective on the rationale, the reasoning behind that so that at least we as investors know why that happened. Certainly, I think there was at least a couple of calls that we took that suggested asking if there was potential shareholders there that were looking on selling or if there's any other ramifications that might be applicable to your desire or ability to be included in various indices.
Andy, thank you for that question. First and foremost, we thought it was in and continue to believe it's in the best interest of the company and all the stakeholders for us to convert enough shares that as a result of doing that, the company will qualify for several key indexes, as well as some other smaller indexes, we believe. We think it's important in today's market to qualify for those indexes. That's really the key reason.
Basically, there was some threshold or something that you need to have a certain, what? Voting power or something available to public market investors to be able to be included into those indices? Is that what you're saying?
Correct.
Okay.
They have certain standards to be included in those indices. As we took a step back and reviewed and tried to figure out from a capital structure standpoint what was in the best interest of the company to move forward, you see how many companies and how many shares on a daily basis trade as a result of the indexes. We wanted to make sure that this was a company that was qualified for as many indexes as we can be qualified for.
Okay. That makes sense. I'm going to leave it there. Thank you very much.
Our next question comes from the line of Brent Thielman with D.A. Davidson. Please proceed with your question.
Hey, thanks. Good morning. Great quarter.
Good morning, Brent.
Hey, maybe first one for Alan. Just kind of a clarification. Looks like the DSOs crept up a little higher than usual this quarter. Anything to be aware of there, just sort of timing of collections?
No, they really haven't. What happens is that the timing of when we get our revenue is really the driver of that. Our March revenue was significantly higher than January and February. When you look at it on a comparison of the accounts receivable to the most recent revenue, it's right in line. What happens is when you measure that at the end of the receivables at the end of a quarter, where last quarter our December sales were way down, so our receivables at that moment. Generally we collect the majority of our receivables within the 30 days, other than the retainage, which is included in those receivables. We've not had any decline in the average length of receivables.
When you have a high revenue month, the receivables, if that happens to be the last month of the quarter, it's going to look like it's been an increase in the average days of sales. That same thing flows over to the cash flow statement when you look at the timing within the quarter of when that revenue is. When our revenue ramps up, naturally our receivables ramp up in that month. Because we had such a strong second quarter, especially the March period, which is kind of the beginning of our heavy season, That's what you get with that.
Okay. That's helpful, Alan, I appreciate that. I guess the next one would be for any and all of you. The balance sheet's in great shape. I guess, just considering the need to maintain a little liquidity from a working capital perspective, and then, I guess, also bonding capacity perspective. Can you just update us on what sort of dry powder you think you have to do a transaction or transactions right now?
Yeah. We've said before that our debt ratio could go as high as 2.0 to EBITDA, so we're below one now. We're at 0.88, so we could easily incur another $50 million, $50, $60 million worth of debt and still be below that two threshold. As far as the cash on the balance sheet, we're entering the period of the year where that will begin to grow again, because we've kind of hit that bulge, as I mentioned with March, in that ramp-up of the receivables. Even without that, we would have probably about $50 million there. Easily $100 million would be available if we were to deploy that and need to deploy that for acquisitions. We are a positive generator of cash over the course of a year.
We also have the flexibility, we've not in the last 18 months financed any of our capital expenditures, but we also have that ability. We've got the money available under our line of credit, substantial dry powder.
Okay, great. My last one, actually two parts, one, it sounds like Alabama will be a nice opportunity as that funding starts flowing. Are there other kind of state legislative initiatives you're tracking right now in some of your key markets that could be meaningful? Then, I guess as the dialogue goes on in Washington around federal funding for infrastructure, and who knows what ultimately happens there. I guess I'm curious between the markets you play in, how dependent are they now on federal dollars versus these state initiatives for infrastructure spending that have moved forward in recent years?
Well, first, all of the states that we operate in within the last three or four years have passed tax increases or other funding increases. Several of those are just like Alabama, are being phased in over a period of time. We're seeing, even though there's no new legislation in those other states, the program that they put in place in the last three or four years has built-in step-ups in that over the next three or four years. You've got that. Several of them are also tied to population and inflation, so they've got built-in escalators, and we see that increase in those states continuing for several more years. The percentage of work that we do that's tied to federal dollars has decreased over the years just because the states have stepped up and taken more of a lead.
If the federal program were to be enhanced, the states that we're in are in great shape to be able to take a federal dollar and turn it into $10 because they only have to provide a small percentage of the matching. They have their matching funds available. If something's done at the federal level, a lot of other states will have to be scrambling to pass legislation to increase their funding in order to get those federal dollars, or else they get reallocated to the five states we're in. There's a lot of strong positive things whether the federal does anything or not. Historically, we've seen that as a minimum, they maintain the current levels.
I'll leave it there. Thank you.
Thank you.
Our next question comes from the line of Josh Wilson with Raymond James. Please proceed with your question.
Thanks. Good morning, congratulations on the quarter.
Good morning.
Could you talk about what the average size of the projects are in your backlog in terms of, is it still around that $1 million-$2 million?
I don't have exactly what it is, but I would be fairly certain that it has not moved hardly at all from that because we've not booked any mega projects. We're still seeing that and the acquisitions that we made in the last two years that are construction related have had similar revenue characteristics to ours. It's a mix from $200,000 to $35 million, $40 million all throughout that band, but that's not really changed.
Got it. Regarding the acquisitions, what was the impact of the acquired sales on gross margin in the quarter? What's the timing of getting through backlog that maybe has lower margins than you normally would operate at?
If you're talking about the two recent acquisitions, the terminal does not have contract revenue, and primarily all of those sales will be internal to us. It had no backlog and had very minimal impact, almost negligible because we didn't get the tanks filled until the last week of March and just began shipping. The acquisition in Central Florida, in Okeechobee, it had very negligible because just due to the size of it. Of course, we gave the Scruggs information. Its sales this quarter was $18.3 million and had zero the same quarter last year because we had not acquired it. Very negligible impact on revenue or margin.
I was trying to get at, is there any margin impact from Scruggs that maybe their backlog that can eventually roll through at higher margins?
There would be some impact, but it's fairly small when it's about 10% of the total revenue. Those jobs that we acquired there have performed at or slightly better than what we've had on the backlog because of some of the initiatives that we implemented with being able to get daily data out to the operations and all. We're seeing good results from it.
Good. That's good to hear. Last one from me. You've mentioned a step up in inventory related to the asphalt terminal. Are there any further ramp ups in inventory or have we reached sort of a new normal with the asphalt terminal in your business?
In the most of the year, this would be probably the majority of the impact. One of the benefits of the terminal is having storage capacity to be able to fill the tanks in the winter, when generally the cost of asphalt cement is lower than in the prime market at times. In the winter, we could actually put two times that amount of inventory or even more into those tanks if the pricing is favorable for doing that. You could see that in the winter months, December, January, February, along in there, we could have $10 million or $12 million worth of inventory stored because we can buy it at a very favorable price. Other than that, typically we would have, at any one time, $4 million to $6 million of inventory in those tanks.
The good thing is, as soon as we sell it, we've collected the money because we're selling it to ourselves.
Great. Good luck with the next quarter.
Thank you.
Ladies and gentlemen, there are no further questions at this time, and I would like to turn the floor back over to management for closing comments.
Okay. Thank you. This is Charles, and I just want to thank everyone for joining us today. We look forward to speaking with you on the next conference call, and I can assure you that we will remain sharply focused on executing our strategy. Thanks again.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.